As the fourth-quarter earnings cycle for Big Media closes Thursday, with Warner Bros. Discovery results after the market close, Wall Street will be eagerly looking for green shoots to confirm that the worst is truly over for the newly minted conglomerate.
Warner Bros. Discovery shares have been gaining slowly but steadily since the beginning of this year as Team Zaslav hammers the point to investors that the worst of its integration and restructuring pain is behind them. WBD CEO David Zaslav has been ahead of the curve in preaching a return to the business fundamentals that have powered Hollywood for more than a half-century.
Disney and Paramount Global delivered results earlier this month that came with sober warnings about streaming losses hitting a peak this year. Zaslav and WBD chief financial officer Gunnar Wiedenfels have promised analysts that the heaviest gusher of investment in HBO Max came in 2022 and that they are now on the path to taking the streamer to the promised land — profitability — next year.
“The majority of heavy lifting (related to restructuring charges etc.) has been completed, direct to consumer losses peaked in ‘22 with a path to breakeven in ‘24, and the cyclical headwinds should abate as macro conditions improve,” Bank of America analyst Jessica Reif Ehrlich wrote in a research note last month on WBD.
WBD’s improved look comes in part because the company was able to take advantage of restructuring and integration savings after completing the complicated spinoff of Discovery and what was AT&T’s WarnerMedia last April. WBD endured months of executive turmoil and cost-slashing that set tongues wagging in Hollywood’s creative community about the fate of Warner Bros. and HBO.
On Thursday, Team Zaslav surely has to deliver evidence of its renewed momentum and detail on its strategy shift away from hoarding pricey content all for its own platforms. Wiedenfels has been super-specific of late in comments to investors, promising no less than 33% to 50% rate of revenue to free cash flow conversion in 2023. That is a strong contrast to rivals including Disney and Paramount Global that are facing another year of negative free cash flow. This is welcome news for WBD in particular and media in general, given the importance of FCF as a metric for the sector.
“I’m very, very pleased with the command and control that we’ve been able to implement already,” Wiedenfels said last month at the Citi Communications Medi and Entertainment conference. “I’m seeing great improvement in this company’s cash generation against that target for next year with 33% to 50%. But remember, we’ve also said that long term, I think the cash generation capacity of the company is even greater than this, and we’re chipping away at that opportunity.”
For the year to date, WBD shares are up 65%, which in part reinforces how shockingly low the stock sank last year (below $9 at one point) during the ugly part of the post-merger overhaul. On Wednesday, shares closed at $15.42. The stock is up again Thursday in early trading, on what is shaping up to be an overall green-territory day for the Dow, Nasdaq and S&P 500 indices.
Investors will be eager to hear any new forecasts or color commentary from Zaslav and Wiedenfels on the company’s Q4 conference call later Thursday. After making bold statements about where WBD and the industry at large is heading, the pair will have to deliver evidence of momentum spurred by the decision to embrace ad-supported streaming options, its renewed focus on the old-fashioned theatrical exhibition window for movies and a promise that some of the company’s TV content will be once again be sold to third-party buyers — to make the most of windowing opportunities and to mitigate the costs of warehousing lightly-watched content on HBO Max.
Most of all, WBD has to continue to make the investment thesis for the WarnerMedia-Discovery merger at a time when even a CEO as respected as Disney’s Bob Iger is facing scrutiny of his $71 billion purchase of 21st Century Fox in 2019.
“A challenging ad environment and continued cord-cutting are ongoing secular pressures and sustained multiple expansion beyond our target will require further confidence that streaming gains can offset linear pain,” Michael Morris, Guggenheim analyst, wrote of WBD in a note published last month.