Warner Bros. Discovery in Q3: DTC business lost 0.7 million subscribers

Warner Bros. Discovery reported financial results for the quarter ended September 30, 2023. Studios revenues were $3,226 million, with an increase by 3% ex-FX compared to the prior year quarter. Theatrical revenue increased significantly due to the strong performance of "Barbie" as well as more titles released in the current year quarter. Games revenue increased meaningfully due to the Q3 release of "MortalKombat" and continued performance of "Hogwarts Legacy." TV revenue declined significantly primarily due to certain large licensing deals in the prior year and the impact of the WGA and SAG-AFTRA strikes.

Other revenue increased 5% ex-FX, due to the Q2 opening of Warner Bros. Studio Tour Tokyo and continued strong attendance at Warner Bros. Studio Tours London & Hollywood, partially offset by the impact of the WGA and SAG-AFTRA strikes on studio production services. Studios operating expenses were $2,499 million. Operating expenses increased 6% ex-FX compared to the prior year quarter. Costs of revenues increased 1% ex-FX, primarily driven by higher theatrical and games content expense commensurate with higher revenues, partially offset by lower TV content expense, including strike-related impacts. SG&A expenses increased 21% ex-FX, primarily driven by higher theatrical marketing expense due to the increased release slate. Studios Adjusted EBITDA was $727 million. Adjusted EBITDA decreased 6% ex-FX compared to the prior year quarter.

“I am very pleased with the strong financial results that our company delivered in Q3, underscored by 22% growth in Adjusted EBITDA and over $2 billion in free cash flow, putting us on track to meaningfully exceed $5 billion for the year and contributing to our nearly $12 billion in debt paydown to date. Among the highlights, our Direct-to-Consumer business had another profitable quarter with $111 million of Adjusted EBITDA and launched its new live-programming offerings with CNN Max and the Bleacher Report Add-On, which are showing early signs of contributing to increased engagement and lower churn on Max. We’ve made great strides in just 19 months and are excited to continue building on this strong momentum, as we focus on driving future growth and creating long-term value for our shareholders," David Zaslav, President and Chief Executive Officer of Warner Bros. Discovery said.

Networks revenues were $4,868 million, with a decrease of the 7% ex-FX, compared to the prior year quarter. Distribution revenue decreased 2% ex-FX, primarily driven by increases in U.S. contractual affiliate rates, which were more than offset by declines in U.S. pay-TV subscribers. Advertising revenue decreased 13% ex-FX, primarily driven by audience declines in domestic general entertainment and news networks and soft advertising markets mainly in the U.S. and, to a lesser extent, certain international markets. Content revenue decreased 22% ex-FX, primarily driven by lower third-party licensing deals and lower international sports sublicensing, partially offset by higher inter-segment content licensing to DTC. Other revenue increased 51% ex-FX, primarily due to services provided to the unconsolidated TNT Sports JV (previously BT Sport). Networks operating expenses were $2,472 million. Operating expenses decreased 4% ex-FX compared to the prior year quarter. Costs of revenues decreased 6% ex-FX, primarily driven by lower international and RSN sports rights fees, as well as lower domestic general entertainment content expense. These benefits were partially offset by costs associated with the unconsolidated TNT Sports JV. SG&A expenses decreased 1% ex-FX, primarily driven by lower marketing and personnel expenses. Networks Adjusted EBITDA was $2,396 million. Adjusted EBITDA decreased 9% ex-FX compared to the prior year quarter.

Total DTC subscribers were 95.1 million, a decrease of 0.7 million global subscribers since the end of Q2. Global DTC ARPU(7) was $7.82, a 6% ex-FX increase from the prior year quarter. DTC revenues were $2,438 million. Revenues increased 5% ex-FX compared to the prior year quarter. Distribution revenue increased 5% ex-FX, primarily attributable to new partnership launches, price increases in the U.S. and certain international markets, the launch of the Ultimate tier in the U.S., and favorable mix shifts from wholesale to higher revenue channels. Advertising revenue increased 29% ex-FX, primarily driven by Max U.S. ad-lite subscriber growth and higher engagement per subscriber. Content revenue decreased 17%, primarily driven by lower third-party licensing. DTC operating expenses were $2,327 million. Operating expenses decreased 21% ex-FX compared to the prior year quarter. • Costs of revenues decreased 12% ex-FX, primarily driven by lower content expense. SG&A decreased 46% ex-FX, primarily driven by more efficient marketing-related spend. DTC Adjusted EBITDA was $111 million, a $745 million year-over-year improvement.

OVERVIEW
According to Parrot Analytics data, today WBD’s Max, serves as one example of how to integrate massive content libraries into one app. Combining Discovery originals onto the old HBO Max platform has created a four quadrant service that is second only to Netflix in terms of total catalog demand with US audiences. However, subscriber growth for Max has plateaued and even ticked down in Q2 2023.
After building a walled garden streaming service, WBD is now back to licensing out some of its premium content, including HBO Originals and DC films, even to Netflix. These moves will help WBD’s bottomline line, and have increased demand for the licensed content, but it may also be pulling consumers back to Netflix and help it further its lead over the field.

Corporate demand share assesses the long-term viability of the top media companies as they look to consolidate their original content’s availability exclusively onto their own platforms, and can effectively help value a conglomerate’s legacy and library content in aggregate. Since the Discovery-WarnerMedia merger went through in April 2022, Disney and WBD have been the top two media conglomerates in corporate demand share. Disney has historically been the biggest slice of this pie chart. These two companies alone account for 37.1% of the demand for all TV content with US audiences as of Q3 2023. WBD’s most straightforward path to leapfrogging Disney in this category is to join forces with a competitor. A combination with either NBCUniversal or Paramount Global would put either new entity ahead of Disney in Corporate Demand Share. While the Hulu buyout should improve Disney’s streaming business, Disney may be arming Comcast with the funds to make an industry-shifting acquisition. Comcast CEO Brian Roberts made failed attempts to acquire both Disney and 21st Century Fox. Regulatory hurdles aside, could the third time for Roberts finally be the charm when it comes to Warner Bros. Discovery?