Warner Bros. Discovery trims profit forecast as it resolves 'messy' assets
Warner Bros. Discovery (NASDAQ:WBD) turned the page with today's first-quarter earnings, which covered a quarter that ended just before Discovery merged with WarnerMedia to launch a new media powerhouse. And the company's financials were only going to garner so much attention compared with its commentary about what's next.
The company's earnings call Tuesday provided that in spades, including some pointed criticism from the new Discovery overlords about what they have found looking behind the curtain.
WBD (WBD) said it's cutting profit expectations for 2022, which Chief Financial Officer Gunnar Wiedenfels said would "undoubtedly be a messy year.
Investors didn't like what they heard from the company, as WBD (WBD) shares dropped as much as 7% in late trading, Tuesday.
Wiedenfels largely got to play bad cop on WBD's (WBD) conference call, as new Chief Executive David Zaslav said he was "impressed by the strong sense of motivation and excitement" and that the merged entities have now become a "far more balanced and competitive company." And while Wiedenfels intended to focus on Discovery's first-quarter results, he spent ample time setting analysts up for the road ahead.
"Starting with the bad news," Wiedenfels said. "[First-quarter] operating profit and cash flow for WarnerMedia were clearly below my expectations." Wiedenfels added that due to the company's first-quarter performance, and "previously unplanned projects in sight," he estimated that the profit baseline for the WarnerMedia side of the business will be around $500 million less than expected. Wiedenfels said results should include "the positive offsets of a couple of hundred million dollars on the Discovery side of the combined company."
Wiedenfels didn't mince words when it came to one part of the business that has quickly been disposed.
"With our new combined leadership team in place out of the gate, I feel very confident in our ability to rectify some of the drivers behind the business case deviations and some very quickly, with the CNN+ decision last week being Exhibit A," Wiedenfels said.
Zooming in on cash flow trends in response to a question, Wiedenfels was more critical, and noted that if WarnerMedia is carved out over the past 15 months, "we're looking at more than $40 billion of revenue and really virtually no free cash flow."
"Right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives," Wiedenfels said. "I don't want to go through sort of a list of specific examples, but there's a lot of chunky investments that are lacking what I would view as a solid analytical, financial foundation.
Turning to streaming optimism, Zaslav said the 18 days as a new company so far hasn't changed the streaming thesis with which Discovery entered the deal.
"If anything, maybe [there is] more enthusiasm around [the] sort of the ability to control one of the most important metrics, which is [subscriber] churn," Zaslav said, alluding to a combined major Discovery-HBO streaming app likely to come in 2023, and the company already winding down marketing of its Discovery+ offering.
In AT&T's earnings report, which covered WarnerMedia's first quarter, it noted HBO and HBO Max had 76.8 million subscribers at the end of the quarter.
Wiedenfels said there is "meaningful churn on HBO Max, much higher than the churn that we have seen," adding that because Discovery has been at it in Europe for eight years, "as we begin to manage churn in a meaningful way, that provides a real meaningful growth."
WBD (WBD) will look to shake up streaming with its combined efforts - and Nielsen's latest look at share of television time shows streaming has bumped up to a new high in terms of how much time viewers are spending on the services.