Warner Bros. Discovery, Inc. quarterly report, Q3 FY2022

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Warner Bros. Discovery, Inc. — Q3 2022 Form 10-Q

Reporting period: Three and nine months ended September 30, 2022; unaudited. Amounts are in U.S. dollars unless noted.

Business context and comparability

WBD completed its merger with AT&T’s WarnerMedia business on April 8, 2022. The 2022 results include WarnerMedia only from the closing date, while historical periods before the merger reflect Discovery alone. Accordingly, year-over-year reported comparisons are substantially affected by the merger. Management also presents unaudited pro forma combined results, which assume the merger occurred January 1, 2021; these are not forecasts and exclude potential integration savings and synergies.

Financial performance and liquidity

  • Q3 revenue: $9.823 billion, versus $3.150 billion reported in Q3 2021. Against pro forma combined Q3 2021 revenue of $10.980 billion, revenue declined 11% (8% excluding foreign exchange, as presented by management).
  • Q3 results: Operating loss was $2.190 billion and net loss attributable to WBD was $2.308 billion, compared with operating income of $329 million and net income of $156 million in Q3 2021. Q3 diluted loss per share was $0.95.
  • Nine-month results: Revenue was $22.809 billion; operating loss was $5.476 billion and net loss attributable to WBD was $5.270 billion. Pro forma combined revenue was $32.087 billion versus $32.913 billion in 2021, down 3% (flat excluding foreign exchange). Pro forma net loss attributable to WBD was $4.132 billion for the nine months of 2022.
  • Adjusted EBITDA: $2.424 billion in Q3 and $5.115 billion for the nine months. Q3 segment results were Studios $762 million, Networks $2.630 billion, DTC loss of $634 million, and Corporate loss of $340 million. Nine-month DTC Adjusted EBITDA loss was $1.379 billion. Adjusted EBITDA is a non-GAAP measure and should not be treated as a substitute for net income or operating cash flow.
  • Revenue mix and DTC: Q3 advertising revenue was $2.042 billion, distribution $4.990 billion, content $2.531 billion, and other $260 million. WBD reported 94.9 million core DTC subscribers at September 30, 2022.
  • Cash flow: For the first nine months, operating cash flow was $1.458 billion, down from $1.914 billion; investing activities provided $3.742 billion, while financing activities used $6.470 billion. Cash, cash equivalents, and restricted cash ended at $2.513 billion, including $91 million restricted cash.
  • Debt and liquidity: Gross debt was $50.144 billion ($49.869 billion net of discounts and issuance costs), including $48.612 billion noncurrent debt. Cash and cash equivalents were $2.422 billion. The $6.0 billion revolving facility was undrawn; there were no outstanding commercial-paper borrowings. Management said cash, operating cash flow, and facility availability should cover short- and long-term needs. The company repaid $6.0 billion of term loans during the nine-month period.
  • Other balance-sheet metrics: Total assets were $136.049 billion, including $34.450 billion of goodwill, $46.744 billion of net intangible assets, and $28.288 billion of net noncurrent film and television content rights and games.

Material changes and unusual items

  • The merger substantially expanded the balance sheet and debt load. WBD assumed approximately $41.5 billion of WarnerMedia senior notes and term loans; the purchase price allocation remained preliminary at quarter-end.
  • Q3 restructuring and other charges were $1.521 billion; nine-month charges were $2.559 billion. These included content impairments and write-offs tied to strategic programming changes, as well as restructuring and contract costs. WBD estimated total pretax restructuring charges of $3.2–$4.3 billion, with $1.0–$1.5 billion expected to be cash expenditures, and expected the program to be substantially completed by the end of 2024.
  • Q3 depreciation and amortization was $2.233 billion, including substantial amortization of acquired intangible assets. Q3 net interest expense was $555 million, compared with $159 million a year earlier, primarily reflecting merger-related debt.
  • A $789 million expense related to additional shares issued in connection with the conversion of preferred stock was recorded in SG&A upon the merger closing. Nine-month transaction and integration costs were $1.129 billion.
  • In September, WBD sold 75% of The CW to Nexstar without cash consideration, retained 12.5%, and recorded an immaterial gain. The company received a $1.2 billion post-closing working-capital settlement payment from AT&T during Q3.

Outlook, risks, and contingencies

  • Management cited expected merger synergies and cost savings, but the filing does not provide a quantified synergy target or financial guidance for revenue, earnings, or cash flow.
  • Management stated that merger-related debt increases future financial commitments, including interest payments. Credit agreements require minimum interest coverage of 3.00-to-1.00 and impose a maximum adjusted leverage ratio of 5.75-to-1.00 after closing, stepping down over time. WBD reported compliance with covenants and no defaults at September 30, 2022.
  • About $2.2 billion of cash was held in foreign subsidiaries; WBD said it intended to reinvest these funds abroad and that repatriation could incur non-U.S. taxes. Management also identified risks from streaming competition and subscriber trends, advertising demand, distribution renewals, integration, foreign exchange, macroeconomic conditions, COVID-19, labor disruptions, and access to capital markets.
  • The filing discloses two purported securities class actions alleging misleading statements related to the merger; WBD said it intends to defend them. Management did not believe routine claims and proceedings would have a material adverse effect.
  • A legacy Six Flags guarantee covers estimated gross undiscounted future cash flows of $544 million through 2028. No liability was recorded; the company said any loss could not be predicted. In October 2022, a MotorTrend joint-venture partner exercised a put right requiring WBD to purchase its 32.5% interest at fair value, which could not then be estimated.

Most important facts for investors to verify

  • How comparable operating performance is after adjusting for the April 2022 merger, including the trend in pro forma revenue and segment Adjusted EBITDA.
  • Progress toward DTC profitability and subscriber growth, and the programming and content spending needed to support those results.
  • Actual restructuring charges and cash costs versus the stated $3.2–$4.3 billion pretax and $1.0–$1.5 billion cash estimates.
  • Debt repayment capacity, interest costs, covenant headroom, and availability of cash held overseas.
  • Final merger purchase accounting, potential content or goodwill impairments, and the eventual cost of the MotorTrend put right and other contingencies.