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Wednesday, 8 November 2023

Hollywood Reporter: Warner Bros. Discovery Posts $111M Streaming Profit, While ‘Barbie’ Powers Studio

Story from Hollywood Reporter:

Warner Bros. Discovery, led by CEO David Zaslav, shrunk its overall losses on higher revenues as the impact of the dual Hollywood strikes weighed on the major studio, as did a sluggish U.S. ad market.

Those industry headwinds were enough for investors to greet the third quarter results by sending stock in Warner Bros. Discovery down by $1.65, or 14 percent, to $9.96 on Wednesday morning. Overall revenues rose 2 percent to $9.97 billion, just shy of a revenue estimate of $10 billion.

And the net loss at the Hollywood studio fell back to $407 million, against a year-earlier loss of $2.28 billion. The latest loss at the owner of CNN, Discovery and the Max streaming platform included $1.75 billion in one-time pre-tax amortization charges.

The adjusted EBITDA rose 22 percent to $2.96 billion, and the third quarter earnings per-share loss of 17 cents was well off an analyst estimate for a 9 cents loss. Warner Bros. Discovery, the result of an earlier combination of Discovery and WarnerMedia, ended September with total global streaming subscribers falling .7 percent to 95.1 million, compared to 95.8 million at the end of the second quarter and 97.6 million subscribers at the end of Q1.

During a morning analyst call, Zaslav paid tribute CNN journalists covering conflicts in Israel and Ukraine. “They’re in harm’s way, working around the clock reporting on these conflicts, and our teams bring not only their news reporting skills, but their deep knowledge of the region, the geopolitical actors and the conflicts to bear in a way that really benefits the audience.”

He also gave a shout out to newly-installed CEO of CNN Worldwide Mark Thompson, who replaced predecessor Chris Licht. “We couldn’t be more thrilled to have Mark at the helm,” Zaslav said. Thompson stepped into the top job at CNN just as the Israel-Hamas conflict escalated in the wake of the Oct. 7 attacks by the Hamas terrorist organization in southern Israel.

Zaslav said increasing audience engagement and reducing churn, or the level at which subscribers leave a TV service, was key to ensure the mix of entertainment and increased news and sport offerings on Max was a longterm success. “That’s a big deal. Churn is the biggest issue that we face. This is a very compelling service, the churn is too high. So this is an all-on attack to reduce churn,” he insisted, not least to reduce overall marketing costs for Max.

During the latest financial quarter, the streaming segment at Warner Bros. Discovery posted $111 million in adjusted EBITIDA, against a year-earlier loss of $634 million. And streaming segment revenues were $2.43 billion, up 5 percent from the year-earlier period. Within the streaming business, which includes a combination of Max and Discovery+, distribution revenue rose 5 percent on subscriber price increases and new partnership launches, and ad revenue rose 29 percent, driven by Max U.S. ad-lite subscriber growth.

With Barbie having generated around $1.5 billion in global box office, Warner Bros. Discovery’s studio segment saw adjusted EBITDA fall 5 percent to $727 million, on overall revenues up 4 percent to $3.2 billion. Higher content and theatrical revenue was offset by TV revenue falling “significantly” due to the impact of the dual Hollywood strikes and large licensing deals recorded in the earlier year period.

Warner Bros. Discovery’s networks segment, which includes traditional linear TV assets, saw overall revenues fall 7 percent to $4.86 billion, and adjusted EBITDA decline 9 percent to $2.39 billion. Advertising revenue tumbled 13 percent on audience declines and a soft ad market in the U.S., and to a lesser extent in international markets.

Warner Bros. Discovery earlier forecast a negative impact of between $300 million to $500 million due to the strikes impacting the timing and box office results for the 2023 movie production and release slate. CEO David Zaslav has been at the negotiating table across from Hollywood unions during the recent spate of labor actions.

Zaslav, in a statement that accompanied his company’s third quarter results, said they positioned Warner Bros. Discovery “well to lean into growth opportunities that will ultimately drive shareholder value, to include our direct-to-consumer business, which, in the wake of the successful launch of Max in the U.S., is tracking well ahead of our financial projections, having generated positive EBITDA in the first half of the year.”

Analysts as they look at the Warner Bros. Discovery results will be weighing what an imminent labor settlement, if it comes, and a return to film production and major releases into 2024 will mean for the Hollywood studio. That’s as Wall Street looks to streaming platforms, including Max at Warner Bros. Discovery, to pivot from a focus on subscriber growth to profitability.

Gunnar Wiedenfels, CFO at Discovery, with an eye to investor concerns about the studio’s debt load, told analysts Warner Bros. Discovery paid down $2.4 billion of debt during the latest quarter. “I’m proud that Warner Bros. Discovery will exit this year with a fundamentally improved financial profile as compared to the beginning of this year,” he said.

Wiedenfels also warned the sluggish linear TV advertising market may not markedly improve any time soon, and visibility for the studio’s TV production business was hampered by the Hollywood actors strike. “This is an evolving process and there is a real risk at this point that some negative financial impact of the strike will extend into 2024 to some extent,” he told analysts.

“We’re not giving up. We really believe in linear. And there was a lot of noise around the Charter deal with Disney. But to Bob’s [Iger] credit, that deal was structured in a way that’s really favorable for both parties and favorable for the ecosystem,” Zaslav added as he pivoted to addressing the recently-struck new carriage deal between Walt Disney and Charter Communications widely seen as having an impact industry-wide on future deals between content producers and distributors.

He argued cable subscribers paying a fee for Disney+ will help reduce churn and increase rates and allow the sale of advertising. “So I think it was a very innovative deal by Charter and Disney and, although it started out noisy and scary, it created a potentially very interesting bridge to more scale, lower churn and more stability to linear. We’ll have to see. It certainly is a positive,” Zaslav added.

The Warner Bros. Discovery boss also discussed Max streaming content, and specifically how it has been been consumed to bolster engagement and what TV series and movies may be licensed to rivals. “On Max, we’re getting to see what people use, where they go first and how much time they spend with it. There’s a lot of content that we see as just for us,” he said, including popular series like The White Lotus and The Last of Us.

But Zaslav also pointed to content less heavily consumed on Max, and where movies or TV series were being licensed to rival platforms, those deals remained non-exclusive. “Some of the content, like DC, we put those in windows, so someone might have it for three months or six months. We always have those movies and we have the complete set of those movies,” he added after DC Universe movies were licensed to Netflix, as an example.

"Candidly, we have found we won’t do it unless the economics are significant. But in many cases, it really helps us as people come back and then they want to see the full bouquet of DC movies and the only place to do that is with us, or it enhances the quality of the DC library,” he told analysts.

Wiedenfels and Zaslav during the analyst call stressed they were laying the ground strategically and cost-wise to achieve future gains in the face of current challenges like a soft advertising market and the dual Hollywood strikes. “This is a generational disruption we’re going through. Going through that with a streaming service that’s losing billions of dollars is really, really difficult to go on offense,” Zaslav said at one point.

But he added Warner Bros. Discovery was set to become a cash flow machine to set it apart from rivals in the eyes of investors. “This will give us a chance not only to fight to grow in the next year, but to have the kind of balance sheet and the kind of stability of a real company — diverse, gaming, motion picture, HBO, linear — that we could be really opportunistic over the next 12 to 24 months,” Zaslav argued.

© 2023 The Hollywood Reporter.