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    Warner Bros. Discovery (WBD)

    Q2 2024 Earnings Summary

    Reported on Aug 7, 2024 (After Market Close)
    Pre-Earnings Price$7.71Last close (Aug 7, 2024)
    Post-Earnings Price$6.76Open (Aug 8, 2024)
    Price Change
    $-0.95(-12.32%)

    What went well

    • WBD's Direct-to-Consumer (DTC) business is poised for significant growth and profitability, driven by international expansion into new markets, a strong upcoming content slate including popular franchises, ARPU improvements through price increases and ad-lite tiers, and strategies like cracking down on password sharing.
    • Global rollout of Max presents substantial subscriber growth opportunities, as WBD plans to expand into the remaining 50% of addressable markets, including major countries like the UK, Germany, and Italy, leveraging partnerships and bundles to accelerate growth and improve the consumer experience.
    • WBD is leveraging its strong IP portfolio to expand in the growing gaming industry, viewing gaming as a core part of its strategy, aiming to capitalize on the unique growth opportunities in interactive entertainment by strengthening capabilities in areas like free-to-play games and integrating their popular franchises.

    What went wrong

    • The decline in the pay-TV universe continues with no signs of stopping, and Warner Bros. Discovery's linear business is underperforming, with company executives unable to predict when consolidated earnings will grow sustainably. Gunnar Wiedenfels, CFO, acknowledged that the trends in the linear business haven't improved as hoped, and the recovery hasn't happened.
    • There is uncertainty surrounding the renewal of NBA rights, which are profitable for the company. Losing these rights could negatively impact the company's basic networks EBITDA. The goodwill impairment recorded by the company reflects uncertainty related to affiliate and sports rights renewals, including the NBA.
    • The company's video games division has seen uneven performance over the past couple of years, highlighting the hit-driven nature of the business. While "Hogwarts Legacy" was a record success, "Suicide Squad" underperformed, indicating challenges in achieving consistent growth in this segment.

    Q&A Summary

    1. Unlocking Shareholder Value
      Q: Are you considering splitting the company to unlock value?
      A: Management emphasizes their focus on operating under the "One Warner Bros Discovery" strategy, highlighting the benefits of integration across their businesses. They are constantly evaluating strategic options but believe in the value of their combined assets and are not currently planning a split.

    2. Potential Loss of NBA Rights
      Q: How would losing NBA rights affect Networks EBITDA?
      A: Management acknowledges the NBA is a profitable right for them. While they won't discuss specifics, they have considered various scenarios in their analysis and remain confident in their strategic planning.

    3. Offsetting Pay-TV Declines
      Q: Can your efforts offset pay-TV declines to grow earnings?
      A: Management believes there is tremendous upside in both their DTC and Studio businesses, which is enough to offset linear declines. They expect acceleration in topline growth and significant opportunities across drivers of the business, aiming for over $1 billion in EBITDA by 2025.

    4. Max DTC Growth Potential
      Q: How do you see Max's future in streaming?
      A: They are expanding Max globally, now launched in Latin America and Europe, with over 100 million DTC subscribers. The focus is on being a global leader, leveraging relationships and local content to drive sustainable growth.

    5. Goodwill Write-down Explanation
      Q: What's behind the goodwill impairment related to the NBA?
      A: The $9.1 billion goodwill impairment is due to a full re-evaluation of their Networks segment. The NBA rights discussion was a triggering event, but no single factor drove the impairment.

    6. Carriage Negotiations Strategy
      Q: Any changes in carriage deals amid NBA programming changes?
      A: Management won't discuss specific negotiations but emphasizes their effectiveness in securing meaningful increases for content through robust offerings across channels. They have a strong presence in 200 countries and focus on delivering value to distributors.

    7. EBITDA Outlook for Second Half
      Q: Can you level set EBITDA expectations for H2?
      A: They expect a significant step forward in DTC. The Studio has two big films in the pipeline, and the TV production business is improving post-strike. Visibility in the linear ad market is low, with Q3 typically weaker due to sports scheduling.

    8. Strategic Value of Video Games
      Q: Is gaming a core part of your portfolio?
      A: They see gaming as a huge opportunity, owning valuable IP like Hogwarts Legacy, the #1 game last year. They aim to expand in the free-to-play space and consider gaming a growth area.

    9. Max Global Expansion
      Q: How many markets will Max reach?
      A: Max is currently in 65 markets, with plans to expand to more than 50% of global markets they're not yet in. They anticipate significant subscriber growth, adding tens of millions over the next 18–24 months.

    10. Impact of Olympics
      Q: How will the Olympics affect your business?
      A: The last Olympics under the old contract will result in a loss this quarter due to costs recognized when games occur. The new arrangement focuses on streaming rights, expected to drive engagement and subscriber acquisition.

    Analyst Coverage

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