Warner Bros. Discovery CEO David Zaslav on Strikes: “We’re in Uncharted Waters”

Georg Szalai and Etan Vlessing
·9 min read
  • Oops!
    Something went wrong.
    Please try again later.

Warner Bros. Discovery CEO David Zaslav struck a conciliatory, yet urgent tone over the Hollywood writers and actors strikes during his studio’s second-quarter financial analyst call Thursday.

“We’re in the business of storytelling…. And we cannot do that without the entirety of the creative community, the great creative community, without the writers, directors, editors, producers, actors, the whole below-the-line crew,” Zaslav said in prepared remarks after the release of Warner Bros. Discovery’s latest financial results.

More from The Hollywood Reporter

The ongoing writers and actors strikes are imperiling the long-term strategic focus of Warner Bros. Discovery and other major Hollywood players. “We’re hopeful that all sides will get back to negotiating and that these strikes get resolved in a way that the writers and actors feel they are fairly compensated and their efforts and contributions are fully valued,” Zaslav added.

The studio topper added he was focused on a resolution to the impasse. “This is our business. This is all we do…. We’re in uncharted waters in terms of the world as it is today and measuring it all. And so in good faith, we’ve all got to fight to get this resolved,” Zaslav added, without directly answering an analyst question over how far apart the actors and writers union are with the Alliance of Motion Picture and Television Producers, which is negotiating on behalf of the studios and streamers.

The studio’s CFO Gunnar Wiedenfels said the dual Hollywood strikes would inevitably impact the timing and performance of future Warner Bros. Discovery content. “While we are hoping for a fast resolution, our modeling assumes a return to work in early September,” Wiedenfels insisted, while adding the studio saved more than $100 million in operating costs due to the dual strikes in the second quarter.

During the latest financial period, Warner Bros. Discovery, which has been a top pick of several analysts, reported a much narrowed quarterly streaming loss Thursday, just short of reaching its second streaming profit in a row, as it posted its latest financials.

Advertising in the latest period fell sharply amid a challenged ad market, but slightly exceeded experts’ expectations. Warner Bros. Discovery, which has been laying off staff to “right-size” its post-merger business, also disclosed pretax restructuring expenses for the second quarter and raised its post-merger cost savings target from $4.0 billion previously to “more than $5.0 billion.”

“While the linear business is being further challenged by the soft ad sales market, we do see cause for optimism,” Zaslav told analysts on the morning call as he pointed to strong upfront ad sales. “This is unusual…. A lot of us expected that there would be a meaningful recovery in the second half of the year and we haven’t seen it, and we’ve needed to figure out how to make up for that,” he said.

CFO Wiedenfels pointed to opportunities in future ad sales on the studio’s streaming platforms. “In fairness, we haven’t really started prioritizing this,” he added of the upside potential.

The Hollywood giant finished the second quarter ending in June with 95.8 million global streaming subscribers, down 1.8 million from 97.6 million as of the end of the first quarter in March amid the impact of combining Discovery+ and HBO Max into new streamer Max starting in May, it disclosed Thursday. Analysts have predicted a user drop in the latest and upcoming quarters amid the change in streaming brand, packages and prices.

Ahead of the earnings report, Goldman Sachs analyst Brett Feldman had highlighted the overlap of around 4 million subscribers of HBO Max and Discovery+, which management has expected to “roll off of the standalone Discovery+ platform within the first few months of the May Max launch,” as he pointed out in a research report. “We update our domestic net add cadence to reflect a second-quarter weighted net loss (2.0 million in the second quarter and 1.0 million in the third quarter), as well as flat international net add growth for the same period ahead of the fourth-quarter Latin America Max launch.”

The Goldman expert lowered his Warner Bros. Discovery (WBD) stock price target by $1 to $20 “on lower near-term estimates related to studios underperformance (notably, The Flash) and linear headwinds within the networks segment, partially offset by the impacts of WBD’s strong free cash flow in the second quarter and strong box office expectations for Barbie,” which opened in theaters in the third quarter.

The entertainment conglomerate’s streaming unit hit a $3 million loss in the second quarter, compared with a loss of $558 million in the year-ago period, after recording a $50 million profit in the first quarter. Streaming revenue rose 13 percent to $2.73 billion in the second quarter, led by a 25 percent advertising gain, helped by year-over-year subscriber growth from 92.2 million as of the end of June 2022. At the same time, costs of revenues fell 6 percent and selling, general and administrative expenses dropped 13 percent.

