Warner Bros. Discovery Q2 earnings miss estimates but free cash flow improves
Warner Bros. Discovery (WBD) reported second quarter earnings before the bell on Thursday that missed estimates as the media giant works to pare down its debt amid linear TV challenges, an unfavorable ad market, and a hotly competitive streaming landscape.
The quarterly results reflect how Warner Bros. Discovery is performing about a year after its formation, when AT&T's WarnerMedia merged with Discovery. The company reported over $1.7 billion in free cash flow in the quarter, more than double the $789 million seen in the year-ago period. Warner Bros. Discovery said it is now targeting $5 billion in cost savings over the next two years, up from the previous target of $4 billion.
The company saw elevated churn following the debut of its Max streaming service, as customers with overlapping subscriptions to both Max and Discovery+ shed extra accounts.
Marketing and launch costs related to Max, which debuted at the end of May, also propelled a direct-to-consumer loss of $3 million in the quarter. That was a significant improvement compared to the $558 million loss in the year-ago period. Streaming losses reversed in the first quarter.
The stock, which climbed more than 4% in premarket trading immediately following the release, dropped about 3% after the opening bell as investors digested the report.
Here are Warner Bros. Discovery's second quarter results compared with Wall Street's consensus estimates compiled by Bloomberg:
Revenue: $10.36 billion versus $10.45 billion expected
Adjusted loss per share: -$0.51 versus -$0.41 expected
Subscriber net additions: Loss of 1.8 million subscribers versus loss of 1.6 million expected
Streaming updates
In the first quarter, WBD revised previous guidance, saying it expected its US direct-to-consumer business to be profitable by this year. Previously, the company had said the streaming division would break even by next year before hitting profitability in two years.
The debut of Max, which launched at the end of May, will be a critical factor in that timeline as Disney (DIS), Netflix (NFLX), and Apple (AAPL) all compete for subscribers.
According to a June report from Bloomberg, the company (which did not respond to Yahoo Finance's request for comment at the time) plans to add live programming from CNN to Max later this year.
Warner Bros. Discovery CEO David Zaslav hinted on the earnings call that those efforts will come to fruition "soon," explaining, "News and sports are important, they're differentiators, they're compelling, and they make these platforms come alive."
WBD has been rethinking the future of CNN as the network grapples with historically low ratings, mass layoffs, a failed foray into streaming with CNN+, and, most recently, the firing of former chief Chris Licht.
Bank of America analyst Jessica Reif Ehrlich told Yahoo Finance that Licht's firing underscores the decisiveness of CEO David Zaslav, explaining, "When he makes a mistake, he corrects it. He doesn't stick with the mistake. That's the right thing to do."
Zaslav's no-nonsense leadership style has led to atypical strategies like licensing content to competitors.
HBO's "Insecure" landed on Netflix last month. According to Deadline, "Six Feet Under," "Ballers," "Band of Brothers," and "The Pacific" will also debut on the platform as part of the deal.
Box office, ad market weigh on Q2 results
A disappointing box office weighed on Q2 results — despite the record-breaking success of "Barbie," which debuted in the company's fiscal third quarter.
Total revenue from the studios division fell a whopping 23% year over year in the quarter, or 24% excluding foreign exchange.
"The Flash" bombed in its theatrical debut in June following an equally disappointing debut of "Shazam! Fury Of The Gods" in the spring. Those double-whammy disappointments have added to concerns surrounding the future of the DC film franchise, which has struggled compared to Disney's Marvel Cinematic Universe.
WBD has also grappled with an unfavorable ad environment. Network advertising revenue tumbled by 13% in the second quarter from the year-earlier period, although the metric did improve slightly on a sequential basis and was ahead of Wall Street consensus estimates.
Earlier this week, the company revealed it will realign its advertising sales division, including its leadership team, amid that weak ad demand.
Despite advertising weakness, falling linear network revenue, and looming recession fears, Wall Street analysts have continued to praise the company's turnaround plan as it executes on its cost-cutting initiatives and further deleverages its balance sheet.
WBD said it has paid down $9 billion in debt since the merger, including $1.6 billion in the second quarter. The company also announced on Thursday it plans to retire up to more than $2.7 billion in additional, short-term debt.
"[WBD] has its costs in a really good place now," Bank of America's Ehrlich said. "When revenue starts to improve — whether it's from advertising, film, or subscription now that Max has launched— the company is in a phenomenal position, and they'll have significant leverage."
Wells Fargo analyst Steve Cahall, who has an Overweight rating and a $20 price target on the stock, added in a new note Thursday morning, "Revenues remain somewhat choppy but WBD is managing to do what it can: Adj. EBITDA, free cash flow and ultimately deleveraging. With strong HBO and WB content we think it has lots of options."
Warner Bros. Discovery stock is up more than 30% year to date.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.
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