Industry Insider: Digesting & Understanding the Warner Bro. Discovery’s Q2 Earnings Call
On August 3rd, 2023, Warner Brothers Discovery (WBD) held their call to report their 2nd Quarter Earrings. The call started with the introduction of a few notable members of the board including Andrew Slabin (EVP), David Zaslov (CEO), Gunnar Wiedenfels (CFO), and JB Perrette (CEO). David Zaslov began at the top of the conference concerning the infamous $43 billion merger. To recap, Warner Media Business of AT&T Inc. and Discovery Inc. officially combined corporations on April 8, 2022. This transaction impacted the entertainment industry at large, with many audiences fearing for their beloved content. The very nature of WBD’s immersion caused numerous changes to the virtual structure that audiences were accustomed to. Recently in May 2023, this brought about the creation of Max. It is not simply a rebranding but a makeover of HBO Max as it fuses the streaming content from all WBD platforms. This is only the beginning, according to David and Gunnar, who both presented the company’s forward-looking statements.
WBD’s Q2 held success in overturning cash flow, amassing $1.7 billion in free cash flow. This number was repeated multiple times on the call as it was predicted that next year would also generate the same amount. With an added tender announced the morning of this call that amounted to $2.7 billion. From these positive profit shares, WBD was able to pay down the larger $50 billion debt by $1.6 billion this quarter. David plans to reduce significant amounts of this debt by this year’s end as he predicts they will be below four times leverage. In comparison to the previous year’s Q2, the adjusted EBITDA grew by 23% during Q2, this is calculated to be upward of 600 million dollars.
Cash flow was further affected due to both SAG-AFTRA and WGA strikes, which directly lowered net content spent by around $100 million.
Gunnar also attributes the focus on cash across the company to the five major performance indicators.
Slight better than expected EBITDA
Improvement across all working capital and below-the-line items
Closing the gap between content cash spent and amortization
Modest cash savings (due to strikes)
Absorbed 200 million dollars due to cash restructuring and integration-related expense
All of which does not include the summer sensation that was the “Barbie” film phenomenon. This success will take effect on the numbers in the Q3 reports later this year. With Barbie grossing over $1.3 billion at the box office at the time of this article, it could be predicted that WBD will see an even greater positive impact from this. Gunnar greatly attributes this success to the cross-marketing abilities they have in-house as a corporation. Naming HGTV’s “Barbie Dreamhouse Challenge”, The Food Network’s “Summer Baking Championship” Barbie-inspired episode, and a sneak preview of the film during Turner Sport’s airing of the NBA Eastern Conference Finals as a few points of reference.
This is also a show of WBD’s content trajectory, using their pre-existing catalog for financial gain within a business-to-business sales structure. It would allow the company to diversify its distribution to other platforms. Of course, this wouldn’t include premium releases, such as DC or Max original content. According to the board, Q2 saw a turbulent relationship with the studios as box office numbers underperformed, and overall content revenue declined by 25%. Gunner attributed a list of reasons that potentially facilitated this.
The timing of series releases and fewer CW series orders.
Lower internal sales to networks (dropping directly to ‘Max’ movies or scripted series that had low ratings).
The Lego Star Wars game was released in the 2nd quarter of last year, which created tough competition for this year.
However, with the great success in streaming series such as The Last of Us and House of Dragons, being a few reasons for HBO Max series overall accumulating 127 Emmy Nominations ((181overall) there would be no question as to why WBD is eager to add live programming to the app. Accompanied by the knowledge that their cable programs occupy one-third of viewers on any average night. There is another glaring factor that has kept WBD in restraints; the “soft ad market” which has driven WBD into a corner causing advertising to decrease by 13 percent. It has mainly affected the sports sector, considering the loss of rights to the NCAA’s Final 4 and Championship Games. Regardless, WBD is prepared for most variables as they steam ahead toward Q3 and 2024.
