Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q3 2023 Earnings Call Transcript November 8, 2023
Warner Bros. Discovery, Inc. misses on earnings expectations. Reported EPS is $-0.17 EPS, expectations were $-0.09.
Operator: Ladies and gentlemen, welcome to the Warner Bros. Discovery Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. Additionally, please be advised that today’s conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.
Andrew Slabin: Good morning and welcome to Warner Bros. Discovery’s Q3 earnings call. With me today is David Zaslav, President and CEO; Gunnar Wiedenfels, our CFO; and JB Perrette, CEO and President, Global Streaming and Games. Before we start, I’d like to remind you that today’s conference call will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements include comments regarding the company’s future business plans, prospects and financial performance. These statements are made based on management’s current knowledge and assumptions about future events and involve risks and uncertainties that could cause actual results to differ materially from our expectations.
In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For additional information on important factors that could affect these expectations, please see the company’s filings with the U.S. Securities and Exchange Commission, including but not limited to the company’s most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K. A copy of our Q3 earnings release, trending schedule and accompanying slide deck will be available on our website at ir.wbd.com. And with that, I am pleased to turn the call over to David.
David Zaslav: Hello, everyone and thank you for joining us. Let me start by saying that we are hopeful we will reach a resolution to the SAG-AFTRA strike soon. We made a last and final offer which meant virtually all of the Union’s goals and includes the highest wage increase in 40 years and believe it provides for a positive outcome for all involved. We recognize that we need our creative partners to feel valued and rewarded, and look forward to both sides getting back to the business of telling great stories. As the strikes underscored, these are challenging times. Our industry is facing accelerated disruption and a rapidly changing marketplace, and to succeed long-term, we must be flexible and adaptable and have a strong arsenal of assets that will enable us to maintain momentum amidst ever evolving consumer behavior.
And at Warner Bros. Discovery, we are and we do. Over the last 19 months, we have been relentlessly focused on reinventing this company, repositioning it as a more stable, efficient free cash flow generating business. While we are and always will be a work in progress and while we are thoughtfully navigating industry wide challenges like a strained advertising market, our teams continue to execute on our strategy. More broadly, we generated over $2 billion in free cash flow in Q3 and are on track to meaningfully exceed $5 billion for the year. This has made it possible for us to aggressively pay down our debt, which we’ve reduced by nearly $12 billion since launching the company last year and as we’ve said, by the end of the fourth quarter, we will be meaningfully below 4 times net levered.
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Q&A Session
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While paying down debt and delevering will remain a top priority for us, we’re also now in a position to allocate more capital toward growth opportunities. Our asset mix, one of the most complete and diversified in the industry, positions us as well as any to drive long-term value. We possess the full slate of production and distribution capabilities as one of the preeminent makers and sellers of content in the world. And as you know, we are home to many of the most iconic brands and franchises in the history of entertainment. Of course, we believe the real power lies not just in the storytelling, IP, brands and franchises, as formidable as they are, but in the opportunities we create as one company to maximize their impact, reach and ultimately their value.
As I said previously, a lot of our most popular IP has been underused. There are great new stories waiting to be told and exciting new ways to bring those stories and characters to life across screens, consumer products, experiences, and more. We recognize that we can do a better job of managing and maximizing the value of our blue chip franchises like Game of Thrones, Harry Potter, and Superman. Each represents an ecosystem of storytelling possibilities and we intend to capitalize on their potential with a more focused franchise management approach and look forward to bringing in a new global head of franchise as we discussed two weeks ago. This person will work closely with the leaders of our businesses to identify opportunities to expand the reach and impact our storytelling IP across the full range of consumer touch points.
More on this soon. One of the big advantages we have at Warner Bros. Discovery is that we own and control all of our content and storytelling IP and that allows us to distribute it in ways that maximize reach and profitability. Of course, the top priority for us is our streaming service Max. We continue to be very pleased with the strong foundation that JB, Casey and the team have put in place to first stabilize and now grow the business. In Q3, we generated another quarter of positive EBITDA behind both distribution and advertising revenue growth. And we recently layered in live programming underpinning a broad content offering that appeals to a wider spectrum of consumers and is showing increased engagement and lower churn. And while the third quarter subscriber numbers were impacted by one of our lightest original content schedules in years, in part due to the strike constraints that compelled us to delay some releases, as well as a further decline in the overlapping Discovery Plus subscriber base, which we expected and discussed with you.
We are very excited about our more robust content slate as we head into the strong 2024 and beyond. We’ve got a fantastic lineup planned, including the new season of True Detective: Night Country with Oscar winner Jodie Foster, which will premiere on January 14, followed in the spring by the new limited series The Regime, starring Oscar winner Kate Winslet. Later in the year, we’ll see The Sympathizer an espionage thriller based on the Pulitzer Prize winning book by the same name, produced and co-starring Robert Downey Junior.
