David Zaslav came to market Friday morning with a fourth-quarter earnings report that delivered enviable free cash flow and put another sizable dent in Warner Bros. Discovery’s heavy debt load. But it wasn’t enough to stop a 10% slide for the company’s already battered share price that took place minutes after the results were unveiled.

Investors were clearly surprised by the depth of the year-over-year declines in revenue and earnings at WB Discovery’s studio and linear networks divisions. These are the company’s profitable pillars, the earnings engines keeping the light bills paid while streamer Max and HBO chomp through investment capital as both entities are reinvented for a new era of television.

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Anyone who has paid attention to Hollywood in the past year should have anticipated a rough Q4 for the Warner Bros studio. The October-December frame encompassed the tail end of two brutal strikes by actors and writers unions that wiped out seven months of production and development activity. But a 30% decline in adjusted earnings for the studio and a 9% drop in revenue were bigger blows than most WBD watchers expected. This was signaled by the muted tone that Zaslav, WBD’s usually ebullient CEO, adopted in his opening remarks. He asserted that 2024 would be a year of strong “momentum” for the company, but he had no choice but to add a sober addendum.

“This business is not without its challenges,” Zaslav said. No doubt he and other corporate leaders were watching the stock price plummet in pre-market trading as he spoke. “We continue to face the impacts of ongoing disruption in the pay TV ecosystem and a dislocated linear advertising ecosystem. We are challenging our leaders to find innovative solutions.”

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There’s been much speculation, of course, in recent months about one of those solutions being yet another merger for a company that has gone through two major transactions, first with AT&T and then with Discovery, since 2018. Zaslav downplayed the possibility of another round of corporate courting. Nor did analysts press him much on that prospect — a lack of inquiry that speaks volumes amid the larger turmoil in media and entertainment.

“We like where we are,” Zaslav said in his only reference to M&A activity toward the end of the hourlong call. “We do have the optionality of looking at other assets. But it’s going to be a very high bar for us. We like our hand where it is and we like the particular strategy right now of building Max and really deploying all of our great creative assets.”

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WBD leaders still need to don hard hats when it comes to Max. The streamer that now incorporates HBO’s results narrowed its overall loss significantly (to $55 million from $217 million in Q4 2022). That was welcome news, as was WBD’s final 2023 tally of $6.2 billion total in free cash flow generated by its legacy businesses across the year. And WBD was prudent in the strike-distressed environment. The studio got an unexpected break in some of its financial obligations to creative talent, which helped it to make $5.4 billion in debt payments last year, including $1.2 billion in Q4. As of the end of last year, WBD’s long-term debt stood at about $42 billion, compared to $48 billion at the end of 2022. Even better, as WBD chief financial officer Gunnar Wiedenfels explained, there are no big payments due anytime soon to add pressure to an organization that already has tall growth targets to hit.

“We have a very manageable amount of debt coming due over the next three years, providing us with real flexibility for how exactly we de-lever the company,” Wiedenfels assured analysts.

But billions in free cash flow and billions of dollars worth of debt abatement efforts were not splashy enough to distract WBD watchers from concerning signs of weakness at the studio and the linear networks. Even in the year of “Barbie,” Warner Bros. film results were a mixed bag. “Aquaman and the Lost Kingdom” and “The Color Purple” were disappointments while “Wonka” yielded respectable global box office that was helped by the studio’s co-financing deal with Domain Capital (meaning WB had help covering the film’s estimated $125 million budget and P&A costs). “Bottom line, the studio has really been underperforming,” Zaslav said. “It has given us the chance to have a lot of upside in the next two years.”

Wall Streeters generally like Zaslav and Wiedenfels for their straight talk and exacting focus on financial details. But after two years of cheerleading for the reconfigured WBD, the questions are getting sharper and the patience for a turnaround in the streaming arena is running thin.

