Warner Bros. Discovery, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Unaudited U.S. GAAP results. Comparisons require care: the WarnerMedia merger closed in April 2022, so reported Q1 2022 results exclude WarnerMedia. Management therefore uses pro forma combined comparisons for operating trends; those comparisons are estimates, not actual historical results.
Business context and financial performance
WBD operates Studios, Networks and direct-to-consumer (DTC) businesses across film, television, streaming, sports, news and gaming. It reported 97.6 million DTC subscribers at quarter-end.
| Metric | Q1 2023 | Comparison / context |
|---|---|---|
| Revenue | $10.7 billion | Down 6% versus pro forma Q1 2022, or 5% excluding foreign exchange. |
| Operating income (loss) | $(557) million | Pro forma Q1 2022 loss was $(340) million. |
| Net income (loss) attributable to WBD | $(1.069) billion | Pro forma Q1 2022 loss was $(299) million. Q1 2022 reported actual income was $456 million, but is not a like-for-like comparison. |
| Adjusted EBITDA | $2.611 billion | Non-GAAP measure; segment trends below provide the filing’s comparable commentary. |
| Operating cash flow | $(631) million | Compared with $323 million provided in Q1 2022; management attributed the decline primarily to working-capital movements and lower income excluding non-cash items. |
| Cash and cash equivalents | $2.594 billion | Down from $3.731 billion at December 31, 2022; $2.4 billion was held in foreign subsidiaries. |
| Debt | $49.215 billion principal; $48.930 billion net carrying amount | Current debt portion was $3.496 billion. Debt principal was $49.276 billion at year-end 2022. |
| Interest expense, net | $571 million | Compared with $153 million in reported Q1 2022; the merger-related debt burden was a principal driver of the increase. |
Capital expenditures were $299 million. Cash used in investing activities was $257 million and cash used in financing activities was $432 million. The filing does not present a defined free-cash-flow measure.
Segment trends and material changes
- Studios: Revenue was $3.212 billion and Adjusted EBITDA was $607 million. EBITDA declined 23% versus the pro forma prior-year period, primarily reflecting lower TV licensing, theatrical and home-entertainment revenue; higher games revenue from Hogwarts Legacy partly offset the declines.
- Networks: Revenue was $5.581 billion and Adjusted EBITDA was $2.293 billion, down 10% pro forma and excluding foreign exchange. Advertising softness, audience and U.S. linear-subscriber declines, and the absence of prior-year Olympics-related activity weighed on revenue.
- DTC: Revenue was $2.455 billion and Adjusted EBITDA was $50 million, a $704 million improvement from the pro forma prior-year loss. Lower marketing and content costs helped; distribution revenue declined slightly, while advertising revenue increased with ad-supported subscriber growth.
- Consolidated revenue mix: On a pro forma, ex-FX basis, distribution revenue declined 2%, advertising declined 14%, and content declined 5%; other revenue rose 37%. The filing cites a soft advertising market and lower licensing/theatrical activity, partly offset by games and studio-services revenue.
Liquidity, debt and outlook
- At quarter-end, WBD had $6.0 billion of unused revolving-credit capacity and no outstanding revolver or commercial-paper borrowings. Cash plus unused facility capacity was $8.594 billion. Covenants were met, with no events of default reported.
- WBD issued $1.5 billion of 6.412% senior notes due March 2026 and used the proceeds to repay $1.5 billion of term loans. The company also repaid $106 million of notes due February 2023. It disclosed $3.2 billion of notes due in Q1 2024, in addition to smaller maturities later in 2023.
- After quarter-end, WBD borrowed $750 million under its credit facility for sports-rights payments and expected to repay it during Q2 2023. Management said cash, operating cash generation and credit availability should be sufficient for short- and long-term needs, while noting capital-market access is not assured.
- The merger-related restructuring program is expected to be substantially complete by the end of 2024. Management estimated total pretax charges of $4.1–$5.3 billion, of which $3.8 billion had been incurred by March 31, 2023; expected cash expenditures were $1.0–$1.5 billion. Q1 charges were $95 million.
- WBD announced that its enhanced streaming service, Max, was expected to launch in the U.S. in May 2023, combining HBO Max and discovery+ content; discovery+ was to remain available. The filing gives no specific consolidated revenue or earnings guidance.
Risks, contingencies and unusual items
- Management identified a weakening advertising market, declining Networks audiences, execution risk in DTC growth, competition, macroeconomic conditions, foreign exchange, sports and content costs, subscriber outcomes, labor actions, cybersecurity, regulation and merger-integration risks as factors that could affect results and asset values. No goodwill impairment indicators or triggering events were identified in Q1, but monitoring will continue.
- Q1 included $831 million of amortization of the content fair-value step-up from the merger, $95 million of restructuring charges, and $31 million of impairments and disposition losses. Other expense included $93 million of net foreign-currency losses and a $68 million fair-value decrease in certain equity investments. Prior-year results included a substantial derivative gain, making some reported comparisons especially unrepresentative.
- Uncertain tax-position reserves were $2.195 billion, with approximately $492 million accrued for related interest and penalties. The company said up to $165 million of unrecognized tax benefits could decrease within 12 months.
- GoldenTree exercised a put right requiring WBD to purchase its 32.5% interest in MotorTrend Group; the redemption value and timing remained under discussion. WBD also disclosed merger-related securities and stockholder litigation; management stated it intended to defend the cases and did not believe resolution of its litigation matters would materially adversely affect the company.
Important facts for investors to verify
- Track cash generation and working-capital movements, particularly given negative Q1 operating cash flow and the reduction in cash.
- Review debt maturities, interest costs, covenant headroom and the use of the credit facility, including the post-quarter $750 million borrowing.
- Assess whether DTC subscriber, revenue and profitability trends support the Max launch and its expected contribution; verify subsequent subscriber and retention disclosures.
- Monitor advertising-market conditions and Networks audience and subscriber trends, as well as Studios licensing, theatrical and games performance.
- Compare realized restructuring charges and cash expenditures with management’s stated ranges and end-2024 completion expectation.
- Follow the resolution of the MotorTrend put, tax exposures and merger-related litigation, and distinguish pro forma comparisons from reported historical results.