Warner Bros. Discovery Earnings: Weak Ad Revenue Overshadows First Adjusted EBITDA Profits at DTC

Warner Bros. Discovery WBD continues to suffer from weak advertising results as the networks segment posted another dour performance despite a strong sports slate. Cost cutting helped the direct-to-consumer segment post its first adjusted EBITDA gain, albeit with a slight revenue decline and weak subscriber additions. Management now expects the business to generate positive adjusted EBITDA for 2023, a year ahead of schedule. This may be a positive sign to some investors, but we believe that focusing on DTC profitability without topline and subscriber growth is not a sustainable strategy because of the need to replace linear television revenues longer term. We are maintaining our $30 fair value estimate.

Total revenue decreased 5% on currency-adjusted pro forma basis to $10.7 billion as weakness at the studio and network segments reinforced the slight drop in DTC revenue. Adjusted EBTIDA improved by 10% to $2.6 billion as cost cutting, merger synergies, and positive DTC EBITDA more than offset the lower revenue.

The network segment reported a pro forma revenue decline of 10% to $5.6 billion. Advertising dropped 14% excluding foreign exchange for the second quarter in a row because of smaller audiences for general entertainment, a weak overall ad market, and the lack of Winter Olympics this year (Eurosport owns rights in Europe). Management is “cautiously optistimic” about a second-half rebound in the ad market, in line with Paramount’s commentary. We still expect that WBD will feel more pain from the ad market slowdown over the next few quarters than its peers, as the legacy Discovery networks are more dependent on ad revenue than its peers. Distribution revenue fell 3% with cord-cutting in the U.S. more than offsetting affiliate rate increases. Content revenue declined precipitously, down 51%, due to Olympics sublicensing deals a year ago. Adjusted EBITDA for the segment fell 10% to $2.4 billion as the revenue drop overwhelmed lower content and marketing expenses.