Warner Bros. Discovery stock slammed after earnings debut

Analysts on average expected earnings of 12 cents a share on revenue of $11.83 billion, according to FactSet. Shares dove more than 11% in after-hours trading following the release of the results, after closing with a 4.6% increase at $17.48.

In a conference call that spanned more than an hour and a half Thursday afternoon, executives laid out some of the reasons that financial performance struggled, including rough times for linear networks, cancelled contracts for content sharing and a downturn in streaming growth writ large.

“With respect to overall Q2 financial performance, clearly these results are neither indicative of the health of the underlying assets nor of their longer-term trajectory, but rather the fact that we’re starting from a less favorable position compared to our expectations,” Chief Financial Officer Gunnar Weidenfels said in a conference call Thursday.

Chief Executive David Zaslav, in a conference call that lasted more than an hour and a half, announced that the company is exploring a free, ad-supported streaming service as a way to attract more customers to the platform.

“In the spirit of optimization, once our SVOD service is firmly established in the market, we see real potential and are exploring the opportunity for a fast or free ad-supported streaming offering that would give consumers who do not want to pay a subscription fee access to great library content, while at the same time serving as an entry point to our premium service,” Zaslav said.

Warner Bros. Discovery reported total streaming subscribers of 92.1 million, which would compare with 260.67 million subscribers for streaming pioneer Netflix Inc.
NFLX,
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Average revenue per subscriber was $7.66, and the company added 1.7 million subscribers on a net basis in the quarter.

Executives did not provide a third-quarter forecast in the announcement nor conference call, but did provide long-term targets for the new company.

“We expect peak EBITDA losses for the DTC segment will occur this year in 2022, as we do the heavy lifting around technology, personnel and integration ahead of the planned relaunch starting next summer,” lead streaming exec JB Perrette said in the call. “We’re targeting the U.S. streaming business to be profitable in 2024 and for the global streaming segment to generate $1 billion in EBITDA by 2025.”

Weidenfels added that adjusted Ebitda for 2022 is expected to be $9 billion to $9.5 billion, which he said was a decline from previous forecasts, and that profit metric would grow to at least $12 billion in 2023. Perette also predicted the subscriber base would grow to roughly 130 million global subscribers in 2025.

The executives confirmed reports that certain completed or nearly-completed film projects, including “Batgirl” and a sequel to “Scoob!,” had been shelved as opposed to releasing them directly to streaming services. In answering a question about that decision, Zaslav showed a commitment to running movies in theaters that seemed more robust than other streaming executives.

“We’ve seen luckily by having access now to all the data, how direct-to-streaming movies perform. And our conclusion is that expensive direct-to-streaming movies — in terms of how people are consuming them on the platform, how often people go there, or buy it, or buy a service for it and how it gets nourished over time — is no comparison to what happens when you launch a film … in the theaters,” Zaslav said. “And so this idea of expensive films going direct to streaming, we cannot find an economic case for it. We can’t find an economic value for it. And so we’re making a strategic shift.”

Analysts hope that the approaching premiere of the “Game of Thrones” spinoff “House of the Dragon” can pump up subscribers, while planned cuts of up to $3 billion in postmerger “synergies” can boost the bottom line.

“‘House of the Dragon’ should minimally buffer subscriber erosion from discontinuing AT&T Mobile promotions and may represent the most plausible 2022-2023 stock catalyst outside visibility on $3B in cost reductions and free cash generation,” Benchmark analyst Matthew Harrigan wrote Wednesday in previewing the report, while maintaining a buy rating and $26 price target.

Warner Bros. Discovery stock has declined 25.6% since the beginning of the year, while the S&P 500 index
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has declined 12.8%. The merger closed on April 8.