Warner Bros. Sales Fall on Loss of NBA, Weak Film Slate

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0:47Scarlet Fu:Bloomberg Audio Studios. Podcasts, radio, news. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business app. Listen on demand wherever you get your podcasts or watch us live on YouTube. We are in earnings season, and right now the big media companies are taking their turn publishing their latest results. Warner Brothers coming out with numbers. The sales declined after it lost the NBA rights, but I don't know that it matters that much given that this is a company being absorbed by Paramount eventually.

1:27Scarlet Fu:Potentially, yes. Right now, that's kind of on hold, but the thinking is that it will be. Fox also came out with the results. The World Cup was certainly a good thing for that company. Let's bring in Geetha Ranganathan. She is our analyst on U.S. media, joining us from Princeton. Geetha, of the results that came out, what gets your attention? Yeah, I mean, you pointed out Warner Brothers Discovery. Yes, you know, the earnings, as you said, Scarlett, and rightly so, is definitely the sideshow for the moment. But I think, you know, Things could change very quickly, and it could be the main piece here because we're really looking at a company, and I think everybody now is kind of thinking of what happens if the Paramount Skydance deal falls through.

2:09And we know that the merger agreement terminates on June 4th of 2027, and if Paramount Skydance can't get its act together and can't settle out of court, there's a very high probability that they actually lose this trial, and then they are in really bad shape. But Warner Brothers Discovery actually is doing a lot to improve its fundamentals. We saw some pretty decent results, at least on the streaming side of the business, as well as, you know, on the TV network side. Yes, the loss of the NBA definitely hurt them, but it also helped them on the expense side because, you know, the EBITDA declines that we saw.

2:42We were seeing something like, you know, 25, 30 percent EBITDA declines last year. Those really moderated now to around four to five percent. So there was some good news there as well. And then, as you pointed out for Fox, of course, huge quarter there with advertising. But again, the bigger story for Fox is also its pending deal for Roku. So a lot of M &A stuff kind of overshadowing the fundamentals here. And I saw that Fox said they're not going to reopen the NFL negotiations until, you know, towards the end of the 2029 season. And I know there was some pressure maybe to do something sooner because the NFL knows that they can get a big increase in rights.

3:18What's what's the status there? Yeah. So, you know, this was always a huge, huge downside risk for Fox, Paul. So I think, you know, just by them kind of, you know, kicking the can down the road, it's a huge sigh of relief, I think, for investors, because Fox was very, very heavily exposed to the NFL. You know, we ran some numbers and we thought that if the NFL actually did manage to secure a big rights increase, that would pressure Fox EBITDA by about 30 to 40 percent almost just because of the exposure. So this definitely really helps kind of the investment case and gives them a lot of breathing time, if you will, to figure out everything with Roku.

3:58Scarlet Fu:You know, we talk a lot with Randall Williams. He's our business of sports reporter about the possibility of a strike for the MLB season at some point because of the discussion on some kind of salary cap. If that happens, Geeta, who's most exposed? Who among the big media companies will be most exposed? And is it as bad as we think it is? Because, I mean, the MLB is not the NFL. There are so many games that the MLB plays as opposed to, you know, just the limited number of games for the NFL. Yeah, there's definitely, you know, some overhang, Scarlett, but as you pointed out, not a whole lot of exposure from the national side.

4:34On the national TV rights side, remember, the MLB has a lot more local TV rights exposure. You know, it used to be the case with the RSNs. Of course, that business has been in secular decline. But yeah, some exposure definitely for Warner Brothers discovery with the Turner Networks for Fox. But I think all of it can be mitigated with, you know, the presence of other sports programming. Did Warner Brothers with this earnings release, did they comment on the pending deal with Paramount? Did they give you any color as to how this might play out? I mean, it was all just really boilerplate commentary.

5:09They said, you know, that they are hopeful that the deal closes. But, you know, I think at the same time, they do very much realize that, you know, things could go south. And I think David Zaslav is definitely prepared for that contingency. Remember, Paul, if if the deal doesn't go through next June, they do collect a nice big fat check for seven billion dollars, apart from, of course, the six hundred and fifty million dollar ticking fee that goes into effect on October 1st.

