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Warner Bros. Discovery got to play a trump card on Friday, unveiling a surprise first-quarter profit for its streaming business to the tune of $50 million.
Wall Street has over the past year often urged Hollywood giants to prove that, when it comes to streaming, they can write in black ink instead of red, with management teams typically vowing to do so starting in 2024 or beyond. So the news came as a coup for the company as CEO David Zaslav touted that WBD’s U.S. streaming business would post a profit for 2023, a year ahead of the original target. “Our U.S. streaming business is no longer a bleeder. It is hard to run a business when you have a big bleeder,” he told analysts on a conference call.
At least one analyst upgraded his stock rating following the earnings update. But WBD’s stock dropped more than 5 percent in early Friday trading, before recovering and trading up 1.2 percent at $12.48 as of 11:40 a.m. ET. Why? Well, like many things in the age of streaming and macroeconomic challenges, it’s complicated.
The fact that WBD reported a bigger-than-expected free cash flow loss of $930 million a day after Paramount Global’s stock dropped sharply on a bigger-than-expected free cash flow loss and a dividend cut likely didn’t help.
“DTC Turns the Corner, Still Waiting for FCF,” summarized Wolfe Research analyst Peter Supino in an early Friday report, using the abbreviations for the direct-to-consumer — aka, streaming — business and free cash flow.
“WBD financial results were below consensus as DTC operating income before depreciation and amortization strength was offset by weaker studio and networks trends,” Supino added. “WBD’s callout for the first half of 2023 to be FCF neutral … should bring some assurance that the de-levering story remains on track (though will be more back-end weighted, and macro remains a concern).”
The Wall Street observer also dove into the first-quarter streaming financials, highlighting that revenue “was weaker at $2.45 billion (-2 percent year-over-year versus our +3 percent estimate and the +1 percent Wall Street consensus, but cost efficiencies led to better DTC adjusted earnings before interest, tax, depreciation and amortization (EBITDA) of $50 million (versus -$59 million estimate/-$79 million consensus).”
Overall, Supino maintained his “outperform” rating and $20 price target on WBD’s stock.
Goldman Sachs analyst Brett Feldman maintained his “buy” rating with a $19 stock price target on the company. “Free cash flow of -$930 million was more negative than we had estimated (-$768 million), but was consistent with guidance for a significant use of cash early in the year,” he wrote. “As such, we see this as primarily timing related.”
He also lauded the streaming profit, noting: “We see this as a key milestone, with the first quarter representing the first-ever profitable quarter for WBD’s DTC segment.”
Wells Fargo‘s Steven Cahall also stuck to his $20 stock price target and “overweight” rating.
For him the headline news beyond the streaming profit was an “adjusted EBITDA miss at studios.” Total adjusted EBITDA of $2.6 billion was 3 percent and 6 percent, respectively, below the analyst’s and Wall Street’s estimates, “with networks ahead/behind us/Street, DTC ahead and studios accounting for the miss (adjusted EBITDA of $607 million versus Street’s $760 million).”
In a section on “key debates” about the stock, Cahall highlighted: “As a deleveraging story, we expect investors to test the deleveraging guidance.” And he noted: “Ad, studio and DTC performance are key to achieving the goals, so we see WBD (shares) as reflecting investor confidence in the guide.”
That confidence seemed to be bolstered by management commentary on the earnings conference call, which featured CFO Gunnar Wiedenfels reiterating previous financial guidance, including for free cash flow. In addition, WBD CEO David Zaslav touted his team’s focus on rebuilding Warner Bros. “to its former glory.”
TD Cowen analyst Doug Creutz, who has an “outperform” rating and $19 price target on WBD shares, was among those who felt reassured by the call. “Slow First Quarter, But Year Remains on Track; DTC Progress Encouraging,” was the takeaway in his report’s headline.
“WBD reported first-quarter results that missed our estimates on revenue and EBITDA, largely on slower content sales across the business segments,” Creutz explained. “Management now expects U.S. DTC profitability in 2023, faster than previous expectations of 2024, and still expects $1 billion-plus DTC profitability in 2025.”
Creutz’s conclusion: “In our view, the accelerated timeline for U.S. DTC profitability is more important than what appears to largely be a timing-related miss in the first quarter, given the confident reiteration of full-year guidance.”
CFRA Research analyst Kenneth Leon even joined the Wall Street bulls by upgrading his stock rating from “hold” to “buy” while sticking to his $18 stock price target. “We think WBD will get through a difficult second quarter 2023 with expected losses and reach profitability in the second half of 2023,” he explained.
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