WarnerMedia earnings fall on higher content, marketing costs; Discovery deal seen closing in Q2

Telecom giant AT&T on Wednesday reported its fourth-quarter financials, with entertainment unit WarnerMedia posting higher revenue, but lower earnings on increased costs, including for programming and marketing.

AT&T also updated its guidance on the timing of the expected close of the WarnerMedia merger with Discovery. After previously saying the deal would wrap up mid-year 2022, “the company now expects to close in the second quarter.”

During an analyst call, AT&T CEO John Stankey touted growth prospects at HBO Max, where the streamer added 13.1 million subscribers in 2021 and currently has a base of 73.8 million subscribers worldwide. “WarnerMedia is well positioned as a dynamic global business,” he told a morning conference call.

AT&T earlier said that HBO Max and HBO would reach between 120 million and 150 million on a combined basis by the end of 2025, up from a previous forecast of between 75 million and 90 million.

Stankey added AT&T was “encouraged with how the process for the WarnerMedia deal is progressing,” as he looked ahead to the transaction closing in the second quarter, or in the three months to the end of June. “Coming off an outstanding year with HBO Max growth, we expect to hand off the business with a strong exit velocity,” he said of the WarnerMedia division overall.

The earnings report didn’t provide an update on the number of subscribers for WarnerMedia’s streaming service HBO Max and HBO, but the company did detail that this included 46.8 million U.S. subscribers, an increase of 5.3 million for all of 2021. Beyond sharing the split between domestic and international customers, it also disclosed that domestic average revenue per user amounted to $11.15 per month.

On Wednesday, Stankey said WarnerMedia and Discovery were moving through the regulatory review process of their planned merger without significant hurdles. “All that is going right to pattern, as we expected, and we don’t see anything that causes concern,” he insisted as AT&T makes “final preparations” to completing the deal.

The AT&T boss also said his company had yet to decide on whether its 71 percent stake in Discovery will be spun-off or split-off after the deal to create WarnerMedia Discovery is completed, as the standalone telecom giant focuses on broadband.

“There are pros and cons to going either with a spin or split … We need to be very thoughtful about what we started with, which is our watchword around this transaction, which was we want the shareholders to get value out of this,” he told analysts.

The merger of WarnerMedia with Discovery, unveiled in May 2021, will create a new global media powerhouse, with the combined firm to be led by Discovery CEO David Zaslav, who will move to Los Angeles.

After a flurry of deal-making by AT&T as it looks to unwind its video business to focus on its core telecom business, Stankey told analysts that, despite his company retaining a 70 percent stake in a standalone DirecTV after it was spun off in a deal backed by private equity firm TPG, the satellite TV firm will not occupy his executive suite.

“The management team is not going to distracted with having to work through additional work on restructuring the asset base of the company in the near term … If that entity decided there was value to create to restructure their business in some way, it is a distinctive group of individuals that would be involved in doing that,” Stankey said.

He also defended AT&T’s decision to end the Amazon distribution deal for HBO Max that removed subscribers from the Amazon channel platform and aimed to bring them back to the WarnerMedia fold where they can be directly controlled. “There are a lot of entities out there growing ‘direct to consumer’ customers that are behind the screen of the Amazon marketplace, that really are Amazon’s direct to consumer customers,” Stankey argued.

During the latest quarter at WarnerMedia, fourth-quarter operating income fell 38 percent to $1.58 billion, even though quarterly revenue rose 15.4 percent to $9.9 billion, “reflecting the partial recovery from prior-year impacts of the pandemic.” The company cited “higher content and other revenues and subscription revenues, partially offset by lower advertising revenues.” The Warner film unit’s film releases in the final quarter of 2021 included Dune and The Matrix Resurrections.

Advertising revenues fell amid “lower audiences and unfavorable comparisons to the prior-year political environment,” the company said.

WarnerMedia’s overall operating expenses jumped 38.0 percent in the latest quarter to $8.3 billion, “driven by higher film and programming costs, increased marketing and incremental selling costs associated with DirecTV advertising revenue sharing arrangements.” Direct costs supporting direct-to-consumer revenues amounted to $2.3 billion in the fourth quarter, versus $1.6 billion in the year-ago quarter. The Hollywood Reporter