Warner Bros. Discovery CEO David Zaslav’s top priority: Cash flow

A number of months in the past, after a prolonged and sobering assessment of Warner Bros. Discovery's enterprise, Chief Executive David Zaslav gave his division heads a cutthroat mission.

Pretend your models are household companies, Zaslav mentioned. Start from scratch and prioritize free money flow, he added, in response to individuals aware of the matter. Then, Zaslav mentioned, come again to me with a brand new strategic plan in your unit.

Zaslav's directive has led to what is going to quantity to hundreds of layoffs on the firm by the center of this month, mentioned the individuals, together with substantial strategic modifications at CNN, the Warner Bros. movie studio and different divisions.

The CEO shaped his plan after he took a tough take a look at the funds of the mixed WarnerMedia-Discovery, a deal that closed in April. Zaslav decided the corporate was a multitude. AT&T mismanaged WarnerMedia by means of neglect and profligate spending, he'd determined, in response to individuals aware of his discussions. The individuals requested to not be recognized as a result of the talks have been personal.

Warner Bros. Discovery's whole debt of about $50 billion was tens of billions greater than the corporate's market capitalization. About $5 billion of that debt is due by the tip of 2024 after paying off $6 billion for the reason that shut of the merger. The firm may push again the maturity on some bonds if needed, however rates of interest have risen dramatically, making refinancing a lot costlier.

To pay down debt, any firm wants money — ideally, from operations. But the near-term tendencies advised Warner Bros. Discovery's enterprise was getting worse, not higher. The firm introduced free money flow for the third quarter was destructive $192 million, in comparison with $705 million a 12 months earlier. Cash from working actions was $1.5 billion for the primary 9 months of 2022, down from $1.9 billion a 12 months earlier.

Along with the rise in charges, Netflix's world income and subscriber development had slowed, prompting traders to bail on peer shares — together with Warner Bros. Discovery, which had spent the previous three years growing streaming companies HBO Max and Discovery+. Moreover, the promoting market was collapsing as company valuations flagged. Zaslav mentioned final month the advert market has been weaker than at any level in the course of the 2020 pandemic.

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Warner Bros. Discovery shares have fallen greater than 50% since WarnerMedia and Discovery closed the deal in April. Its market worth stands at about $26 billion.

In addition to job cuts, Zaslav's directive spurred the elimination of content material throughout the corporate, together with scrapping CNN authentic documentaries, Warner Bros. killing off "Batgirl" and "Scoob 2: Holiday Haunt," and HBO Max eliminating dozens of little-watched TV collection and films, together with about 200 outdated episodes of "Sesame Street."

The rapid selections allowed Zaslav to make the most of tax efficiencies that include modifications in technique after a merger. Warner Bros. Discovery expects to take as much as $2.5 billion in content material impairment and improvement write-offs by 2024. The firm, which has about 40,000 workers, has booked $2 billion in synergies for 2023. Overall, Zaslav has promised $3.5 billion in value cuts to traders — up from an preliminary promise of $3 billion.

The underlying rationale behind Zaslav's cost-cutting technique centered on turning Warner Bros. Discovery right into a money flow generator. Not solely would money be wanted to repay debt, however Zaslav's pitch to traders could be to view his firm as a shining mild within the altering leisure world — a legacy media firm that really makes actual cash.

"You should be measuring us in free cash flow and EBITDA [earnings before interest, taxes, depreciation and amortization]," Zaslav mentioned an investor convention run by RBC Capital Markets final month. "We're driving for free cash flow."

Zaslav is making an attempt to offer Warner Bros. Discovery a head begin on what could also be a 12 months of downsizing amongst giant media and leisure corporations. His technique seems clear: Cash era will coax Wall Street into seeing his firm as an trade outperformer. But he'll must hold collectively an organization made up of tens of hundreds of ex-Time Warner after which ex-WarnerMedia workers who’ve been by means of spherical after spherical of reorganizations and layoffs.

"It isn't going to be overnight, and there's going to be a lot of grumbling because you don't generate $3.5 billion of operating synergies without, you know, breaking a few eggs today," Warner Bros. Discovery board member and media mogul John Malone advised CNBC in an interview final month.

Cash guidelines the whole lot

Malone has co-strategized and cheered Zaslav's effort to focus the corporate on maximizing free money flow, which is outlined as web earnings plus depreciation and amortization minus capital expenditures.

"Whenever I talk to David, the first thing I say is manage your cash," Malone mentioned final month. "Cash generation will ultimately be the metric that David's success or failure will be judged on."

Even earlier than Zaslav gave his directive to all the division heads, the brand new CEO was already occupied with learn how to enhance money flow. That was a minimum of a part of the motivation to get rid of CNN+ simply weeks after it launched, which had a spending price range of about $165 million in 2022 and an eventual $350 million, in response to individuals aware of the matter.