5:35Scarlet Fu:Right. And that would be Paramount Skydance paying for it. And, you know, a lot of that backed by Larry Ellison when it comes down to it. We did hear, though, that the U.K. regulators have approved the Paramount Warner Brothers deal. Does that move the needle at all, Geetha, or is it just checking the box? Not at all, Scarlett. Really, the biggest thing right now for the Warner Brothers and the Paramount deal are the, you know, the 12 state AGs who have filed a motion to basically block this merger. And it looks like the judge, everything seems to be kind of favoring the courts right now. So Paramount is really in a difficult situation at this point.

6:15I've been trying to read up on this, but is there any type of out-of-court settlement that Paramount could get that would still preserve the merits of the deal while satisfying these states? Yeah, it's really a double-edged sword. So if we listen to Rob Bonta, who is the AG in California, he really seems to not be favoring a settlement. Structural remedies are always possible, Paul. But then as you pointed out, does that then get Paramount the$6 billion in synergies that they promised? It's really going to be a very, very tough road. Obviously, Paramount doesn't want to give up any of its assets.

6:55They want to get away with as few structural remedies as possible, but they might have to actually end up selling a big portion of the TV network's business or maybe even some of the studio assets.

7:07Scarlet Fu:So Geetha, operationally then, Warner Brothers, Discovery, Paramount, Skydance have to continue to move forward as independent companies, right? Like they can't really, can they do a lot in terms of, you know, looking at operations and seeing where their synergies or they just have to continue as is? Yeah, so they are continuing as is. And actually, ironically, they both are doing kind of okay, just kind of given the situation. So Paramount, what we saw in their results was they actually posted pretty strong profits. And a lot of that was driven by the synergies with the Skydance transactions.

7:40So what we saw and what really, I think, surprised even the street was that if you looked at the TV network business, we've seen margins of about 25%. Just with all of those synergies in the business, they kind of took that up to almost 35%. So there's obviously a lot of cost savings to be extracted, which is really what the street is banking on with the whole Warner Brothers discovery transaction since they've outlined about$6 billion in cost savings On the Warner Brothers side as well, we saw again, they're managing the decline in the TV networks business pretty well. Streaming has been an absolute standout, Scarlett.

8:11They've really, really made fantastic progress when it comes to profitability. They posted margins of about 17%. And remember, their long-term target is 20%. So they're really in pretty good shape. The studio is a little bit of an up and down, but we do have a pretty exciting lineup. I mean, we have Dune coming a little bit later this year. And then, of course, The Digger with Tom Cruise, which is expected to do really well. So that'll be interesting.

9:02Scarlet Fu:website. So they basically simulate online shopping without the cost. The food one cracks me up. So you can buy items, but they're never going to arrive. Yeah, it wants you to feel good. You just want to fill that cart. Yeah, fill the cart. It makes you feel good. Does it? The Bloomberg This Weekend Podcast. Subscribe today on Apple, Spotify, or wherever you listen. You're listening to the Bloomberg Intelligence Podcast. Catch us live weekdays at 10 a.m. Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube.

9:40Let's get back to the tech space because why not? You can't stay away from tech very long because that's what's driving the bus here. I noticed at Google, which some people call Alphabet, they've had some changes in some of their AI management ranks. I was told by a guest from Franklin Templeton who does a lot of this tech investing, don't worry it's okay he's not going to be wandering far but i want to talk to mandeep singh because he knows all the tech stuff yes he does intelligence mandeep um we had some looks like some management changes at the all-important ai business within alphabet tell us what's going on there and whether investors should be concerned yeah these are a couple of high profile departures after, you know, recently, I believe four weeks back, there were a couple of other names that had departed.

10:33One went to OpenAI. So the fact that Google is losing talent, I mean, these are people who have been there for very long. It's definitely not a good sign, if you ask me. And plus, their model release has been delayed. So the Gemini 3.5 version model, Pro 1, has been delayed. And from what we have gathered, the Gemini 4 is most likely going to get delayed. So this is a race about the models. And if you are not releasing a frontier model and Anthropic and OpenAI keep creating all the news about how their models can hack, you know, any system out there, that's definitely feels like, you know, Google is missing at least the model lead right now.

11:21And it could change. But to my mind, this is not a positive. And I think the stock reflected that sentiment.

11:30Scarlet Fu:So we hear that they're going to really centralize their leadership to California. That kind of is the seat of everything, even though we know that is it Larry Page or Sergey Brin, who's been moving to outside of California, Florida or I don't know, Nevada, Nevada. Yeah, he went to Rino. Yeah, yeah, exactly. Incline Village, which is basically California, but just across the border. What does that say about California as the center of tech talent and how whatever efforts you want to make to try to decentralize that, to spread it out to other places, maybe lower cost places? It's kind of a fool's errand, isn't it?

