Release Date: August 07, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Warner Bros. Discovery Inc (WBD, Financial) reported strong growth in its direct-to-consumer (DTC) segment, adding 3.6 million subscribers in Q2 2024.
- The launch of Max in Europe, timed with the Olympics, was highly successful, engaging over 141 million people across various platforms.
- The company has made significant progress in paying down its debt, successfully executing a tender for $3.4 billion of debt.
- Warner Bros. Discovery Inc (WBD) has a robust content lineup for the next two years, including highly anticipated series like 'House of the Dragon' and 'The Penguin'.
- The company is seeing strong momentum in its advertising revenues, with streaming ad revenues doubling year-over-year.
Negative Points
- Warner Bros. Discovery Inc (WBD) recorded a $9 billion non-cash impairment charge against its Networks segment due to market conditions and strategic planning adjustments.
- The company continues to face tough market conditions in its legacy business, particularly in the US ad market.
- Free cash flow decreased by $750 million year-over-year, largely due to increased net content investment and lower operating profits.
- The company is still in the midst of a multiyear turnaround for its studio business, with recent releases underperforming.
- There is uncertainty related to future affiliate and sports rights renewals, which could impact the company's financial outlook.
Q & A Highlights
Q: With over 100 million DTC subscribers, how do you think about the future of Max in the streaming marketplace and whether you have a preference to exploring formal JVs, either in the US or internationally, or looking to expand the content offering through third-party licensing deals?
A: (David Zaslav, CEO) We spent the last two years rebuilding Max, and we are a global media company with infrastructure in every country. We see sustainable growth by being a global leader. We are off to a terrific start in Latin America and Europe, and we are seeing real growth with almost 4 million international subscribers last quarter. (Jean-Briac Perrette, CEO and President, Global Streaming and Games) We have more partners outside the US looking to collaborate, particularly local content players. We have active conversations with additional partners to help us scale and localize our offerings.
Q: Can you talk more about the goodwill write-down and the uncertainty with the outcome of the NBA and how that led to any sensitivities around future affiliate fee negotiations?
A: (Gunnar Wiedenfels, CFO) The goodwill impairment is not driven by one factor but a systematic process. The NBA rights discussion was a triggering event that compelled us to reevaluate our business case. The $9.1 billion impairment reflects the state of the industry and our strategy. The transition in the industry is a distribution ecosystem in transition, and we are using our content more successfully in the streaming space.
Q: Could you talk about the strategic value of video games for Warner Bros. and whether you view it as a core part of the portfolio?
A: (Jean-Briac Perrette, CEO and President, Global Streaming and Games) We see the gaming industry as a growing area in terms of time spent, engagement, and revenue. Our franchises are in high demand and can help launch games. We are particularly leaning into the free-to-play space, which is about half of the $200 billion games business. The Player First deal strengthens our capabilities in that space. (David Zaslav, CEO) Owning our IP allows us to create immersive experiences, like Hogwarts Legacy, which was successful because it allowed players to enter the world of Harry Potter.
Q: Can you talk about the strategy around carriage negotiations, given the potential changes related to NBA programming?
A: (David Zaslav, CEO) We have been in the business of free-to-air and cable channels for 40 years, requiring carriage agreements. We ensure our content is robust and meaningful to get significant value from distributors. We have been effective in getting meaningful increases for our content, whether it be sports channels or other channels.
Q: Are you considering more aggressive action to unlock value in your stock price, given all the press speculation about splitting the company up?
A: (Gunnar Wiedenfels, CFO) We are aware of our responsibility to evaluate strategic options. We are focused on running the business effectively and evaluating everything beyond just the operational business. (David Zaslav, CEO) The market conditions within the traditional business are tough, but we have a strong balance sheet and are investing substantially in content. We expect our Studio and global direct-to-consumer business to create shareholder value.
Q: Can you help level set expectations for the back half of the year, given linear challenges, DTC investments, and the hit-driven nature of the Studio?
A: (Gunnar Wiedenfels, CFO) We expect a significant step forward on the DTC side. The Studio side has two big films in the pipeline, and the TV production business should improve as we come into the part of the year impacted by the strike last year. The linear ad market environment in the US remains challenging, but Europe is performing strongly.
Q: When do you foresee consolidated earnings growing on a sustainable basis, given the steady decline in the pay-TV universe?
A: (Gunnar Wiedenfels, CFO) We believe there is tremendous upside opportunity in the DTC and Studio businesses to offset the linear challenges. We have a strong plan that supports this, and we expect to see an acceleration in topline and bottom-line growth. (David Zaslav, CEO) We have an attack plan for direct-to-consumer growth, including international rollouts, a strong content slate, ARPU improvements, product experience enhancements, distribution agreements, and password sharing crackdowns.
Q: How big could Max be globally, and how do you expect the Olympics to drive the business in the third quarter?
A: (David Zaslav, CEO) We are not in three of the biggest markets yet, including the UK, Germany, and Italy. We will launch in these markets by the end of '25. (Jean-Briac Perrette, CEO and President, Global Streaming and Games) We are in just over 50% of the addressable markets today with 103 million subs. We see the opportunity to add tens of millions of subscribers in the next 18 to 24 months. (Gunnar Wiedenfels, CFO) The Olympics will have a negative impact on EBITDA in the third quarter, but the new arrangement will focus more on streaming rights and opportunities.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
