Warner Bros Discovery Reports Mixed Q2 Results Amid Streaming Growth

Warner Bros. Discovery (WBD), the newly formed media giant that combines the assets of WarnerMedia and Discovery, announced its second-quarter earnings on Thursday, revealing mixed results amid a challenging environment for the entertainment industry.

Q2 Highlights

• Q2 total reported revenues were $9.8 billion, down 1% year-over-year excluding foreign exchange effects.
• Net loss of $3.4 billion includes $2 billion of amortization of intangibles, $1 billion of restructuring and other charges, and $983 million of transaction and integration expenses.
• Adjusted EBITDA was $3.1 billion, up 13% year-over-year excluding foreign exchange effects.
• Direct-to-consumer (DTC) subscribers reached 92 million globally, up from 67 million in Q1, driven by the launch of HBO Max with ads and the international expansion of discovery+.
• Advertising revenues increased 12% year-over-year to $2.9 billion, reflecting the recovery of the ad market and the growth of DTC platforms.
• Content revenues decreased 11% year-over-year to $3.4 billion, mainly due to lower licensing and theatrical revenues as a result of the pandemic and the shift to DTC distribution.
• Distribution revenues increased 3% year-over-year to $3.5 billion, driven by higher affiliate fees and DTC subscription revenues.

DTC Strategy Update

In a conference call with analysts and investors, Warner Bros. Discovery CEO David Zaslav provided an update on the company’s DTC strategy, which he said is the “number one priority” for the combined entity.

Zaslav said that Warner Bros. Discovery will leverage its “unmatched” portfolio of content and brands to create a “global streaming leader” that will offer consumers a “compelling value proposition” across genres, demographics and geographies.

He said that the company will launch a new global DTC platform in 2023 that will combine the best of HBO Max and discovery+, as well as content from other Warner Bros. Discovery brands such as CNN, DC, Eurosport, HGTV, Food Network, TNT, TBS and more.

He said that the new platform will have a “flexible” pricing model that will include ad-supported and ad-free tiers, as well as different levels of access to content depending on the market and consumer preference.

He also said that the company will continue to invest in original content for its DTC platforms, as well as license content from third parties where appropriate.

He cited some examples of recent and upcoming DTC content that showcase the breadth and depth of Warner Bros. Discovery’s offerings, such as:

• The Suicide Squad, a DC blockbuster film that debuted simultaneously on HBO Max and in theaters on August 6.
• House of the Dragon, a prequel series to Game of Thrones that will premiere on HBO Max in 2022.
• Magnolia Network, a lifestyle brand led by Chip and Joanna Gaines that launched on discovery+ in July.
• Tokyo Olympics, a major sports event that was broadcasted on Eurosport and discovery+ in Europe.

Zaslav said that Warner Bros. Discovery’s DTC strategy is “well underway” and that the company is “very confident” in its ability to achieve its long-term goals of reaching 200 million to 300 million global subscribers and generating $15 billion to $20 billion in annual DTC revenues by 2025.

Analysts’ Reactions

Analysts had mixed reactions to Warner Bros. Discovery’s Q2 results and DTC strategy update.

Some analysts praised the company’s strong DTC subscriber growth and its ambitious plans for creating a global streaming powerhouse.

For example, Michael Nathanson of MoffettNathanson said that Warner Bros. Discovery’s Q2 results were “solid” and that its DTC strategy was “compelling”.

He said that Warner Bros. Discovery has a “unique opportunity” to leverage its “unparalleled” content library and global reach to create a “differentiated” streaming service that can compete with Netflix, Disney+ and Amazon Prime Video.

He also said that Warner Bros. Discovery’s valuation is “attractive” compared to its peers and that he expects the company to generate strong free cash flow in the future.

He maintained his buy rating and $65 price target on Warner Bros. Discovery’s stock.

However, some analysts expressed concerns about the company’s high costs and potential challenges in executing its DTC strategy.

For instance, Jessica Reif Ehrlich of Bank of America said that Warner Bros. Discovery’s Q2 results were “mixed” and that its DTC strategy was “unclear”.

She said that Warner Bros. Discovery’s net loss was “worse than expected” due to high expenses related to the merger and the DTC transition.

She also said that Warner Bros. Discovery’s DTC strategy faces “significant risks” such as increased competition, content cannibalization, customer churn and regulatory hurdles.

She lowered her price target on Warner Bros. Discovery’s stock from $60 to $55 and kept her neutral rating.

Stock Performance

Warner Bros. Discovery’s stock closed at $51.23 on Thursday, down 2.4% from the previous day.

The stock has gained 18% since the merger between WarnerMedia and Discovery was announced in May, but has underperformed the broader market and the media sector.

The following table shows the stock performance of Warner Bros. Discovery and its main competitors in the past three months: