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Warner Bros Discovery Had an Ugly Quarter. It is Combining HBO Max and Discovery+.

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In its first quarter as a combined company,



Warner Bros. Discovery

missed Wall Avenue’s estimates throughout the board, noticed streaming subscriber progress gradual, and watched its leverage rise.

Warner Bros. Discovery inventory (ticker: WBD) was down about 12% in after-hours buying and selling on Thursday.

Warner Bros. Discovery is the product of a spring merger between Discovery and Warner Bros., which AT&T (T) spun off to refocus on its telecommunications businesses. The mixed media firm contains HBO Max and Discovery+, the Warner Bros. Hollywood studio, and cable TV channels together with TNT, CNN, Discovery, Meals Community and HGTV. That transaction closed on April 8, one week into the second quarter.

On Thursday afternoon, WBD reported second-quarter income of $9.8 billion, or $10.8 billion had the businesses been united for the total three months. That professional forma income was down about 3% from the identical interval a yr earlier. Wall Avenue analysts had been forecasting $11.8 billion in income on common.

WBD reported a web lack of $3.4 billion, or $1.50 per share, versus consensus of a revenue of 11 cents per share earlier than the report. Professional forma, that may have been a lack of $2.2 billion. It contains about $2 billion of restructuring and transaction associated prices and one other $2 billion of intangible asset amortization.

Reported adjusted earnings earlier than curiosity, taxes, depreciation, and amortization—or Ebitda—was $1.7 billion, down 32% yr over yr and effectively behind analysts’ $2.5 billion forecast. With the professional forma changes, adjusted Ebitda would have been $1.8 billion.

The corporate’s free money circulation was $789 million within the quarter, up 4% however in need of the $961 million consensus.

“We’ve had a busy, productive 4 months since launching Warner Bros. Discovery, and have extra conviction than ever within the large alternative forward,” mentioned WBD CEO David Zaslav, who was beforehand CEO of Discovery. “We’re assured we’re on the fitting path to satisfy our strategic targets and actually excel, each creatively and financially.”

WBD ended the second quarter with 92.1 million streaming subscribers on HBO Max and Discovery+, up by 1.7 million in the course of the interval. That’s slowing progress. On the finish of the primary quarter, HBO and HBO Max had 76.8 million subscribers, up by three million within the first three months of the yr, and Discovery+ had 24 million subscribers, up by two million. 

Common income per subscriber was $7.66 within the quarter. The corporate didn’t report subscriber figures for the 2 companies individually on Thursday. Combining HBO Max and Discovery+ into one service is a part of the plan, with a launch within the U.S. in summer time 2023 adopted by worldwide markets by 2024. A free, advertising-supported tier of the service is within the works, Zaslav mentioned Thursday, along with present ad-free and ad-lite variations.

Streaming-segment income was $2.4 billion within the second quarter, up 2%, and adjusted Ebitda was a lack of $560 million—versus a professional forma lack of $235 million within the year-ago interval.

Administration mentioned on Thursday it expects peak streaming losses to be this yr, on the way in which to adjusted Ebitda break-even by 2024 and at the very least $1 billion in revenue in 2025—when the service might have 130 million international subscribers and common income per consumer will likely be increased.

WBD’s TV networks enterprise—its largest—had income of $6.1 billion, down 1%, and adjusted Ebitda of $2.4 billion, down 12%. Increased sports-rights prices have been behind the decline in earnings.

Lastly, WBD’s film studio section had $3.4 billion in income and $409 million in adjusted Ebitda, up 1% and down 7%, respectively.

Administration steerage from Might 2021, when the spinoff and merger was introduced, known as for $52 billion in complete income in 2023, together with at the very least $15 billion in streaming income; $14 billion of adjusted Ebitda; and about $8 billion of free money circulation subsequent yr.

Administration was additionally focusing on $3 billion in annual price financial savings on account of the merger, of which $1 billion has already been achieved. The brand new administration shut down the CNN+ streaming service quickly after taking on, and solely about a month after its launch. Executives walked by a number of different areas they have been focusing on for price slicing on Thursday, together with axing some less-promising TV and film productions.

WBD had $49 billion in web debt on the finish of the second quarter, or 5.0 occasions adjusted Ebitda. Administration plans to get leverage all the way down to 2.5 to three.0 occasions inside two years.

WBD inventory has rebounded greater than 30% from its late-June lows, however stays low-cost: WBD had a market worth of near $41 billion and was buying and selling for 12 occasions ahead earnings at Thursday’s closing worth. The shares have been nonetheless down 29% because the AT&T/Discovery deal closed on April 8 by Thursday’s shut. The S&P 500 is down 7.4% in that interval.

Write to Nicholas Jasinski at nicholas.jasinski@barrons.com

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