1 week Ago
JHVEPhoto Up until now, free cash flow of Warner Bros. Discovery ( NASDAQ: WBD ) has literally carried the acquisition of Warner Bros. As Gunnar Wiedenfels, CFO, mentioned during the latest roadshow : Up until now, the huge outperformance on free cash flow has not impressed the market because it is widely perceived as not coming from operations.
But the cash flow behind this free cash flow gave the company time to build the necessary infrastructure so that management could finally move forward with the original plan. Now, according to Gunnar Wiedenfels, management finally feels that the supporting infrastructure is in place so that the anticipated turnaround of the business can get going. Linear - The Last Article The last article focused on the write-down of the linear assets because linear is going away faster than anyone anticipated.
But management firmly believes that the transition underway will replace the cash flow lost as traditional television fades into history. Mr. Market has doubts because the cash flow has been coming from all kinds of nonrecurring things that were covered previously in addition to operations.
Therefore, the market could not tell what was producing the cash flow and is concerned with the possibility of lower cash flow in the current fiscal year. After all, positive comparisons are everything in this momentum atmosphere. There is a widespread concern that the cash flow produced by linear will disappear with nothing to replace it.
But management appears to now have the plans in place (with the supporting infrastructure necessary to carry out those plans). Since there is no record of these cash flow sources, Mr. Market has a lot of doubts about those future sources of cash flow.
Infrastructure But as several of the previous articles discussed, there was not enough information being generated by existing systems to support decision-making. When the CFO noted that cash was not being billed or being collected on a timely basis, there should have been a suspicion that major systems and basic discipline were missing. That was going to take extra time to put in place.
But the lack of infrastructure also delayed the turnaround because you need good information and the latest tools to use before any strategies can be put into place. This made a lot of market expectations unrealistic. But that did not prevent Mr.
Market from completely "going off the deep end" in that the market "held fast" to original expectations on the turnaround despite a lot of evidence that the turnaround would take longer than the market had patience for. Streaming Streaming initially benefited from one of the fastest transitions from big losses to marginal profitability in the industry. Beginning with the Olympics, streaming launched in a lot of countries so that the program was available for consumers to see the Olympics.
The rollout has continued since then: This quote from Gunnar Wiedenfels during the same roadshow ( Bank of America's Media Communications And Entertainment Conference on September 4, 2024 ). According to management, the streaming profitability should be in a position to increase as the launching costs decline. The Olympics will also be a one-quarter profit drag as well because the Olympics typically shows a loss while the profits come at other times.
But as the quote above alludes to, the period of sustained growth is about to finally begin because all the parts have now finally fallen into place. Probably the first thing that investors will see is new adds climbing, with profitability to follow. If management can keep new programming costs in line, then streaming can be an extremely profitable business.
However, pioneer Netflix ( NFLX ) has long not been able to control costs, which has meant that free cash flow only recently appeared on the financial statements. I have covered the lack of cash flow (let alone free cash flow) for years with articles on Netflix. Warner Bros.
Discovery intends to do much better. Time will tell on that assertion. Studio Not many realize that the company has long had a studio business that has produced shows for others as well as for the company itself.
That business was affected by the strike and there are still some lingering effects. On the other hand, it is probably one of the more reliable cash flow items that came with the acquisition. There was talk about a flight to quality in this area as traditional television continues to decline.
However, that means this business heads to streaming, and so there will be future opportunities as well . Clearly, the transition will be challenging, but management feels they have potential solutions for whatever happens here. Overall, the outlook appears positive.
There will likely be positive comparisons against the strike-influenced quarters. So, this business should begin to show positive comparisons in the second half of the year. Film On the film business, here are some outside opinions: Daniel Loria Analyst At Box Office Pro On Warner Bros Discovery Year In Films (The Hollywood Reporter Written By Pamela McClintock Quoting Daniel Loria) The Seeking Alpha website confirms that "Beetlejuice" is off to a good start with another potential hit behind it.
In the meantime, quarterly comparisons have suffered because "Barbie" was a hit movie in the previous fiscal year, but the money rolled in earlier. One of the things mentioned here was that the games part of the business is likewise suffering from negative comparisons because the game that was put out this year was nothing close to the game put out the previous fiscal year. More importantly, the people put in place to get the movie business more consistent (so there are more opportunities for games) will not be getting their product to market until likely sometime next year because it takes that long for movies to be planned and then completed.
