“Pop” from the movie Office Space
Source: 20th Century Fox | Youtube
When listening to the CEO of Warner Bros. Discovery's David Zaslav speaking 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 are tasked with determining which employees in the company should be promoted or fired.
When The Bobs press Tom on what he's doing at the company after they don't understand it at first, Tom snaps and screams“I have people skills! I'm good at dealing with people! Can't you understand that?! What's wrong with you guys?!”
Warner Bros. investors Discovery is the Bobs, CEO David Zaslav is Tom, and the spinoff he worked on is free cash flow.
Warner Bros. said: Discovery said Friday that it generated $3.3 billion in free cash flow during the fourth quarter and ended the year with free cash flow of $6.2 billion, up 86% from the previous year. However, it beat analysts' expectations for revenue and profits, and its 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. paid back the film. Discovery has taken on $12.4 billion in debt in less than two years since the discovery and WarnerMedia merger was announced.
He drove that message back on Friday during his company's earnings conference call.
“Our top priority this year was to put this company on a solid foundation and on a path to growth, and we did that,” Zaslav said. “We said we would be at less than four times, and we are. We are now at 3.9 times and expect to continue to deliver in 2024. We have significantly enhanced the efficiency of the organization with a long runway still to achieve.” go ahead. “We said we would achieve meaningful free cash flow… and we exceeded our target by $6.2 billion for the year.”
David Zaslav attends the world premiere of The Flash in Hollywood, Los Angeles, California, US, June 12, 2023.
Mike Blake | Reuters
It was the board of directors of Warner Bros. Discovery is very intent on raising cash I changed Zaslav's compensation last year To link his bonus to cash flow generation.
So why did stocks fall on Friday, now down 45% over the past 12 months?
Investors may not have liked the company's hesitant answer on free cash flow generation in 2024, fearing that the positive momentum there would be short-lived.
CFO Gunnar Wiedenfels declined to provide guidance, citing the company's unknown earnings performance with ad market volatility and increased content spending on Max now that Hollywood writers and actors' strikes are over.
But it's more likely, given the stock's continued poor performance in the past year, that investors simply don't care about free cash flow the way Zaslav wants them to. (Recall that Netflix recently tried, and failed, to refocus investor sentiment on its preferred metrics. Shares only started rising when Netflix returned to subscriber growth, which is what Netflix tried to redirect from.)
Legacy media needs a narrative to grow. It's one needed for the last year. Reduce spending, Garbage movies, Programming license to Netflix, laying off employees, Saving money due to strikes – these are not growth stories.
If earnings and revenue fall short of estimates, and if the company doesn't add tens of millions of Max subscribers, there won't be much for shareholders to be excited about.
Boosting free cash flow and paying down debt may make Zaslav richer, but they are not obvious catalysts for multiple expansion for a company burdened by slowly dying cable networks and associated declining advertising revenues.
Just because Zaslav wants investors to focus on free cash flow rather than metrics like streaming subscriber additions, earnings and revenue, doesn't mean they'll listen.
Just because a worker says he is one of the people does not make him one of the people, no matter how many times or how loudly he repeats it.
Watch: Investors surprised by Warner Bros.' lack of… Discovery to guide throughout the year
Don't miss these stories from CNBC PRO:
“Infuriatingly humble alcohol fanatic. Unapologetic beer practitioner. Analyst.”