In May, Zaslav had shared that the conglomerate was expecting its U.S. direct-to-consumer business to be profitable for all of 2023, a year ahead of its previous guidance. After all, management has vowed to make the streaming business sustainably profitable, including by not chasing subscribers at all costs. WBD investors are expected to take the Thursday update as a confirmation that the company is making good on its promise to take a leadership role in the industry’s push toward streaming profitability.

The company’s quarterly earnings before interest, taxes, depreciation and amortization (EBITDA) saw a 22 percent increase to $2.15 billion, helped by the streaming upside surprise, while its net loss narrowed from $1.86 billion to $1.24 billion. It included $1.66 billion of “pre-tax amortization from acquisition-related intangible assets and $146 million of pre-tax restructuring expenses,” the company said. Second-quarter revenue dropped 4 percent to $10.36 billion.

WBD’s Studios unit EBITDA fell 25 percent in the second quarter to $306 million amid a 23 percent revenue drop to $2.58 billion and came in below estimates due to a difficult comparison with the year-ago quarter, which had benefited from strong The Batman theatrical and home entertainment results, which The Flash and Evil Dead Rise couldn’t match in the latest period. Also hitting the studios division profits in the second quarter were marketing costs for the third-quarter hit release Barbie.

Zaslav said Barbie would continue to play in the theatrical window, with the studio helping to market its release across its varied TV assets, before the tentpole landed on Max, likely in the Fall. “The fact that we can supersize it globally, it’s a big deal for us,” he insisted.

While studios’ division expenses fell, TV revenue declined, “primarily due to the timing of production, fewer CW series and fewer series sold to our owned platforms,” and games revenue came in lower “due to the release of Lego Star Wars: The Skywalker Saga in the prior year,” Zaslav added.

In the firm’s networks unit, advertising revenue fell 13 percent, excluding foreign currency exchange hits, “primarily driven by audience declines in domestic general entertainment and news networks and soft advertising markets mainly in the U.S. and, to a lesser extent, certain international markets.” The company also noted: “Additionally, the absence of the NCAA March Madness Final Four and Championship this year, which we broadcast in the prior year, negatively impacted the year-over-year growth rate, partially offset by the broadcast of the NHL Stanley Cup Finals in the current year.”

Distribution revenue also decreased by 1 percent as increases in U.S. contractual affiliate rates were more than offset by declines in U.S. pay-TV subscribers. Overall the networks unit EBITDA fell 8 percent to $2.17 billion, driven by a 6 percent revenue decrease to $5.76 billion.

Warner Bros. Discovery CFO Wiedenfels told analysts that he expected the AT&T SportsNet channels will likely to be sold off by the end of the year. The media and entertainment giant, which also owns Turner Sports, is looking to get out of the regional sports network business.

Zaslav pointed to live sport rights that the studio owns eventually gaining profile on its streaming platforms. “We own the digital rights to our sports. So we have the ability, for no incremental cost, to put that content on our (streaming) platforms. It’s pretty compelling…. You will hear from us, soon,” he told analysts.

The studio’s overall EBITDA also allowed the company to exceed free cash flow forecasts for the second quarter. Free cash flow is a key metric that management and analysts are keeping a close eye on as the company continues to pay down debt after the megamerger that created it. WBD previously said it has paid down $9 billion in debt paid so far. On Thursday, it said in a separate press release that it plans to retire up to around $2.7 billion in additional debt.

The megamerger between Discovery and WarnerMedia, previously owned by AT&T, closed in April 2022. “We’ve come through some major restructurings and have repositioned our businesses with greater precision and focus,” Zaslav said in May. “And we see a number of positive proof points emerging, with direct-to-consumer perhaps the most prominent.”

Wells Fargo analyst Steven Cahall in a first reaction noted this as one key takeaway from the earnings update, using the headline: “Deleveraging Like a Boss.” WBD shares were up more than 3 percent in premarket trading.

In a statement as part of Thursday’s earnings report, Zaslav also touted room for upside ahead, saying: “All of [this] positions us well to lean into growth opportunities that will ultimately drive shareholder value, to include our direct-to-consumer business, which, in the wake of the successful launch of Max in the U.S., is tracking well ahead of our financial projections, having generated positive EBITDA in the first half of the year.”

Best of The Hollywood Reporter

Click here to read the full article.