Warner Bros. Discovery owns streaming companies, linear cable networks, a film studio, a TV manufacturing studio and digital properties. It owns DC Comics, HBO, CNN, Bleacher Report, and oodles of actuality TV programming. It has sports activities rights each internationally and domestically, together with the NBA on TNT.

Zaslav hopes his reconstruction of Warner Bros. Discovery will ship two outcomes. First, it can showcase the corporate as a completely diversified content material machine, that includes top manufacturers and mental property in status TV (HBO), films (Warner Bros.), actuality TV (Discovery), children and superheroes (Looney Tunes, DC), information (CNN) and sports activities (NBA, NCAA March Madness).

Liberty Media's John MaloneMichael Kovac | Getty Images

Second, he needs it to show {that a} fashionable media firm that's spending billions on streaming video also can generate billions in money flow. The firm has estimated 2023 EBITDA shall be $12 billion. Warner Bros. Discovery will generate greater than $3 billion in free money flow this 12 months, about $4 billion subsequent 12 months and near $6 billion in free money flow in 2024, in response to firm forecasts.

That would give Zaslav a promoting level to traders in comparison with different legacy media corporations. Disney has generated simply $1 billion of free money flow over the previous 12 months and analysts estimate the corporate can have about $2 billion in 2023. That's regardless of rising Disney+, its flagship streaming service, by 46 million subscribers in the course of the interval and proudly owning a theme park enterprise that generated $28.7 billion in income for the fiscal 12 months — up 73% from a 12 months earlier.

The low free money flow relates largely to the cash drain from streaming companies and Disney's giant investments in theme parks. Over the previous 12 months, Disney had $4.2 billion in working earnings from its media properties, down 42% from a 12 months in the past. Returning Disney CEO Bob Iger mentioned in a city corridor final month he’ll prioritize profitability over streaming development — a change from when he left the submit in 2020. Outgoing boss Bob Chapek put into place a Dec. 8 worth hike for Disney+ and different streaming companies to speed up money flow.

"Discovery was a free cash flow machine," Zaslav mentioned earlier this 12 months of his former firm, which he ran for greater than 15 years earlier than merging it with WarnerMedia. "We were generating over $3 billion in free cash flow for a long time. Now, we look at Warner generating $40 billion of revenue and almost no free cash flow, with all of the great IP that they have."

Wall Street vs. Sunset Boulevard

When AT&T introduced it was merging WarnerMedia with Discovery Communications final 12 months, Zaslav instantly went on a Hollywood "listening tour," sensing a chance to change into the brand new king of Tinseltown. Many Hollywood energy gamers thought Zaslav would dedicate his first 12 months as CEO to currying favor with the trade given his lack of historical past with scripted TV or films. He even purchased producer Bob Evans' home for $16 million in Beverly Hills, an indication some thought meant he wished to be Hollywood's subsequent mogul.

A 12 months later, Zaslav isn't the king. In reality, many take into account him a villain.

It turned out Zaslav's top precedence as CEO of a big public firm wasn't to win over Hollywood. Rather, it was to persuade traders his firm may survive and flourish as a relative minnow towards a lot bigger sharks, together with Apple, Amazon, Disney and Netflix, in an leisure world that's shortly transferring to digital distribution.

Zaslav's concentrate on traders earlier than Hollywood makes enterprise sense. The firm have to be financially sound earlier than it could make huge investments. But he's taken successful, reputationally, with some within the inventive group.

"HBO Max is widely acknowledged to be the best streaming service. And now the execs who bought it are on the verge of dismantling it, simply because they feel like it," tweeted Adam Conover, the creator and host of "The G Word" on Netflix and "Adam Ruins Everything" on HBO Max, in August. "Mergers give just a few wealthy people MASSIVE control over what we watch, with disastrous results."

One Hollywood insider who met with Zaslav to offer him recommendation earlier than he stepped into the job mentioned the Warner Bros. Discovery CEO has ignored 90% of his recommendation on learn how to handle the enterprise.

Time will inform whether or not Zaslav's year-one selections have lasting ramifications with a spurned Hollywood group. Critics of Iger at Disney initially mentioned he lacked "creative vision" when he first took over as chief govt almost twenty years in the past.

Zaslav can counter that Warner Bros. Discovery hasn't decreased content material spending. The firm spent about $22 billion on programming in 2022. But he's additionally made value consciousness some extent of satisfaction.

"We're going to spend more on content — but you're not going to see us come in and go, 'Alright, we're going to spend $5 billion more,'" Zaslav mentioned in February. "We're going to be measured, we're going to be smart and we're going to be careful."

