The “Bobs” from the film Office Space
Source: twentieth Century Fox | YouTube
Listening to Warner Bros. Discovery Chief Executive Officer David Zaslav speak on Friday’s fourth-quarter earnings calls, I could not help but consider a scene within the movie “Office Space.”
An worker named Tom meets with two consultants, each named Bob (together, The Bobs), who’ve been tasked with deciding which employees at the corporate ought to be promoted or fired.
When The Bobs press Tom on what he does at the corporate after they don’t initially understand, Tom snaps, screaming, “I even have people skills! I’m good at coping with people! Cannot you understand that?! WHAT THE HELL IS WRONG WITH YOU PEOPLE?!”
Warner Bros. Discovery investors are The Bobs, Chief Executive Officer David Zaslav is Tom and the disconnect he’s worked up about is free cash flow.
Warner Bros. Discovery on Friday said it generated $3.3 billion in free cash flow in the course of the fourth quarter and ended the yr with $6.2 billion in free cash flow, up 86% from a yr prior. Yet it missed analyst estimates for revenue and profit, and its shares fell 10%.
For greater than yr, Zaslav has repeatedly told the investment community that his priority is to spice up free cash flow to enhance the health of the corporate and to pay down debt. Warner Bros. Discovery has paid down $12.4 billion in debt in lower than two years since announcing the merger of Discovery and WarnerMedia.
He led with that message again on Friday during his company’s earnings conference call.
“Our top priority this yr was to get this company on solid footing and on a pathway to growth, and we have done that,” Zaslav said. “We said we would be lower than four-times levered, and we’re. We’re now at 3.9 times and expect to proceed to delever in 2024. We have significantly enhanced the efficiency of the organization with an extended runway still to go. We said we were going to generate meaningful free cash flow. … And we have exceeded our goal with $6.2 billion for the yr.”
David Zaslav attends the world premiere of “The Flash”, in Hollywood, Los Angeles, California, U.S., June 12, 2023.
Mike Blake | Reuters
Warner Bros. Discovery’s board of directors has been so intent on boosting cash that it last yr modified Zaslav’s compensation to tie his bonus to cash flow generation.
So, why did the shares slump Friday, down now 45% previously 12 months?
Perhaps investors didn’t like the corporate’s wishy-washy answer on free cash flow generation in 2024, fearing the positive momentum there could possibly be short-lived.
CFO Gunnar Wiedenfels refused to offer guidance, citing the corporate’s unknown earnings performance with the vicissitudes of the promoting market and increased content spend on Max now that strikes by Hollywood writers and actors are over.
But it’s more likely, given the stock’s consistent underperformance previously yr, that investors simply don’t care about free cash flow in the best way Zaslav wants them to. (Remember, that Netflix fairly recently tried, and failed, to refocus investor sentiment onto its preferred metrics. Shares only began rising when Netflix returned to subscriber growth, from which Netflix tried to redirect.)
Legacy media needs a growth narrative. It’s needed one for the past yr. Cutting spending, trashing movies, licensing programming to Netflix, shedding employees, saving money due to strikes — these aren’t growth stories.
If earnings and revenue miss estimates, and if the corporate is not adding tens of hundreds of thousands Max subscribers, there’s not all that much for shareholders to get enthusiastic about.
Zaslav’s argument is his company’s balance sheet have to be in fine condition before growth can begin. But it’s unclear where that growth will occur. Boosting free cash flow and paying down debt may make Zaslav richer, but they don’t seem to be clear catalysts for multiple expansion for a corporation saddled with slowly dying cable networks and associated declining promoting revenue.
Simply because Zaslav wants investors to deal with free cash flow as an alternative of metrics like streaming service subscriber additions, profit and revenue doesn’t suggest they’ll listen.
Simply because a employee says he’s a people person doesn’t make him a people person, regardless of how persistently, or how loudly, he repeats it.
WATCH: Investors are surprised by Warner Bros. Discovery’s lack of full-year guidance
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