Warner Bros. Discovery (WBD) shares fell about 12% in early trading Thursday after the company reported disappointing second-quarter earnings on Wednesday that missed expectations on both the top and bottom lines.
The company took a massive $9.1 billion impairment charge related to its television networks unit following the loss of a major media rights deal with the National Basketball Association. The company has sued the league over what it says was “unjustified refusal” From the company’s conformity rights proposal.
Including an additional $2.1 billion in merger-related costs, the company took a $11.2 billion loss on write-offs and charges in the past quarter. Additionally, the company reversed past earnings trends in its streaming business despite adding nearly 4 million subscribers in the quarter, while its linear TV unit continued to decline.
Wall Street analysts weighed in on the report on Thursday, with at least one noting that it was “unlikely” things would get worse for the media giant.
The company’s studio business is likely to outperform in 2025 compared to 2024 while streaming could continue to offset accelerating declines in the linear network, said KeyBanc analyst Brandon Nispel, who holds an “overweight” rating on the stock.
Warner Bros. Discovery CEO David Zaslav confirmed on the company’s earnings call that profitability within its streaming unit will be positive in the second half of the year with “significant subscriber growth” in the current quarter and “at least” $1 billion in EBITDA for the segment in 2025.
However, Zaslav pointed to shifting industry dynamics as a key driver of the impairment charge, telling investors on the call, “It’s fair to say that even two years ago, market valuations and prevailing conditions for traditional media companies were very different than they are today. This impairment recognizes this and better balances our book value with our future expectations.”
WBD CFO Gunnar Weidenfels added that the second quarter saw “a number of catalytic events, including the difference between the company’s current market value and book value, continued weakness in the U.S. advertising market and uncertainty surrounding the renewal of affiliate and sports rights, including the NBA.”
“While I certainly don’t discount the magnitude of this weakness, I think it’s equally important to recognize that the other side of this reflects the shift in value across business models and our conviction and confidence in the growth and value opportunities across our studios and global direct-to-consumer businesses,” he said.
Revenue in the third quarter was $9.7 billion, below the Bloomberg consensus estimate of $10.12 billion and down 6% from $10.36 billion a year ago.
The company reported an adjusted loss per share of $4.07, compared to a loss of $0.51 in the year-ago period and below the consensus estimate of $0.21 due to impairment charges.
But free cash flow, which was a bright spot in the first quarter, bucked the trend this time around. The metric fell 43% year over year to $976 million, missing the $1.2 billion Bloomberg consensus.
The company’s direct-to-consumer (DTC) streaming business was a bright spot in the quarter. It added 3.6 million Max subscribers amid the debut of the second season of “House of the Dragon.” That was above the Bloomberg consensus forecast of 1.89 million and also above the 1.80 million subscribers added in the second quarter of 2023.
Online ad revenue rose to $240 million, beating Bloomberg’s estimate of $191 million and up 98% from the $121 million the company reported in the year-ago period. However, the direct-to-consumer streaming division reported a loss of $107 million after reporting a profit in the first quarter.
Unclear future amid linear conflicts
In its latest media rights negotiations, the NBA has ceded WBD to two new companies: tech giant Amazon (AMZN) and Comcast Corp.’s NBCUniversal (CMCSA). The league has also reached a new rights agreement with its other current media partner, Disney (DIS). The current WBD rights expire at the end of next season.
Analysts have warned that losing these rights would hurt the future success of the Max streaming service, and would likely accelerate the demise of its linear networks, which are already in free fall.
Network ad revenue fell 10% in the second quarter compared to the year-ago period. The company reported network ad revenue of $2.21 billion, below Bloomberg’s forecast of $2.26 billion.
That put pressure on second-quarter earnings before interest, taxes, depreciation and amortization, with full-year adjusted earnings before interest, taxes, depreciation and amortization now at risk of falling below $10 billion, according to the latest Bloomberg estimates. That’s about $4 billion less than analysts had expected at the time of the merger.
Rumors have been swirling about the company’s next move, with Bank of America analysts laying out potential strategic options in a recent report that could include splitting the company’s digital streaming and studio businesses from its legacy linear TV unit.
Management avoided addressing the split during the earnings call, but appeared to acknowledge that the topic had been discussed.
“It’s a public company,” Weidenfels said. “We’re all very aware of our responsibility to have a say on any strategic options that are available. We’re very focused on evaluating everything beyond just running the business.”
However, the company said it has been “working under one Warner Bros. Discovery strategy for the past two and a half years… and every day we see the benefits.”
Alexandra Channel She is a senior reporter at Yahoo Finance. You can follow her on X @Ali_Canal, LinkedIn, You can email her at alexandra.canal@yahoofinance.com.
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