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

Warner Bros. Discovery stock (ticker: WBD) was down about 12% in after-hours trading 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 combined media company includes HBO Max and Discovery+, the Warner Bros. Hollywood studio, and cable TV channels including TNT, CNN, Discovery, Food Network and HGTV. That transaction closed on April 8, one week into the second quarter.

On Thursday afternoon, WBD reported second-quarter revenue of $9.8 billion, or $10.8 billion had the companies been united for the full three months. That pro forma revenue was down about 3% from the same period a year earlier. Wall Street analysts had been forecasting $11.8 billion in revenue on average.

WBD reported a net loss of $3.4 billion, or $1.50 per share, versus consensus of a profit of 11 cents per share before the report. Pro forma, that would have been a loss of $2.2 billion. It includes about $2 billion of restructuring and transaction related costs and another $2 billion of intangible asset amortization.

Reported adjusted earnings before interest, taxes, depreciation, and amortization—or Ebitda—was $1.7 billion, down 32% year over year and well behind analysts’ $2.5 billion forecast. With the pro forma adjustments, adjusted Ebitda would have been $1.8 billion.

The company’s free cash flow was $789 million in the quarter, up 4% but short of the $961 million consensus.

“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 WBD CEO David Zaslav, who was previously CEO of Discovery. “We’re confident we’re on the right path to meet our strategic goals and really excel, both creatively and financially.”

WBD ended the second quarter with 92.1 million streaming subscribers on HBO Max and Discovery+, up by 1.7 million during the period. That is slowing growth. At the end of the first quarter, HBO and HBO Max had 76.8 million subscribers, up by three million in the first three months of the year, and Discovery+ had 24 million subscribers, up by two million. 

Average revenue per subscriber was $7.66 in the quarter. The company didn’t report subscriber figures for the two services separately on Thursday. Combining HBO Max and Discovery+ into one service is part of the plan, with a launch in the U.S. in summer 2023 followed by international markets through 2024. A free, advertising-supported tier of the service is in the works, Zaslav said Thursday, in addition to existing ad-free and ad-lite versions.

Streaming-segment revenue was $2.4 billion in the second quarter, up 2%, and adjusted Ebitda was a loss of $560 million—versus a pro forma loss of $235 million in the year-ago period.

Management said on Thursday it expects peak streaming losses to be this year, on the way to adjusted Ebitda break-even by 2024 and at least $1 billion in profit in 2025—when the service could have 130 million global subscribers and average revenue per user will be higher.

WBD’s TV networks business—its largest—had revenue of $6.1 billion, down 1%, and adjusted Ebitda of $2.4 billion, down 12%. Higher sports-rights costs were behind the decline in profits.

Finally, WBD’s movie studio segment had $3.4 billion in revenue and $409 million in adjusted Ebitda, up 1% and down 7%, respectively.

Management guidance from May 2021, when the spinoff and merger was announced, called for $52 billion in total revenue in 2023, including at least $15 billion in streaming revenue; $14 billion of adjusted Ebitda; and about $8 billion of free cash flow next year.

Management was also targeting $3 billion in annual cost savings as a result of the merger, of which $1 billion has already been achieved. The new management shut down the CNN+ streaming service soon after taking over, and only about a month after its launch. Executives walked through several other areas they were targeting for cost cutting on Thursday, including axing some less-promising TV and movie productions.

WBD had $49 billion in net debt at the end of the second quarter, or 5.0 times adjusted Ebitda. Management plans to get leverage down to 2.5 to 3.0 times within two years.

WBD stock has rebounded more than 30% from its late-June lows, but remains cheap: WBD had a market value of close to $41 billion and was trading for 12 times forward earnings at Thursday’s closing price. The shares were still down 29% since the AT&T/Discovery deal closed on April 8 through Thursday’s close. The S&P 500 is down 7.4% in that period.

Write to Nicholas Jasinski at [email protected]