Warner Bros. Discovery Posts Streaming Profit of $289 Million in Q3 as Subs Grow to 110.5 Million

Shares of Warner Bros. Discovery surged over 12% during Thursday’s trading session as its a direct-to-consumer division posted a profit of $289 million during its third quarter of 2024, fueled by its largest-ever quarter of subscriber growth since the launch of Max, which topped 110 million globally.

“Anyone who has listened to one of our earnings calls over the last two years knows Max’s importance to Warner Brothers Discovery,” WBD CEO David Zaslav told analysts during the company’s third quarter earnings call on Thursday. “Getting Max right has required patience, discipline and substantial investment. Today, those investments are delivering clear results, both in terms of subscriber related revenue growth and bottom line impact.”

But WBD’s overall results were dragged down by the studios division, which posted a 17% dip in revenue and 58% plummet in profit during the quarter. Theatrical revenue fell 40% during the quarter, primarily driven by lower box office revenue. The performance of “Beetlejuice Beetlejuice” and “Twisters” in the current year was more than offset by the stronger performance of Barbie in the prior year.

“Our third quarter saw strong success with ‘Beetlejuice Beetlejuice,’ but even in an industry of hits and misses, we must acknowledge that our studios business must deliver more consistency,” Zaslav said.

During the call, Wall Street analysts pressed management about their strategy surrounding M&A to boost its stock price, whether it be selling or spinning off assets or acquiring them. Comcast said earlier this week that it is exploring a possible spinoff of its cable network portfolio into a standalone, publicly traded company, which could provide an opportunity to roll-up distressed linear TV assets from other companies, including Warner.

“We have an upcoming new administration, and it’s too early to tell, but it may offer a pace of change and an opportunity for consolidation that may be quite different, that would provide a real positive and accelerated impact on this industry that’s needed,” Zaslav said Thursday, after reiterating his belief that further consolidation in the industry would positively impact WBD.

“These are great companies, and if the best content is going to win, there needs to be some consolidation in order to have these businesses be stronger and have a better consumer experience,” he said.

Here are the top-line results:

Net income: $135 million, compared to a loss of $417 million a year ago. That included $1.6 billion of “pre-tax acquisition-related amortization of intangibles, content fair value step-up, and restructuring expenses.”

Earnings Per Share: A profit of $5 cents per diluted share, compared to a loss of $7 cents per share estimated by analysts surveyed by Zacks Investment Research.

Revenues: $9.6 billion, down 4% and less than the $9.94 billion expected by Zacks.

Adjusted EBITDA: $2.4 billion, a 19% decrease from $2.97 billion.

Subscribers: Added 7.2 million subscribers for a total of 110.5 million globally.

Warner ended the third quarter with $3.5 billion in cash on hand, $40.7 billion in gross debt and 4.2 times net leverage. Free cash flow fell 69% year over year to $632 million due to higher content spend compared to the prior year period. WBD repaid nearly $900 million in debt during the quarter, with about $300 million set to mature next week.

“We continue to expect to de lever year over year, albeit much more modestly than initially planned, in part due to the studio shortfalls and impairments, and we will continue to use virtually all of our free cash flow to retire debt as we continue to target 2.5 to 3 times gross leverage for the longer term,” chief financial officer Gunnar Wiedenfels told analysts.

While WBD stock is up 23% since its April 2022 merger, shares are currently trading at around $9 per share.

“We believe strongly that the current stock price doesn’t adequately reflect the underlying value of these great assets that we have and we’re hard at work,” Zaslav said. “We’re seeing the results of executing operationally domestically and around the world to drive significant transformation of this company and meaningful growth.”

Max international expansion drives DTC growth

The direct-to-consumer division reported a total of 52.6 million domestic subscribers and 57.9 million international subscribers. The division’s $289 million profit included a $41 million loss from the broadcast of the Olympics in Europe, and was up $178 million from a profit of $111 million a year ago.

DTC saw revenue grow 8% to 2.6 billion, compared to $2.44 billion in the year-ago period. Average revenue per user came in at $11.99 domestically, $4.05 internationally and $7.84 globally. Distribution revenue climbed 6% year over year to $2.32 billon, primarily driven by a 15% increase in subscribers and higher pricing, after WBD launched Max in Latin America and Europe during the first half of 2024. Advertising revenue rose 49% to $205 million, primarily driven by an increase in domestic ad-lite subscribers. And content revenue slip 11% to $107 million, primarily driven by fewer third-party licensing deals.

Zaslav said the company was “highly confident” that it was on track to “meaningfully exceed” its target of $1 billion EBITDA in 2025.

“We believe our content will continue to provide us a meaningful competitive advantage, and we are only scratching the surface of what we can achieve through added scale,” Zaslav said.

Zaslav touted the strength of the Disney+, Hulu, Max bundle, noting that the subscriber growth from the offering is “significant” and that customer satisfaction is “quite high.”

And the WBD CEO emphasized on Thursday that he believes he believes the entertainment industry — and in particular, streaming — should consolidate to improve the customer experience.

“Consumers put on a TV set and they see 16 apps, and each of those are doing different pricing, and you’re sitting there with your phone and Googling where a show is or where a sport is, and you’re going from one to another, and there’s so many that you have you have to go to a separate page,” he said. “It’s just not a good consumer experience. It’s not sustainable and there probably should have been more meaningful consolidation.”

