Hollywood Reporter: Warner Bros. Discovery Becomes First Hollywood Conglomerate to Turn Full-Year Streaming Profit, Hitting $103M

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Warner Bros. Discovery has become the first Hollywood conglomerate to turn a profit for its streaming unit for a full year. In 2023, the company, led by CEO David Zaslav, reported a profit of $103 million, compared with a loss of nearly $2.1 billion for all of 2022 for what it calls its “Direct-to-Consumer,” or DTC, unit.

During the fourth quarter, this segment at Warner Bros. Discovery, which includes its streaming and premium pay-TV services, posted a loss of $55 million in adjusted earnings before interest, taxes, depreciation and amortization (EBITDA), compared with a year-ago loss of $217 million. Segment revenue grew, helped by subscriber price increases and higher advertising revenue, driven by Max U.S. ad-lite subscriber gains.

The company had improved its streaming unit bottom line throughout two of the first three quarters of 2023. In the first quarter, it had swung to a $50 million profit from a year-ago loss of $654 million. In the second quarter, its streaming loss narrowed to $3 million compared with a bigger year-earlier loss. And in the third quarter, its $111 million streaming profit compared with a $634 million loss a year earlier.

All in all, Warner Bros. Discovery had entered fourth-quarter earnings season as the only Hollywood giant approaching a profitable year in the unit housing its streaming business. Over the first nine months of this year, it had swung from a loss of $1.85 billion for the January-to-September 2022 period to a $158 million profit for the first three quarters of 2023, saying it would break even or even post a profit for all of 2023.

Warner Bros. Discovery on Friday also gave an update on its global streaming subscriber base, which had ended the third quarter at 95.1 million, down from 95.8 million in the second quarter. The company ended 2023 with a total of 97.7 million streaming subscribers. “Total DTC subscribers were 97.7 million which included 1.3 million subscribers from our acquisition of BluTV,” Warner Bros. Discovery said. “Excluding BluTV and TNT Sports Chile, subscribers increased by 0.5 million.”

Streaming revenue for the fourth quarter increased 3 percent to more than $2.5 billion, helped by a 4 percent gain in distribution revenue, “primarily attributable to new partnership launches, price increases in the U.S. and certain international markets” and other factors, and a 51 percent advertising revenue jump, “primarily driven by higher U.S. Max engagement and ad-lite subscriber growth.” But content revenue decreased 30 percent, driven by the timing of third-party licensing.

Full-year DTC unit revenue climbed 5 percent to nearly $10.2 billion. Among the contributing factors were higher ad revenue and the fact that Warner Bros. Discovery has been licensing more of its content to third parties.

Operating expenses in the segment dropped 3 percent in the fourth quarter, and selling, general and administrative expenses declined 8 percent, “primarily driven by more efficient marketing-related spend,” the company said.

With Netflix profitable and being seen by some observers as the king of streaming, Wall Street has been looking for Hollywood conglomerates to make their streaming business units profitable after an initial focus on subscriber growth. These units are not directly comparable though as they sometimes don’t include all streaming operations of a company or include additional business. Warner Bros. Discovery’s DTC segment, for example, consists of its streaming and premium pay-TV services, meaning HBO is part of it.

Warner Bros. Discovery on Friday also posted free cash flow, a key performance metric for management, for its fourth quarter that pushed its full-year 2023 figure above its guidance target.

The company also achieved its year-end goal for debt reduction. Its net leverage ratio, defined as total debt divided by the sum of the most recent four quarters of adjusted EBITDA, came in at 3.9 times as of the end of 2023. Warner Bros. Discovery had targeted ending the year at four times or below.

Warner Bros. Discovery, however, also continued to struggle with a weaker advertising market in the fourth, just like its peers, with ad revenue in its networks segment dropping 12 percent, or 14 percent when excluding foreign exchange impacts.

On the call, CFO Gunnar Weidenfels indicated that the ad situation as improving in the current quarter: “Domestic ad sales are pacing meaningfully better quarter to date as we are beginning to capture the benefits of our strong upfront deals start last year,” he said.

And its studios segment reported an earnings miss amid difficult year-over-year comparisons, the impact of the dual Hollywood strikes and the fact that the company released more movies in the fourth quarter than in the year-ago period, meaning higher marketing costs. Adjusted EBITDA for the unit fell 30 percent to $543 million as revenue decreased 18 percent to $3.2 billion.

Within the studios unit, content revenue declined 20 percent, “TV revenue declined significantly primarily due to the impact of the WGA and SAG-AFTRA strikes and certain large licensing deals in the prior year,” but theatrical revenue “increased due to the larger release slate in the current year quarter (Wonka, Aquaman and the Lost Kingdom, and The Color Purple),” Warner Bros. Discovery noted. “Games revenue increased meaningfully due to the continued performance of Hogwarts Legacy, including the fourth-quarter launch on the Nintendo Switch.”

So-called other revenue rose 12 percent in the fourth quarter, helped by the performance of the Warner Bros. Studio Tour Tokyo, “partially offset by the impact of the WGA and SAG-AFTRA strikes on studio production services.”

Studios unit operating expenses fell 15 percent, helped by “lower TV content expense, including strike-related impacts, partially offset by higher games content expense.” Theatrical marketing expenses rose though due to the larger release slate.

Fourth-quarter networks unit revenue at Warner Bros. Discovery dropped 8 percent to $5 billion, with adjusted EBITDA falling 11 percent to $2.2 billion. The AT&T SportsNet business exit “negatively impacted” the year-over-year comparison, the conglomerate said.

Distribution revenue decreased 3 percent, “primarily driven by declines in U.S. pay-TV subscribers, exiting the AT&T SportsNet business, and the transfer of TNT Sports Chile from Networks to direct-to-consumer, partially offset by increases in U.S. contractual affiliate rates and inflationary impacts in Argentina.”

Advertising revenue decreased 14 percent, “primarily driven by audience declines in domestic general entertainment and news networks and soft linear advertising markets mainly in the U.S. and, to a lesser extent, certain international markets, as well as exiting the AT&T SportsNet business.”

“After executing against our strategic plan to reposition the company, we are now on solid footing with a clear pathway to growth,” said Zaslav in the earnings report Friday. “We generated $6.2 billion in free cash flow and paid down $5.4 billion in debt in 2023, which puts us at 3.9 times net leverage.”

He added: “We have an attack plan for 2024 that includes the rollout of Max in key international markets, a more robust creative pipeline across our film and TV studios, and further progress against our long-range financial goals and are confident in our ability to drive sustained operating momentum and enhanced shareholder value.”

Warner Bros. Discovery shares were down more than 5 percent in premarket trading.

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