Yahoo Finance Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q4 2023 Earnings Call Transcript
Warner Bros. Discovery, Inc. (NASDAQ:WBD) Q4 2023 Earnings Call Transcript February 23, 2024
Warner Bros. Discovery, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Ladies and gentlemen, welcome to the Warner Bros. Discovery Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation there will be a question-and-answer session. Additionally, please be advised that today's conference call is being recorded. I would now like to hand the conference over to Mr. Andrew Slabin, Executive Vice President, Global Investor Strategy. Sir, you may begin.
Andrew Slabin: Good morning and thank you for joining us for Warner Bros. Discovery's Q4 earnings call. Joining me today is David Zaslav, President and Chief Executive Officer; Gunnar Wiedenfels, Chief Financial Officer; and JB Perrette, CEO and President, Global Streaming and Games. Today's presentation will include forward-looking statements that we make pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. The forward-looking statements may include comments regarding the company's future business plans, prospects and financial performance and involve risks and uncertainties that could cause actual results to differ materially from our expectations. For additional information on factors that could affect these expectations, please see the company's filings with the U.S. Securities and Exchange Commission, including but not limited to the company's most recent annual report on Form 10-K and its reports on Form 10-Q and Form 8-K.
And with that, I'd like to turn the call over to David.
David Zaslav: Hello, everyone, and thank you for joining us for our fourth quarter and full year earnings call. Our top priority this year was to get this company on solid footing and on a pathway to growth, and we've done that. We said we would be less than 4 times levered, and we are. We paid down $5.4 billion in debt for the year for a total of more than $12.4 billion since the deal closed. We're now at 3.9 times and expect to continue to de-lever in 2024. We've significantly enhanced the efficiency of the organization with a long runway still to go. We said we were going to generate meaningful free cash flow, a key KPI for our leadership and company, and we've exceeded our goal with $6.2 billion for the year. Gunnar will take you through the financials, but I would just highlight that as we look at the start of the first quarter, two months in, we are already seeing markedly improved free cash flow for Q1 versus first quarter last year, and inflection sequentially in linear, and an acceleration in streaming advertising.
We are optimistic that the efforts we've undertaken on digital and advanced advertising solutions, much of which you'll hear about leading up to and during the upfront, will enable us to achieve a more competitive profile. Bottom line, we're a far healthier company now, and we're building real momentum. And we expect 2024 will be a year to drive that momentum forward even further. That said, this business is not without its challenges. Among them, 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. For example, our US networks and sports teams have been collaborating on a number of initiatives aimed at expanding audience reach and impact through cross promotion.
And I do believe we are getting smarter at determining what's working and what's not, which is helping to drive healthy traction in ratings and an improved near-term outlook in advertising revenue. Internationally, Gerhard Zeiler and his regional teams are doing an outstanding job, as international networks are performing strongly and gaining momentum, particularly in EMEA. Of note, linear advertising in EMEA was positive in Q4, with standout markets in Poland, Germany, and Italy, the latter of which is enjoying a truly material upswing in ratings behind some of the incredibly successful programming moves at flagship [NoVe] (ph), which had its best quarter ever in Q4. I was just in Italy two weeks ago and spent some time with the team. Their ratings this quarter are tracking it up over 20%.
It's a terrific creative team and they have some real momentum. In fact, EMEA enjoyed its largest quarterly year-over-year share growth since the outset of the pandemic in 2020, despite some sluggishness in the UK and certain Nordic markets. This next chapter from Warner Bros. Discovery is about putting us on a pathway to growth. And we've got a lot of drivers of that growth, which at its core is underpinned by great storytelling. We are a creative storytelling company powered by 100 years of arguably the best franchises, brands, libraries, and content in the business and we are on offense. Our studios are back and firing on nearly all cylinders after the strikes. We're one of the biggest makers and sellers of content in the world. On the theatrical and gaming side, while we did have some real misses this year, we also had some really big wins, including Barbie, the number one movie globally and the most successful movie in the history of Warner Bros., and Hogwarts Legacy, the biggest game of 2023.
