As the media giant prepares to report fourth-quarter earnings, CEO David Zaslav has to prove he can cut costs and squeeze more money out of every show
David Zaslav used to charm Wall Street. Now he’s running a debt-laden media company that one observer described as a “dumpster fire.” Just how hot things are getting for the Warner Bros. Discovery CEO will become clear after it reports fourth-quarter earnings Thursday — Zaslav’s third outing as the combined company’s chief.
The competitive pressure to scale up and compete with Netflix’s ballooning content budget drove AT&T to spin off WarnerMedia and combine it with Discovery, creating a film and TV giant with a bulked-up streaming library. But even as the deal got done last year investors were already changing their tune. Profitability, not growth or scale, is the watchword now.
You've reached your article limit.
Unlock premium content with a subscription.
Click Here Already a subscriber? LoginZaslav’s key priority on Thursday’s earnings call should be laying out the debt-laden entertainment giant’s “road to profitability,” Omdia media analyst Sarah Henschel told TheWrap.
“All of these newer streaming services have yet to become profitable and need to start showcasing when they will be to shareholders,” Henschel said. “Content investments have largely started to outpace the profitability of streaming services so it makes sense to [pull] back on content that does not offer value to your consumers.”
Warner Bros. Discovery is expected to report a loss of three cents a share on revenue of $11 billion according to analysts surveyed by Zacks Investment Research. But Wall Street still sees potential in the company over the long-term as its share price has climbed approximately 63% year to date and 14% in the past month.
A big obstacle in Zaslav’s journey to growth and profit is Warner’s net debt of $47.5 billion. While Disney’s $45 billion debt load is similar in size, its debt to equity ratio — a measure of financial health closely watched by Wall Street — is less than half Warner Bros. Discovery’s, and Disney recently announced it would resume paying a dividend. Paramount, with $15.6 billion in debt, and Netflix with $14.4 billion have lower ratios as well.
Zaslav needs to focus on paying down the company’s debt as soon as possible, Gerber Kawasaki Wealth & Investment Management CEO Ross Gerber told TheWrap. The company, he said, had “a great set of assets that are being restructured” and “Zaslav is definitely the guy to fix it,” but Warner faces a challenge in maintaining its place in streaming. He’s watching the company’s earnings report closely for more write-downs, which he said would indicate that Discovery “overpaid for assets” in merging with WarnerMedia.
Rewriting the Warners script
In December, Warner Bros. Discovery said it expected to incur restructuring charges of up to $5.3 billion, including up to $3.5 billion of content impairment and development write-offs. The total was $1 billion higher than a forecast the company gave in October for the restructuring effort, which it anticipates will be complete by the end of 2024.
Another important question for Warner Bros. Discovery will be “how the company is looking to optimize the monetization of its existing IP” as it looks to compete with Netflix and others, said Third Bridge senior analyst Jamie Lumley.
The latest victims of the company’s cost-cutting measures included the TV series “Westworld,” “Love Life,” and “The Nevers,” which are being pulled off HBO Max entirely and licensed to third-party free, ad-supported streaming television services. In January, Warner signed deals with Roku and Tubi as part of the FAST licensing push.
Getting more from consumers and advertisers
Seeking to bolster its direct-to-consumer revenues, Warner hiked HBO Max pricing in January for the first time, with the cost of its ad-free subscription climbing $1 to $15.99 per month. At the time, the company said the move would allow the company to “continue to invest in providing even more culture-defining programming and improving our customer experience for all users.”
But Gerber warned there’s a limit to how many subscriptions people are willing to sign up for that are over $10 per month.
“The higher price your streamer is, the more likelihood somebody’s not gonna sign up for it,” he said. “HBO is already expensive. I don’t want to pay any more for HBO just because you’re putting Discovery content on it … so where’s the value gain? And I think that’s where HBO is stuck.”
Warner also plans to offer a standalone version of Discovery+ at a lower price point in addition to a cheaper, ad-supported combination of HBO Max and Discovery+ set to launch later this year. It also has its own FAST service in the works, Zaslav confirmed on the company’s last earnings call in November, which would fruther expand its advertising-supported offerings.
“Investors will want to know more about WBD’s newer AVOD offering and the timeline for its rollout in 2023,” Matt Voda, the chief executive officer of marketing analytics firm OptiMine, told TheWrap. “Coming off the heels of Netflix’s announced success in selling out of its advertising inventory, this new offering could compete with other streamers, and in particular, if WBD offers enhanced consumer and household targeting options to brands.”
Voda noted that advertising revenues via free or reduced-fee streaming options should help Warner Bros. Discovery “achieve more scale without having to continue the bloodshed of building subscriber growth in paid streaming services,” and that lower-cost offerings will “appeal more broadly to inflation-impacted consumers.”
Fitz-Gerald Group prinicpal analyst Keith Fitz-Gerald told TheWrap that Warner’s guidance for 2023 will be “critical.”
Analysts expect it to achieve $43.7 billion in sales this year, a 12.7% increase over last year. If the forecast Zaslav offers Thursday falls short of that, shareholders could grow restless.
“Online content is becoming super competitive and complicated which means the need to prove itself worthy of investors’ attention is more important than at any point in the past, certainly since COVID hit,” Fitz-Gerald said. “I do not own the stock and would be hard pressed to buy it absent some very, very compelling results.”
Lucas Manfredi
Lucas Manfredi is a TV Business reporter with TheWrap. He has a Bachelor of Science in Television-Radio from Ithaca College. He can be reached at lucas.manfredi@thewrap.com.