Looking ahead, Max is expected to continue to grow. The service is scheduled to launch in seven markets across Southeast Asia later this month, Australia and over a dozen markets next year, and three of Europe’s biggest markets in 2026. Max is currently available in 65 markets.

“Given the cadence of Max’s rollout over the next 18 months or so at international markets and the launch of a lower priced advertising supported offering in many more markets, we expect to see [Average Revenue Per User] trend lower in the near term, reflecting the growth of the Max’s ad supported footprint from only one market up until this year to now over 45 markets,” Wiedenfels said. “However, we expect further strong subscriber related revenue growth and EBITDA going forward, as well as enhanced retention, the cadence of which will reflect when, where and how heavily we invest in subscriber acquisition.”

JB Perrette, WBD’s streaming and games president, said the company is in the early stages of its ad revenue growth stream and that there’s room to grow capacity on ad load and on pricing.

“We’ve been judicious about every every price rise we’ve done so far, the churn has actually been lower than we projected, as expected, and the retention continues to be strong,” Perrette said. “We will kick off some very soft messaging later this quarter around password sharing, and as we kick into 2025 and into 2026 you’ll see more and more progress on that, which in effect is a form of a price rises.”

Studios dragged down by lower box office

The studios division saw total revenue tumble 17% to $2.68 billion, while adjusted EBITDA fell 58% to $305 million. Total content revenue fell 18% to $2.46 billion. Distribution revenue in the segment fell 54% to $6 million, while advertising revenue declined 75% to $1 million.

Games revenue plunged 31%, primarily driven by the better performance of the prior year slate, mainly Mortal Kombat 1, compared to the current year slate. Zaslav said the games business is “substantially underperforming its potential” and that it would focus its development efforts on the Hogwarts Legacy, Mortal Kombat, Game of Thrones and DC franchises in order to improve its success ratio.

“We’re through some of the worst and it hasn’t been pretty on the gaming business, but we have four games that are really powerful and have a real constituency that love them and we’re going to focus on those four primarily,” Zaslav said. “We’re going to go away from trying to try to launch 10,12, 15, 20 different games.”

TV revenue was a bright spot, growing 30%, primarily driven by higher initial telecast revenue as a result of the impact from the WGA and SAG-AFTRA strikes in the prior year.

Zaslav said that WBD’s TV studios is on track to have its most profitable year in scripted content in the last five years. The studio, he said, produces more than 80 live action, scripted, unscripted and animated series for nearly 20 platforms.

In the fourth quarter of 2024, WBD expects its film business to perform in line with Q4 2023 and anticipates its games business will be flat to modestly better year over year, as last year’s launch of Hogwarts Legacy on the Nintendo Switch in November is offset by lower costs. It also expects its momentum in the TV business to continue in the fourth quarter. Studio Q4 EBITDA is forecast to be up by a few hundred million dollars year over year, depending on the timing of certain content licensing deals.

WBD has only one film release remaining in Q4, the modestly budgeted Lord of the Rings animated movie “War of the River,” Wiedenfels said.

Looking ahead, Zaslav touted the potential of its DC franchise over the next five to 10 years, which is now led by James Gunn and Peter Safran. He also said Mike DeLuca and Pam Abdy’s film lineup will begin next year

Networks boosted by Olympics, despite advertising and audience declines

The networks segment saw total revenue grow 3% to $5.01 billion, while adjusted EBITDA for the segment fell 12% to $2.1 billion. The broadcast of the Olympics in
Europe negatively impacted adjusted EBITDA by $65 million.

Content revenue increase by $618 million to $833 million, primarily driven by the sublicensing of Olympic sports rights to broadcast networks throughout
Europe, which totaled $578 million. The Paris games generated more than 215 million cumulative views across WBD platforms, a 23% increase
versus the 2020 games in Tokyo.

Distribution revenue fell 8% to $2.598 billion, primarily driven by a 9% decrease in domestic linear pay-TV subscribers and an approximately 200 basis point impact from the AT&T SportsNet exit, which was partially offset by a 5% increase in domestic affiliate rates. Advertising revenue fell 13% to $1.49 billion, primarily driven by domestic networks audience declines of 21% and the soft linear advertising market in the U.S., partially offset by the broadcast of the Olympics in Europe in the current year.

Last quarter, WBD took a $9.1 billion write-down on its networks business, due to continued softness in the U.S. linear advertising market and uncertainty related to affiliate and sports rights renewals, including the NBA. Warner Bros. Discovery has filed a lawsuit against the NBA after the league rejected its matching proposal for Amazon’s $1.8 billion per year rights package.

“While the challenges and headwinds we face in our U.S., linear television business are well known, this is still an extraordinarily important part of our business,” Zaslav said. “Linear TV is a core vehicle to deliver WBD storytelling to hundreds of millions of fans worldwide, and the significant profits it generates helps fund building the investments that will carry Warner Brothers Discovery into the future.”

Despite the loss of the NBA, Warner secured an early renewal of its carriage deal with Charter Communications in September, bundling Max and Discovery+ with the latter’s Spectrum TV Select packages. Zaslav said he hopes to strike similar deals with distributors domestically and globally.

“Our company struck a deal that’s mutually beneficial, where the consumer wins most of all,” he said. “We are optimistic this is a sign that these types of agreements will create more stability in our industry.”

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