Global entertainment and media company Warner Bros. Discovery (NASDAQ:WBD) fell short of analysts' expectations in Q2 CY2024, with revenue down 6.2% year on year to $9.71 billion. It made a GAAP loss of $4.07 per share, down from its loss of $0.51 per share in the same quarter last year.
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Warner Bros. Discovery (WBD) Q2 CY2024 Highlights:
- Revenue: $9.71 billion vs analyst estimates of $10.07 billion (3.6% miss)
- EPS: -$4.07 vs analyst estimates of -$0.19 (-$3.88 miss)
- Gross Margin (GAAP): 36.1%, in line with the same quarter last year
- EBITDA Margin: -1.1%, down from 20.7% in the same quarter last year
- Free Cash Flow of $976 million, up 150% from the previous quarter
- Market Capitalization: $18.55 billion
Formed from the merger of WarnerMedia and Discovery, Warner Bros. Discovery (NASDAQ:WBD) is a multinational media and entertainment company, offering television networks, streaming services, and film and television production.
Media
The advent of the internet changed how shows, films, music, and overall information flow. As a result, many media companies now face secular headwinds as attention shifts online. Some have made concerted efforts to adapt by introducing digital subscriptions, podcasts, and streaming platforms. Time will tell if their strategies succeed and which companies will emerge as the long-term winners.
Sales Growth
A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one tends to grow for years. Luckily, Warner Bros. Discovery's sales grew at an exceptional 29.4% compounded annual growth rate over the last five years. This shows it expanded quickly, a useful starting point for our analysis. 
We at StockStory place the most emphasis on long-term growth, but within consumer discretionary, a stretched historical view may miss a company riding a successful new product or emerging trend. Warner Bros. Discovery's recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.5% over the last two years.
Warner Bros. Discovery also breaks out the revenue for its three most important segments: Distribution, Advertising, and Content, which are 50.2%, 25%, and 21.7% of revenue. Over the last two years, Warner Bros. Discovery's revenues in all three segments declined. Its Distribution revenue (licensing fees) averaged year-on-year decreases of 2.8% while its Advertising (marketing services) and Content (films, streaming, games) revenues averaged drops of 11.1% and 9.6%.
This quarter, Warner Bros. Discovery missed Wall Street's estimates and reported a rather uninspiring 6.2% year-on-year revenue decline, generating $9.71 billion of revenue. Looking ahead, Wall Street expects sales to grow 2.8% over the next 12 months, an acceleration from this quarter.
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Cash Is King
Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can't use accounting profits to pay the bills.
Warner Bros. Discovery has shown decent cash profitability, giving it some flexibility to reinvest or return capital to investors. The company's free cash flow margin averaged 12% over the last two years, slightly better than the broader consumer discretionary sector.
Warner Bros. Discovery's free cash flow clocked in at $976 million in Q2, equivalent to a 10% margin. The company's cash profitability regressed as it was 6.6 percentage points lower than in the same quarter last year, prompting us to pay closer attention. Short-term fluctuations typically aren't a big deal because investment needs can be seasonal, but we'll be watching to see if the trend extrapolates into future quarters.
Over the next year, analysts predict Warner Bros. Discovery's cash conversion will fall. Their consensus estimates imply its free cash flow margin of 16.9% for the last 12 months will decrease to 13.5%.
Key Takeaways from Warner Bros. Discovery's Q2 Results
We struggled to find many strong positives in these results. Its EPS missed and its revenue fell short of Wall Street's estimates. We note its operating margin was severely negative because of a one-time impairment charge. Overall, this was a weaker quarter for Warner Bros. Discovery. The stock traded down 9.3% to $7 immediately after reporting.
Warner Bros. Discovery may have had a tough quarter, but does that actually create an opportunity to invest right now? When making that decision, it's important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it's free.