Sixteen months into the Warner Media-Discovery merger, the new combined company, Warner Bros. Discovery, had a rough second quarter of 2023. The company reported total revenue of $10.4 billion, a 4% decrease year-over-year, and a net loss available of $1.2 billion, compared to a net loss of $3.4 billion in the second quarter of 2022. In addition, the company rebranded HBO Max as simply Max in the US in May.
Though the company lost 1.8 million global direct-to-consumer subscribers during the quarter, president and CEO David Zaslav said the Max launch was successful. At the end of the quarter, Warner Bros. Discovery had 95.8 million direct-to-consumer subscribers, compared to 97.6 million subscribers at the end of the first quarter. Global average revenue per user (ARPU) was $7.71, compared to $7.58 in the second quarter of 2022.
“The migration to Max has gone exceedingly well with the overwhelming majority of subscribers in the US successfully transferred,” Zaslav said on the August 3, 2023 earnings call. “While we have seen some expected subscriber disruption, we have experienced lower-than-expected churn throughout this process.”
Zaslav called the Max consumer experience “top notch” and said subscribers are watching for longer periods of time and viewing different genres, including nonfiction content.
“We’re seeing early and encouraging signs of stronger engagement,” the president and CEO added.
About Max
The streaming subscription service Max has three tiers.
- $9.99 a month with ads, or $99.99 a year (2 devices, full HD)
- $15.99 a month, or $149.99 a year, for an ad-free experience (2 devices, full HD, 30 downloads)
- $19.99 a month, or $199.99 a year, for the ultimate ad-free experience. (4 devices, best video quality, immersive audio, 100 downloads)
At launch, the company said Max offered 35,000 hours of content, more than double the amount of content on HBO Max. The rollout in the US is complete. Max will roll out to Latin America later this year and in Europe and Asia-Pacific next year.
Warner Bros. Discovery’s Direct-to-Consumer segment had total revenue of $2.7 billion, including $2.2 billion in distribution revenue, $121 million in advertising revenue and $410 million in content revenue. The company expects their Direct-to-Consumer segment to be profitable for 2023, a year ahead of schedule.
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Other quarterly highlights
Warner Bros. Discovery shared the following second-quarter highlights:
- The Studios segment had $2.6 million in revenue, and content revenue decreased 25% due to production timing of TV programs and fewer series. Games revenue was lower due to the release of LEGO Star Wars: The Skywalker Saga the prior year. Because of strong performance the prior year, home entertainment and theatrical revenues decreased.
- The Networks segment had revenue of $5.8 million, a 5% decrease year-over-year. Distribution and advertising revenue decreased, but content revenue grew 18% and other revenue increased 24%.
- The company had Adjusted EBITDA of $2.1 million, a 23% increase year-over-year.
- Cash from operating activities was $2.0 million, and free cash flow was $1.7 million.
- Warner Bros. Discovery repaid $1.6 billion in debt during the quarter and ended the quarter with $3.1 billion in cash on hand and $47.8 billion of gross debt.
- The company received 181 primetime Emmy award nominations, including 127 for HBO and Max, more than any other network or platform.
Outlook for the third quarter
On the earnings call, Warner Bros. Discovery CFO Gunnar Wiedenfels provided the following guidance:
- Free cash flow is estimated to be approximately $1.7 billion. This is anticipated because the company is saving money during the entertainment strikes and due to the success of the Barbie movie.
- Full-year cash flow is estimated to be between $4.5 billion and $5 billion.
- Adjusted EBITDA will be between $11 billion and $11.5 billion with ad sales, direct-to-consumer profits and studio segment revenue being key drivers.
“When I take a step back, notwithstanding the factors influencing the broader landscape, I am more and more convinced that the dedicated work of the leadership team and efforts throughout the company, marked by a meaningful shift in mindset about how to manage this company, is starting to pay dividends. I believe our financial results this quarter speak volumes about this change,” Wiedenfels said on the earnings call.
“I am very confident in the trajectory of our delevering and debt pay down, the benefits of which will increasingly allow us to turn our dedication and focus to support further growth initiatives to ensure long-term, sustainable and profitable growth ahead,” the CFO added.
Stock value
Despite the losses, investors have not lost faith in the global entertainment conglomerate. The day before the earnings report – August 2 – Warner Bros. Discovery Inc. stock was valued at $12.55 per share. As of 7:57 p.m. EDT on August 4, stock was valued at $13.97 per share, $2.37 less than its 52-week high of $16.34.
Insider Take
The second quarter was a mixed bag for Warner Bros. Discovery with slight revenue declines and a billion dollar loss. More notably, the loss of subscribers in the company’s direct-to-consumer was significant. Some of the churn may be due to the slight price increases implemented in February, but more likely it is from the transition from HBO Max to Max. While Max has significantly more content than HBO Max did, the transition from one service to the other may have caused some involuntary churn. We anticipate this will turn around for the entertainment company in either the third or fourth quarter.
The box office success of Barbie will contribute to strong theatrical revenue for the third quarter too. According to Deadline, in its third weekend in theaters, Barbie made $53 million. The film is now just $40 million away from hitting the half-a-billion dollar milestone.
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