Warner Bros. Discovery Down 15% After Earnings Debut As Wall Street Sees “Post-Merger Growing Pains” – Update

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Shares of Warner Bros. Discovery continued to fall Friday, down more than 15%, after its first combined financials report featured a big net loss, disappointing revenue, high debt and a slower outlook for streaming amid anticipate post-merger growing pains.

Steven Cahall of Wells Fargo, downgraded the stock (from ‘equal weight’ to ‘overweight’) and cut his price target. The collection of assets is great but outlook and guidance “indicate a company going through a lot of post-merger growing pains.”

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The numbers, which were released after market close yesterday, were followed by a long, meaty call with CEO David Zaslav, CFO Gunnar Wiedenfels and global streaming head JB Perrette. Presentations, slides and Q&A were a start to understanding the new company but highlighted the complex task ahead. Basically, WarnerMedia’s fundamental trends were weaker than management had expected.

Analysts have been pondering what the new entity would look like for over a year since the deal was announced. On Thursday, they finally got the “long-awaited quarterly pro forma financials to align models and establish a common financial blueprint that captures all the moving pieces and adjustments,” said Robert Fishman of MoffettNathanson. It will take a beat to process. Meanwhile, he said, “We expect the elevated debt load, macro headwinds and growing secular pressure from faster cord-cutting, along with…uncertainty around key strategic questions, to be an overhand for the shares.”

PREVIOUSLY: Zaslav’s team is in the midst of a major restructuring and rethinking of the economic models around streaming, theatrical distribution and costs. It plans to combine HBO Max and Discovery and may introduce a free ad-supporting service after.

Streaming losses ($518 million actual, $560 million combined pro forma) are expected to peak this year and the business to post $1 billion in positive EBIDTA by 2025, when the combined company expects to have 40 million more subscribers, meaning about 130 million.

Gross debt was $53 billion, hefty but mostly long term, said Wiedenfels. The company  is looking cut at least $3 billion in costs, and to spend carefully, a process underway. It axed Batgirl, and Demimonde from J.J. Abrams and is said to be on the verge of major layoffs starting this month. Execs didn’t mention looming job cuts, and Wall Street analysts didn’t ask about them.

The CFO called 2022 a transition year and started off his remarks noting that a more difficult economic backdrop and a full look at the combined numbers had required the team to adjust forecasts for this year and next.

Read the earnings report here.

PREVIOUSLY: Newly minted Warner Bros. Discovery posted $9.8 billion in revenue at its landmark first earnings report since Warner Media and Discovery formally tied the knot. It would have been $10.8 billion if the company had been merged for the full three months. (They closed their deal April 8.) That was 3% down from the year earlier and lower than $11.8 billion that was Wall Street’s consensus.

Net loss of $3.4 billion (or $2.2 billion pro forma) included $2 billion of amortization of intangibles, $1 billion of restructuring and other charges, and $983 million of transaction and integration expenses.

The deal marks a major shift in the media landscape with the combined company publicly starting to take shape today. CEO David, Zaslav, CFO Gunnar Wiedenfels, and global streaming chief JB Perrette will present the business and strategic contours and take questions from Wall Street on a webcast beginning at 4:30 ET that could run for several hours with details or thinking on bringing together HBO Max and Discovery+; on film (including why WBD just shelved Batgirl in the final stages of post-production); on impending layoffs to eliminate redundancies amid $3 in planned cost savings; on IP, news and sports. It’s a lot of ground. In a running start, WBD earlier today announced a new CNN Originals streaming hub on Discovery+, and Magnolia Network moving to HBO Max.

Here are some financial highlights:

-Q2 total reported revenues were $9.8 billion. Pro forma combined revenues decreased 1% excluding foreign exchange) compared to the prior year quarter.

-Net loss of $3.4 billion includes $2 billion of amortization of intangibles, $1 billion of restructuring and other charges, and $983 million of transaction and integration expenses.

-Adjusted EBITDA was $1.664 billion.

-Cash provided by operating activities increased to $1 billion and reported free cash flow increased to $789 million.

-Ended Q2 with $3.9 billion of cash on hand, and gross debt of $53 billion.

-Ended Q2 with 92.1 million global DTC subscribers, an increase of 1.7 million versus 90.4 million subscribers at the end of Q1, as adjusted for the company’s new DTC subscriber definition. The new definition resulted in the exclusion of 10 million legacy Discovery non-core subscribers and unactivated AT&T mobility subscribers from the Q1 subscriber count.

“We’ve had a busy, productive four months since launching Warner Bros. Discovery, and have more conviction than ever in the massive opportunity ahead,” said CEO David Zaslav.

“We have the most powerful creative engine and bouquet of owned content in the world, as highlighted by our industry leading 193 Emmy nominations, and we intend to maximize the value of that content through a broad distribution model that includes theatrical, streaming, linear cable, free-to-air, gaming, consumer products and experiences, and more, everywhere in the world. We’re confident we’re on the right path to meet our strategic goals and really excel, both creatively and financially, and couldn’t be more excited about the future of our company.”

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