Warner Bros. Discovery, the media company formed through the merger of Discovery and WarnerMedia, recently reported its fourth-quarter earnings. While the company boasted an 86% increase in free cash flow and significant debt reduction, it failed to meet analyst estimates for revenue and profit. As a result, shares in Warner Bros. Discovery fell by 10%. This article examines the company’s promotion of free cash flow and its disconnect with investors.
David Zaslav, the CEO of Warner Bros. Discovery, has consistently emphasized the importance of increasing free cash flow to improve the company’s financial health and pay down debt. The company has made significant progress in this area, paying off $12.4 billion in debt since the merger announcement. Zaslav highlighted this achievement in the earnings conference call, stating that the company had exceeded its goal with $6.2 billion in free cash flow for the year.
However, despite these positive developments, investors remain unconvinced. The stock has consistently underperformed over the past year, with shares down 45%. The lack of full-year guidance on free cash flow generation for 2024 may have contributed to this skepticism. The CFO, Gunnar Wiedenfels, refused to provide guidance, citing uncertainties in advertising market performance and increased content spend on Max following the resolution of strikes by Hollywood writers and actors.
Furthermore, it appears that investors are more interested in other growth metrics, such as earnings, revenue, and subscriber additions to Warner Bros. Discovery’s streaming service, Max. Legacy media companies like Warner Bros. Discovery need a compelling growth narrative to attract shareholders. Cost-cutting measures and debt reduction alone may not be enough to excite investors, especially considering the decline of cable networks and advertising revenue.
The article draws a parallel between Warner Bros. Discovery’s promotion of free cash flow and Netflix’s attempt to refocus investor sentiment onto its preferred metrics. Netflix’s shares only started rising when the company returned to subscriber growth, indicating that investors prioritize certain growth indicators over others.
In conclusion, Warner Bros. Discovery’s emphasis on free cash flow and debt reduction has not resonated with investors. While the company has made progress in these areas, it failed to meet revenue and profit estimates, leading to a decline in share price. Investors are looking for a compelling growth narrative, and free cash flow alone may not be enough to generate excitement. The company needs to demonstrate its ability to drive earnings, revenue, and subscriber additions to its streaming service to regain investor confidence.
