WarnerMedia 2022 Profit Baseline to Be $500M Lower Than Expected: WBD

Warner Bros. Discovery is “positioned to win” as one of the “true content makers,” with its ability to produce and control intellectual property “vs. those that just write checks,” said CEO David Zaslav Tuesday on a Q1 earnings call, its first as a combined company after AT&T’s spinoff of WarnerMedia was finalized April 8.

WBD has “the ability to ring any number of cash registers,” said Zaslav, citing theatrical, gaming, premium home video, pay TV and free-to-air broadcast. The combined company has 100 million collective streaming VODs, he said, calling streaming a “growing and important complement to these existing and traditional avenues of monetization.” Over time, streaming will drive the company’s strategic decisions, he said.

Chief Financial Officer Gunnar Wiedenfels, commenting on “the bad news” coming from the WarnerMedia side, said Q1 operating profit and cash flow “were clearly below my expectations.” Citing “previously unplanned projects,” Wiedenfels expects the WarnerMedia part of the WBD profit baseline for 2022 to be about “$500 million lower than what I had anticipated.” He also cited a “positive offset of a couple of hundred million dollars” from Discovery, saying “2022 will undoubtedly be a messy year.”

Plans for WBD’s direct-to-consumer offering “will take some time,” as the company is in the early integration phase of go-to-market plans, after “having had very little interaction across the organizations” during the pre-closing period, Zaslav said. Management is studying technology proficiencies, subscriber concentration and overlap, content opportunities and marketing and pricing strategies, he said.

On timing of the DTC relaunch, Wiedenfels said the newly combined team is “working hard to hammer out the exact cadence.” During the interim, the priority is to rally behind the integrated product while being “very thoughtful about our spend.” The company won’t launch new markets for now and won’t “chase aggressively behind subscriber growth” during the interim phase, he said. Wiedenfels referenced upcoming content, including House of Dragons in Q3, which the company hopes will be a “global phenomenon” that could drive subscriber adds.

“We want to get it right,” Zaslav said: “We could have a record-breaking number of people watching Euphoria, but we want to make sure that when they finish Euphoria … we have an ability to recommend” eight other shows viewers will want to watch on the platform. Zaslav said WBD’s product from Discovery and Warner Bros. is “very low churn” because of its “differentiated” and broad offering that has something for everyone in the household. Company data shows that the more people in a home that use the content, “the higher the growth and the lower the churn,” he said. He highlighted home shows, the Oprah Winfrey Network, Cartoon Network, and NHL playoffs and NCAA March Madness as examples of the company's content breadth.

As it ramps its streaming business, WBD will be “leaning in with efficiencies” in its traditional cable offering, which “generates a lot of cash flow,” Zaslav said. As a "maker," Warner Bros. Television Studios is “an arms dealer” that’s selling content in bidding wars, Zaslav said. Over 50% of content the company produces is for third parties, he said. As one of the world’s largest content creators, “we can change strategy” in response to market changes, said the executive. If it turns out that WBD needs to produce more content for itself in a competitive streaming market, “we’re not going to have to go write a lot of checks to others to get the best content because we have the factory.”

On windowing, Zaslav doubled down on the company’s commitment to theatrical releases. While the industry has been questioning whether to collapse the motion picture business around streaming, Zaslav was saying no, he said: “Now that the data is starting to show, no way,” he said. “When you open a movie in the theaters, it has a whole stream of monetization; it’s marketed, and it builds a brand.” When it goes from theaters to streaming, there's a sense of "higher quality that benefits the streaming service,” he said. The “magic” of the big screen also helps to attract the “greatest and most compelling talent,” he said.

The company remains committed to CNN, despite the upcoming shutdown of CNN+. “We love the news business,” Zaslav said, differentiating CNN from “advocacy” news networks.” The executive called the ability to provide great journalism and facts “the foundation of civilized society.” Sports are “rented,” but the company owns CNN content, and news is globally scalable, he said. CNN, on pay TV and mobile devices, “creates a connection” and is “meaningful” to viewers, Zaslav said. Acknowledging the “solemn moment” of war in Ukraine, Zaslav said if there ultimately will be war crimes trials against the Russians, "Exhibit A, B, C and D will be the great work of the war correspondents that are risking their lives to get what’s going on there on video.”

WBD has a “massive opportunity” to reach a wide international audience with advertising-free content, a lower priced “ad-lite” tier -- its highest average revenue per user product -- and an advertising-only offering for select “price-sensitive” markets outside the U.S., Zaslav said. The stock closed 7.8% lower Tuesday at $19.83.