Also in 2023, we relaunched our theatrical animation division with a commitment to have two features a year on our slate beginning in 2026. Bill Damaschke is leading our animation division after spending two decades at DreamWorks and he's hard at work here with us on the lot. Now with the addition of animation, DC, and our existing Warner Bros. and New Line Cinema labels, we have created a home for every kind of film and story to be told. And we are excited about what's ahead for movie-going audiences. We've had a challenging couple of years, but we are now very excited about our slate in the year ahead, starting with Dune: Part Two, which arrives in theaters a week from today and has strong tracking, 97% on Rotten Tomatoes, which is rare for a sequel.
We also have Godzilla vs Kong: The New Empire, a follow-up to the hugely successful 2021 film opening next month. When we launched this company almost two years ago, we made it clear. We believe in this business. We're a pure storytelling company, and we're going to bring the best people in front of and behind the camera back to Warner Bros. And we have been laser focused on doing just that. First, Warner Bros is back in business with Tom Cruise. Our partnership with Tom is off and running. Mike and Pam spent a couple of days hard at work with Tom in London earlier this month. As you saw yesterday, we are in negotiations for a new film by Academy Award winner Alejandro Inarritu starring Tom. This will be the first of many films with us and Tom and we look forward to a long future together.
Paul Thomas Anderson is also at Warner, hard at work on his new film, starring Leonardo DiCaprio, Sean Penn, and Regina Hall. Maggie Gyllenhaal's new movie is set to begin shooting soon, starring Christian Bale, Jesse Buckley, Penelope Cruz, and Annette Benning. Black Panther's director, Ryan Coogler, and star Michael B. Jordan are coming together for a new original genre film that will go in front of cameras later this spring. George Clooney is back with Warner Bros. and working on a number of exciting projects. On the TV side, we just announced another season of the hit show, True Detective with creator and show runner Issa Lopez. A Juggernaut series, The White Lotus, from creator and showrunner Mike White, is currently in production. And Craig Mazin has started filming the new season of the hit show, The Last of Us. It's really encouraging to see so many incredibly talented creatives here at Warner Bros.
And most importantly, they share our vision to be home to great storytelling, stories that entertain, inform, and when we are at our best, inspire. This is the Warner Bros we are building together. This is the Warner Bros of the future. A real strategic advantage we have as a company, and I've talked about it often, is the strength and depth of our franchises, which I believe will be a meaningful driver of asset value and growth for us. And we intend to deliver on our commitment to reinvigorate the best of them. And as I've said, major franchises have been underused and underleveraged. We are hard at work to begin to get full value. Superman, we haven't made a Superman movie in over a decade. James Gunn's Superman starts filming next week. I've had a glimpse into what James and Peter are doing, and it really does serve as an exciting indicator of where the new DC is headed under their leadership.
And there'll be more that you'll hear from them in the months ahead. Game of Thrones. George R.R. Martin is in pre-production for the new spin-off, A Knight of the Seven Kingdoms, which will premiere in late 2025 on Max. Harry Potter. We've not been shy about our excitement around Harry Potter. The last film was made more than a dozen years ago. I was in London a few weeks ago with Casey and Channing, and we spent some real time with JK and her team. Both sides are thrilled to be reigniting this franchise. Our conversations were great, and we couldn't be more excited about what's ahead. We can't wait to share a decade of new stories with fans around the world on Max. We're aiming for a debut in 2026. The top priority for us has been building Max, our streaming service.
We fought hard to get Max to be profitable last year. We are now committed to driving profitable top line growth. And while it's still early innings, we feel good about the trajectory we were on and are on track to achieve our guidance of $1 billion in EBITDA in 2025. We're especially excited about the next 24 months. We have a number of meaningful growth levers ahead, including the rollout of Max in key international regions and markets, starting with Latin America next week, with markets in EMEA and APAC to follow later in the year, including new markets, France and Belgium to coincide with the Paris Olympics this summer. Keep in mind, we are only available in less than half the addressable households and markets as compared to our larger peers.
So we still have a huge opportunity for growth and globalization over the next two years, including many critical markets around the globe, such as the UK, Germany, Italy, Australia, and Japan. All of which we have a substantial amount of local content, and in many we have sports as well. We're also driving better segmentation and monetization by launching the new ad-supported offering which is currently only available here in the U.S. And by the end of this year will be available in over 40 markets globally as well. We also have a number of lucrative partnership deals internationally that will help us scale in more efficient and accelerated fashion. It's worth noting that Q4 saw the lowest US churn rates in HBO Max and Max's history. And the personalization and product improvements planned for this year should continue to have a positive impact on churn.