BatVerse: And in 2025, we’ll have brand new seasons of The Last of Us, Euphoria, White Lotus and more. We’re confident this great new content will further fuel Max’s popularity, both domestically and around the world. Coupled with our new live programming, it really does provide an exceptional offering for consumers. In October, we launched CNN Max, a 24/7 streaming offering with live news, analysis and original programming from the most recognizable news brand in the world. And while CNN is a strong linear asset, we also appreciate there’s a segment of the population, mostly young people, who don’t subscribe to cable, and this new streaming product appeals to them as well, as evidenced by CNN Max viewers being nearly 20 years younger than traditional linear viewers and the vast majority of our CNN Max viewers being non-pay TV Subs.
We are analyzing everything we’re learning in these early stages and we’ll continue to iterate and improve the offering. But the key takeaway here is that we saw an opportunity and we were able to pivot quickly, seamlessly and decisively. And by providing CNN Max on the service, we’re expanding our audience and our impact. The fact is what CNN does has never been more important or more impactful, and no one does it better. In my view we have the very best journalists in the business. Right now we have over 70 people on the ground across Israel, Gaza, the West Bank and Lebanon and we’ve also got teams in Ukraine. They’re in harm’s way, working around the clock, reporting on these conflicts. And our teams bring not only their news reporting skills, but their deep knowledge of the regions, the geopolitical actors and the conflicts to bear in a way that really benefits the audience.
If you go to the White House, the Pentagon, the State Department, Congress, Embassy Row, CNN is on and it’s on in homes across the U.S. and everywhere across the globe. Our new Chairman and CEO of CNN Worldwide, Mark Thompson is in the seat now. He has visited nearly all of the offices and has already spent considerable time with leaders and employees. We couldn’t be more thrilled to have Mark at the helm. CNN is coming off a strong month in October with our new prime time programming lineup off to a very strong start and audience levels for the U.S. network up double digits year-over-year in key demos, while also outpacing the competition on both linear and digital platforms where CNN remains the number one digital news outlet in the world.
We’re excited to build on this momentum. We also launched Sports on Max last month with the Bleacher Report Add-On Sports tier which will include over 300 live sporting events annually starting with the Major League Baseball post season games which were incredible and now NHL and the NBA through the playoffs as well as NCAA Men’s March Madness, U.S. Soccer and more. It’s a huge advantage for us to have live sports and news together with our bouquet of scripted entertainment, nonfiction and one of the best TV and motion picture libraries in the world. Not only does this make for an even better offering for consumers, as evidenced by the millions of subscribers who have enjoyed our sports and news offering in only the first few weeks, but it’s also helping habituality, which is the most strongly correlated influence on churn.
Similar to news, sports is bringing in an incremental and younger audience with Max viewers, on average 12 years younger than traditional linear. We’ll be launching Max in Latin America in the first quarter of 2024, followed by the Nordics, Iberia, Netherlands and Central and Eastern Europe starting in the spring. The service will launch in France and Belgium in 2024 as well, our first entirely new markets. And in markets where Max will not yet be available, Discovery Plus and Max will be the only place where fans can get every minute of the Olympics in Paris next summer. Lots to look forward to. I also want to remind people that Max and HBO Max are still only available in markets that reach 45% of the world’s broadband households, even excluding China, Russia and India.
And while we will stay financially disciplined in our decision making, we have significantly more growth to come over the next two to three years as we expand to over half of the world where we are not yet available. Looking across our full portfolio, another area where we see particular opportunity is in gaming where we have 11 world class studios and are unique amongst our media peers as both a developer and publisher of games. Research has shown that Gen Z and Gen Alpha prefer gaming to any other form of entertainment, more than social media, more than watching television or listening to music, more than going to the movie theater. Games will be even more important to our fans in the future, and so having this asset in our arsenal is a critical differentiator and a real growth opportunity.
As a developer and publisher, we control quality and enjoy the full economic benefits of the games we produce as well as capturing the broader franchise benefits across the company. In 2023 we’ve released two of the industry’s top 10 console games, including the number one game released this year, Hogwarts Legacy and we still have the Switch version to come, launching next week. Our Harry Potter fans have immersed themselves in Hogwarts legacy, playing more than 700 million hours to date. That engagement helps not only our games business, but also helps build and revitalize the entire Harry Potter franchise and we know our fans want even more. We’ve worked really hard on our games business for the last year and a half. And it’s also a business where we have had a strong track record.
Games have been a very successful and steady segment for Warner Bros. for over a decade. We’ve been profitable in each of the last 15 years averaging more than $400 million in EBITDA the last three years alone. We believe games is a critical and very valuable asset for the company with a great deal of potential for growth. Games has consistently enjoyed among the highest ROIs of any of our businesses. And while we’re smaller than some of the leading pureplay gaming companies, our operating margins are comparable to the best of the public companies. We’re clearly punching above our weight and we’re just getting started. And similar to the leaders in the industry, we’ve led with multiple key franchises, each of which is $1 billion gaming property.
