5 things we learned from Warner Bros Discovery’s Q2 earnings
Analysis
Warner Bros Discovery (WBD) reported a $9.1bn goodwill impairment charge on its TV networks in its Q2 financial results, as its linear segment’s book value far exceeded its market value.
Total net loss reached $10bn. WBD also reported total revenue declined 5% to $9.7bn.
Shares of WBD fell by more than 10% in pre-market trading following the earnings release. Since WBD was relisted following the merger between Warner Media and Discovery, the value of the stock has declined more than 70% amid repeated disappointing earnings results.
Here’s what else you need to know.
1. Writedown attributed to declining linear market
The entertainment conglomerate attributed the impairment charge to “continued softness in the US linear advertising market”, as well as “uncertainty related to affiliate and sports rights renewals, including the NBA”.
WBD’s networks segment saw revenue decrease 8% year on year to $5.27bn.
The continued decline of linear revenue is little surprise, given the rise in popularity of streaming services, especially in the US. But it is the latest proof point requiring legacy media companies to shift long-term business strategies to better align with changing consumer habits.
WBD CEO David Zaslav admitted that the impairment has been done to better reflect the true market value of the company’s linear segment.
“It’s fair to say that, even two years ago, market valuations and prevailing conditions for legacy media companies were quite different than they are today, and this impairment acknowledges this and better aligns our carrying values with our future outlook,” he said on the company’s earnings call on Wednesday.
2. Loss of NBA rights a big hit
Last month, WBD lost the rights to broadcast the US National Basketball Association (NBA) in what has become an increasingly expensive and lucrative live sports market.
The NBA’s new rights deal, worth $75bn over 11 years, went to Disney, Comcast and Amazon, despite WBD matching their offer. In response, WBD sued the NBA, arguing that the league’s refusal of WBD’s offer was in breach of contract.
Uncertainty around whether WBD has standing in the lawsuit aside, losing access to the NBA removes a significant chunk of its capacity to garner reliable viewership in a dwindling linear market that is increasingly reliant on live sports and news.
NBA rights deal highlights importance of live sports and impact of streaming
3. Streaming isn’t saving WBD
On Wednesday’s earnings call, WBD chief financial officer Gunnar Wiedenfels tried to spin the impairment in a more positive light.
“While I am certainly not dismissive of the magnitude of this impairment, I believe it’s equally important to recognise that the flip side of this reflects the value shift across business models,” he said.
However, unlike many of its competitors — many of which are similarly seeing continued losses in the linear segments but are at least growing their smaller but future-facing direct-to-consumer (DTC) segments — WBD’s streaming services saw a decline in revenue in Q2. Indeed, DTC revenue fell 5% to $2.6bn.
The silver lining is that total DTC subscribers grew by 3.6m compared with the previous quarter to now total 103.3m. Furthermore, ad revenue from streaming doubled (+99%) due to higher engagement with Max’s ad tier, although the company did not specify an ad revenue figure, meaning this is possibly from a low base.
Disney and Warner Bros Discovery’s bundle: Is streaming turning into cable?
4. Still weighed down by huge debt
The Media Leader has previously written about WBD’s ongoing debt problem. When Warner Media merged with Discovery, the latter took on a tremendous amount of debt to finance the deal. In total, the conglomerate had $53m in debt and a net leverage of 5.0x circa August 2022. Industry analysts have previously described any net leverage above 3.0x as far too high for a media company.
Since merging, Zaslav has taken a number of unpopular decisions aimed at reducing debt. These have included binning films and TV shows even though production had already wrapped, writing the losses off for tax purposes.
Presently, WBD still has $41.4bn of gross debt after paying off an additional $1.8bn during Q2. Net leverage now totals 4.0x — still above a sustainable total.
5. Is a sale a solution?
Given the continued decline in WBD’s share price, Zaslav and Wiedenfells have reportedly been evaluating “all options” to turn things around.
Last month, that included a strategic plan to split its TV network, film studio and streaming businesses into separate entities, although the Financial Times this week suggested that this is now unlikely. Rather than break up the company, executives are now targeting a way to offload smaller assets, such as in international markets or its gaming division, as a way to reduce debt and improve the company’s market capitalisation.
WBD had also previously been in talks with Paramount Global about a potential merger of their streaming services before Paramount inked a wider deal with Skydance Media.
With shares of WBD falling further following the release of its Q2 earnings, there will be renewed pressure on the company’s executives to come up with a solution — be it through a merger, a sale of assets, a break-up or an outright sale to a larger conglomerate — to stem losses.
Why Warner Bros Discovery is considering splitting its business