Warner Bros. Discovery stock drops after disappointing forecast

Shares of Warner Bros. Discovery sank Friday after the media and entertainment giant reported disappointing earnings and lowered profit projections for the recently combined company.

The New York-based company’s stock fell $2.73, or 16%, to $14.74 a share as Wall Street gave a cool response to the company’s second-quarter results, in the first full earnings report since WarnerMedia assets merged with Discovery Inc. in a $43-billion deal.

A spokesperson for Warner Bros. Discovery declined to comment.

The transaction closed in April, ending AT&T’s stewardship of WarnerMedia brands including HBO, CNN and the Warner Bros. film and TV studio.

Warner Bros. Discovery, led by chief executive David Zaslav, on Thursday reported revenue of $9.83 billion, falling short of analysts’ estimates. Wall Street had anticipated $11.8 billion in sales, according to FactSet data. On a pro forma basis, revenues were down 3% from the combined revenues of the two companies during the same quarter last year.

The media giant reported a loss of $3.42 billion, or a loss of $1.50 a share, which also missed expectations. The loss included $1 billion in restructuring charges and $983 million in expenses related to the transaction and integration of the companies.

Further, the company down-shifted its full-year estimates, citing what the company is calling a “transition year” as it figures out nuts and bolts of the combined company’s strategy to take on Netflix and Disney while also sustaining its business.

The firm expects adjusted profits of $9 billion to $9.5 billion in 2022. Looking to 2023, the company cut its full-year profit guidance from $14 billion to “at least $12 billion.”

The revisions come as the media and entertainment industry grapples with the challenges of the streaming business, which involve heavy upfront costs, and the expected effects of a recession on businesses including on TV advertising and consumer spending.

“We are not surprised by management’s lowering guidance and believe the decision to reset expectations makes sense as the media and economic backdrops have changed since the deal was first announced 15 months ago,” wrote JP Morgan analyst Philip Cusick in a note to clients.

Warner Bros. Discovery executives also laid out plans to combine HBO Max and Discovery+ into one streaming service, set to debut in the U.S. next summer. The company said it is aiming for 130 million global streaming subscribers in 2025 and that its direct-to-consumer business will be profitable by 2024.

Meanwhile, the company is facing blowback from Hollywood talent after it decided to shelve a mostly completed “Batgirl” film that cost $90 million to produce. The industry is also bracing for substantial layoffs as Zaslav looks embarks on a plan to save $3 billion in costs from the merger.

For Wall Street analysts, the report was a mixed bag, and several noted that the rollout of the combined streaming service is taking longer than expected and may not deliver as great a return as investors would like.

Cowen & Co. analyst Doug Creutz wrote to clients that he had “expected management to deliver clear answers on two questions: first, what are the company’s plans to merge the HBO Max and Discovery+ services, and second, are there any changes to the company’s [2023] financial guidance” that was first given last year.

“While the answers may not have been all that we had hoped for, particularly on the second question, management’s presentation was thoughtful and clearly explained,” Creutz said.