And finally, we're excited to be refreshing and reigniting our content pipeline at Max. The fact is, the strikes really slowed down production. And we didn't have as much content as we wanted for Max. And we're now moving forward with a great slate. Our most recent series, True Detective: Night Country, starring Jodie Forster, was a real success, averaging over 12.5 million viewers, the highest season ever for the series. Looking ahead, we've got one of the best lineups in the history of HBO. This next quarter, we'll have Hacks and House of the Dragon, followed by DC's The Penguin and the new Dune series. Then in 2025, we'll kick off the year with the new season of The White Lotus, followed by The Last of Us and Euphoria, just to name a few.
Also coming to Max from Warner Bros. Motion Pictures are Aquaman and the Lost Kingdom on February 27th. Wonka will join the service on March 8th followed by Dune: Part Two in the spring. We also inked a multi-year deal with a A24 in December to bring A24 theatrical releases exclusively to Max. They've already started being carried. I want to mention one other area of our business before turning it over to Gunnar to talk through the quarter. As you heard last week, we're entering a new joint venture with Disney and Fox focused on sports. We believe this will provide a terrific consumer experience and will be a great business. We couldn't be more excited about it. We'll also be able to bundle this product with Max. So we see this new joint venture as another potential driver of incremental growth for our business going forward.
One more point on our sports business. Last weekend we saw great coverage and strong ratings at the NBA All-Star Game and All-Star Weekend. We have a strong positive 40-year relationship with the NBA. And in terms of our NBA rights, we are now fully engaged in renewal discussions, and they are constructive and productive. Our global sports portfolio continues to provide real meaningful value to all of our platforms. We're proud to be the home of one of the most coveted collections of premium sports content in the industry, along with a best-in-class talent roster and exceptional production values. We're excited for our expansive coverage of the Paris Summer Olympics throughout all of Europe as well. The hard work we've done over the last nearly two years has positioned us well financially and creatively.
And as we look towards the future, we will continue to make the tough calls and do what is necessary to get this business on a clear pathway to growth and to drive increased shareholder value. With that, I'll turn it over to Gunnar, and he'll walk you through the financials for the quarter.
Gunnar Wiedenfels: Thank you, David, and thank you everyone for joining us this morning. 2023 was indeed a year marked by the accomplishment of several key objectives, and I'm very pleased with the effort across the organization to evolve our company as our industry continues to change. We come into 2024 well-positioned and once again with an ambitious agenda to further enhance our financial and strategic profile and to drive meaningful long-term shareholder value. Though we grew EBITDA 12% for the year on a pro forma basis, more than $1 billion year-over-year, the enormous financial benefits of our many important and successful transformative efforts have been somewhat mitigated by sustained headwinds across the industry. Yet we made strong progress against this backdrop this year, and I'd like to highlight a few notable accomplishments.
First, our post-merger integration is substantively complete as of the end of 2023. We have now achieved total combined merger and transformation savings of $4 billion, not including the significant savings realized on content as well. As David has laid out before, while we talked about synergies, we're really applying a fundamentally different management approach to the combined company, data-driven and rational, with shareholder value at the center. There are substantial improvement opportunities left for us to capture, particularly in areas such as enterprise systems, production flow, global centers of excellence to name a few, and we expect to see this reflected in our near and long-term free cash flow generation. This is an entire organization buying into and operating with a one-team, one-company mindset.
Second, our streaming team has made the turn. The D2C segment generated approximately $100 million of positive EBITDA, a $2.2 billion improvement year-over-year on a pro forma basis, well ahead of our targets. This was accomplished with a tremendous level of rigor and discipline across every aspect of the business, from programming to marketing to technology. And as expected, we've begun to see an inflection in subscriber-related revenues, both distribution and advertising, which accelerated to over 6% during the second half of the year versus very modest growth in the first, helped by price increases, growth in the ultimate tier, and scaling of the ad-lite subscriber base. 2024 will indeed be a pivotal year for Max. Relaunches and rebranding in existing Latin American and European markets over the next few months will be critical to bringing consumers an improved product experience and a more robust content offering, which will put us on better competitive footing.