The firm's content material selections have been primarily based on strategic corrections, corresponding to eliminating made-for-streaming films and chopping again on children and household programming that don't materially entice new subscribers or maintain present ones, executives decided. Warner Bros. Discovery's HBO continues to churn out hits, together with "White Lotus," "Euphoria," "House of the Dragon" and "Succession," beneath the management of Casey Bloys.

V Anderson | WireImage | Getty Images

Zaslav will put his stamp on streaming technique subsequent 12 months. Warner Bros. Discovery executives are near choosing a brand new identify — mentioned to be "Max" — for a mixed HBO Max-Discovery+ streaming service that can replicate the service's broader attain past HBO, CNBC reported earlier this week.

Warner Bros. Discovery is planning to develop a free advertising-supported service subsequent 12 months and gained't be shy about promoting Warner Bros. TV and film productions to different streamers and media corporations if Zaslav and his executives assume they aren't strategic matches for the HBO Max/Discovery+ combo.

Zaslav additionally employed James Gunn and Peter Safran to co-head the corporate's DC Comics movie and TV unit. Zaslav has tasked the pair with unifying the DC Comics world to offer extra cohesion to future TV collection and films, bringing a Pixar-like strategy of pairing a inventive determine (Gunn, who directed "The Suicide Squad") with a businessman (Safran, who produced "Aquaman") to create worth for Warner Bros. Discovery.

'We don't need to have the NBA'

Perhaps Zaslav's greatest dilemma is what to do with the NBA.

Like different media corporations, Warner Bros. Discovery rents the rights to hold video games and pays billions to leagues for the privilege. Warner Bros. Discovery at present pays round $1.2 billion per 12 months to place NBA video games on TNT. In 2014, the final time the league struck a take care of TNT and Disney's ESPN, carriage rights rose from $930 million to $2.6 billion per 12 months.

Negotiations to resume TNT's NBA rights will start in earnest subsequent 12 months. Zaslav has mentioned he has little curiosity in paying an enormous enhance simply to hold video games once more on cable networks — a platform that loses hundreds of thousands of subscribers annually.

"We don't have to have the NBA," Zaslav mentioned Nov. 15 at an investor convention. "With sport, we're a renter. That's not as good of a business."

The drawback for Zaslav is maintaining legacy pay TV afloat could also be his finest method to hold money flow coming, and placing NBA video games on TNT could also be his finest likelihood to try this. In the third quarter, Warner Bros. Discovery's cable community enterprise had adjusted EBITDA of $2.6 billion on $5.2 billion of income. That's in contrast with a direct-to-consumer enterprise that misplaced $634 million.

If Warner Bros. Discovery goes to pay billions of {dollars} a 12 months for the NBA, Zaslav needs a deal to be future-focused. He has the luxurious of getting NBA Commissioner Adam Silver's ear for the subsequent three years as a result of the NBA shall be on TNT by means of the tip of the 2024-25 season.

"If we do a deal on the NBA, it's going to look a lot different," Zaslav mentioned.

Charles Barkley on Inside the NBASource: NBA on TNT

Warner Bros. Discovery is aware of learn how to produce NBA video games and airs a studio present, "Inside the NBA," which is extensively considered the perfect in skilled sports activities. It's attainable Zaslav may strike a take care of one other bidder, corresponding to Amazon or Apple, which can permit Warner Bros. Discovery to supply their video games whereas giving him a package deal of video games that got here with a lower cost tag.

Ideally, Zaslav want to do sports activities offers that embody possession of mental property. This can also be interesting to Netflix, The Wall Street Journal reported final month. Acquiring leagues will get Zaslav out of the rental enterprise. But whereas smaller skilled sports activities leagues, corresponding to Formula One and UFC, are owned by media corporations (Malone's Liberty Media and Ari Emanuel's Endeavor, respectively), it appears unlikely NBA house owners would comply with promote Warner Bros. Discovery a stake within the league.

Silver mentioned final month on the SBJ Dealmakers Conference he was open to rights offers structured in novel methods.

"We're in the enviable position right now of letting the marketplace work its magic a little bit, you know, to see where the best ideas are going to come from, what's going to drive the best value," Silver mentioned.

It's additionally attainable Zaslav may stroll away from the NBA fully. While "Inside the NBA" co-host Charles Barkley not too long ago signed a 10-year contract to stick with Warner Bros. Discovery, it consists of an out clause if Zaslav doesn't re-up the NBA, in response to The New York Post.

Live sports activities aren't essentially important to most streaming companies' success. Netflix, Disney+ and HBO Max all have zero reside sports activities — a minimum of for now.

The one certainty is Zaslav's choice shall be squarely primarily based on how a deal impacts the corporate's free money flow.

"It's how much do we make on the sport?" Zaslav mentioned. "When I was at NBC, when we lost football [in 1998], we lost the promotion of the NFL, which was a huge issue. Then you have the overall asset value without the sport. So you have to evaluate all that."

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primarily based on website supplies www.cnbc.com

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