Warner Bros. Discovery is hyping free cash flow. Investors don’t appear to be buying it

Listening
to


Warner
Bros.
Discovery
Chief
Executive
Officer
David
Zaslav
speak
on
Friday’s
fourth-quarter
earnings
calls,
I
couldn’t
help
but
think
of
a
scene
in
the
movie
“Office
Space.”

An
employee
named
Tom
meets
with
two
consultants,
both
named
Bob
(together,
The
Bobs),
who
have
been
tasked
with
deciding
which
employees
at
the
company
should
be
promoted
or
fired.

When
The
Bobs
press
Tom
on
what
he
does
at
the
company
after
they
don’t
initially
understand,

Tom
snaps,
screaming,
“I
have
people
skills!
I
am
good
at
dealing
with
people!
Can’t
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
during
the
fourth
quarter
and
ended
the
year
with
$6.2
billion
in
free
cash
flow,
up
86%
from
a
year
prior.
Yet
it

missed
analyst
estimates
for
revenue
and
profit,
and
its
shares
fell
10%.

For
more
than
year,
Zaslav
has

repeatedly
told
the
investment
community
that
his
priority
is
to
boost
free
cash
flow
to
improve
the
health
of
the
company
and
to
pay
down
debt.
Warner
Bros.
Discovery
has
paid
down
$12.4
billion
in
debt
in
less
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
year
was
to
get
this
company
on
solid
footing
and
on
a
pathway
to
growth,
and
we’ve
done
that,”
Zaslav
said.
“We
said
we’d
be
less
than
four-times
levered,
and
we
are.
We’re
now
at
3.9
times
and
expect
to
continue
to
delever
in
2024.
We’ve
significantly
enhanced
the
efficiency
of
the
organization
with
a
long
runway
still
to
go.
We
said
we
were
going
to
generate
meaningful
free
cash
flow.
…
And
we’ve
exceeded
our
goal
with
$6.2
billion
for
the
year.”

Warner
Bros.
Discovery’s
board
of
directors
has
been
so
intent
on
boosting
cash
that

it
last
year
changed
Zaslav’s
compensation
to
tie
his
bonus
to
cash
flow
generation.

So,
why
did
the
shares
slump
Friday,
down
now
45%
in
the
past
12
months?

Perhaps
investors
didn’t
like
the
company’s
wishy-washy
answer
on
free
cash
flow
generation
in
2024,
fearing
the
positive
momentum
there
could
be
short-lived.

CFO
Gunnar
Wiedenfels

refused
to
give
guidance,
citing
the
company’s
unknown
earnings
performance
with
the
vicissitudes
of
the
advertising
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
in
the
past
year,
that
investors
simply
don’t
care
about
free
cash
flow
in
the
way
Zaslav
wants
them
to.
(Remember,
that
Netflix
fairly
recently

tried,
and
failed,
to
refocus
investor
sentiment
onto
its
preferred
metrics.
Shares
only
started
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
year.

Cutting
spending,

trashing
films,

licensing
programming
to
Netflix,

laying
off
employees,
saving
money
because
of
strikes
—
these
aren’t
growth
stories.

If
earnings
and
revenue
miss
estimates,
and
if
the
company
isn’t
adding
tens
of
millions
Max
subscribers,
there’s
not
all
that
much
for
shareholders
to
get
excited
about.

Zaslav’s
argument
is
his
company’s
balance
sheet
must
be
in
good
shape
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’re
not
clear
catalysts
for
multiple
expansion
for
a
company
saddled
with
slowly
dying
cable
networks
and
associated
declining
advertising
revenue.

Just
because
Zaslav
wants
investors
to
focus
on
free
cash
flow
instead
of
metrics
like
streaming
service
subscriber
additions,
profit
and
revenue
doesn’t
mean
they’ll
listen.

Just
because
a
worker
says
he’s
a
people
person
doesn’t
make
him
a
people
person,
no
matter
how
many
times,
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: