Warner Bros. Discovery, the nation’s second-largest entertainment giant, reported Thursday that sluggish advertising sales dented third-quarter results as the company continues to eye cost-cutting layoffs and a viable streaming strategy.
The studio reported a loss of $2.3 billion, or 95 cents a share, on revenue of $9.82 billion. Analysts had been projecting an adjusted loss per share of 17 cents on $10.37 billion of revenue. It marks the second-straight quarter Warner Bros. has posted a loss after swerving $3.42 billion into the red.
WBD, like other Hollywood studios, faced macroeconomic headwinds such as further subscriber losses in linear television, sluggish advertising sales, and further restructuring charges from Discovery’s $44 billion acquisition of Warner Bros. that closed in April. And Wall Street is still looking for any signs that CEO David Zaslav is any closer to building out a streaming strategy as he combines HBO Max and Discovery+, while later adding CNN’s news programming to the mix.
Warner Bros. Discovery reported that it gained 2.8 million subscribers to its streaming services during the quarter, which was anchored by “House of the Dragon” that recently debuted. That’s compared to the 3.3 million net additions that Wall Street was expecting versus the 1.7 million new customers the studio picked up during the second quarter. The company has been projecting it will have 130 million paying streaming users by 2025.
“We are reimagining and transforming the organization for the future while driving synergy enterprise-wide, increasing our target to at least $3.5 billion, and making significant progress on our combined DTC product,” Zaslav said in prepared remarks. “While we have lots more work to do, and there are some difficult decisions still to be made, we have total conviction in the opportunity ahead.”
Shares of Warner Bros. Discovery have fallen 49% year-to-date, and shed 5% to $12.04 ahead of the closing bell on Wall Street. The stock slipped another 2% in after-hours trading ahead of the company’s call with investors and analysts.
Investors have been keeping a careful eye on Zaslav’s plan to streamline the bloated studio, slashing a pledged a now $3.5 billion worth of costs over the next few years as it builds out its yet unnamed streaming platform. There have been widespread reports that morale at the company has been significantly low as WBD initiated a new round of layoffs last month across its scripted, unscripted, and animation units.
But, so far, there’s only been a few hundred jobs that have been eliminated — meaning more pain is yet to come.
WBD reported advertising revenue decreased to $2 billion from $2.7 billion in the previous quarter, reflecting similar trends experienced by everyone from Big Tech companies to rival studios. The economy’s downturn and expected tilt into a recession has caused many big advertisers to scale back on their budgets during the past three months, and that is only expected to grow worse in upcoming quarters.
This was made apparent as the studio reported that its TV networks business saw an 8% decline in revenue during the quarter, much of this attributable to an 11% drop in advertising revenue.
Looking ahead, the company reiterated its 2022 adjusted earnings guidance to between $9 billion and $9.5 billion, which is a significant drop from the company’s previous $10 billion forecast. Full-year 2023 projections were also trimmed to $12 billion from $14 billion.
The company also reported that its debt load fell slightly versus the second quarter, to $50.4 billion from $53 billion. Warner Bros. Discovery took $1.5 billion in restructuring costs during the period, and wrote off $2.2 billion in depreciation and amortization costs. Zaslav warned last month that he expects to see total restructuring costs hit up to $4.3 billion.
But, there is a huge bright spot in Thursday’s earnings results — all episodes of “House of the Dragon” are averaging around 29 million viewers in the U.S.. That’s more than triple the average debut night audience, demonstrating what WBD said was “strong catch-up viewing.” The company projects the new streaming platform will launch early next year.
“Is the golden age of content over? Absolute not,” Zaslav told analysts. “People are consuming content more than they ever have. It has to be great content. It’s not about how much, but what’s good, and the consumer is telling us right now that …. our portfolio of tentpole assets at WBD, the breadth is large and the opportunity is real.”
He added that the “great experiment of “taking subscribers at every cost is over.” He said the strategy where competitors like Netflix or Disney+ burns through cash to lure new customers is “deeply flawed,” and that he’ll control such spending so that there’s a “real opportunity to deliver the content subscribers are willing to pay for.”
What will be a service that consumers are willing to pay for? That’s the big question as WBD launches its new combined streaming service as it does battle with industry leader Netflix and the burgeoning prowess of Disney+.
“It will be critically important to get the pricing right for the newly combined service. We’ve seen Netflix implement new ad-tiers which have shaken up the market. We’re seeing that streaming audiences want fewer, shorter and more relevant ads – and streaming technology enables that model,” said Dan Goman, CEO of Beverly Hills-based media supply chain company Ateliere.
“HBO Max has struggled with technology challenges, while Discovery+ has offered a more minimalist user experience,” he added. “WBD intends to combine the best of both services with the right technology to offer a robust user experience, addressing consumer concerns about advertising for its ad-supported tiers.”