The “Bobs” from the film Office Space
Source: 20th Century Fox | Youtube
Hear Warner Bros. Discovery As CEO David Zaslav spoke on Friday’s fourth-quarter earnings call, I thought of a scene in the movie “Office Space.”
An employee named Tom meets with two consultants, both named Bob (collectively “The Bobs”), who have been tasked with deciding which company employees should be promoted or fired.
When the Bobs press Tom about what he does at the company after initially not understanding it, Tom snaps and shouts, “I have people skills! I’m good at dealing with people! Can’t you understand that?! WHAT THE HELL is wrong with you guys?!”
Warner Bros. Discovery’s investors are The Bobs, Chief Executive Officer David Zaslav is Tom, and the discrepancy he’s upset about is free cash flow.
Warner Bros. Discovery said Friday that it generated free cash flow of $3.3 billion in the fourth quarter and ended the year with free cash flow of $6.2 billion, which represents an increase of 86% compared to the previous year. Still, the company missed analysts’ estimates for revenue and profit and its shares fell 10%.
For more than a year, Zaslav has repeatedly told the investment community that his priority is to increase free cash flow to improve the company’s health and reduce debt. Warner Bros. Discovery has paid off $12.4 billion in debt in less than two years since announcing its Discovery-WarnerMedia merger.
He reiterated that message during his company’s earnings conference call on Friday.
“Our top priority this year was to put this company on solid footing and on a growth path, and we succeeded,” Zaslav said. “We said we would have less than four times the debt, and that is the case. We are now at 3.9 and expect to continue deleveraging in 2024. We have significantly improved the efficiency of the organization and still have a long way to go.” We said we would generate significant free cash flow. … And we exceeded our target of $6.2 billion for the year.”
David Zaslav attends the world premiere of “The Flash” on June 12, 2023 in Hollywood, Los Angeles, California, USA.
Mike Blake | Reuters
Warner Bros. Discovery’s board was so anxious to increase cash flow that it changed Zaslav’s compensation last year to tie his bonus to cash flow generation.
Why did stocks plunge on Friday and are now down 45% in the last 12 months?
Perhaps investors didn’t like the company’s vague answer about free cash flow generation in 2024, fearing that the positive momentum there might be short-lived.
Chief Financial Officer Gunnar Wiedenfels declined to provide guidance, citing the company’s unknown earnings trajectory given the vicissitudes of the advertising market and increased content spending for Max now that strikes by Hollywood writers and actors are over.
However, given the stock’s continued underperformance over the past year, it’s more likely that investors simply don’t care about free cash flow as much as Zaslav would like. (Remember, Netflix recently tried and failed to reorient investor sentiment toward its preferred metrics. Shares only began to rise when Netflix returned to subscriber growth that Netflix was trying to distract from.)
Legacy media needs a growth narrative. One was needed for last year. Cutting spending, destroying films, licensing programs to Netflix, laying off employees, cutting money due to strikes – these are not growth stories.
If earnings and revenue fall short of estimates and the company doesn’t add tens of millions of Max subscribers, there isn’t much to worry about for shareholders.
Zaslav’s argument is that his company’s balance sheet must be in good shape before growth can begin. However, it is unclear where this growth will take place. Increasing free cash flow and paying down debt may make Zaslav richer, but it’s not a clear catalyst for multiple expansion for a company struggling with dying cable networks and associated declining advertising revenue.
Just because Zaslav wants investors to focus on free cash flow instead of metrics like subscriber growth, profit and revenue for streaming services doesn’t mean they’re listening.
Just because a worker says he is a people person does not mean he is a people person, no matter how often or how loudly he repeats it.
WATCH: Investors surprised Warner Bros. Discovery doesn’t have full-year guidance
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2024-02-23 20:55:46
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