We will continue to take a disciplined approach to investing in subscriber growth, mindful of lifetime value to subscriber acquisition cost ratios as we proceed into this next phase. D2C advertising growth should layer in nicely throughout the year and the business is gaining momentum as it scales. With a more high-profile slate of shows from HBO scheduled for release throughout the year as compared to the second half of 2023, we're very well positioned to offer a greater share of highly coveted premium streaming inventory. Third, you have heard us talk about the free cash flow opportunity since we first announced the deal. In 2023, we generated $6.2 billion of free cash flow, a 60% conversion of our EBITDA to free cash flow. The impact of the strikes contributed roughly $1 billion to free cash flow while negatively impacting our EBITDA by a few hundred million dollars.
We made great strides in realizing capital efficiencies throughout the year, and it was particularly evident in Q4 with over $3.3 billion of free cash flow generated this quarter alone. I am very pleased with the momentum here as the focus of the entire team continues to shift towards a deeper understanding of capital returns and shareholder value. We have laid a very solid foundation in 2023, and I expect 2024 to be another strong free cash flow year. Finally, all of this has helped support $5.4 billion of debt paydown during the year, including all of our more expensive variable rate term loans, enabling us to finish 2023 with less than $40 billion of net debt and resulting in net leverage of 3.9 times EBITDA, in line with our guidance from last February, despite all the headwinds mentioned earlier.
I am very pleased and comfortable with our current capital structure, given the tremendous progress we have made. The entirety of our outstanding debt is now fixed with an average cost of 4.6% and an average duration of 15 years. Importantly, we have only very manageable amounts of debt coming due over the next three years, $1.8 billion this year; $3.1 billion next year, and $2.3 billion in 2026, providing us with real flexibility in how exactly we delever the company. We remain committed to our long-term gross leverage target of 2.5 times to 3 times, and while we do not expect to hit that target by the end of this year, as we noted on our last earnings call, we do expect to continue delevering in 2024 as we stay focused on debt repayment with our free cash flows and any proceeds from non-core asset sales like the All3Media sale announced last week.
Turning briefly to the quarter, which I will discuss on a constant currency basis, I'd like to call out a few items and offer some additional puts and takes to consider for each of the segments. Starting with Studios. The primary callouts were, number one, the impact of the strikes, as I noted, which halted the production and delivery of TV content during the fourth quarter, which also informed some of our decisions about retaining or licensing content externally in the second half of the year. And two, what can best be characterized as an inconsistent performance of a theatrical slate. Wonka, the co-financing partnership, has had great success at the global box office and performed well above expectations, while Aquaman and the Lost Kingdom and The Color Purple unfortunately did not.
This was evident in our lower-than-expected financial results across revenue and EBITDA. A couple of items to consider for the Studios segment during the coming quarter. We are lapping the release of Hogwarts Legacy in February last year, which saw the largest portion of its very positive financial impact in the first quarter. This year, Suicide Squad, one of our key video game releases in 2024, has fallen short of our expectations since its release earlier in the quarter, setting our games business up for a tough year-over-year comp in Q1. On the film side, Q1 will be burdened with the marketing campaigns for Dune Two and Godzilla vs. Kong, which opens at the very end of the quarter. Turning to Networks, revenues decreased 8% as advertising decreased 14% due to continuing softness in the US linear advertising market.
Note, the disposition of the AT&T SportsNet negatively impacted advertising revenues by approximately 100 basis points during the quarter. While still not back to where we'd like it to be, we are seeing a nice improvement thus far in Q1. Domestic ad sales are pacing meaningfully better quarter to date as we are beginning to capture the benefits of our strong upfront deal struck last year. International ad sales, which accounts for over 20% of total network ad sales, continue to be firmer overall, particularly in EMEA, which represents over three quarters of international ad revenues, and where we saw a modest growth year-over-year during the fourth quarter. Like the US, we're seeing acceleration through the beginning of the first quarter so far in EMEA overall, while we continue to face challenging market environment in LatAm as ad dollars more steadily migrate to streaming, which ultimately presents a nice opportunity for Max as we relaunch in these markets.