So far, many of the movies coming out were underway before the acquisition. This has been a frustrating issue for the market. This is definitely one area where the market had no patience for the solution.
Management has long stressed that the strategy implemented (and especially the cash collection procedures) takes time to get through to completion. Until then, they may have a hand in it to possibly improve what is already underway. But that is not the same as handling the whole project from the beginning.
Tours The "Harry Potter Tours" is a relatively new business that represents a high-margin business that could grow fairly rapidly in the future. This is a business that depends upon franchises. It is another way to monetize an asset.
Now this business is in its early stages, but there are many possibilities if the current idea "has legs" and makes profits for a while. This is really an area that Disney ( DIS ) has famously exploited in a number of ways. There are of course others as well.
So, there are models out there to copy. Sports Here, all the talk has been about the NBA contract, and that, of course, is a significant profit driver. However, there are a lot more sports out there and the company has long had a worldwide sports organization.
Until the court case is resolved, there will probably be very few comments from management in this area. But there are other sports in the United States for the company to potentially cover and worldwide, there are opportunities as well. There is a very good chance that the organization survives and even thrives, no matter what happens with the NBA contract.
The key is financial discipline with enough prompt action to right-size the situation, no matter what happens. If the profit lost from a potential loss of the NBA contract cannot be made up with other sports, then other divisions need to pick up the slack. There are plenty of possibilities.
But investors should figure that management will "do something" as opposed to "sitting there and taking it". Summary Management has some clear-cut future goals like $1 billion in profits from streaming while building the movie business to potentially $3 billion at first and later to as much as $5 billion a year. Mr.
Market has a lot of doubts about all of this because all the cutting and streamlining so far has led to a lot of negative comparisons. Then, came the news that a lot of nonrecurring items that led to extra free cash flow are coming to an end. So now, the business itself needs to generate free cash flow.
Management appears to be ready with strategies to get that market-demanded free cash flow. As I noted in the last article, John Malone, a board member, has often stated that this turnaround would take time. Not only has the market not given management credit for the huge free cash flow outperformance in the early stages, but the market also wants to punish management for some negative free cash flow comparisons.
Yet, the facts were that the business had really no (or badly insufficient) cash flow (let alone free cash flow) when the assets were acquired. Therefore, the fact that operations are now going to generate free cash flow and decent levels of GAAP cash flow is a major improvement from the point of acquisition. The beginning part of a leveraged buyout like this one (even though the stock was used as well) is often bumpy until the market can see the results of operations.
Until now, there have been a lot of nonrecurring issues (like receivables not collected and, in some cases, not billed). From here on in, the financial statements will reflect operations as they are going to be (as designed by management). This remains a strong buy recommendation because management had the nerve to first construct the underlying infrastructure needed to supply good information while installing basic discipline that was clearly lacking before the turnaround strategies were launched.
Mr. Market so far has thrown a temper tantrum because expected results (by Mr. Market) have not been reported.
Now, right about the time the market is ready to give up completely (as shown by the stock price), the benefits of what this management has accomplished and planned for the future should become apparent. Clearly, the risk is elevated more than anticipated. But management now has some good chances to deliver on its priorities.
Risks Several of the businesses are "hit" businesses. Without a hit, the comparisons can be ugly until the next big winner arrives. Several divisions like retail clothes (for example) depend upon either hit television, streaming, or movies.
Consistency in these businesses is often the goal that is rarely achieved. Management overachieved free cash flow from a number of nonrecurring items. Now comes the time when operations need to take up the slack as those items fade while showing some growth potential.
There is no assurance that will happen. There has been market concern about declining EBITDA and other business measures as the company cut down to core profit areas. That has caused considerable confusion about the growth prospects of those core areas.
Even though the original streamlining is largely done (and the decision-making infrastructure has been established), the initial numbers have led to market doubts about future plans even though comparisons are likely not valid due to those intentional cutbacks to establish profitability. The strategy has now changed to growth (that track record will take some time to establish). The loss of key personnel can have a material effect on the future plans of the company.
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It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA.
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