Warner Bros. Discovery (WBD) Q1 2022 earnings

David Zaslav

Anjali Sundaram | CNBC

Warner Bros. Discovery shares fell Tuesday after the company warned its 2022 profit would be lower than expected in light of a “messy” combination of assets.

Chief Financial Officer Gunnar Wiedenfels said during the company’s first earnings conference call since merging WarnerMedia and Discovery that “unexpected projects” and weaker first-quarter WarnerMedia operating profit and cash flow led to the new guidance.

“Q1 operating profit and cash flow for WarnerMedia were clearly below my expectations,” Wiedenfels said. “I currently estimate the WarnerMedia part of our profit baseline for 2022 will be around $500 million lower than what I had anticipated, however, with the positive offsets of a couple hundred million dollars on the Discovery side of the combined company.”

Shares dropped more than 6% to trade around $20 a piece in morning trading.

While Wiedenfels declined to specifically identify all of the unexpected projects, one of them is CNN+. Chief Executive Officer David Zaslav decided to pull the plug on the new WarnerMedia streaming service last week less than a month after it launched. WarnerMedia planned to spend hundreds of millions more on the service.

“Right or wrong, management has made a decision to invest a lot of the incoming funds into a number of investment initiatives,” Wiedenfels said. “As I’m looking under the hood here, again CNN+ is just one example, and I don’t want to go through a list of specific examples, but there’s a lot of chunky investments that are lacking what I would view as a solid analytical, financial foundation and meeting the ROI hurdles that I would like to see for major investments.”

Streaming strategy

The newly combined Warner Bros. Discovery, a result of the WarnerMedia-Discovery merger that closed April 8, debuts as a pure-play media company that investors can compare to Disney, Netflix and Paramount Global. Zaslav said during Tuesday’s conference call he hopes to show Wall Street the new entity’s assets, including streaming services HBO Max and Discovery+, can compete globally for market share against the biggest entertainment companies in the world.

Zaslav confirmed HBO Max and Discovery+ will be combined and offered as product “we can really drive around the world.” Zaslav noted HBO Max has had higher churn than Discovery+, and he has a plan to mitigate churn with the addition of Discovery+ and other content from WarnerMedia such as CNN programming.

“There’s meaningful churn on HBO Max — much higher than the churn we have seen,” Zaslav said. “As you begin to manage churn in a meaningful way, that provides real meaningful growth.”

Warner Bros. Discovery said it added 2 million Discovery-related streaming subscribers in the quarter for a total of 24 million. That’s consistent with the 2 million added in the fourth quarter.

Last week, AT&T said HBO and HBO Max had 76.8 million subscribers at the end of the first quarter of 2022. The announcement marked the final time WarnerMedia would be part of AT&T’s earnings report.

While Netflix said this month it plans to crack down on password sharing, Warner Bros. Discovery said it’s not a major problem for the company.

Warner Bros. Discovery reported a 13% revenue jump and consistent streaming subscriber growth for its fiscal first quarter Tuesday. The results don’t include first-quarter performance from WarnerMedia, which Discovery bought this month.

Here are the key numbers:

  • Earnings per share: 69 cents, compared with 21 cents in last year’s first quarter
  • Revenue: $3.16 billion, compared with $2.79 billion in last year’s first quarter
  • Discovery streaming customers: 24 million, up 2 million from the prior quarter

WATCH: Why CNN+ is shutting down

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