Warner Bros. Discovery took a $9.1 billion non-cash goodwill impairment charge for its linear television networking unit in the second quarter, acknowledging a sharp change in the value of its linear business, which continues to shrink amid broader declines in the pay-TV industry.

“It is fair to say that market valuations and conditions for traditional media companies were very different just two years ago than they are today. This impairment reflects that and better aligns our book values ​​with our future prospects,” WBD CEO David Zaslav said Wednesday during the company’s second-quarter earnings conference call.

Gunnar Wiedenfels, WBD’s chief financial officer, noted that the company regularly monitors the value and use of its assets and cited a number of events in the second quarter, “including the difference between our current market capitalization and the book value of the company, the continued weakness of the US advertising market and the uncertainty surrounding the renewal of partner and sports rights (including the NBA)” that “forced us to adjust our planning assumptions” and take the impairment charge at the expense of the Network segment.

Nevertheless, the CEO emphasized that the focus will be on expanding the studio and direct-to-consumer streaming business.

“While I by no means deny the magnitude of this impairment, I think it is equally important to recognize that the flip side of this reflects the shift in value across all business models and that our conviction and confidence in the growth and value creation opportunities in the studios and in our global direct sales business have never been stronger,” Wiedenfels said.

Due to the impairment, WBD reported a net loss of $10 billion for the quarter. Total second quarter revenue of $9.7 billion was a 5% decrease year over year. Quarterly adjusted EBITDA of $1.8 billion was a 15% decrease year over year.

The linear TV networks segment, which includes broadcasters such as Discovery, TNT Sports, HGTV, Food Network, TLC, TruTV, TBS and others, saw total revenue decline 8% year-over-year to $5.3 billion as both distribution revenue and advertising revenue declined. The studio segment reported revenue of $2.4 billion, down 4% year-over-year. And direct-to-consumer revenue of $2.6 billion declined 5% compared to Q2 2023, despite the launch of European Max, which helped DTC add 3.6 million net subscribers worldwide in the quarter. The company saw gains in DTC advertising revenue, reaching $240 million during the period, which it attributed to higher domestic Max engagement and subscriber growth at its advertising tier. DTC profitability also saw a reversal, with the segment’s adjusted EBITDA turning to a loss of $107 million, after reporting an increase in adjusted DTC EBITDA of $86 million in the first quarter, compared to a loss of $3 million in the second quarter of 2023.

On the subscriber side, WBD lost 300,000 domestic (US and Canada) DTC subscribers compared to Q1 to a base of 52.4 million, but saw launch success in Europe, following the launch of Max in Latin America in Q1. Internationally, DTC Warner Bros Discovery gained 3.9 subscribers in Q2 to a base of 50.8 million, helping to bring its total global subscribers to 103.3 million by the end of June.

Going forward, the company expects the lion’s share of subscribers to come from international markets, but expects monetization growth across all regions, with the U.S. still offering the greatest growth potential in the short term, according to Wiedenfels.

WBD recently increased the price of its ad-free Max plans in the U.S., and the CFO said attrition was “better than expected” in July as the increase took effect among domestic subscribers. And while the first half of the year was heavily impacted by investments to support the Max launch in Latin America and Europe, with those launches now behind us, the company expects a shift toward DTC EBITDA profitability in the second half, supported by improved subscriber-related revenue trends and more momentum in the content lineup.

“I expect the D2C segment to be well profitable throughout the year and to see a strong increase in the second half of the year, which will represent a significant step toward our EBITDA target of at least one billion dollars for 2025,” said Wiedenfels.

Internationally, WBD has gotten a boost for Max as European launches, including in France and Belgium, were deliberately placed in the middle of the second quarter and ahead of the 2024 Paris Olympics, which began in July after the end of the second quarter, with Max and discovery+ serving as exclusive platforms for comprehensive coverage of the Games. In addition to streaming services, WBD is broadcasting the Olympics on linear television and online through its Eurosport channels in 47 markets and 20 different languages. Across multiplatform distribution, Zaslav said, more than 141 million people watched the Olympics across different channels and platforms.

“We deliberately planned the launch of Max in Europe so that we could take advantage of the attention surrounding the Olympic Games. It was hard work that paid off,” Zaslav said in the conference call.

Max is currently available in 65 international markets, with plans to continue rolling out over the next 18 to 24 months, including in key streaming markets Australia, Japan, the UK, Germany and Italy.

Linear erosion overshadows DTC and studio assets

Still, the outlook for WBD’s linear networks is not necessarily rosy, as the company now also has to contend with the potential loss of NBA rights beginning with the 2025-2026 season.

The company filed suit against the NBA after the NBA rejected its offer in favor of one from Amazon Prime Video under new contracts that run through 2036. WBD’s TNT Sports was a longtime NBA rights holder, the loss of which is seen by some as a potentially major blow to its linear networks and streaming services, and could potentially damage its position on the upcoming sports streaming service Venu, which is set to launch this fall as part of a joint venture with Fox and Disney.

In his opening remarks, Wiedenfels discussed significant investments, difficult tasks and the multi-year journey, including on the DTC side and since the creation of the combined company through the merger in 2022. He said, “It finally feels like we are starting to reap the fruits of that labor, both operationally and financially.”

However, not everyone is convinced, including the analysts at Wolfe Research.

The investment research firm expressed concern in a note Thursday that EBITDA could peak in 2023. This follows weaker second-quarter results combined with a cautious outlook as WBD’s linear decline rate continues to outpace growth in the studio and DTC businesses and executives have no clear forecast on when this trend might change.

“Without visibility into EBITDA stabilization, Warner’s $40 billion in gross debt versus $9 billion in EBITDA looks problematic, with ~85% tied to ~$1 billion/year linear shrinkage,” wrote Wolfe analyst Peter Supino.

And the company believes that WBD is unlikely to seek to spin off certain assets due to operational and legal concerns, “leaving the company with limited viable options to save profitability.”

“Studio, Max and CNN’s assets are dwarfed by the collapse of the linear business, while a potential acquisition would face antitrust scrutiny and lack urgency among potential buyers,” Supino wrote.

Wolfe Research sees WBD on the right long-term path, which it sees as the next best option to bundling Max, increasing DTC scale and shifting viewership from linear to streaming. But with streaming unable to make up for declines in linear, which historically brought in lucrative affiliate and broadcast fees, the analysts noted that the transition “looks lengthy and challenging, especially without the NBA and all the major affiliate renewals coming up in 2025.”