Warner Bros Discovery stumbled in the third quarter, falling short of Wall Street expectations due to a slowdown in advertising and merger-related restructuring charges.Total revenue came in at about $9.8 billion, down 11% from the year-earlier period, and net losses totaled $2.8 billion. The losses included $1.9 billion of pre-tax amortization from acquisition-related intangible assets and $1.5 billion in restructuring charges. Free cash flow swung to a negative $192 million from a positive $705 million in the year-ago quarter.Warner Bros Discovery reported 94.9 million direct-to-consumer subscribers, primarily spanning HBO and the Discovery+ and HBO Max streaming services, an increase of 2.8 million from the prior quarter. Warner Bros Discovery has not broken out individual numbers for each streaming outlet.Analysts’ consensus estimates called for revenue of $10.36 billion and a net loss per share of 21 cents.In the earnings release, the company said its target for cost savings related to the merger would increase to $3.5 billion from $3 billion. The company has been laying off a considerable number of workers and also consolidating job functions in several divisions. “While we have lots more work to do, and there are some difficult decisions still to be made, we have total conviction in the opportunity ahead,” CEO David Zaslav said in the release.Because the merger of WarnerMedia and Discovery closed last April, comparisons with the prior-year quarter were reported on a pro-forma basis. Like many peers in a media sector battered by foreign exchange turbulence and a host of macroeconomic challenges, Warner Bros Discovery came into today’s earnings report with low expectations on Wall Street. Warner Bros Discovery is in the midst of a major restructuring, and while eventually several billion dollars in cost savings will be realized (substantially more than the $1.5 billion target put forward by AT&T when it swallowed Time Warner in 2018), in the shorter term there will be charges taken due over several quarters due to the overhaul. The company also is working to reduce its heavy debt load of more than $47 billion (with leverage of 5.1 times trailing EBITDA far higher than the eventual target of 2 to 3 times) and also coping with pay-TV losses due to cord-cutting and widespread uncertainty in advertising.In the networks division, advertising revenue tumbled 14% (or 11% when foreign-currency gyrations are factored out) to $1.9 billion. Unlike other media owners, Warner Bros Discovery doesn’t own a broadcast network or local stations, which tend to be the biggest beneficiaries of political ad spending. The decline matched forecasts, both the company’s and Wall Street’s.Distribution revenue decreased 5% (or 2% without foreign exchange effects) to $2.9 billion. Gains from higher U.S. affiliate rates and premium sports packages in Latin America were more than offset by a decline in pay-TV subscribers in the U.S. and lower affiliate rates in some European markets, the company said.The studio division posted an 8% dip in total revenue, to about $3.09 billion, but adjusted EBITDA jumped 37% to $762 million.The DTC unit posted negative EBITDA of $634 million, reflecting ongoing investments in HBO Max and Discovery+, which launched in 2020 and 2021, respectively. (They are to be combined as a single offering in 2023, and the launch date is moving up to spring from a prior summer window, Zaslav announced.)Shares in Warner Bros Discovery had a volatile day, falling as low as $11.64 this morning before recovering a bit but still closing down almost 6%, at $11.97, on above-average trading volume. The stock has slumped badly since the merger of WarnerMedia and Discovery closed last April, falling more than 50%. Bears assert that the combined company is overburdened with declining assets like cable TV networks and the flagship movie studio. Bulls, on the other hand, see a storehouse of potent IP with a promising streaming outlet in HBO Max, plus bonus points for a cost-conscious management team with a new strategic plan for DC as it looks to narrow the gap with Marvel.In addition to the financial complications, both in the industry and in the broader economy, the supply of new content was uneven in the quarter. While the period saw the hugely successful premiere of HBO’s Game of Thrones prequel House of the Dragon, which delivered average tune-in across platforms of 29 million viewers an episode, the July-to-September frame was notably sleepy for Warner Bros Pictures. The only release over the summer was animated family title DC League of Super Pets, which has done a solid $200 million-plus in global box office but isn’t the same kind of mega-tentpole as The Batman or Black Adam, other 2022 releases put out at other times this year. Don’t Worry Darling came out just prior to the September 30 end of the quarter, contributing a small amount to the top line but mostly showing up as a drag on the bottom line due to marketing and distribution costs.
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