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Why “Barbie” Couldn’t Lift Warner Bros. Discovery in Q3

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Unless you have been living under a rock, you know that the Warner Bros. film Barbie was a billion-dollar blockbuster that was one of the most popular movies of all time. Let’s see how the film impacted the earnings of the company that produced it.

Warner Bros. Discovery (NYSE:WBD) released its third-quarter earnings on Wednesday morning, and the blockbuster film surely had an impact. However, it wasn’t enough to account for the losses elsewhere, and the company’s stock plummeted nearly 16% in Wednesday-morning trading as a result.

The Barbie effect?

With almost $1.5 billion in worldwide box-office revenue, Barbie is the highest-grossing film of 2023 and helped Warner Bros. Discovery’s studio business generate $3.2 billion in quarterly revenue, a 4% year-over-year increase. It also helped the company hit $10 billion in overall revenue, a 2% increase, and generate over $2 billion in free cash flow.

However, the revenue gains fueled by the film were not enough, as the company posted a $417 million net loss, or 17 cents per share. This was better than the $2.3 billion net loss a year ago but fell short of analysts’ expectations of a 6-cent per-share loss. However, Warner Bros. Discovery’s adjusted EBITDA rose 2% to $3 billion.

The company is still dealing with merger-related costs, but there were other concerns in the quarter that caused the earnings miss. The major drag on earnings came from the networks business, which saw its revenue decline 7% to $4.9 billion, primarily due to a 12% drop in advertising income and a 22% decline in content revenue. The drops in advertising and content revenue stemmed mainly from the WGA and SAG-AFTRA strikes, which led to declines in viewership due to one of the lightest slates of new, original content in years.

However, Warner Bros. Discovery did see a bit of a boost from its direct-to-consumer streaming business, where its revenue jumped 5% year over year to $2.4 billion with adjusted EBITDA of $111 million. A year ago this quarter, the adjusted EBITDA was a net loss of $634 million. Total worldwide subscribers dropped to 95.1 million from 95.8 million in Q2, but average revenue per user (ARPU) was $7.82, up from $7.71 in Q2.

Looking at its financials, Warner Bros. Discovery increased its free cash flow to $2 billion, from -$192 million a year ago, due to higher operating profits and lower content expenses because of the WGA and SAG-AFTRA strikes, among other factors. It also paid down $2.4 billion in debt, chipping away at its $45.3 billion in gross debt.

What’s next?

Today’s selloff may be a short-term overreaction to an earnings report that showed some progress in streaming and the company’s cash flow and balance sheet. Then again, blockbusters like Barbie don’t come around that often either, so if you see the glass as half full, you could say it could have been a lot worse. However, if you see the glass as half empty you could say it should have been much better. Most investors saw the latter on Wednesday.

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However, there are other lingering concerns that may have accelerated the selloff. Chief Financial Officer Gunnar Wiedenfels elaborated on them on the earnings call on Wednesday morning. One is the “possibility of continued sluggish advertising trends,” he said. The other is the effects of the strike.

“As as we begin to formulate the initial framework or TV production business getting back to work into 2024, there is simply a lot we don’t know yet. We have every confidence that this will eventually work itself out throughout the next year, and there should be an eventual tailwind from the end of the work stoppage. This is an evolving process, and there is a real risk at this point that some negative financial impact of the strike will extend into 2024,” Wiedenfels said.

CEO David Zaslav said he is hopeful that the SAG-AFTRA strike will end soon.

“We recognize that we need our creative partners to feel valued and rewarded and look forward to both sides getting back to the business of telling great stories,” Zaslav said.

Published First on ValueWalk. Read Here.

Featured Image Credit: Photo by Criativa Pix Fotografia; Pexels; Thank you!


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