Industry Insider: A Look Into Warner Bros. Discovery's 2023 Q1 Earnings Call
It comes with no surprise that Warner Bros. Discovery’s 2023’s Q1 is as successful as its biggest hits. With more than $2 billion in free cash flow - even after absorbing the restructuring and M&A costs coming from the merger between AT&T’s WarnerMedia and Discovery Inc. - the resulting Warner Bros. Discovery has the possibility to further invest in its most profitable segments and fully finance new content and ventures.
President and CEO David Zaslav started the call by announcing the successes in free cash flow, stating that “we have lots more to do and more to attack and we are aggressively doing just that”. He posed particular attention on the DTC segment, which, during Q1, has generated $50 million in EBITDA and has added 1.6 million subscribers for a total of 98 million between HBO, HBO Max, and Discovery+. He also noted that, although their streaming platforms currently reach only half of the global population, they are on track to becoming profitable by the fiscal year 2023 - a huge step that only a few other streaming platforms have been able to complete. HBO Max is on track to expanding its reach on a global scale in 2023 and has very lucrative deals in place with India and Canada against virtually zero expenses, as the content is already Warner Bros.’.Moreover, as part of the relaunch strategy that follows 2022’s restructuring, at the end of May 2023 HBO Max will combine with Discovery+ and will rebrand as “Max” - a strong signal for the end of the merger phase and the beginning of a full attack on growth and expansion.
One of the strengths of Warner Bros. comes from its most popular brands - Harry Potter, Game of Thrones, DC Comics to name a few. All of these will be strengthened by new content: the hit TV series House of the Dragon has been renewed for a second season, DC Comics’ The Flash will come to theaters in 2023 after receiving positive reactions at its world premiere at CinemaCon, and the Harry Potter franchise will continue to live on after the announcement of a new TV series that will go over the whole series again, each season focusing on a single book. The Harry Potter brand is bringing in revenues also through the gaming division, as the video game Hogwarts Legacy launched in February and has already accumulated more than $1 billion in retail sales and over 50 million units sold worldwide. The video game gives the players an interactive experience where they can follow a storyline as Hogwarts students, a true treat for Harry Potter fans - and a strategic launch just before announcing the new series in development. The video game is set to bring in even more revenues when it will be available also on Nintendo Switch in November 2023. Moreover, Warner Bros. will expand its film library by continuing the Dune three-part series with the release of Dune: Part Two in November 2023. Animation is also getting a new stimulus with the appointment of Bill Damaschke, former COO of DreamWorks, as President of Warner Animation, a seat that was left vacant since the exit of Allison Abbate in 2022.
HBO is yet another of the great strengths of the company. The golden recipe of the hit-Sunday-night-show has proven itself to be sustainable over several months and shows. Opposite to the binge-watching phenomenon, these extremely high-quality shows repropose the older formula of the weekly episode, which nonetheless proves itself to be timeless as audiences continue on turning on HBO on Sunday nights. The White Lotus finale drew in 4.1 million people, The Last of Us finale a staggering 8.2 million viewers, and the ongoing Succession’s fourth episode garnered 2.6 million watchers, a 11% jump with respect to the fourth and last season’s premiere. In addition to the sheer volume of subscribers that these hit shows attract to HBO Max, HBO Originals alone have more than 15 “foundational advertising partners” (like Mercedes Benz for Succession) that take great advantage of both the on-demand and Sunday night shows – and generate proportionally large revenues, with $2.3 billion accounted for 1Q23.
The diversified foundation of the company was able to generate meaningful free cash flows, and the relaunch strategy also comprises an increased attention to the live programming of sports and news, as these are some of the few traditional outlets that still attract a considerable portion of liive audience. In fact, in the near future, TNT will host both the NBA Eastern Conference Finals as well as the Stanley Cup Finals in June.
One of the financial goals of the CFO Gunnar Wiedenfels is to keep the debt ratio under 4x, possibly even lowering it while further increasing free cash flow. He also underlined that, regarding the DTC segment, they anticipate a peak of $300 million of EBITDA losses for the second quarter. Wiedenfels commented that:
“We are tracking ahead of our profitability target and now expect to be profitable in the U.S. on a full year basis this year. That is a full year ahead of our original plan of breakeven in 2024. And I remain ever confident in our outlook of generating $1 billion or more of profitability in 2025 globally.”
