Warner Bros. Discovery, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. The filing is the historical financial report of Discovery, Inc., renamed Warner Bros. Discovery after its April 8, 2022 merger with AT&T’s WarnerMedia business. Q1 figures do not include WarnerMedia, so they are not representative of the combined company and are not directly comparable with future results.
Financial results and liquidity
- Revenue: $3.159 billion, up 13% year over year (15% excluding foreign-exchange effects). Advertising revenue rose 5% to $1.482 billion; distribution rose 9% to $1.422 billion; other revenue increased to $255 million, mainly reflecting European Olympics-rights sublicensing.
- Profitability: Operating income was $353 million, down 11%, with an 11.2% operating margin versus 14.2% a year earlier. Net income was $475 million; $456 million was attributable to WBD. Diluted EPS was $0.69 versus $0.21. Other income of $490 million included $497 million of derivative gains, a significant contributor to reported earnings.
- Adjusted OIBDA: $1.027 billion, up 23%. U.S. Networks contributed $1.025 billion, up 25%; International Networks contributed $161 million, up 7%; corporate and other costs were $159 million. Adjusted OIBDA is a non-GAAP measure and excludes specified expenses.
- Cash flow: Operating cash flow was $323 million versus $269 million. Investing provided $529 million, including $639 million of net derivative proceeds; financing used $587 million. Cash, cash equivalents and restricted cash ended at $4.165 billion, up $260 million during the quarter.
- Balance sheet at March 31: Cash and cash equivalents were $4.162 billion; current assets were $7.173 billion and current liabilities $3.562 billion. Debt, net of issuance costs and discounts, was $14.399 billion ($794 million current and $13.605 billion noncurrent). Total assets were $33.799 billion.
- Operating indicators: Discovery reported 24 million paid DTC subscriptions. U.S. linear-network subscribers were down 8% year over year, or down 4% excluding the sold Great American Country network.
Material changes and significant events
- Revenue growth was led by U.S. Networks and Olympics-related activity internationally. Olympics costs also drove higher costs of revenue: consolidated costs rose 28%, while International Networks costs rose 38%.
- Adjusted OIBDA improved despite lower GAAP operating income. Higher content amortization and depreciation and amortization, as well as $87 million of transaction and integration costs, affected the comparison.
- On April 8, 2022, Discovery completed the WarnerMedia merger. AT&T received $40.5 billion in cash, debt securities and retained debt, and AT&T shareholders received 71% of the combined company on a fully diluted basis; legacy Discovery shareholders retained 29%.
- In connection with the merger, WBD became responsible for WarnerMedia financing that included a $10 billion term loan and $30 billion of senior unsecured notes, and also assumed approximately $1.6 billion of existing WarnerMedia senior notes. These obligations are subsequent to the March 31 balance sheet; the filing does not provide a complete pro forma combined-company debt balance.
- The merger accounting was incomplete at filing, with preliminary purchase-price allocation information expected in the Q2 2022 Form 10-Q. A $789 million expense related to additional shares issued to Advance/Newhouse was recorded upon merger closing.
Outlook, risks and contingencies
- The filing gives no specific numerical revenue, earnings, cash-flow or subscriber guidance. Management said cash, operating cash flow and credit-facility availability were expected to meet short- and long-term needs, while warning that merger-related debt would materially increase financial commitments and interest payments.
- Management expected significant one-time integration costs during the first year after the merger and significantly increased content commitments. The timing and amount of costs and synergies were uncertain.
- The $6 billion revolving credit facility became available following the merger; there were no borrowings under the legacy facility or commercial-paper program at March 31. The legacy company was in covenant compliance at quarter-end. Leverage covenant limits were scheduled to step down after the merger.
- COVID-19 remained a source of uncertainty, particularly for theatrical revenue, production, studios and themed entertainment. Other stated risks include integration execution, impairment of acquired goodwill and intangibles, higher debt and borrowing costs, streaming competition and subscriber performance, labor disruptions, foreign exchange, regulation, and the Russia-Ukraine conflict.
- In April, WBD announced CNN+ would cease operations effective April 30; the financial impact was still being evaluated. The company also exited Russia during Q1 and did not expect that action to have a material financial effect.
- Eight lawsuits by alleged Discovery stockholders concerning merger disclosures were pending as of April 1, 2022. Management did not believe routine claims and proceedings would materially adversely affect the company, but litigation outcomes remain uncertain.
Key facts for investors to verify
- Review the first post-merger quarterly results for WarnerMedia’s contribution, combined-company debt, interest expense, cash flow and purchase-price allocation; Q1 2022 is Discovery-only.
- Assess how much reported Q1 net income benefited from derivative gains and whether operating performance and cash generation support the earnings trend.
- Track integration costs, realized synergies, content spending and the company’s ability to meet debt covenants as leverage limits tighten.
- Monitor DTC subscriber trends, streaming economics, linear subscriber declines and the financial effects of CNN+’s closure.
- Follow the merger-related lawsuits, potential acquired-asset impairments, and any material COVID-19, labor or international-market developments.