Warner Bros. Discovery to report Q2 earnings amid challenged environment

Warner Bros. Discovery (WBD) will report second quarter earnings before the bell on Thursday as the media giant works to pare down its debt amid linear TV challenges, an unfavorable ad market, and a hotly competitive streaming landscape.

The quarterly results will reflect how WBD is performing about a year after its formation when AT&T’s WarnerMedia merged with Discovery.

Analysts will be closely watching for updates on WBD’s streaming division. Streaming losses reversed in the first quarter as subscriber growth came in above consensus estimates. WBD revised previous guidance then, saying it expected its US direct-to-consumer business to be profitable by this year. Previously, the company had said the streaming division would break even by next year before hitting profitability in two years.

This quarter, the company is expected to see elevated churn following the debut of its Max streaming service as customers with overlapping subscriptions to both Max and Discovery+ shed extra accounts. Marketing and launch costs related to Max, which launched at the end of May, could propel an estimated $300 million streaming loss in the quarter.

Here’s what Wall Street expects, according to Bloomberg estimates:

The debut of Max, which launched at the end of May, came at a critical time in the streaming wars with competitors like Disney (DIS), Netflix (NFLX), and Apple (AAPL) all vying for subscribers.

At the time of the platform’s debut, CEO David Zaslav touted the company’s strong storytelling IP from franchises like “Lord of the Rings” and “Harry Potter” to successful shows like “Friends” and “The Big Bang Theory.”

According to Bloomberg, the company, which did not respond to Yahoo Finance’s request for comment, plans to add live programming from CNN to Max later this year.

WBD has been rethinking the future of CNN as the network grapples with historically low ratings, mass layoffs, a failed foray into streaming with CNN+, and, most recently, the firing of former chief Chris Licht.

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Bank of America analyst Jessica Reif Ehrlich told Yahoo Finance Licht’s firing underscores the decisiveness of Zaslav, explaining, “When he makes a mistake, he corrects it. He doesn’t stick with the mistake. That’s the right thing to do.”

Zaslav’s no-nonsense leadership style has led to atypical strategies like licensing content to competitors.

HBO’s “Insecure” landed on Netflix last month. According to Deadline, “Six Feet Under,” “Ballers,” “Band of Brothers,” and “The Pacific” will also debut on the platform as part of the deal.

Box office, ad market likely to weigh on Q2 results

A disappointing box office could weigh on Q2 results — despite the record-breaking success of “Barbie,” which debuted in the company’s fiscal third quarter. Marketing expenses related to “Barbie,” however, will likely be an overhang.

“The Flash” bombed in its theatrical debut in June following an equally disappointing debut of “Shazam! Fury Of The Gods” in the spring. Those double-whammy disappointments have added to concerns surrounding the future of the DC film franchise, which has struggled compared to Disney’s Marvel Cinematic Universe.

WBD has also grappled with an unfavorable ad environment. Network advertising revenue tumbled by 15% in the first quarter from the year-earlier period, or 14% excluding foreign exchange.

“While our Network ad estimates were already conservative, we do think lower upfront volumes and pricing ‘roll backs’ — especially on entertainment content — will drag revenues,” Wells Fargo analyst Steve Cahall wrote in a note prior to Thursday’s release.

Earlier this week, the company revealed it will realign its advertising sales division, including its leadership team, amid that weak ad demand.

Despite advertising weakness, falling linear network revenue, and looming recession fears, Wall Street analysts have continued to praise the company’s turnaround plan as it executes on its cost-cutting initiatives and further deleverages its balance sheet. WBD is targeting $4 billion in cost savings over the next two years.

“[WBD] has its costs in a really good place now,” Bank of America’s Ehrlich said. “When revenue starts to improve — whether it’s from advertising, film, or subscription now that Max has launched — the company is in a phenomenal position, and they’ll have significant leverage.”

Cahall, who has an Overweight rating and $20 price target on the stock, added, “For WBD to work beyond deleveraging, we think investors will need to see a path to offset Networks-driven EBITDA pressures.”

“We think WBD is the most commercially-minded Media stock, and it has perhaps the best content including HBO,” the analyst continued. “Licensing HBO and Warner Bros. content/brands to big streamers, and paring back direct-to-consumer investments, could help drive earnings regardless of linear trends. If WBD stock underperforms, we see this maneuver as increasingly likely.”

Shares of Warner Bros. Discovery are up more than 35% year-to-date.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at [email protected].

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