Shares of leading entertainment company, Paramount Global (PARA, Financial) traded sharply lower following a lackluster earnings report and subsequent cut to its dividend. Linear Pay TV pressures including shifts in viewership, subscriber erosion and softer ad revenues presented headwinds. In response, PARA began a restructuring of the TV Media business, reducing domestic staff by 25%. Filmed Entertainment revenue and operating income also declined in the period due to timing and mix of theatrical releases, however the 2023 and 2024 movie slate include many high-profile franchises returning to theatres. Meanwhile, Paramount+ continues to add subscribers, with global direct-to-consumer (DTC) subscriptions reaching 60 million. Although DTC revenues continue to grow, DTC operating losses expanded versus a year ago due to increased investment in content and marketing of the service. To cut down on spending and strengthen the value proposition of its streaming services, Paramount integrated Showtime with Paramount+ in June. We expect 2023 to be the peak year for streaming losses as management magnifies its focus on profitability for its DTC segment, which should drive positive free cash flow in 2024 and beyond. In our view, the company’s long-term opportunity in streaming and the value of its proprietary content remain meaningfully underappreciated at current trading levels.
From John Rogers (Trades, Portfolio)' Ariel Fund second-quarter 2023 commentary.