Network distribution revenues were effectively flat in the quarter after adjusting for the 400 basis points headwinds from exiting the AT&T SportsNet and transferring the TNT Sports Chile business to the D2C segment. On a reported basis, revenue decreased 3% as US pay-TV subscriber declines outpaced US affiliate rate increases, while inflationary impacts supported by inflation-linked pricing agreements in Argentina also benefited results. Overall, Networks EBITDA decreased 11% as the decline in high-margin advertising revenues was only partially offset by a 3% decrease in operating expenses, excluding the AT&T SportsNet's and TNT Sports Chile impact. Turning now to D2C, we finished the quarter with nearly 98 million subscribers, a modest sequential increase after accounting for the full consolidation following our acquisition of the outstanding shares of BluTV as well as transferring our TNT Sports Chile subs to the D2C segment as part of our premium sports streaming strategy.
International remains the most important driver of our D2C subscriber growth with over 1 million subscribers gained in Q4. This more than offset domestic declines, where we continue to feel the impact of the partly strike-driven lack of fresh tent-pole content through the second half of the year. And as discussed before, remember that linear wholesale losses continue to mask underlying retail D2C traction. Content revenue in the segment declined 30% due to the intrayear timing of third-party licensing deals that we laid out in detail earlier in the year. Keep this in mind as we comp this in Q2 of 2024. Among the D2C subscriber-related revenues, which were up over 6% in the quarter, distribution revenues increased 4% and benefited from price increases in the US and certain international markets, as well as the Amazon Prime partnership in the US, which we lapped in December.
Advertising revenues accelerated nicely versus Q3 to over 50%, helped by the 20230-2024 upfront deals, higher engagement on Max and ad-lite subscriber growth. We currently see the pace of D2C advertising revenue accelerating off this pace in Q1 and expect this to be an impactful segment driver for 2024 overall. With regional relaunches and key new market launches heavily weighted towards the first half of the year, we expect D2C EBITDA to be modestly negative in the first half and then profitable again in the second half. Net-net, we currently expect the D2C segment to be profitable for the year as we continue to pivot our focus on profitable top line growth. We remain focused on our target of $1 billion in D2C segment EBITDA in 2025, and 2024 will certainly lay important foundations for achieving this goal.
Turning to our outlook for Q1 free cash flow, we're off to an outstanding start. Remember, Q1 is traditionally our seasonally weakest quarter, yet we see continued strong momentum so far and expect a very meaningful improvement year-over-year versus the negative $930 million we incurred last year. We continue to capture our cash opportunities, and I believe we have many more bites at the apple for years to come. Let me mention additional puts and takes to consider as you think about free cash flow for the year. Number one; the net cash benefit from the strikes, which will reverse this year as content production resumes to normalized levels, will naturally be a negative to free cash flow. We incurred roughly $1 billion in integration related cash costs, a little lower than what we had anticipated for 2023 due to the timing of certain initiatives.
As we continue to execute on our transformation journey, we will likely incur some additional cash restructuring costs, but we expect this to be at a significantly lower level. Number three, the Olympics will be a drag to free cash flow this year, given its working capital dynamic. Number four, interest expense will certainly be lower in 2024 as we continue to delever and CapEx will likely be slightly lower as well. And then finally, of course, EBITDA will be the biggest determinant of free cash flow. Before I turn it back for Q&A, I'd like to finish with a final remark on the magnitude of change that's taken place at WBD. It really is night and day versus where we started. Of course, we still have additional work to do and more opportunity to capture, but the heavy lifting we've done helps pave the way for ongoing transformation and our ability to embrace the three pillars of our strategy, which reflect our strong commitment to quality storytelling, achieving maximum value through broad distribution and monetization, and operating professionally with a one company mindset.
We are significantly closer to our longer-term leverage targets with more than $12 billion of debt paid down in less than two years. Certainly, having a more flexible financial profile doesn't insulate us, or anyone else for that matter, from having creative wins and losses, but it most certainly will help us take the necessary steps required to further achieve our growth objectives and to more intently focus on driving shareholder value. Now, David, JB and I will take your questions.
See also 12 Best Gold Stocks Under $25 and 20 Best Cities to Retire for 2024.
To continue reading the Q&A session, please click here.
