Warner Bros. Discovery took a non-cash goodwill impairment charge of $9.1 billion in Q2 related to its linear TV networks unit, reflecting an acknowledgment of a stark change in value for its linear business that continues to shrink amid wider pay TV industry declines.
“It’s fair to say that even two years ago, market valuations and prevailing conditions for legacy media companies were quite different than they are today and this impairment acknowledges this and better aligns our carrying values with our future outlook,” said WBD CEO David Zaslav on the company’s second quarter earnings call Wednesday.
WBD finance chief Gunnar Wiedenfels noted that the company regularly monitors the value and use of its assets and cited a number of events in Q2 “including the difference between our current market cap and the book value of the company, the continued softness in the U.S. ad market and uncertainty related to affiliate and sports rights renewals [including the NBA]” that “required us to adjust our planning assumptions” and take the impairment charge against the value of the networks segment.
Still, the executive emphasized a focus on growing its studio and direct-to-consumer streaming businesses.
“While I am certainly not dismissive of the magnitude of this impairment, I believe it’s equally important to recognize that the flip side of this reflects the value shift across business models and our conviction and confidence in the growth and value opportunity across studios and our global direct-to-consumer business have never been stronger,” Wiedenfels said.
The impairment charge led to WBD recording a net loss of $10 billion in the quarter. Total Q2 revenue of $9.7 billion was down 5% year over year. Quarterly adjusted EBITDA of $1.8 billion was down 15% year over year.
The linear TV networks segment, which includes channels like Discovery, TNT Sports, HGTV, Food Network, TLC, TruTV, TBS and others, saw total revenues drop 8% year over year to $5.3 billion as both distribution revenue and advertising revenue declined. The studios segment posted $2.4 billion in revenue, down 4% year over year. And the direct-to-consumer revenue of $2.6 billion was down 5% compared to Q2 2023, despite European Max launches that helped grow DTC by 3.6 million net global subscribers in the quarter. The company saw DTC ad revenue gains, reaching $240 million in the period, which it attributed to higher domestic Max engagement and subscriber growth on its ad tier. There was also a reversal in DTC profitability, with segment adjusted EBITDA swinging to a loss of $107 million after reporting DTC adjusted EBITDA gains of $86 million in Q1 and compared to a loss of $3 million in Q2 2023.
On the subscriber side WBD lost 300,000 domestic (US and Canada) DTC subscribers compared to Q1 for a base of 52.4 million, but touted success of rollouts in Europe, which followed Max launches in Latin America in the first quarter. Internationally, DTC Warner Bros Discovery gained 3.9 subscribers in Q2 for a base of 50.8 million, which helped increase its total global subscriber count to 103.3 million as of the end of June.
Going forward it expects the lion’s share of subscribers to come from international markets, but anticipates monetization growth in all regions, with the U.S. still representing the biggest upside near-term, according to Wiedenfels.
WBD recently raised the price of its ad-free Max plans in the U.S. and the CFO said July saw “better-than-expected churn” when the increase took effect through the domestic subscriber base. And while the first half of the year was heavy for investment to support Max rollouts in LATAM and Europe, with those launches now in the rearview, the company expects a shift towards DTC EBITDA profitability in the second half of the year that’s helped by improved subscriber-related revenue trends and more momentum behind its content slate.
“I expect the D2C segment to be nicely profitable for the full year and with a strong ramp in the second half, which will represent a meaningful step towards our 2025 EBITDA target of at least $1 billion,” Wiedenfels said.
Internationally, WBD got a boost for Max as it intentionally timed European launches, including France and Belgium, in the middle of Q2 and ahead of the 2024 Paris Olympic Games that kicked off in July after the end of Q2, where Max and Discovery+ serve as exclusive homes of extensive games coverage. In addition to the streaming services, WBD is broadcast the Olympic Games on linear TV and online through its Eurosport channels in 47 markets and 20 different languages. Across the multi-platform distribution Zaslav said more than 141 million people engaged with the Olympic games across channels and platforms.
“We purposely timed the launch of Max in Europe to capitalize on the attention around the Olympics. It was a heavy lift and it paid off,” said Zaslav on the earnings call.
Max is now available in 65 international markets, with plans to continue rollouts over the next 18 to 24 months including key streaming markets of Australia, Japan, the UK, Germany and Italy.
Linear erosion overshadows DTC, studio assets
Still, the outlook isn’t necessarily bright for WBD’s linear networks, where it also now is dealing with the potential loss of NBA rights starting with the 2025-2026 season.
The company filed a lawsuit against the NBA after the league rejected its matching offer in favor of a bid from Amazon Prime Video under new agreements that run through 2036. WBD’s TNT Sports had been a long-time rights holder for the NBA, the loss of which is seen by some as a potential major hit to its linear networks, streaming services and possibly hamper its position in the forthcoming Venu sports streaming service that’s poised to launch this fall through joint venture with Fox and Disney.
In opening remarks, Wiedenfels commented on substantial investments, heavy lifts and its multi-year journey including on the DTC side and since creating the combined company through the 2022 merger, saying “it finally feels like we’re beginning to see the fruits of that labor, both operationally and financially.”
However, not everyone is convinced, including analysts at Wolfe Research.
The investment research firm in a Thursday note said it’s concerned EBTIDA peaked in 2023, following weaker Q2 results combined with a cautious outlook, where WBD’s rate of linear declines keeps outpacing growth in the studio and DTC business and executives don’t have clear visibility into when that trend might shift.
“Without visibility into EBITDA stabilization, Warner’s $40B of gross debt looks problematic vs $9B of EBITDA with ~85% tied to linear shrinking ~$1B/yr,” wrote Wolfe analyst Peter Supino.
And the firm believes that since WBD is unlikely to seek a spin out of certain assets because of operational and litigation concerns, “the company is left with limited viable options to salvage profitability.”
“Marquee asset values for the Studio, Max and CNN are overshadowed by a collapsing linear business, while a potential takeout would face antitrust scrutiny and potential buyers lack urgency” wrote Supino.
Wolfe Research sees WBD as making progress on the right long-term path, which, in its view, is the next-best option of bundling Max, growing DTC scale and shifting viewership from linear to streaming. But with streaming not making up for declines in linear that historically brought lucrative affiliate and carriage fees, the analysts noted that transition “looks long & challenging, particularly without the NBA and all major affiliate renewals come up in 2025.”