“All eyes are on how much room there is left for management to manage costs to offset the challenges in linear (even if trends are stabilizing today) and most importantly, what the longer-term opportunity is to grow [direct-to-consumer] revenue and profits,” Robert Fishman, analyst for MoffettNathanson Research, wrote in a note published Friday. “Networks EBITDA benefited from several billion dollars in improved efficiencies. Top line trends may improve slightly in 2024, but it is unclear how much room there is left to cut to help offset further declines.”

WBD is in the same leaky streaming boat as Disney, Comcast and Paramount Global when it comes to squeezing out a profit from its direct-to-consumer ambitions. The solution for all of them seems to be moving away from the “direct” and “consumer” parts of the equation and back to the B-word: Bundling.

Zaslav was pressed about the TV sports venture that WBD, Disney and Fox Corp unveiled earlier this month. The partners plan to link arms and offer a streaming package that includes ESPN, Fox Sports, WBD’s TNT and TBS in a bid to reach sports fans who don’t subscribe to linear cable or satellite TV.

“We’re able to go after those that we’re missing, those subscribers that the traditional cable industry is missing,” Zaslav said. “We think it’s very pro-consumer. This is unique product that’s looking to meet a very strong demand.”

Of course, that’s pretty much what they said about HBO Max three years ago and Max one year ago. Total subscriber numbers for Max were buried deep in WBD’s earnings announcement for a reason. The growth rate, whether measured sequentially or year over year, was unimpressive for a frame in which Netflix bolted on 13.1 million subscribers. Max’s worldwide subscriber base stood at 97.7 million at the end of last year, up from 96.9 million at the end of 2022. Domestic subscribers stood at 52 million, down from 54.6 million in the year-ago period.

In Zaslav’s view, the unnamed sports venture is a sign that media heavyweights have no intention of letting outside distributors drive the push to offer bundles of competing channels (just like old-fashioned cable). The goal is to simplify a pay TV programming landscape that has become confusing to industry insiders, let alone consumers.

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“I expect that there will be meaningful bundling,” Zaslav predicted. “It’s going to happen in one of two ways. It’ll either be a bundling by an intermediary — a platform company like an Apple or an Amazon or Roku, or you know what’s going on with Charter and Comcast [with their Xumo streaming box] which is very compelling and very helpful to all of us in the content business…. Or we could do it ourselves. And I’ve always advocated that we should do it ourselves.”

WBD, like its rivals new and old, is also banking heavily on international growth to improve the fortunes of Max in the coming years. HBO traditionally had a checkerboard approach to international distribution. In some territories, it had standalone channels but in other big markets such as the U.K. and Germany, it licensed its shows or an custom HBO feed to be carried as part of a larger channel bundle. Max is launching as a standalone offering in Latin America this month and in France and Belgium in the second quarter, just in time for the summer Olympics. By 2026, WBD expects to detach HBO content from Comcast-owned satellite distributor Sky in the U.K., Germany and Italy in order to launch dedicated streaming platforms in both markets. That sounds a lot like an un-bundling effort. JB Perrette, CEO and president of global streaming and gaming for WBD, suggested that the company believes that it is leaving Euros and pounds on the table by not going it alone with Max in large European markets.

“Having our own direct-to-consumer product in those markets is a core strategic initiative of ours,” Perrette said. “And we’re already in business aggressively in those markets.”

Strike-induced delays in production undoubtedly cost Max some subscriber growth in 2023, Zaslav asserted. Fundamentally, for a company described by its leader as focused on “pure storytelling,” the play’s the thing that brings in the bucks. And so, at regular intervals, Zaslav took a cue from every other Hollywood CEO in history by expressing his high hopes for the hot titles coming down the pike this year. (There was no mention from analysts or executives about a possible IATSE strike later this year to rain on this parade.)

“We feel like we’re on a great trajectory,” Zaslav said, reeling off upcoming film and TV titles for the studio and Max that including the upcoming “Joker” movie sequel and the TV series spin on “Harry Potter.” “The content lineup over the next two-plus years on Max is the most rich, the deepest and broadest that I think we will ever have…We’re going to be rolling out all these franchises and shows over the next 12 to 24 months and it gives us a real sense of optimism.”

(Pictured: David Zaslav)

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