Warner Bros. Discovery overstates free cash flow. Investors don't believe it

Hear Warner Bros. Discovery CEO David Zaslav spoke on Friday's fourth-quarter earnings conference calls. I couldn't help but think of a scene from 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 company employees should be promoted or fired.

When the Bobs press Tom about what he does at the company after initially not understanding it, Tom explodes and yells, “I have people skills! I'm good at dealing with people! Can't you understand that?! WHAT?” HELL IS IT WRONG WITH YOU?!”

Warner Bros. Discovery's investors are The Bobs, CEO David Zaslav is Tom, and the disconnect he's worried about is free cash flow.

Warner Bros. Discovery said Friday that 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 earlier. However, it missed analyst estimates for revenue and earnings, and the stock fell 10%.

For more than a year, Zaslav has repeatedly told the investment community that his priority is to increase free cash flow to improve the health of the company and pay down debt. Warner Bros. Discovery has paid off $12.4 billion in debt in less than two years since announcing the merger of Discovery and WarnerMedia.

He delivered that message again Friday during his company's earnings conference call.

“Our top priority this year was to get this company on a solid footing and growth path, and we have done that,” Zaslav said. “We said we would be less than 4x leveraged, and we are. We are now at 3.9x and expect to continue deleveraging in 2024. We have significantly improved the efficiency of the organization with a long way to go.” “It's left to go. We said we were going to generate significant free cash flow… And we've surpassed our goal with $6.2 billion for the year.”

Warner Bros. Discovery's board has been so determined to grow cash that it changed Zaslav's compensation last year to tie his bonus to cash flow generation.

So why did the stock plummet on Friday, down as much as 45% in the past 12 months?

Perhaps investors didn't like the company's hesitant response to free cash flow generation in 2024, fearing that the positive momentum there could be short-lived.

Chief Financial Officer Gunnar Wiedenfels declined to provide guidance, citing the company's unknown earnings performance with the vicissitudes of the advertising market and increased content spending at Max now that Hollywood writers' and actors' strikes have ended.

But it's more likely, given the stock's consistent underperformance over the past year, that investors simply don't care about free cash flow in the way Zaslav wants them to. (Remember that Netflix recently tried, unsuccessfully, to reorient investor sentiment toward its preferred metrics. The stock only began to rise when Netflix returned to subscriber growth, which Netflix attempted to redirect from.)

Traditional media needs a growth narrative. Needed one for last year. Cutting expenses, trashing movies, licensing programming to Netflix, laying off employees, saving money through strikes are not growth stories.

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

Boosting free cash flow and paying down debt may enrich Zaslav, but they are not clear catalysts for multiple expansion for a company burdened with slowly dying cable networks and resulting declining advertising revenue.

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 they are a people person does not make them a people person, no matter how many times or out loud they repeat it.

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