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Before its merger with WarnerMedia that created new entertainment powerhouse Warner Bros. Discovery earlier in April, Discovery, led by CEO David Zaslav, reached 24 million streaming subscribers worldwide to its direct-to-consumer services, including Discovery+, as of the end March.
That was up from 22 million at end of 2021 and 20 million as of Sept. 30 last year. The company provided its results and operating updates for the pre-merger quarter on Tuesday, also disclosing better-than-expected earnings per share.
WarnerMedia’s HBO and its HBO Max streaming service ended March with 76.8 million global subscribers, an increase of 3 million after hitting 73.8 million subscribers as of the end of 2021, telecom giant AT&T reported on April 21 in its final disclosure for its former entertainment arm.
On Tuesday, Zaslav addressed a morning analyst call amid a streaming sector shaken up by Netflix just reporting a drop in subscribers for its most recent quarter. By contrast, Discovery added 2 million direct-to-home subscribers during its first quarter and HBO and HBO Max continue to add subscribers at a steady rate.
Zaslav told investors that Warner Bros. Discovery as a diversified company with old and new media platforms now puts Netflix as a standalone streamer on the backfoot. “Warner Bros. Discovery emerges as a far more balanced and competitive company,” he argued of the new expanded studio offering popular global streaming content, an agnostic distribution platform and a “balanced monetization model,” among other assets.
Zaslav argued Netflix and Disney had paved the way for Warner Bros. Discovery to thrive in the streaming space. “Here comes this new company with this lane, a middle lane wide open for us to accelerate with the broadest and most compelling content in the world,” and aimed at the advertising-based video on-demand and subscription video on-demand sectors.
He added Warner Bros. Discovery would drive long term shareholder value, and not “overspend” to secure streaming subscriber growth. Zaslav said the studio’s integrated streaming platforms will “complement” existing and traditional TV and theatrical platforms like Warner Bros. films and TV series and HBO, each “global leaders that are producing at scale.”
And Zaslav reiterated that the studio would not just write big checks to produce streaming content, but will “invest at scale smartly and will uniquely position us to drive to become a fully scaled global streaming leader.” On efforts to secure around $3 billion in cost savings and synergies following the merger of Discovery and WarnerMedia, he added the “attack is strategic, operational, structural and financial.”
“We will clearly take swift and decisive action on certain items, as you saw last week with CNN+, while others will take time to formulate appropriate action plans,” Zaslav said. Warner Bros. Discovery CFO Gunnar Wiedenfels added he wanted to see more free cash flow coming out of Warner Bros. and its hefty content investments.
“Right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives. As I’m looking under the hood here, again CNN+ is just one example, and I don’t want to go through a list of specific examples, but there’s a lot of chunky investments that are lacking for what I would view as a solid analytical financial foundation and meeting the ROI hurdles that I would like to see for major investments,” Wiedenfels argued.
As HBO Max and Discovery Plus merge into one app, Warner Bros. Discovery execs did not specify when the relaunch of the studio’s direct-to-consumer offering would happen, or whether they will be renamed.
“We’re not changing our mindsets. The priority is to rally behind the integrated product and be very thoughtful about our spend,” Wiedenfels added. And Zaslav said the combined and enlarged streaming platform would look to reduce subscriber churn, especially for HBO Max, with a broader content offering.
“There’s meaningful churn on HBO Max, much higher than the churn that we have seen,” Zaslav said as he pointed to Europe where Discovery managed to retain subscribers and reduce churn by offering a content behemoth with a broad-based mix of programming.
Tuesday’s first-quarter earnings report, the final one for Discovery’s performance as a standalone company before the mega-merger, showed a 5 percent U.S. advertising revenue gain and 11 percent distribution revenue growth, driven by Discovery+. Guggenheim analyst Michael Morris recently slightly raised his first-quarter ad revenue forecast for the pre-deal close Discovery. His forecast was for 4.0 percent ad revenue growth to more than $1.0 billion in the first quarter, including a 5.7 percent U.S. ad gain to $460 million.
In Discovery’s international business, advertising revenue grew 11 percent excluding foreign-exchange impacts, helped by the Winter Olympics in the company’s European markets. Distribution revenue posted an 8 percent gain thanks to Discovery+.
Overall revenue in the first quarter rose 15 percent, or 13 percent after foreign-exchange impacts, to $3.16 billion. That included nearly $450 million, growth of 55 percent over the prior-year period, of what the company calls “next-generation revenue,” which it defines as “subscription and advertising revenues generated from the company’s DTC products, as well as revenues from TV Everywhere, our Go applications and other digital properties.”
Quarterly net income rose to $456 million, or earnings per share of 69 cents, from $140 million, or 21 cents a share, in the year-ago period. The bottom line benefitted from total operating expenses decreasing 8 percent to $907 million. Costs of revenues increased 14 percent, “primarily due to higher content amortization at Discovery+, which launched in January 2021, and the linear networks,” but selling, general and administrative expenses fell 25 percent, “primarily due to lower marketing-related expenses for Discovery+ compared to last year’s launch period,” the company said.
Guggenheim analyst Morris is bullish on the merged company. “We see attractive long-term potential for the combined entity, though view limited insight on go-to-market strategy and potential selling pressure from core AT&T shareholders following the distribution as near-term headwinds,” he wrote in a recent report.
April 26, 4:07 a.m. PST: Updated headline to include “M” for million, which was temporarily missing.
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