Karma Comes Knocking at Warner Bros. Discovery’s Door

Warner Bros. Discovery (WBD) reported Q3 2023 results before the markets opened this morning. Investors didn’t like what they heard. As a result, WBD is down more than 19%, making it the worst-performing S&P 500 stock on the day.

As a result of Wednesday’s smackdown, WBD stock has lost all of its gains over the past year and is now down nearly 4% over the past 52 weeks. I’m confident investors are looking to scoop up its shares on the dip.

Do yourself a favor. Don’t. 

Karma is knocking on CEO David Zaslav’s door. It’s payback time for years of overly generous compensation combined with a lack of shareholder returns. Activists ought to be circling.

Here’s why.

The Ego-Driven Acquisition From Hell

Richard Branson once said, “If you want to become a millionaire, start as a billionaire and launch an airline.” You could easily say the same thing about the media and entertainment business. 

Zaslav and his team point to the fact it paid off $2.4 billion of the company’s debt in the third quarter, bringing its total debt repayment in 2023 to $4.2 billion over the first nine months, an 8.5% reduction from its $49.5 billion in gross debt at the end of 2022. 

I guess that’s something. 

He’ll also point out that its adjusted EBITDA in the quarter was $2.97 billion, 22% higher than a year earlier, excluding currency. That’s an adjusted EBITDA margin of nearly 30% on $10 billion in revenue. Its free cash flow in the quarter was $2.06 billion, up significantly from -$192 million in Q3 2022. For the nine months ended Sept. 30, its free cash flow was $2.85 billion, more than $2 billion higher than in the same period a year earlier. 

I guess that’s also something.

Zaslav and company will continue to stress that it’s a long-term play that requires him to be obscenely paid for the next few years. At some point, the CEO has to have his feet held to the fire.  

Zaslav became CEO of Discovery Communications in November 2006. The company went public on September 18, 2008. It took way longer than I would have liked, but I calculated that if you held Discovery/WBD shares from Sept. 18, 2008, to today, you would have generated a compound annual growth rate of 5.3%. 

Over those 15 years, Zaslav would easily have earned several hundred million dollars if he timed his stock sales well. That’s a lot of money for a stock that couldn’t keep up with the index over 1.5 decades. 

Why Is Now Any Different?

I don’t suppose you’ve noticed Disney's (DIS) struggle with its streaming business.

Disney reports Q4 2023 earnings today after the markets close. Investors hope the streaming losses will be more subdued in the fourth quarter. In the first nine months of the year, its streaming business lost $2.3 billion.

In Q3 2023, Warner Bros. Discovery’s Direct-to-Consumer (DTC) business, which includes HBO, MAX, and Discovery+, delivered a 5% increase in revenue to $2.44 billion. On an adjusted EBITDA basis, it earned $111 million, significantly better than the $634 million loss a year ago. 

You could conclude this was a successful quarter from a DTC perspective, but that wouldn’t explain today’s big drop. 

One explanation could be that DTC’s subscriber base fell by 700,000 to 95.1 million worldwide. 

Another explanation: the company’s CFO Gunnar Wiedenfels admitted it won’t meet its 2024 target debt leverage of 2.5 to 3.0 times adjusted earnings due to a slow-recovering TV ad market. 

“‘It is unlikely from today’s perspective, that we will hit our target leverage range by the end of 2024 without a meaningful recovery of the TV ad market,’ said Wiedenfels,” the Financial Times reported.  

“‘It is becoming increasingly clear now, that, much like 2023, 2024 will have its share of complexity,’ he said.”

In Q3 2023, the company’s Networks segment experienced a 13% decline in advertising revenue. Overall, the segment’s revenue declined by 7%, to $4.87 billion, while its adjusted EBITDA decreased by 9%, to $2.40 billion. 

The Bottom Line

As I finish writing this, the markets are closing, with WBD stock down 19% on the day. It was the worst loss in two years. 

Zaslav’s assessment of his company’s Q3 results is, as expected, exceedingly positive.  

“I am very pleased with the strong financial results that our company delivered in Q3, underscored by 22% growth in Adjusted EBITDA and over $2 billion in free cash flow, putting us on track to meaningfully exceed $5 billion for the year and contributing to our nearly $12 billion in debt paydown to date,” Deadline reported Zaslav’s comments. 

He highlighted DTC’s profitable quarter and its progress in 19 months since the merger. 

I’m confused. 

If the quarter was so good, why did its stock give up 20% of its value? It can’t just be the CFO’s admission that it won’t meet its debt reduction target that sent the shares lower.

I guess karma really is a b***h.

 

On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.