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 do not initially understand, Tom snaps, screaming, “I actually 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 money flow.
Warner Bros. Discovery on Friday said it generated $3.3 billion in free money flow throughout the fourth quarter and ended the 12 months with $6.2 billion in free money flow, up 86% from a 12 months prior. Yet it missed analyst estimates for revenue and profit, and its shares fell 10%.
For greater than 12 months, Zaslav has repeatedly told the investment community that his priority is to spice up free money 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 12 months 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 money flow. … And we have exceeded our goal with $6.2 billion for the 12 months.”
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 money that it last 12 months modified Zaslav’s compensation to tie his bonus to money flow generation.
So, why did the shares slump Friday, down now 45% up to now 12 months?
Perhaps investors didn’t like the corporate’s wishy-washy answer on free money flow generation in 2024, fearing the positive momentum there might 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 surely’s more likely, given the stock’s consistent underperformance up to now 12 months, that investors simply don’t care about free money flow in the way in which 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 12 months. 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 tens of millions 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 good condition before growth can begin. But it surely’s unclear where that growth will occur. Boosting free money flow and paying down debt may make Zaslav richer, but they don’t seem to be clear catalysts for multiple expansion for an organization saddled with slowly dying cable networks and associated declining promoting revenue.
Simply because Zaslav wants investors to deal with free money flow as a substitute 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, irrespective of how over and over, or how loudly, he repeats it.
WATCH: Investors are surprised by Warner Bros. Discovery’s lack of full-year guidance
Don’t miss these stories from CNBC PRO: