Understanding WARNER BROS DISCOVERY’s Disastrous Q4 Earnings Call

David Zaslav unveiled Warner Bros. Discovery's Q4 earnings and the company's stock price tanked. Here's a picture of what happened.
Warner Bros Discovery logo

It was a rough Friday morning for David Zaslav, as he revealed some hard truths about Warner Bros. Discovery’s (WBD) Q4 earnings to investors.

2023 brought in the biggest success in the film studio’s history through Barbie‘s $1.5 billion gross. But the last quarter was particularly painful for the studio, as Wonka and its surprising $400M box office total was unable to rescue Aquaman and the Lost Kingdom and The Color Purple, both of which lost money. But this isn’t why investors were disappointed on Friday.

The Good News Coming Out of WBD’s Earnings Call


Let us start with the upside. WBD became the first major Hollywood business to turn a full-year profit on their streaming venture, $103M, as The Hollywood Reporter put it. Max isn’t profitable overall at this point, but the company expects it to be in 2024. Meanwhile, Bob Iger’s Disney Plus hasn’t yet turned a profit, overall or yearly.

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Keep in mind that this is not for Max only, but it also includes HBO, which has been profitable for a long time (in fact, it was pulling in $2 billion a year). This is also where some of WBD’s semantics come in to pretty up the situation: HBO isn’t direct-to-consumer by definition, yet they are lumping it in with other platforms so they can claim their DTC part of the business (i.e., streaming) is profitable.

WBD has also reported an 86% uptick in its free cash flow (money that comes in minus the money they spent) for the full year, topping $6.16 billion ($3.3 billion for Q4). This is largely due to the strikes, of course, since the studio didn’t spend money during the six-month labor stoppage. The expectation marked internally by WBD for the end-of-year free cash flow was $5 billion, which they’ve exceeded.

Jodie Foster HBO True Detective Night Country
Jodie Foster in HBO’s True Detective: Night Country.

This is an important metric. Zaslav has been insisting for a long time that improving the company’s free cash flow is the key to financial success, so much so that he’s tied his own year-end bonus to this metric. (Beware that news will come out over the next few weeks about him getting a big, fat check while the writers were starving last summer.)

Zaslav’s primary objective has been reducing the giant debt the company had accumulated by the time he took over the merged Warner Bros. and Discovery in spring 2022. Since then, he’s been able to reduce $12.4 billion off that debt, and the total now sits at $44.2. They repaid $1.2 billion in Q4. But of course, they’ve been able to do this by taking some risks, including the not-so-popular decision of trashing finished films like Batgirl or Scoob! 2. In the last quarter alone, WBD was able to take $115M on tax write-downs, though they didn’t disclose which projects it was for. No word on whether the much-discussed Coyote vs. Acme was part of that deal.

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The Bad News Coming Out of WBD’s Q4 Earnings

House of the Dragon HBO Olivia Cooke
Olivia Cooke in HBO’s House of the Dragon.

Though WBD did manage to reduce the debt and increase their free cash flow in 2023, and in Q4 in particular, other indicators worried investors and caused the company’s stock price to fall, reaching an all-time low of $8.50 a share. It was down 14% for the week, and the overall value of the company has gone down from $130 billion to $60 billion since the April 2022 merger. Not good.

There are several reasons for that. First, investors can read between the lines and understand that streaming isn’t profitable for WBD despite what Zaslav claims, because they know that those numbers are boosted by the long-successful HBO.

There are also other indicators like the ad market is at an all-time low — and remember, TV networks account for more than half the company’s sales. Ad revenue dropped 14% this last quarter.

David Zaslav CEO Warner Bros Discovery
David Zaslav, CEO of Warner Bros. Discovery

Earnings before interest, taxes, depreciation, and amortization (EBITDA) was $10.2 billion for the full year, which came in slightly below the expected $10.5-$11 billion, per a regulatory filing from last September, when they increased their expectations in light of the strikes.

But there is one primary reason why investors lost faith in the company. Zaslav and Chief Financial Officer Gunnar Weidenfels didn’t provide any earnings or free cash flow projections for next year, besides the following generic comment:

“I expect 2024 to be another strong free cash flow year. I deliberately do not want to give a specific quantitative free cash flow guidance.”

Gunnar Weidenfels, Warner Bros. Discovery CFO

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But will it be strong? In 2024, they managed to cut costs thanks to hundreds of layoffs, and especially, a six-month industry-wide stoppage that prevented the creative divisions at the company from spending millions of dollars on new productions. But they are now forced to get the pipeline going again, and it’s not like they have another Barbie on the horizon.

BURBANK, CALIFORNIA – APRIL 12: David Zaslav, President and CEO of Warner Bros. Discovery, speaks onstage during a Warner Bros. Discovery Streaming Press Event at Warner Bros. Studios on April 12, 2023 in Burbank, California. (Photo by Jeff Kravitz/Getty Images for HBO)

WB’s films for this year include likely hits like Joker: Folie à Deux and Dune: Part Two. The former is a good candidate to hit $1 billion, but it’s coming with a price tag of $200M (according to a recent Variety report) and a costly marketing campaign. The latter is tracking well, but will likely top at $650M by the end of its run.

There’s also Tim Burton’s Beetlejuice Beetlejuice, which could be a hit in the making, or crash and burn due to the lack of awareness around the property with younger audiences. The studio is also distributing the Saudi-financed Horizon movies from Kevin Costner, which probably won’t do very well.

The Hollywood Reporter collected a bunch of excerpts from Wall Street analysts and investment firm representatives weighing in on the matter, including Zaslav’s lack of future guidance.

What the Future Holds for Warner Bros. Discovery

Superman: Legacy

There is a saying at the top executive floors in Hollywood these days: “Survive until ’25”. The feeling behind that is that, much like the year of 2023 was considered lost in terms of production, the year 2024 by extension will be lost in terms of output.

WBD’s offerings this year are less impressive than in recent times and probably than they will be in 2025 too, both on the TV front and also the movie studios. New seasons of The Last of Us and The White Lotus are coming next year to HBO, and DC is reigniting its fire with Superman: Legacy, which Zaslav did mention during the call (saying it will start filming this week in Atlanta.)

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But the box office numbers for this year will mostly depend on how many people show up to see Timothée Chalamet and Zendaya over the next few weeks, and how many want to see Joaquin Phoenix and Lady Gaga in October. And, perhaps to a lesser degree, how many people want to see Jenna Ortega on the big screen in September? Max has two big bets this year, that will likely drive a lot of the streaming revenue in Q2 and Q3: House of the Dragon and The Penguin, respectively.

For these reasons, the free cash flow expectations for this year should not be very strong, and the studio will be doing its best to weather the storm. The good news for Zaslav is that Q4 will likely bring a lot of ad revenue to their TV division thanks to the presidential election. “What is CNN without Trump?” is another popular saying, and the network will now start to show exactly what it can be under Mark Thompson’s leadership.

Though it wasn’t brought up much during the call, WBD is one of the three sponsors of the upcoming sports super app coming this fall, along with Disney and Fox. This could be a large investment for Zaslav this year, but a good bet long term, most likely.

(L-r) TIMOTHÉE CHALAMET as Paul Atreides and ZENDAYA as Chani in Warner Bros. Pictures and Legendary Pictures’ action adventure “DUNE: PART TWO,” a Warner Bros. Pictures release.

There’s also the opening that Zaslav will have come April to start negotiating deals with other companies, to either sell or merge WBD. There’s been a lot of talk about NBCUniversal stepping in, or even a merger with Paramount Global. The latter seems like it was just a strategic leak to the media late last year, and was not well received by investors because both companies heavily rely on their TV channels, which is a declining business. The former still seems like a pipe dream for everyone involved.

What do you think about WBD’s earnings call? Do you think they will have a good 2024, or do you think we’ll be talking about even worse numbers a year from now? Which company do you think will suffer the most this year? Let us know your thoughts on our Twitter or our Discord server!

Source: WBD Q4 Earnings Call Press Release, The Hollywood Reporter, CNBC

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