WBD Earnings Misses Expectations

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 WBD, 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.

WBD on Friday said it generated $3.3 billion in free cash flow during the fourth quarter and ended the year with $6.2 billion in free cash flow, up 86% from a year prior. Yet it missed analyst estimates for revenue and profit, and its shares fell 10%.

For more than year, Zaslav has repeatedly told the investment community that his priority is to boost free cash flow to improve the health of the company and to pay down debt. Warner Bros. Discovery has paid down $12.4 billion in debt in less than two years since announcing the merger of Discovery and WarnerMedia.

He led with that message again on Friday during his company’s earnings conference call.

“Our top priority this year was to get this company on solid footing and on a pathway to growth, and we’ve done that,” Zaslav said. “We said we’d be less than four-times levered, and we are. We’re now at 3.9 times and expect to continue to delever in 2024. We’ve significantly enhanced the efficiency of the organization with a long runway still to go. We said we were going to generate meaningful free cash flow. ... And we’ve exceeded our goal with $6.2 billion for the year.”

Warner Bros. Discovery’s board of directors has been so intent on boosting cash that it last year changed Zaslav’s compensation to tie his bonus to cash flow generation.

So, why did the shares slump Friday, down now 45% in the past 12 months?

Alex Sherman at CNBC opines perhaps investors didn’t like the company’s wishy-washy answer on free cash flow generation in 2024, fearing the positive momentum there could be short-lived.

CFO Gunnar Wiedenfels refused to give guidance, citing the company’s unknown earnings performance with the vicissitudes of the advertising market and increased content spend on Max now that strikes by Hollywood writers and actors are over.

But it’s more likely, given the stock’s consistent underperformance in the past year, that investors simply don’t care about free cash flow in the way Zaslav wants them to.