When a $217 Million Streaming Loss Is a ‘Clear Highlight’

No streamer wants to lose hundreds of millions of dollars — and no company sets out to shed billions — in a single quarter, but in the case of Warner Bros. Discovery, results may not be as bad as they appear.

Warner Bros. Discovery recognized a $2.1 billion loss in the final quarter of 2022; its direct-to-consumer (DTC) business lost $217 million, or about 10 percent of the overall loss, during the same months. At a glance, both are glaring — but they mark substantial improvements from previous quarters, and the DTC loss is way better than Wall Street expected.

Let’s work big to small: The lion’s share of the overall company loss can be attributed to another three months of amortizing merger and restructuring costs tied to the April 2022 combination of WarnerMedia and Discovery, Inc. The direct-to-consumer loss in the fourth quarter was less than half what analysts anticipated and about one-third of the prior-quarter’s streaming loss.

The market consensus was for direct-to-consumer (streamers HBO Max and Discovery+, as well as linear HBO) losses to come in at $534 million. The equity analysts at bank Wells Fargo, which forecast a $580 million DTC loss, called the loss of $217 million “significant progress” and “the clear highlight” of Warner Bros. Discovery’s fourth-quarter financials.

Macquarie’s Senior Media Tech Analyst Tim Nollen also went with “highlight” as the word of choice, and raised his target price for WBD shares 10 percent to $22. Moffett Nathanson, which thought the DTC losses would be $402 million, called the overall story of Q4 “a positive narrative” and tacked $2 onto its own target price, now at $17 per share. (WBD Shares are currently trading a bit under $16.)

UBS analysts, who predicted a $476 million DTC loss, echoed the sentiments by qualifying the segment’s actual losses as “a substantial step down” from Q3’s $634 million loss, and “the big story” of Q4. Wait until they hear about the current quarter. (Kidding, they know.)

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Warner Bros. Discovery now believes it will nearly break even with Q1 2023’s direct-to-consumer performance. That will be a temporary reprieve, though — the chasm will again widen in Q2 when marketing costs hit for the combined HBO Max/Discovery+ service in the U.S. and Latin America. WBD plans to combine HBO Max and Discovery+ into one super-service this April. (The company will also continue the much cheaper Discovery+ as a standalone platform, and plans to launch a FAST service in the future.)

Building a profitable streaming business is the company’s No. 1 priority, a Warner Bros. Discovery insider told IndieWire on Thursday. Officially, senior executives also list reducing the company’s gross debt of $49.5 billion right alongside that one.

From October to December, Warner Bros. Discovery added 1.1 million direct-to-consumer subs, and the combination of linear HBO and streaming services HBO Max and Discovery+ now adds up to 96.1 million. That was about on pace with expectations.

Less in line was Warner Bros. Discovery’s overall Q4 financial performance. With a loss of 86 cents per share on about $11 billion in revenue, the combined WarnerMedia-Discovery missed top- and bottom-line estimates.