#Warner Bros. Discovery Swings to $50M Streaming Profit, Says U.S. Streaming Business Will Be Profitable for 2023

Warner Bros. Discovery ended March with 97.6 million global streaming subscribers, compared with around 96.1 million as of the end of 2022 and ahead of estimates, the entertainment conglomerate disclosed in its first-quarter earnings report on Friday. Importantly, its streaming unit swung to a $50 million profit, compared with a loss of $654 in the year-ago period and a $217 million loss in the fourth quarter. Wall Street will take note of that streaming success as a sign of continued progress toward management’s vow to make the business sustainably profitable and of delivering on its promise to not chase subscribers at all costs.

“We feel great about the trajectory we are on,” said Warner Bros. Discovery CEO David Zaslav about becoming the first Hollywood giant to post a profitable quarter for its streaming division since entertainment CEOs set their sights on getting their direct-to-consumer operations to making a profit. He spoke of “a meaningful turn,” adding: “In fact, we now expect our U.S. direct-to-consumer business to be profitable for 2023 – a year ahead of our guidance.”

Wells Fargo analyst Steven Cahall had in his earnings preview forecast a streaming loss of $76 million, “though we expect losses to step up to $344 million in the second quarter on higher selling, general and administrative (expenses) associated with the Max relaunch.”

Warner Bros. Discovery on Friday reported quarterly revenue of $10.7 billion, down 6 percent and roughly in line with analysts’ expectations, while the bottom line fell below estimates. The company’s first-quarter loss of 44 cents per share compared with a Wall Street consensus for a loss of 5 cents a share and marked a swing from the year-ago profit of 69 cents per share. However, stripping out expenses related to the merger of Discovery and AT&T’s WarnerMedia, which created the sector powerhouse, the company would have beaten consensus earnings estimates.

The company’s quarterly loss of $1.07 billion included $1.81 billion in “pre-tax amortization from acquisition-related intangible assets and $95 million of pre-tax restructuring expenses,” the company said.

Growing free cash flow, a profitability metric that shows how much money a company has left over after meeting its financial obligations, has been a key focus of Zaslav’s team. However, for the first quarter, Warner Bros. Discovery on Friday reported negative free cash flow of $930 million due to interest and sports rights payments.

WBD’s stock was down more than 5 percent in pre-market trading.

The mega-deal that created the company closed a little more than a year ago, in April 2022. “We’ve come through some major restructurings and have repositioned our businesses with greater precision and focus,” Zaslav said on Friday. “And we see a number of positive proof points emerging, with direct-to-consumer perhaps the most prominent.”

Various Wall Street analysts have turned bullish on Warner Bros. Discovery this year amid management’s focus on free cash flow, debt reduction and streaming profitability.

The company unveiled in mid-April that it would combine its HBO Max and Discovery+ streaming services into the rebranded Max, set to launch in the U.S. on May 23. Its goal is to make Max the streaming destination for everyone in a household, with the new tagline “The One to Watch.” Max will offer the company’s library product and new intellectual property, but also double down on beloved franchises with the likes of a live-action Harry Potter scripted television series and new installments of The Big Bang Theory and Game of Thrones. 

Streaming revenue for the first quarter hit $2.46 billion, down 1 percent excluding foreign-exchange impacts “as global retail subscriber gains were more than offset by a decline in wholesale revenues,” while advertising revenue jumped 29 percent, “primarily driven by subscriber growth on our direct-to-consumer (DTC) ad-supported tiers,” the company said. Content revenue dropped 16 percent, driven by lower third-party licensing of HBO content. Streaming unit operating expenses declined 24 percent to $2.41 billion due to lower content amortization, the shutdown of CNN+ and “more efficient marketing spend,” the firm said.

Studios unit adjusted earnings before interest, depreciation and amortization (EBITDA) declined to $607 million in the first quarter, down 23 percent excluding foreign-exchange impacts, driven by lower revenue. Studios revenue of $3.21 billion decreased 7 percent due to “lower TV licensing, theatrical film rental and, to a lesser extent, home entertainment revenues,” the company said. “TV licensing declined primarily due to certain large TV licensing deals in the prior-year quarter, as well as fewer theatrical
availabilities. Theatrical film rental was lower due to the strong performance of The Batman in the prior- year quarter.” However, “other revenue” increased 30 percent due to higher studio production services and “continued strong attendance at Warner Bros. Studio Tours in London and Hollywood.” Plus, the first-quarter launch of Hogwarts Legacy was the largest release of all time for Warner Bros. Games, making it the firm’s “best-selling game year-to-date with over $1 billion in retail sales.”