Warner Bros. Discovery will not meet deleveraging targets by the end of 2024 without a recovery in TV ads, CFO warns
Warner Bros. Discovery Inc.’s stock tumbled 18% Wednesday to put it on track for its worst one-day performance in more than two years, after the studio and streaming-video company reported a wider-than-expected third-quarter loss.
Adding to the gloom, the company (WBD) warned on its call that it would not meet debt-repayment targets if the TV ad market fails to revive.
The company’s loss came to $417 million, or 17 cents a share, for the quarter, narrower than the loss of $2.31 billion, or 95 cents a share, posted in the year-ago period. But it was wider than the FactSet consensus for a loss of 9 cents a share.
Revenue grew 1.6% to $9.98 billion, just above the FactSet consensus of $9.97 billion.
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On the company’s earnings call with analysts, Chief Executive David Zaslav said the company is hopeful the SAG-AFTRA actors strike will be resolved soon — one of two factors, along with declining TV ad revenue, to weigh on performance.
“As the strikes underscored, these are challenging times,” he said, according to a FactSet transcript.
“Our industry is facing accelerated disruption in a rapidly changing marketplace. And to succeed long term, we must be flexible and adaptable and have a strong arsenal of assets that will enable us to maintain momentum amidst ever-evolving consumer behavior, and at Warner Brothers Discovery, we are and we do.”
Warner has been focused on paying down debt to free capital for growth opportunities, he said. The company repaid $2.4 billion of debt in the quarter, which allowed it to eliminate nearly all of its floating-rate debt.
In October, it repaid an additional $600 million of a term loan, according to Chief Financial Officer Gunnar Wiedenfels.
“We have taken significant financial and operating risk off the table over the last year, and we are fully committed to our gross leverage target range of 2.5 times to 2 times adjusted Ebitda,” Zaslav said, referring to earnings before interest, taxes, depreciation and amortization.
“That said, taking together the factors just mentioned for an early view of 2024, it is unlikely from today’s perspective that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market,” he said.
MoffettNathanson said the news was a negative for shareholders.
“Absent a turn in the linear ad market — we are not holding our breath — networks Ebitda should continue to decline into next year,” analysts led by Robert Fishman wrote. “An increase in content spending as production ramps up post-strikes should further weigh on profitability and free cash flow.”
MoffettNathanson stuck with its neutral rating on the stock but lowered its price target to $12 from $14.
TD Cowen, which has an outperform rating on the stock, said its model is under review following the debt news.
“Management is expecting continued linear ad weakness going into 2024along with some extended negative impact from the strikes, though they do expect the studio business to make a full recovery,” analysts Doug Creutz and Mei Lun Quach wrote.
TD Cowen has a $19 price target on the stock.
Warner Bros. said revenue for its network segment fell 22% from a year ago to $215 million. Studio revenue rose 4% to $3.226 billion.
Theatrical revenue was boosted by the strong performance of “Barbie,” while games revenue was boosted by the release of “Mortal Kombat 1” and continued strength for “Hogwarts Legacy.”
TV revenue fell sharply due to the ongoing actors strike, a strike by writers that has been resolved and the absence of large licensing deals from the prior-year quarter.
Direct-to-consumer subscribers totaled 95.1 million, which was down 700,000 from the end of the second quarter, while average revenue per user was $7.82, up 6% when excluding the impact of currency.
Paramount Global Inc.’s stock (PARA) fell in sympathy and was last down 8%. BofA conducted a double downgrade of that stock earlier this week and said needed asset sales do not seem likely.
Warner Bros. shares have dropped 47% in the year to date, while the S&P 500 SPX has gained 14%.