Warner Bros. Discovery’s cost-cutting strategy ‘is world-class,’ analyst says

Yahoo Finance
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Needham & Co. Senior Media & Internet Analyst Laura Martin joins Yahoo Finance Live to discuss quarterly earnings for Warner Bros. Discovery, competition within the streaming space, inflation, and the outlook for Warner Bros. Discovery.

Video Transcript

DAVID ZASLAV: We are on track to achieve this year's financial targets. And we see a number of positive proof points emerging across our businesses with direct to consumer perhaps the most prominent. With strong command and control of our DTC business, we made a meaningful turn this quarter, generating $50 million in EBITDA, and adding 1.6 million new subscribers. And we feel really good about the trajectory we are on.

RACHELLE AKUFFO: Warner Brothers is now expecting that division to be profitable as soon as this year. Now, that's despite concerns about streaming competition and inflation. Still, the company posted a big loss in the first quarter, and investors are looking for more from Warner Brothers-- looking for more from CEO David Zaslav. Joining us now to help digest this tough quarter is Laura Martin, Needham Company's Senior Media and Internet Analyst. Good to have you on the show here, Laura.

So I want to first start with Warner Brothers' discovery there. Are you as optimistic? You have a hold on this at the moment.

LAURA MARTIN: Yeah, so they're making really good momentum. The cost-cutting here is world-class, and they're saving. They keep raising the estimates of how much they can save and cost-cutting, and their next focus is going to be on the film segment, which I think there's a lot of excess costs there. So I think what's happening in all these businesses is we're bringing a really disciplined cost-cutting umbrella into what was traditionally in Warner Brothers under AT&T monopoly cost structures, which are typically inflated.

RACHELLE AKUFFO: And do you think potentially this could be something attractive that Apple could be looking at to buy?

LAURA MARTIN: We're arguing that Apple should buy the Walt Disney Company. The issue here is I think we have a broken film content creation engine, where it's not-- Disney the company, it is not broken. But here at Warner Brothers, it's unclear they can actually make DC comic movies. So "Batman" has been successful. They're going to launch another Superman.

So we'll see. But the Warner Brothers film studio has been on a cold spell for the last five years. And Apple can't help with that. Apple's a distribution platform, so Apple would really need to buy a successful and healthy film studio to make content-- not a broken one.

RACHELLE AKUFFO: And so then, what would be the biggest selling points in terms of the synergies that you already see between Apple and Disney?

LAURA MARTIN: Apple and Disney? So the great thing that-- the brand consistency, right? World-class brands in both cases. You'd be adding 100% of omnichannel touchpoints, because you can touch consumers in theme parks, which Apple can't do. And then you would also have two billion active devices in Apple. You could do some of the content of the Walt Disney Company exclusive to Apple for a certain window-- three months or something, which would drive Apple iPhone penetrations.

So there's a lot of synergies always between distribution-- which is what Apple iPhones are-- and content, which is what Disney is. So we think that's an interesting-- but WBD does have a big library. I think it's still in the turnaround phase. We expect WBD to look at Paramount as an acquisition. They reported their stock was down over 20% yesterday. And Warner Brothers is just managing the same business better than I think Paramount is. So that's the one I think Warner Brothers should buy.

RACHELLE AKUFFO: So then, in terms of the biggest upsides you see for Warner Brothers-- especially in such a competitive streaming space here-- what are your top upsides for them?

LAURA MARTIN: So one of the things they said that was new is that HBO churn is really high, but Discovery Plus churn is really low. And we called that. Discovery Plus is all of that-- let me call it "super fandom" content, like "Love It Or List It," or "The Fixer Uppers." So I think putting those two services together should lower churn, bring more fandom, which should bring more pricing power. And you would have the upside of that really high-quality HBO Max content.

So it could arguably be the most powerful streaming company. We'll see. It always has held that promise and so far hasn't, but now we have it in the hands of a new CEO and a new marketing team. So maybe they'll be better. But I would say that's the biggest hidden upside value driver potential is that HBO-- what they're now going to call Max with that full line of content-- becomes as sticky and as popular as Disney or Netflix.

RACHELLE AKUFFO: And we knew that we were going to hear a lot about ad spend coming into this earnings season for big tech. Meta certainly surprising in that regard. How do you see the ad spend story for this earnings season in big tech?

LAURA MARTIN: So advertising was down 15% for Warner Brothers in North America. So I would say the connected television ad market is weak right now, as evidenced by Roku and Fubo just reported weak ad revenue. And this one, Warner Brothers and Paramount, weak ad revenue. Down double digits. So in the connected television glass, that ad unit-- those are weak.

To your point, some of the-- Google-- so Alphabet and Meta had better advertising numbers than they have-- the momentum is turning, but that's a smartphone ad unit. So it's sort of different than-- and remember, smartphone ad units sell round numbers at $2 cost per thousand, and connected television ad units sell at $20 cost per thousand. So You really have a disproportionately negative impact on advertising growth if what's weak is the connected TV ad market because of the higher cost per thousand.

RACHELLE AKUFFO: And so obviously, we saw a lot of money and a lot of investors pouring into big tech, despite what they were hearing from the Fed about not pausing anytime soon. Now you have this-- a good jobs number, although it puts the Fed in a tough space. What's your outlook for tech, then, based on what we've already seen this earnings season? Even though the expectation-- the bar-- was quite low, but we kept hearing about those macroeconomic concerns still lingering.

LAURA MARTIN: I got to tell you, these Apple numbers yesterday were-- as the biggest of the big tech, Apple's numbers were excellent yesterday. Not only did they generate $28 billion of free cash flow, but they grew on an FX adjusted-- so currency-neutral-- basis. They grew revenue at 2% out of emerging markets. They hit-- they really exceeded everybody's iPhone estimates, all from emerging markets-- places we never think of as having Apple relevance. So I think that's really interesting.

And China is coming back. So China was locked down for a lot longer than the US and Europe. And now, the band is starting to come back. And it used to be 20% of total iPhone demand. And it's starting to come back. So that could actually drive the upside to the Apple story for the next year or so. So I would say Apple among big tech is a good place to hide, because it doesn't have any ad revenue. It just has a two billion active device installed base of some of the wealthiest consumers on Planet Earth.

RACHELLE AKUFFO: Certainly not a bad spot to be in if you're Apple. A big thank you. Always great to have you on. Laura Martin, Needham Company Senior Media Internet Analyst. Thank you, and have a great weekend.