Warner Bros. Discovery, Inc. quarterly report, Q2 FY2023

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Warner Bros. Discovery, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The WarnerMedia merger closed on April 8, 2022, so reported 2022 results do not include a full comparable period. Management therefore uses pro forma combined results for many operating comparisons.

Business context and key financial metrics

  • WBD operates Studios, Networks and direct-to-consumer (DTC) businesses. It launched the Max streaming service in May 2023, combining HBO Max and discovery+ content; discovery+ remains available.
  • Q2 revenue: $10.36 billion, up 5% from reported Q2 2022. Against pro forma combined prior-year results, revenue declined 4% on a constant-currency basis.
  • Q2 revenue trends: On a pro forma, constant-currency basis, distribution revenue was flat, advertising fell 13%, and content revenue fell 3%. Advertising weakness reflected audience declines and soft markets; content was affected by lower TV licensing, games, home entertainment and theatrical rentals.
  • Profitability: Q2 operating loss was $906 million and net loss attributable to WBD was $1.24 billion, or $0.51 per share. Adjusted EBITDA was $2.15 billion. Adjusted EBITDA is a non-GAAP measure and is not a substitute for GAAP earnings.
  • Segments: Q2 Adjusted EBITDA was $306 million for Studios, $2.17 billion for Networks, negative $3 million for DTC, and negative $245 million for Corporate, before eliminations. Studios and Networks Adjusted EBITDA declined 26% and 7%, respectively, versus pro forma prior-year results on a constant-currency basis. DTC improved by $554 million against the pro forma prior-year loss.
  • DTC subscribers: 95.8 million at June 30, 2023, as defined by the company. DTC distribution revenue benefited from retail subscriber gains, partly offset by wholesale subscriber declines.
  • Six-month results: Revenue was $21.06 billion; operating loss was $1.46 billion; net loss attributable to WBD was $2.31 billion. Six-month revenue was up 62% versus reported 2022, but that comparison is distorted by the merger; against pro forma combined results, revenue declined 4% on a constant-currency basis.
  • Cash flow, first half: Operating cash flow was $1.38 billion; investing cash outflow was $567 million; financing cash outflow was $1.68 billion. Capital expenditures were $591 million. Cash, cash equivalents and restricted cash ended at $3.08 billion.
  • Liquidity and debt: June 30 cash and cash equivalents were $3.03 billion. Debt was $47.56 billion before unamortized items ($47.28 billion net carrying value); $3.00 billion was classified as current. WBD had no borrowings under its $6.0 billion revolving facility or commercial paper program. Cash plus unused facility capacity was reported as $9.03 billion.
  • Balance sheet: Total assets were $128.62 billion, total liabilities $81.83 billion, and total equity $46.48 billion. Current assets of $13.77 billion were below current liabilities of $16.91 billion.

Material changes and unusual items

  • Q2 GAAP net loss narrowed from the reported prior-year loss of $3.41 billion; the prior-year period included merger-related and restructuring costs and is not directly comparable. Versus the pro forma combined Q2 2022 net loss of $1.85 billion, the Q2 2023 loss was smaller.
  • Q2 restructuring expense fell to $146 million from $1.03 billion. The 2022 amount included substantial content impairments and development write-offs related to post-merger content strategy changes.
  • Interest expense, net was $574 million in Q2 and $1.15 billion for the first half. Management attributed higher interest expense versus the prior year primarily to debt assumed in the merger.
  • WBD repaid $2.60 billion of term loans in the first half, purchased $460 million of floating-rate notes and $194 million of senior notes, and issued $1.5 billion of 6.412% notes due 2026. Debt due in 2023 and the first half of 2024 included $179 million in September 2023, $67 million in December 2023 and $2.75 billion in the first and second quarters of 2024.
  • Cash from operations increased modestly year over year, but working-capital outflows included $7.66 billion for film and television content rights, games and related payables. First-half cash interest paid was $1.14 billion.
  • The company recorded $124 million of content impairments in the first half of 2023, versus $506 million in the first half of 2022. It reported no goodwill or intangible-asset impairment indicators in its first-half monitoring, but identified factors it will continue to monitor.

Outlook, risks and contingencies

  • WBD expects total pre-tax restructuring charges of $4.1–$5.3 billion; $4.0 billion had been incurred by June 30, 2023. Expected total cash expenditures are $1.0–$1.5 billion, with the program expected to be substantially completed by the end of 2024.
  • Management stated that cash, operating cash generation and available credit are expected to fund short- and long-term needs. The company also expects significant ongoing investment in content, sports rights, and development and marketing of Max. The filing provides no specific earnings or revenue guidance.
  • The WGA and SAG-AFTRA strikes had no material business impact in Q2, but WBD said their effects were uncertain. The filing warns that prolonged strikes have delayed production and could delay releases, reduce revenue or increase costs.
  • Other cited risks include advertising-market weakness, linear subscriber declines, streaming execution and subscriber goals, competition, substantial debt and covenant compliance, currency exposure, and potential impairment of goodwill and intangible assets. WBD reported compliance with credit agreement covenants and no events of default at June 30.
  • GoldenTree exercised a put right requiring WBD to purchase its 32.5% interest in MotorTrend Group; the redemption value and payment timing had not been determined. WBD also disclosed merger-related securities and stockholder litigation; management said it intended to defend the cases and did not expect resolution of its litigation matters generally to materially adversely affect the company.
  • After quarter-end, WBD disclosed $95 million of senior-note repurchases during July and announced tender offers for specified notes due in 2023 and 2024.

Important facts for investors to verify

  • Use pro forma combined comparisons, not reported 2022 growth rates, when assessing underlying trends given the April 2022 merger.
  • Track whether Max subscriber growth and DTC profitability continue, and review how the company defines its 95.8 million DTC subscriptions.
  • Monitor advertising demand, linear subscriber declines, strike-related production and release delays, and the pace of content licensing and theatrical recovery.
  • Assess debt maturities, interest costs, refinancing and repayment capacity alongside cash generation and the $6.0 billion revolving facility.
  • Compare restructuring charges and cash expenditures with management’s stated ranges and end-2024 completion expectation; review the unresolved MotorTrend put valuation and material litigation developments.