Warner Bros. Discovery, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited results. WBD operates Studios, Networks and direct-to-consumer (DTC) businesses. Comparisons with 2022 require care: the WarnerMedia merger closed in April 2022, so reported nine-month 2022 results do not include a full year of WarnerMedia; management also presents pro forma combined comparisons.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 |
|---|---|---|---|
| Revenue | $9.979 billion | $9.823 billion | $31.037 billion |
| Operating income (loss) | $97 million | $(2.190) billion | $(1.366) billion |
| Net loss attributable to WBD | $(417) million | $(2.308) billion | $(2.726) billion |
| Adjusted EBITDA | $2.969 billion | $2.424 billion | $7.729 billion |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.899 billion |
| Capital expenditures | Not provided for quarter | Not provided for quarter | $1.048 billion |
Q3 revenue increased 2% year over year. Distribution revenue rose 1%, content revenue 12%, and other revenue 22%; advertising revenue fell 12%. Q3 operating margin was approximately 1.0%, versus approximately negative 22.3% in Q3 2022. Adjusted EBITDA margin was approximately 29.8%, versus 24.7%.
For the first nine months, reported revenue rose 36% versus reported 2022, primarily reflecting the merger-period mismatch. Against management’s pro forma combined 2022 baseline, revenue declined 3% (3% ex-FX). Adjusted EBITDA was $7.729 billion versus $5.115 billion reported for 2022, while management’s segment comparison shows a 9% decline against pro forma combined 2022. Nine-month operating loss improved from $5.476 billion reported in 2022; against pro forma combined results, management reported a 65% improvement.
- Segments, Q3: Studios revenue was $3.226 billion and Adjusted EBITDA $727 million (down 5%); Networks revenue was $4.868 billion and Adjusted EBITDA $2.396 billion (down 9%); DTC revenue was $2.438 billion and Adjusted EBITDA $111 million, versus a $634 million loss a year earlier. DTC had 95.1 million subscribers at quarter-end.
- Cash and debt: Cash and cash equivalents were $2.383 billion at September 30, down from $3.731 billion at year-end 2022. Total debt was $45.087 billion, including $1.302 billion current; net debt was approximately $42.7 billion, calculated as total debt less cash. WBD had no revolver or commercial-paper borrowings and reported $6.0 billion of unused revolving capacity.
- Cash flow: Nine-month operating cash flow was $3.899 billion, versus $1.458 billion in 2022. Investing used $1.025 billion and financing used $4.308 billion. Cash, cash equivalents and restricted cash ended at $2.430 billion. Operating cash flow less capital expenditures was approximately $2.851 billion, a simple calculation rather than a company-reported free-cash-flow measure.
- Liquidity: Current assets were $12.831 billion and current liabilities $14.588 billion at September 30, 2023. Management stated that cash, operating cash generation and credit availability should fund short- and long-term needs.
Material changes and notable items
- Q3 cost reductions, including lower content, SG&A and restructuring costs, helped return reported operating results to a small profit. Nine-month restructuring and other charges were $510 million, down from $2.559 billion reported in 2022.
- WBD repaid or repurchased debt during the first nine months, including $2.850 billion of term loans and $2.378 billion of senior notes due in 2023 and 2024; it also issued $1.5 billion of 6.412% notes due 2026. An additional $600 million of term loans was repaid in October 2023.
- Management changed the amortization method for linear-network and HBO trademarks and trade names effective July 1, 2023, increasing Q3 amortization expense by $171 million.
- In September and October 2023, WBD sold two of its three regional sports networks and expected to exit the remaining network in Q4. The filing does not provide sale proceeds or a clear quantified earnings impact.
Outlook, risks and contingencies
- Management expects its merger-related restructuring program to be substantially complete by the end of 2024. Expected pretax charges are $4.1–$5.3 billion; $4.1 billion had been incurred by September 30, 2023. Expected cash expenditures are $1.0–$1.5 billion.
- The WGA strike ended September 27, with a new agreement ratified October 9; SAG-AFTRA remained on strike. WBD said the disruptions delayed production spending, supporting near-term operating cash flow, but could adversely affect production, licensing, delivery of content and the timing and performance of the 2023 film slate. Full effects remain uncertain.
- Management cited pressure on linear distribution, declining subscribers, soft U.S. advertising markets, audience declines at domestic entertainment and news networks, competition, streaming execution and high debt as important risks. It also noted possible impairment sensitivity in Networks and DTC reporting units. No goodwill or intangible-asset impairment trigger was identified during the first nine months.
- WBD expects continued significant investment in content, sports rights and Max. It reported $12.508 billion of remaining performance obligations under long-term contracts, with recognition extending as far as 2043.
- Management did not expect ordinary-course litigation to have a material adverse effect, but merger-related securities and stockholder lawsuits remain pending. A GoldenTree put requires WBD to purchase a 32.5% MotorTrend interest; the valuation process was finalized after quarter-end and completion was expected in Q4 2023.
- Uncertain tax-position reserves were $2.191 billion, with $558 million accrued for related interest and penalties. The company said up to $77 million of unrecognized tax benefits could decrease within twelve months.
Investor verification points
- Review the pro forma combined and ex-FX comparisons, particularly for nine-month revenue, operating results and segment EBITDA, given the merger-related mismatch in reported 2022 periods.
- Track whether DTC subscriber growth and positive Adjusted EBITDA persist, and how Max monetization and content costs evolve.
- Monitor the remaining SAG-AFTRA disruption, production schedules and any follow-on effects on cash flow, content availability and film performance.
- Verify debt repayment progress, interest burden, covenant compliance and liquidity; WBD reported covenant compliance and no credit-agreement defaults at September 30.
- Check completion and financial effects of the remaining regional sports network exit and the MotorTrend put transaction.
- Assess recurring profitability and cash generation alongside significant restructuring, amortization, content investment and other items excluded from Adjusted EBITDA.