Warner Bros. Discovery (NASDAQ:WBD) faced a challenging second quarter, reporting earnings that missed expectations on both the top and bottom lines. The company took a substantial $9.1 billion impairment charge related to its TV networks unit, contributing to a total hit of $11.2 billion on its balance sheet. This Warner Bros. Discovery earnings miss has raised concerns among investors, leading to a 7% drop in the company’s stock during after-hours trading.
Major Setback in Earnings
The company reported revenue of $9.7 billion, falling short of the Bloomberg consensus expectations of $10.12 billion. This represents a 5% decline compared to the $10.36 billion in the same quarter last year. Additionally, Warner Bros. Discovery reported an adjusted loss per share of $4.07, significantly worse than the $0.51 loss reported in the prior year and far below the consensus estimate of a $0.21 loss. The massive impairment charge was a major factor contributing to these disappointing results.
The company’s free cash flow, which had been a positive aspect in the first quarter, also took a hit. It dropped 43% year-over-year to $976 million, missing Bloomberg’s expectation of $1.2 billion. This decline in cash flow adds to the challenges Warner Bros. Discovery is facing as it navigates a tough media landscape.
Streaming Success Amid Broader Struggles
Despite the overall Warner Bros. Discovery earnings miss, the company’s direct-to-consumer streaming business was a bright spot. Warner Bros. Discovery added 3.6 million subscribers to its Max streaming service, driven by the debut of “House of the Dragon” season 2. This exceeded Bloomberg’s expectations of 1.89 million new subscribers and outpaced the 1.80 million subscribers added in the second quarter of 2023.
The strong performance in streaming is encouraging, but it wasn’t enough to offset the broader challenges the company faces. Network advertising revenue declined by 10% year-over-year, with revenue falling to $2.21 billion, missing Bloomberg’s expectations of $2.26 billion. This decline in ad revenue pressured the company’s second-quarter EBITDA, leading to concerns that the full-year adjusted EBITDA could fall below $10 billion—$4 billion less than analysts expected at the time of the company’s merger.
Challenges and Strategic Moves
The Warner Bros. Discovery earnings miss comes at a time when the company is grappling with multiple challenges, including the loss of a key media rights deal with the NBA. This loss was compounded by a lawsuit the company filed against the league, accusing it of unjustified rejection of a matching rights proposal. These setbacks have further complicated Warner Bros. Discovery’s efforts to stabilize its business.
Despite these challenges, the company has several potential tailwinds heading into the second half of the year. Warner Bros. Discovery is set to launch a sports streaming partnership with Disney (NYSE:DIS) and Fox (NASDAQ:FOX), which could provide a boost to its streaming business. Additionally, the Max streaming service recently expanded into markets outside the U.S., including Latin America and Europe, which could help drive international growth.
The company is also pursuing cost-cutting measures to improve its financial performance. Earlier this summer, Warner Bros. Discovery reportedly laid off around 1,000 employees across various business sectors, following the elimination of approximately 100 positions at CNN. These aggressive cuts are part of the company’s strategy to increase free cash flow and manage its debt load.
Looking Forward
Despite the Warner Bros. Discovery earnings miss, Wall Street analysts have identified potential strategic options for the company. Bank of America analysts recently suggested that Warner Bros. Discovery could consider splitting its digital streaming and studio businesses from its legacy linear TV unit. This move could help the company streamline operations and focus on its more profitable segments.
However, the road ahead remains challenging. Warner Bros. Discovery shares have declined by 30% since the start of the year, and the company will need to navigate a complex media environment to regain investor confidence. As Warner Bros. Discovery continues to adjust its strategy and address its financial challenges, the coming quarters will be crucial in determining its long-term success.
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