Warner Bros. Discovery (WBD, Financial) hit new multi-year lows today after missing Q2 revenue estimates and reporting a significant GAAP net loss, primarily due to a $9.1 billion goodwill impairment charge from its Networks segment. The loss of NBA rights to Amazon (AMZN, Financial), which signed a new 11-year agreement with Disney (DIS, Financial) and NBCUniversal (CMCSA, Financial), triggered a full reevaluation of the goodwill on WBD's books. CEO David Zaslav pointed out that market valuations for legacy media companies have drastically changed over the past two years, and the impairment reflects this shift.
The loss of NBA rights adds uncertainty to WBD's Networks EBITDA. During its recent conference call, WBD acknowledged its responsibility to explore strategic options for its Networks segment, including potential M&A activities or partnerships.
Despite the impairment charge, WBD's Direct-to-Consumer (DTC) business, particularly its streaming service, showed strong performance in Q2:
- DTC added 3.6 million subscribers sequentially in Q2, up from 2.0 million in Q1. The timing of the European streaming launch ahead of the Olympics boosted these numbers. Management expects continued subscriber growth in Q3.
- WBD sees significant upside for its primary streaming platform, Max, in international markets. Currently absent in key markets like Australia, Japan, the U.K., Germany, and Italy, WBD plans to roll out Max in these regions over the next 18 to 24 months.
- DTC was a major driver for advertising, with Q2 marking its best streaming quarter for ad sales. This helped reduce the company's total advertising declines to 3% from 7% last quarter. The ad revenue boost supports WBD's confidence in achieving positive EBITDA in the second half of the year, aiming for over $1.0 billion in EBITDA by 2025.
The contrast between WBD's Networks and DTC businesses reflects the challenges legacy media companies face as cord-cutting continues to reduce pay-TV subscribers. The goodwill impairment is substantial, but even if WBD had retained NBA rights, declining distribution and ad revenues in its Network business might have led to a write-down eventually.
WBD still holds valuable sports rights, including MLB and College Football. However, losing the NBA, a core feature of its streaming service, may hinder the momentum in its DTC business. Given the complexities and uncertainties, it may be prudent to wait and see how WBD navigates the future of its Networks segment and the impact of losing NBA rights on its DTC business.
