Warner Bros. Discovery shares drop 10% as company misses estimates, warns of 2024 cash flow headwinds

Warner Bros. Discovery missed analyst targets for both profit and revenue in the fourth quarter as advertising slumped and the company failed to provide free cash flow guidance for 2024.

Shares of Warner Bros. Discovery closed down 10% on Friday after the report.

The company’s fourth-quarter net loss was $400 million, or 16 cents per share, compared with a loss of $2.1 billion, or 86 cents per share, during the year-ago period. Warner Bros. Discovery reported a 14% decline in linear television advertising revenue excluding changes in foreign exchange and a 4% drop in actual distribution revenue.

“This business is not without its challenges,” Chief Executive Officer David Zaslav said during the company’s fourth-quarter earnings conference call. “Among them, we continue to face the impacts of ongoing disruption in the pay TV ecosystem and a dislocated, linear advertising ecosystem. We are challenging our leaders to find innovative solutions.”

Here’s what the company reported for the quarter ended Dec. 31, versus analysts’ estimates, according to LSEG, formerly known as Refinitiv:

• Loss per share: 16 cents vs. 7 cents expected
• Revenue: $10.28 billion vs. $10.35 billion expected

Fourth-quarter adjusted EBITDA was $2.5 billion, down 5% from a year ago, excluding the impact of foreign exchange, as studio revenue lagged as a result of strikes by the Writers Guild of America and the Screen Actors Guild-American Federation of Television and Radio Artists.

Studio revenue dropped 17% to $3.17 billion in the quarter. Adjusted EBITDA for the unit fell 29% to $543 million.

“The studio has really been underperforming, including the end of the year, where we had some real struggle,” Zaslav said during the earnings conference call.

Warner Bros. Discovery generated $3.31 billion in free cash flow in the fourth quarter and ended 2023 with $6.16 billion in free cash flow, up 86% from a year prior. Zaslav has prioritized boosting free cash flow and shrinking the company’s debt.

Still, the company said there will be free cash flow headwinds in 2024 as content spend increases with the completion of the writers’ and actors’ strikes last year.

Chief Financial Officer Gunnar Wiedenfels declined to give free cash flow guidance for 2024 while noting that the Olympics, a commitment to increasing Max revenue with increased spend and the uncertainty of annual EBITDA could all weigh on cash generation this year.

“I expect 2024 to be another strong free cash flow year,” Wiedenfels said. “I deliberately do not want to give a specific quantitative free cash flow guidance.”

Warner Bros. Discovery paid down $1.2 billion of debt in the quarter and $5.4 billion in debt in 2023. It still has $44.2 billion of gross debt remaining after paying off $12 billion of debt in the last two years.

The company’s flagship subscription streaming service, Max, ended 2023 profitable, with full-year adjusted EBITDA of $103 million.

Zaslav has dramatically cut content spending for the streaming service since merging WarnerMedia and Discovery in 2022. His efforts have helped Max reach profitability before the streaming divisions of legacy media rivals Disney, Comcast‘s NBCUniversal and Paramount Global.

The company reported 97.7 million global direct-to-consumer subscribers, a 2% increase from the previous quarter.

The company said Max would be profitable in 2024, though it would lose money in the first half of the year as the studio increases content spending before recovering in the second half. Warner Bros. Discovery forecast Max would generate EBITDA of $1 billion for 2025.

Max’s advertising tier, currently only available in the U.S., will be rolled out to 40 international markets by the end of 2024, Zaslav said during the call.

Zaslav didn’t offer any pricing details for the company’s forthcoming sports joint venture, announced earlier this month with Disney and Fox, but he reiterated the product will be for the 60 million U.S. households that don’t currently subscribe to cable.

Zaslav noted one of the benefits to the service, set to launch in the fall of 2024, is consumers won’t have to worry about finding the right channel for playoff games for Major League Baseball, the National Hockey League or the National Basketball Association, because the streaming app will automatically send consumers to any game on Fox, ESPN, TNT or TBS.

“We don’t see a lot of people unsubscribing to cable in order to get this,” Zaslav said. “The younger generation that is not subscribing, we’re able to go after those that we’re missing.”

Warner Bros. Discovery continues to negotiate with the NBA for renewed media rights, but won’t overpay according to the company’s internal estimates of the league’s value, Wiedenfels said.

“It’s very easy to lose control over sports rights investments,” Wiedenfels said. “That’s not how we do it. We know exactly what value we assign, and we stay disciplined during our discussions.

Disclosure: NBCUniversal is the parent company of CNBC.

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