Warner Bros. Discovery (WBD) stock fell as much as 12% on Thursday morning after the company reported disappointing second-quarter earnings on Wednesday, missing expectations for both revenue and profit.
The company took a massive $9.1 billion writedown on its TV network unit after losing a major media rights deal with the NBA. The company filed a lawsuit against the league over what it called the NBA’s “unjustified rejection” of the company’s proposal for matching rights.
Including an additional $2.1 billion in merger-related costs, the company lost $11.2 billion in depreciation and amortization charges in the most recent quarter. In addition, the company reversed previous profit trends in its streaming business, despite adding nearly 4 million subscribers in the quarter, while its linear TV unit continued to decline.
Wall Street analysts weighed in on the report on Thursday, with at least one analyst saying it was “unlikely” the situation for the media giant would get any worse.
KeyBanc analyst Brandon Nispel, who has an Overweight rating on the stock, said the company’s studio business is likely to outperform in 2025 compared to 2024, while streaming could continue to offset the accelerated decline of linear networks.
Warner Bros. Discovery CEO David Zaslav insisted during the company’s earnings call that profitability within the streaming unit will be positive in the second half of the year with “even greater subscriber growth” in the current quarter and “at least” $1 billion in segment EBITDA by 2025.
Still, Zaslav pointed to changing industry dynamics as a key catalyst for the impairment charge, telling investors during the earnings call: “It’s fair to say that even two years ago, market valuations and prevailing conditions for traditional media companies were quite different than they are today. This impairment recognizes this and better aligns our book values with our future prospects.”
Gunnar Wiedenfels, WBD’s CFO, added that “a number of triggering events occurred in the second quarter, including the difference between our current market capitalization and the company’s book value, continued weakness in the U.S. advertising market and uncertainty regarding the renewal of affiliate and sports rights, including the NBA.”
“While I certainly don’t want to deny the magnitude of this erosion, I think it’s equally important to recognize that the flip side of this reflects the value shift across business models and our confidence in the growth and value opportunities within studios and our global direct to consumer businesses,” he said.
Revenue for the quarter was $9.7 billion, below the Bloomberg consensus estimate of $10.12 billion and down 6% from $10.36 billion last year.
The company reported an adjusted loss per share of $4.07, compared with a loss of $0.51 in the year-ago period and below consensus estimates of $0.21 due to the impairment.
Free cash flow, which had been a bright spot in the first quarter, bucked the trend this time around. The metric fell 43% year-over-year to $976 million, also missing Bloomberg’s consensus forecast of $1.2 billion.
The company’s direct-to-consumer (DTC) streaming business was a bright spot in the quarter, adding 3.6 million Max subscribers amid the launch of “House of the Dragon” Season 2. That was ahead of Bloomberg consensus expectations of 1.89 million and also ahead of the 1.80 million subscribers added in Q2 2023.
Streaming ad revenue rose to $240 million, topping Bloomberg estimates of $191 million and up 98% from the $121 million the company reported in the same period a year ago. However, the DTC division posted a loss of $107 million after reporting a profit in the first quarter.
Future unclear amid linear struggle
In recent media rights negotiations, the NBA has dropped WBD in favor of two newcomers: tech giant Amazon (AMZN) and Comcast’s NBCUniversal (CMCSA). The league was able to reach a new rights deal with its other current media partner, Disney (DIS). WBD’s current rights expire at the end of next season.
Analysts warn that the loss of these rights will have consequences for the future success of the Max streaming service and will likely accelerate the demise of the linear networks, which are already in freefall.
Network ad revenue fell 10% in Q2 from the same period a year earlier. The company reported network ad revenue of $2.21 billion, missing Bloomberg’s forecast of $2.26 billion.
That put pressure on second-quarter EBITDA, with full-year adjusted EBITDA now at risk of falling below $10 billion, according to the latest estimates from Bloomberg. That’s $4 billion less than what analysts had expected at the time of the merger.
Rumors are swirling about the company’s next move. Bank of America analysts outlined potential strategic options in a recent report. These options could include spinning off the company’s digital streaming and studio businesses, separate from its legacy linear TV division.
Management dodged the topic of a split during the earnings conference call, but did indicate that it had been discussed.
“This is a publicly traded company. We are all very aware of our responsibility to have a view on whatever strategic options are out there,” Wiedenfels said. “We are very clearly focused on evaluating everything that goes beyond just running the operational business.”
Still, the company said it has been operating under the “one Warner Bros. Discovery strategy for the past two and a half years. …and we’re seeing the benefits every day.”
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and send her an email at alexandra.canal@yahoofinance.com.
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