Warner Bros. Discovery’s sluggish performance and $9-billion write-down in the value of its cable TV channels is rattling investors, sending the beleaguered company’s stock on a steep slide.
Shares fell as much as 11% in early trading Thursday after the company acknowledged during its second quarter earnings call that the expected loss of its NBA contract had negative ramifications on its TV business.
The company reviewed the value of its basic cable channel portfolio and concluded that the once mighty channels — including CNN, HGTV, Food Network, TNT and TLC — were worth billions of dollars less than they were just two years ago.
The massive write-down brings into sharp focus the collateral damage of the shift to streaming. Warner Bros. Discovery’s channels have long been mainstays of the television landscape and frequent destinations for viewers during an earlier era of channel surfing. But no more.
“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,” Chief Executive David Zaslav said during a call with analysts Wednesday after the close of Wall Street trading.
However, Zaslav’s company’s problems go beyond the headwinds facing traditional television companies.
The company has laid off thousands of employees in the last two years. Its stock is down nearly 40% year-to-date, with much of the slide coinciding with the company’s inability to negotiate a renewal of the NBA rights deal for its TNT channel. Last month, the NBA announced that it was striking agreements with Walt Disney Co.’s ESPN, NBCUniversal and Amazon’s Prime Video.
The move sidelined TNT, which has broadcast pro basketball since 1989.
Late last month, the company filed a breach of contract lawsuit against the NBA, asking a judge to prohibit the league from awarding a television contract to Amazon Prime Video after Warner Bros. Discovery tried to match Amazon’s bid.
Bank of America analyst Jessica Reif Ehrlich has been blunt in her assessment that the firm, created by Discovery’s absorption of WarnerMedia in 2022, is not on an a sustainable path.
The stock slide “comes on the heels of significant under-performance over the last two years,” Reif Ehrlich wrote in a report Thursday.
“Unfortunately, the stock performance is a clear indication that investors see little optimism that the tides may soon start to turn,” MoffettNathanson media analyst Robert Fishman wrote in a separate report Thursday.
Reif Ehrlich and other analysts have suggested the company look at asset sales, such as cleaving off its video game unit, which suffered a tough quarter as its “Suicide Squad” game dramatically underperformed, particularly compared to last year’s Harry Potter hit.
While company executives have hinted they are open to looking at sales, they also underscored the importance of keeping the company whole during Wednesday’s after-market call.
“Look, we have been operating under the one Warner Bros. Discovery strategy for the past two and a half years,” Chief Financial Officer Gunnar Wiedenfels said. “Every day, I’m seeing evidence everywhere in the business of the benefits of those strategies.”
But the second-quarter numbers did not contain such evidence.
The company reported a net loss of $9.99 billion, or $4.07 per share, compared with a loss of $1.24 billion, or 51 cents per share, for the same period a year earlier. Analysts were not expecting such a huge loss.
Warner Bros. Discovery generated revenue of $9.7 billion, a 6% decline compared with the same quarter a year earlier.
Adjusted earnings before interest, taxes, depreciation and amortization dropped 16% to nearly $1.8 billion compared to $2.15 billion in the year-earlier period.
Wiedenfels’ response to a question posed by Reif Ehrlich on Wednesday appeared to shake investors’ confidence.
She asked whether moves the company has made to cobble together some additional sports rights — a few college football games, NASCAR, Big East college basketball and the French Open of tennis — were “enough to close the gap” after the expected loss of the NBA deal.
Investors are worried that, without basketball, Warner Bros. Discovery will not be able to maintain its distribution fees during upcoming contract negotiations with pay-TV providers such as Comcast and DirecTV.
Wiedenfels said the company has confidence that its move to streaming would soon pay off, but he said he didn’t know when.
“There’s been talk about recovery a year, a year and a half ago,” Wiedenfels said. “It hasn’t really happened. It is what it is. We’re managing this as best we can.”
