Warner Bros. Discovery (NASDAQ:WBD) saw its stock plummet by over 15% during early trading on Wednesday, driven by the company’s acknowledgment of persistent weaknesses in the advertising market that could potentially affect its visibility for 2024.
During the post-earnings conference call, WBD’s CFO, Gunnar Wiedenfels, expressed concerns about the complexities anticipated in 2024, especially in the face of ongoing sluggish ad trends. He went on to note that it appears unlikely, based on the current perspective, that the company will achieve its targeted leverage range by the end of 2024 without a substantial recovery in the TV advertising market.
WBD, like many other media companies, has been grappling with an unfavorable advertising environment. In an earlier announcement this summer, the company revealed its intentions to restructure its advertising sales division, including its leadership team, due to the persistently weak ad demand.
The third quarter saw a 13% decline in network advertising revenue compared to the same period the previous year, mirroring the drop experienced in the second quarter.
In the third quarter, WBD reported a total of 95.1 million streaming subscribers, representing a decrease of 700,000 global subscribers since the end of the second quarter. The company recently introduced a new sports tier on its Max service and CNN Max, a 24/7 streaming news offering, as part of an open beta on Max at the end of September.
WBD’s CEO, David Zaslav, mentioned in the earnings release that both of these new offerings are already demonstrating early signs of contributing to increased engagement and reduced churn on the Max platform.
Despite missing consensus estimates for subscriber growth, the company reported an impressive year-over-year improvement in direct-to-consumer (DTC) adjusted EBITDA, reaching $111 million in the third quarter, a $745 million improvement.
The company reported a loss of $0.17 per share in the third quarter, wider than the expected loss of $0.08 per share but a significant improvement from the prior year’s loss of $0.95.
WBD’s revenue of $9.98 billion was in line with consensus estimates, excluding foreign exchange (FX), and marked a 1% increase compared to the third quarter of 2022.
Notably, the company’s free cash flow exceeded expectations, surpassing $2 billion, primarily due to reduced content spending resulting from Hollywood strikes and continued post-merger synergies.
Wells Fargo analyst Steve Cahall, who has an Overweight rating on the stock with a $20 price target, observed that WBD is ahead in terms of deleveraging and expects higher 2023 free cash flow estimates. He also highlighted the industry-wide trend of improved direct-to-consumer profits. The focus now turns to 2024 EBITDA and deleveraging and whether they can counter the constant pressures on Networks.
One bright spot in the earnings report was the performance of the box office, with total revenue from the studio divisions reaching $3.2 billion, up 3% excluding FX compared to the previous year’s quarter. This was driven by the record-breaking success of the film “Barbie,” released in July, which became the highest-grossing film in Warner Bros. history, generating nearly $1.5 billion in global box office.
However, TV revenue experienced a significant decline, mainly attributed to certain large licensing deals in the prior year and the impact of the Writers Guild of America (WGA) and Screen Actors Guild-American Federation of Television and Radio Artists (SAG-AFTRA) strikes. Network content revenue also saw a substantial 22% year-over-year decrease to $215 million, dragging overall network revenue down by 7% to $4.87 billion for the quarter.
The company reiterated its full-year adjusted EBITDA expectation, initially stated in September, within the range of $10.5 billion to $11 billion, which is slightly lower than the previous low-end estimate of $11 billion to $11.5 billion.
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