Warner Bros. Discovery Stock: Forget first-quarter financial results


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The problem with any report is that sometimes the report just isn’t relevant unless there is something over the line. Warner Bros. Discovery (NASDAQ: WBD) is in this situation because finances have changed so much since the end of the first quarter that little will be relevant about it. Financial statements should be reviewed and audited by any investor. But the main focus will be on the corporate structure now that the merger is complete. This is found elsewhere.

Warner Bros. Subscribers

Subscription activity as reported by AT&T appears to be adding subscribers at a steady pace.

“At the end of the quarter, there were 44.2 million domestic HBO Max and HBO subscriberscompared to 41.5 million at the end of the fourth quarter of 2020. Domestic HBO Max and HBO subscribers increased by more than 11 million year-over-year, driven by growth in HBO retail subscribers Max. National ARPU was $11.72.”

Source: AT&T First Quarter 2022 Earnings Press Release

Subscription growth has not yet suffered from the arrival of competition in the market. This is in stark comparison to Netflix (NFLX) which recently reported a net loss of subscribers for the last quarter. Netflix management says higher market penetration than most competitors is key. But they also admitted to some competitive headwinds on the conference call.

The difference here is that Warner Bros. has waited for the market to grow and is willing to report streaming financial losses for several years in an effort to build a viable streaming business. The benefit part of this can be a bit confusing for shareholders, as the accounting is not as clear as when reporting a line of business.

It is possible for a diversified company to start a new business that shows a loss, but the net effect is to increase profits for the whole company. The reason this happens is that the new line (in this case streaming) is assigned costs that were previously paid for by the remaining legacy activity.

Therefore, spreading these existing costs may allow the new line to lose money while traditional businesses show increased profits from lower shared costs. Another added benefit is that the new business can be considered marketing because it attracts enough customers to more than offset all the expenses to again lead to increased profits that are “worth it”. The key to all of this is sufficient overall profitability which can be a very slippery slope for complacent management.

The entry of companies like Warner Bros. Discovery is changing the streaming model for the industry. These new competitors have more than one way to make money with a new business like streaming. This places pioneers like Netflix at a competitive disadvantage, as Netflix relies heavily on the streaming business despite only recently entering other related markets.

The weakness of Netflix’s current corporate model is now apparent, as standalone streaming doesn’t seem to be as popular as streaming as part of a diverse parent company. The fact that competitors are willing to lose money to gain subscribers highlights a very big risk factor for a company like Netflix. It’s possible that a company like Warner Bros. Discovery postpones the schedule again and again to show a streaming profit. Netflix currently does not have this option as the main business and source of cash flow is streaming.

Therefore, investors will need to listen carefully to management’s presentation for clues about the company’s future course. The Warner Bros. Discovery Stock dropped to the news to shut down CNN+. The supposed reason is that the launch was not well thought out, resulting in low subscription levels. But like any diversified business, there are HBO’s other lines of business that are doing well.

A company like Warner Bros. Discovery is likely to enter a market like streaming with more of a targeted streaming entry. The reason for this is that a targeted entry will attract target audiences which will make it easier to manage growth. The Discovery part of the business already had several “niche” entries to begin with that really had less competition. So there may be a path to a streaming company that serves “niche” areas already built by the company.

Entertainment in general lacks a big competitive moat because people are constantly changing their minds about what entertains them. Therefore, attracting a long-term audience that only uses the company’s products is unrealistic. Instead, there is a constant need for new products that meet the needs of long-term subscribers. There is always the risk that a niche that has been successful in the past (like History Channel) will become stale in the future.

Debt reduction

Management has provided the following debt guidance. This focus really hasn’t changed much from the original presentation.

Introducing Warner Brothers Discovery Financial Leverage and Deleveraging Advice

Warner Bros. Discovery Leverage overview and advice on deleveraging (Warning Brothers. Discovery presentation of the business combination May 2021.)

Global diversification seems to make the debt reduction presented above a good bet. While individual divisions may have fluctuating cash flow or volatility, overall parent company revenue and cash flow appear predictable through diversification.

Leverage is not as much of a concern as these businesses tend to generate plenty of free cash flow when managed well. The risk, of course, lies in the “well managed” assumption. This direction has a good long-term track record in the company. This track record also helps reduce the risk of future debt reduction advice.


Quarterly results for the first quarter are almost meaningless because they represent the results of a business setup that no longer exists. Investors have yet to review the results for material lingering challenges that could affect the newly merged company. Generally, such a find is a rare thing.

Far more important is the current business setup and the resulting management guidance for the new business. There could easily be several quarters of “cleaning up” and optimizing the business before the financial results accurately reflect the state of the business. Management advice in this area will be important.

The new company has been mentioned several times for its entry into the streaming business. But this streaming business is going to be (and likely will remain) a small part of the company’s overall bottom line (at least for the foreseeable future). The company has more than one way to enjoy and profit from streaming. It will probably be a competitive advantage.

But the real key to the performance of the company’s shares will be the performance of the company’s core businesses post-merger. Therefore, the direction the company takes in the future will be very important for investors to assess the risks and potential returns. In this sense, the next quarterly conference call will be unusual.


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