Warner Bros. Discovery Earnings: A Weak Traditional TV Ad Market Drags Down Top Line

The weak traditional TV advertising market remains a drag on Warner Bros. Discovery WBD results, as the networks segment posted another substantial top-line decline. The direct-to-consumer segment didn’t get a subscriber bump from the U.S. launch of the rebranded Max platform but posted breakeven adjusted EBITDA, demonstrating the effectiveness of the cost-cutting measures implemented over the past year. Management now expects the DTC segment to generate adjusted EBITDA losses of a “couple of hundred million dollars” for 2023. While this may be a positive sign to some investors, we remain convinced that focusing on DTC profitability without top-line growth is not a sustainable strategy because of the need to replace linear television revenue longer term. We are lowering our fair value estimate to $26 from $30 on slower DTC margin expansion and higher ad revenue declines.

Total revenue fell 4% on a currency-adjusted basis to $10.8 billion, as weakness at the studios and network segments offset the gain in DTC revenue. Adjusted EBITDA improved by 23% to $1.7 billion as cost-cutting, merger synergies, and breakeven DTC EBITDA more than offset the revenue decline. Free cash flow improved to $1.7 billion from $789 million a year ago.

The network segment reported a revenue decline of 5% to $5.6 billion. Advertising fell by 14%, marking the fourth straight quarter with a double-digit decline. The drop was once again attributed to smaller audiences for general entertainment and a weak overall ad market, reinforced by the lack of the NCAA Final Four, which alternates with CBS. Management still expects a second-half improvement in the ad market, but now forecasts single-digit declines in the second half. We still expect WBD to suffer more than its peers from the ad market slowdown as the legacy Discovery networks depend more on ad revenue.