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Warner Bros. shares Discovery Falls 10% as Company Misses Estimates and Warns of Cash Flow Headwinds in 2024

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The exterior of the Warner Bros. campus Discovery Atlanta is pictured after the Writers Guild of America began its strike against the Alliance of Motion Pictures and Television Producers, in Atlanta, Georgia, May 2, 2023.

Alyssa Pointer | Reuters

Discovery Warner Bros. fell short of analysts’ fourth-quarter earnings and revenue targets as advertising fell and the company failed to provide free cash flow guidance for 2024.

Warner Bros. shares Discovery closed down 10% on Friday after the report was released.

The company’s fourth-quarter net loss was $400 million, or 16 cents per share, compared with a loss of $2.1 billion, or 86 cents per share, in the same period a year ago. earlier. Warner Bros. Discovery reported a 14% decline in linear TV advertising revenue excluding currency fluctuations and a 4% decline in actual distribution revenue.

“This business is not without its challenges,” CEO David Zaslav said during the company’s fourth-quarter earnings conference call. “Among them, we continue to face the impacts of continued disruptions to the pay TV ecosystem and a dislocated, linear advertising ecosystem. We challenge our leaders to find innovative solutions.

Here’s what the company reported for the quarter ended December 31compared to analyst estimates, according to LSEG, formerly known as Refinitiv:

  • Loss per share: 16 cents versus 7 cents expected
  • Income: $10.28 billion versus $10.35 billion expected

Fourth-quarter adjusted EBITDA was $2.5 billion, down 5% from last year, excluding the impact of foreign exchange rates, as studio revenues lagged due to strikes by the Writers Guild of America and the Screen Actors Guild-American Federation of Television and Radio Artists.

Studio revenue fell 17% to $3.17 billion in the quarter. The unit’s adjusted EBITDA fell 29% to $543 million.

“The studio really underperformed, including at the end of the year, where we had real difficulties,” Zaslav said during the earnings conference call.

Free movement of capital

Warner Bros. Discovery generated $3.31 billion in free cash flow in the fourth quarter and ended 2023 with $6.16 billion in free cash flow, up 86% from the prior year. Zaslav priority on increasing free cash flow and reduce company debt.

Still, the company said there will be free cash flow headwinds in 2024 as content spending increases with the completion of writing and editorial projects. actor strikes Last year.

Chief Financial Officer Gunnar Wiedenfels declined to give a free cash flow forecast for 2024, while noting that the Olympics, Max’s commitment to increase revenue with increased spending and uncertainty of the Annual EBITDA could all weigh on cash generation this year.

“I expect 2024 to be another year of strong free cash flow,” Wiedenfels said. “I deliberately do not want to give specific quantitative guidance on free cash flow.”

Warner Bros. Discovery paid down $1.2 billion in debt in the quarter and $5.4 billion in debt in 2023. It still has $44.2 billion in gross debt remaining after paying down $12 billion in debt in the over the last two years.

Max profitable for 2023

The company’s flagship subscription streaming service, Max, ended 2023 profitably, with full-year adjusted EBITDA of $103 million.

Zaslav has significantly reduced content spending for the streaming service since the merger of WarnerMedia and Discovery in 2022. His efforts helped Max reach profitability before the streaming divisions of traditional media rivals. Disney, Comcastfrom NBCUniversal and Paramount Worldwide.

The company reported 97.7 million direct-to-consumer subscribers worldwide, an increase of 2% from the previous quarter.

The company said Max would be profitable in 2024, although it would lose money in the first half as the studio increased its spending on content before recovering in the second half. Warner Bros. Discovery projects Max would generate $1 billion in EBITDA for 2025.

Max’s ad tier, currently only available in the United States, will roll out to 40 international markets by the end of 2024, Zaslav said on the call.

JV sports

Zaslav did not provide any pricing details for the company’s upcoming sports. joint ventureannounced earlier this month with Disney and Fox, but he reiterated that the product would be aimed at the 60 million American households who currently do not subscribe to cable.

Zaslav noted that one benefit of the service, scheduled to launch in fall 2024, is that consumers won’t have to worry about finding the right channel for Major League Baseball playoff games, of the National Hockey League or the National Basketball Association. as the streaming app will automatically send consumers to any game on Fox, ESPN, TNT or TBS.

David Zaslav, Chairman and CEO of Warner Bros. Discovery, attends the world premiere of the restored 1959 4K film “Rio Bravo,” shown during opening night of the 2023 TCM Classic Film Festival at the TCL Chinese Theater in Hollywood, California, April 13. , 2023.

Aude Guerrucci | AFP | Getty Images

“We don’t see a lot of people unsubscribing from cable to get this,” Zaslav said. “The younger generation that doesn’t subscribe, we can tackle those that we’re missing.”

Warner Bros. Discovery continues to negotiate with the NBA for media rights renewals, but will not overpay based on the company’s internal estimates of the league’s value, Wiedenfels said.

“It’s very easy to lose control of investments in sports rights,” Wiedenfels said. “That’s not how we do things. We know exactly what value we assign and we remain disciplined in our discussions.

Disclosure: NBCUniversal is the parent company of CNBC.

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