Warner Bros. Discovery (WBD) shares fell as much as 12% in early trading on Thursday after the company reported disappointing second-quarter results on Wednesday that fell short of expectations on both revenue and earnings.
The company took a massive $9.1 billion impairment charge related to its TV division after losing a key media rights deal with the NBA. The company filed suit against the league, alleging that the NBA “unjustifiably rejected” the company’s matching rights proposal.
Including additional costs of $2.1 billion related to the merger, the company recorded write-downs and charges of $11.2 billion last quarter. In addition, the company reversed previous profit trends in its streaming business, although it added nearly 4 million subscribers in the quarter, while the performance in the linear TV space continued to deteriorate.
Wall Street analysts commented on the report on Thursday, with at least one of them saying it was “unlikely” that things could get any worse for the media giant.
KeyBanc analyst Brandon Nispel, who rates the stock overweight, said the company’s studio business is likely to perform better in 2025 than in 2024, while streaming could continue to offset the accelerating decline of linear networks.
Warner Bros. Discovery CEO David Zaslav stressed in the company’s earnings call that the streaming unit’s profitability will be positive in the second half of the year, with “even greater subscriber growth” in the current quarter and “at least” $1 billion in segment EBITDA in 2025.
Still, Zaslav pointed to changing industry dynamics as the primary reason for the impairment, telling investors on the conference call: “It’s fair to say that market valuations and prevailing conditions for traditional media companies were very different just two years ago than they are today. This impairment takes that into account and better aligns our book values with our future prospects.”
Gunnar Wiedenfels, CFO of WBD, added that there were “a number of triggering events in the second quarter, including the difference between our current market capitalization and the book value of the company, the continued weakness of the US advertising market and uncertainties related to the renewal of partners and sports rights, including the NBA.”
“While I certainly do not deny the magnitude of this impairment, I believe it is equally important to recognize that the flip side of this reflects the shift in value across all business models and our belief and confidence in the growth and value creation opportunities in the studios and in our global direct sales business,” he said.
Revenue for the quarter was $9.7 billion, below Bloomberg’s consensus estimate of $10.12 billion, and down 6% from the year-ago figure of $10.36 billion.
The company reported an adjusted loss per share of $4.07, compared to a loss of $0.51 in the year-ago period. Due to the impairment, the loss was below the consensus estimate of $0.21.
Free cash flow, which was a bright spot in the first quarter, bucked the trend this time around, falling 43% year over year to $976 million and also falling short of Bloomberg consensus expectations of $1.2 billion.
The company’s direct-to-consumer (DTC) streaming business was a bright spot this quarter, adding 3.6 million Max subscribers with the debut of the second season of “House of the Dragon.” That was above Bloomberg consensus forecasts of 1.89 million and also above the 1.80 million subscribers added in the second quarter of 2023.
Streaming advertising revenue rose to $240 million, beating Bloomberg estimates of $191 million. That’s 98 percent higher than the $121 million the company reported in the same period last year. However, the DTC division posted a loss of $107 million after reporting a profit in the first quarter.
Future uncertain amid linear battles
In its recent media rights negotiations, the NBA passed over WBD in favor of two new entrants: tech giant Amazon (AMZN) and Comcast’s NBCUniversal (CMCSA). The league was able to reach a new rights agreement with its other current media partner, Disney (DIS). WBD’s current rights expire at the end of next season.
Analysts warn that the loss of these rights will hurt the future success of the Max streaming service and will likely accelerate the decline of linear networks that are already in free fall.
Network advertising revenue fell 10% in the second quarter from the same period last year. The company reported network advertising revenue of $2.21 billion, below Bloomberg’s expectations of $2.26 billion.
This has put pressure on second-quarter EBITDA, and according to Bloomberg’s latest estimates, full-year adjusted EBITDA is now at risk of falling below $10 billion, $4 billion less than analysts had expected at the time of the merger.
Rumors have been circulating about the company’s next move. In a recent report, analysts at Bank of America laid out possible strategic options that could include a spin-off of the company’s digital streaming and studio business from its existing linear TV division.
Management avoided the topic of a split during the conference call, but apparently admitted that it had been discussed.
“This is a publicly traded company. We are all aware of our responsibility to have a view of all strategic options,” said Wiedenfels. “We are clearly focused on evaluating everything that goes beyond simply running the operational business.”
Nevertheless, the company said it has been operating under the “one Warner Bros. Discovery strategy” for the past two and a half years… and every day we see the benefits.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and send her an email at [email protected].
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