The “Bobs” from the movie Office Space
Source: 20th Century Fox | YouTube
I hear Discovery by Warner Bros CEO David Zaslav spoke on Friday’s fourth-quarter earnings call, I couldn’t help but think of a scene in the movie “Office Space.”
An employee named Tom meets two consultants, both named Bob (together, The Bobs), who are tasked with deciding which employees in the company will be promoted or fired.
When the Bobs press Tom about what he’s doing at the company after initially not understanding, Tom bursts out, screaming“I have people skills! I’m good at getting along with people! Don’t you get that? WHAT THE HELL IS WRONG WITH YOU?”
Investors in Warner Bros. Discovery is The Bobs, CEO David Zaslav is Tom, and the disconnect he’s worked on is free cash flow.
Warner Bros. Discovery on Friday said it generated $3.3 billion in free cash flow in the fourth quarter and ended the year with $6.2 billion in free cash flow, up 86% from a year earlier. But it missed analysts’ estimates for revenue and profit, and shares fell 10%.
For more than a year, Zaslav has repeatedly told the investment community that his priority is to boost free cash flow to improve the company’s health and pay down debt. Warner Bros. Discovery has paid off $12.4 billion in debt in less than two years since it announced the merger of Discovery and WarnerMedia.
He led with that message again Friday during his company’s earnings conference call.
“Our top priority this year was to put this company on solid footing and on a path to growth, and we’ve done that,” Zaslav said. “We said we would be less than 4x leveraged, and we are. We are now at 3.9x and expect to continue to leverage into 2024. We have significantly improved the efficiency of the organization with a long runway still. We said we will generate substantial free cash flow … And we’ve exceeded our goal by $6.2 billion for the year.”
David Zaslav attends the World Premiere of ‘The Flash’ in Hollywood, Los Angeles, California, USA on June 12, 2023.
Mike Blake | Reuters
The board of directors of Warner Bros. Discovery was so intent on boosting cash that last year he changed Zaslav’s compensation to link his bonus to cash flow generation.
So why did the stock fall on Friday, now down 45% over the past 12 months?
Investors may not have liked the company’s rosy response to free cash flow generation in 2024, fearing that the positive momentum there could be short-lived.
CFO Gunnar Wiedenfels declined to provide guidance, citing the company’s unknown earnings performance with advertising market headwinds and increased content spending at Max now that the Hollywood writers’ and actors’ strikes are over.
But it’s more likely, given the stock’s consistent underperformance over the past year, that investors simply don’t care about free cash flow the way Zaslav wants them to. (Remember that Netflix has tried quite recently, and failed, to refocus investor sentiment on its preferred metrics. The stock only started to rise when Netflix returned to subscriber growth, which Netflix has tried to redirect from.)
Legacy media needs a growth narrative. Need one for the past year. Cut costs, trash movies, programming licensing at Netflix, layoffs, saving money due to strikes — these are not growth stories.
If earnings and revenue miss estimates, and if the company doesn’t add tens of millions of Max subscribers, there’s not much for shareholders to get excited about.
Boosting free cash flow and paying down debt may make Zaslav richer, but they aren’t clear catalysts for multiple expansion for a company littered with slowly dying cable networks and associated with declining advertising revenue.
Just because Zaslav wants investors to focus on free cash flow instead of metrics like streaming subscriber additions, earnings and revenue doesn’t mean they’ll listen.
Just because a worker says he is a man of the people, does not make him a man of the people, no matter how often, or how loudly, he repeats it.
BEWARE: Investors Surprised by Warner Bros. Lack of Guidance Discovery for the whole year