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Warner Bros. Discovery hopes to strike deal with NBA as earnings fall short of estimates amid linear TV woes

Warner Bros. Discovery (WBD) said Thursday it is “hopeful” of reaching an agreement with the NBA after a Wall Street Journal report said the company was at risk of losing the league’s media rights to competitor NBCUniversal (CMCSA).

“We have enjoyed a strong partnership with the NBA for almost four decades. We continue to talk with them and hope that we can reach an agreement that makes sense for both parties,” WBD CEO David Zaslav said on the company’s first-quarter earnings call.

The executive said the company is able to match third-party offers before the NBA enters into any deals, adding that it is prepared “for a variety of potential outcomes.” He did not want to describe in detail what stage the talks are currently at.

The comments come after the company reported first-quarter earnings that exceeded expectations on both profit and earnings fronts. Free cash flow increased on aggressive cost cutting, while the company’s linear TV business continued to decline.

Revenue came in at $9.96 billion, missing the Bloomberg consensus estimate of $10.27 billion, down 7% from the $10.70 billion reported in the first quarter of 2023. The company reported an adjusted loss per share of $0.40, compared with a loss of $0.44 in the year-earlier period.

WBD, like other legacy media companies, is struggling with an unfavorable advertising environment. Network advertising revenues fell 11% in the first quarter compared to the same period last year. The company saw network ad revenue of $1.99 billion, missing Bloomberg’s expectation of $2.01 billion.

The studios’ business has also struggled, despite high-profile films like “Dune 2.” This segment has been weakened by gaming, with “Suicide Squad: Kill the Justice League” underperforming, especially compared to last year’s release “Hogwarts Legacy.”

Segment revenue was $2.82 billion, down 13% year-over-year, excluding foreign exchange issues. That missed the estimate of $3.01 billion.

Free cash flow was a bright spot this quarter, hitting $390 million and beating the Bloomberg consensus estimate of $239 million. In the same period a year earlier, the company reported negative free cash flow of almost $1 billion.

The company’s direct-to-consumer (DTC) streaming business also performed better. It added 2 million Max subscribers this quarter, topping the Bloomberg consensus estimate of 1.25 million, as well as 1.6 million subscribers added in the first quarter of 2023.

FILE PHOTO: The Warner Bros logo is seen during the Cannes Lions International Festival of Creativity in Cannes, France, June 22, 2022. REUTERS/Eric Gaillard/File PhotoFILE PHOTO: The Warner Bros logo is seen during the Cannes Lions International Festival of Creativity in Cannes, France, June 22, 2022. REUTERS/Eric Gaillard/File Photo

The Warner Bros logo is seen during the Cannes Lions International Festival of Creativity in Cannes, France, June 22, 2022. REUTERS/Eric Gaillard/File Photo (Reuters/Reuters)

Streaming ad revenue rose to $175 million, topping Bloomberg’s estimate of $157 million and up 70% from the $103 million the company reported in the same period a year ago.

The direct-to-consumer (DTC) business also turned a profit in the quarter, posting a profit of $86 million, an improvement of $36 million year-over-year. In February, the company revealed that its direct-to-consumer streaming unit turned a profit for full-year 2023, reporting $103 million in EBITDA compared with a loss of about $2.1 billion for full-year 2022.

“Thanks to our strong start in the first quarter, I expect that we will maintain profitability in the DTC segment in 2024, despite significant launch investments,” WBD CFO Gunnar Wiedenfels said on the call. “I have full confidence that we are on track to achieve our 2025 EBITDA target of over $1 billion and our growth ambitions beyond.”

Wall Street analysts cited several unfavorable events coming in the second half of the year, which include WBD’s upcoming sports streaming partnership with Disney (DIS) and Fox (FOXA), as well as the recent launch of its Max streaming service in markets outside the United States, including Latin America and Europe.

On Wednesday, WBD and Disney said they will offer a bundle of Disney+, Hulu and Max streaming services in the U.S. starting this summer. Customers will be able to sign up for the package with or without ads on any of the three platforms.

Additionally, the company is reportedly pursuing further cost cuts and further price increases for streaming. According to Bloomberg, cost-cutting plans may include layoffs after WBD laid off 2,000 employees over the past year. The company did not respond to Yahoo Finance’s request for comment.

Aleksandra Channel is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].

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