Warner Bros. Discovery’s Has In-Line End to 2022

Weak advertising results at the networks segment again hampered Warner Bros. Discovery’s WBD performance during its third quarter as a combined entity. However, the focus on cost-cutting at the direct-to-consumer segment appears to be working as the adjusted EBITDA loss decreased sequentially and year over year. While we think investors are looking for lower losses for DTC segments across the media industry, we also believe that those improvements cannot be combined with weak top-line and subscriber growth, as seen this quarter for WBD. We are maintaining our $30 fair value estimate.

In the fourth quarter, total revenue decreased 9% on a currency-adjusted pro forma basis to $11.0 billion as the growth at DTC was overwhelmed by the studios and network segments. Adjusted EBITDA fell only 2% to $2.6 billion as cost-cutting, merger synergies, and lower DTC losses almost offset the lower revenue.

DTC revenue improved by 6% on a currency-adjusted pro forma basis to $2.5 billion. Total DTC subscribers increased to 96.1 million from 94.9 million in the third quarter and 86.2 million a year ago. The adjusted EBITDA loss for the DTC segment fell to $217 million from $728 million a year ago and $634 million last quarter. Management expects that the segment will be adjusted EBITDA breakeven in the first quarter. While the combined HBO Max and discovery+ platform launch in the second quarter will hinder adjusted EBITDA for the full year, management remains positive on its 2025 target of $1 billion in adjusted EBITDA for the segment.

DTC distribution revenue (85% of segment revenue) fell 2% as retail subscriber growth was overcome by the loss of wholesale subscribers from the closing of Amazon Channels pipeline in September 2021. Management said the firm has signed a deal to get HBO Max back onto Amazon Channels. While this agreement could help with subscriber and top-line growth, there will be a margin hit as Amazon takes a significant chunk of the subscription price.