12:08Yeah. And look, right now, it feels like Entropic and OpenAI are getting the big names when it comes to the folks who are actually training these models and the scaling laws that are driving all the development. So from that perspective, I mean, Google is still a pretty large firm and they've got folks all over. But there was a time when Google and Meta used to be the magnet for the top talent. It feels like right now it's anthropic and open AI. And the departures kind of suggest that, I mean, even though Google has a lot going for them in terms of infrastructure, the TPUs, and all those are positives.

12:55But when it comes to the model race, I mean, that's why Mark Zuckerberg spent millions to form that super intelligence unit with 50 people, but 50 of the smartest people. And still, Meta doesn't have a model that is comparable to the Frontier Labs. So it is a very hard problem to solve in terms of catching up to the frontier. And I feel once you slip, it will get hard.

13:20Scarlet Fu:So just a follow up on that. If you don't come out with the frontier model and you have this talent, is it just a matter of time before that talent then goes to OpenAI Anthropic out of frustration that they're not making more concrete progress? I mean, it sounds like, especially with Jeff Dean and a couple of guys that left, you know, this week, there was an element of frustration. And that's been the case with Google since the ChatGPT days. They invented the transformer. Why weren't they the first ones to release a product? So it keeps coming back with this management team. It's like, you're not releasing new products fast enough.

13:57And yes, they have to defend that search business, which is the cash cow, which is what feeds everything. So I can see both sides. But when it comes to talent, they'll go to the place where they see, you know, a lot happening in terms of new products, model development. And so maybe Google is being conservative on the model side for a good reason. They have to defend search. I think what we're all coming to appreciate more is this stuff's expensive to do this stuff. And now and Google's out today with a twenty five billion dollar bond. Yeah, they can raise capital with the snap of the fingers.

14:31How about like the Anthropics and OpenAI? I mean, at some point, they got to start hitting the capital markets, I would think. I mean, the interesting anecdote here is a lot of Google's cloud revenue comes from Anthropic running their workloads on Google. In fact, Anthropics models are even trained on Google TPUs. So Google is the infrastructure provider for Anthropic, but at the same time, they are competing at the model there. So it is kind of quite intertwined when you think about this race and it's very concentrated. But I don't think Google cares about it being expensive. Yeah.

15:10Scarlet Fu:Before we let you go, there was a viewer, I should say a listener question for you today. Yeah. It has to do with advanced micro devices, which is higher today by about 1.8 percent, but it did plunge about 7 percent after its latest set of results. How come AMD stock fell flat when reported earnings after the market closed on Tuesday. What's your read on those results and why investors reacted negatively? I mean, right now, when we hear about how supply constrained the market is and, you know, we keep seeing with Nvidia's numbers every time they report, they just beat and raise in a big way. With AMD, we didn't see that big beat and raise.

15:49and that's how the whisper numbers are always higher. You see the reaction with Sandus today, the stock is down. They had a phenomenal growth quarter. So that's where, you know, expectations and even the consensus numbers are much lower when you compare to what the companies are measured against. And Indy had a good quarter, but then it wasn't something to wow, you know, and have that snap positive reaction.

16:15Scarlet Fu:Stay with us. More from Bloomberg Intelligence coming up after this. I'm Matt Miller. And I'm Hannah Elliott, inviting you to join us for the Bloomberg Hot Pursuit podcast. Every week, we bring you news and industry insight on everything cars. And we do a whole lot more than just talk about cars, Matt. We actually get behind the wheel of basically every latest model, especially the luxury ones and the sports cars, direct from the showroom floor. It really is remarkable how many cars we have access to. I feel a little bit guilty about it. but everything from$40 ,000 EVs to exotic half-million-dollar supercars.

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17:27Scarlet Fu:Eastern on Apple CarPlay and Android Auto with the Bloomberg Business App. Listen on demand wherever you get your podcasts or watch us live on YouTube. Hertz Global, they put out some numbers that beat Wall Street's estimates six flags. Their shares are down as the water park operator reported. revenue for the quarter that missed estimates. Let's break it down with Jody Lurie. She's a senior credit analyst at Bloomberg Intelligence. She follows all these leisure companies. Jody, let's first start with Hertz, because I am a gold member at Hertz Global. I'm proud of it. I'm proud of it, yes. What's going on at Hertz, Jody?

18:03I mean, those are the priorities, Paul. So the thing that's interesting about Hertz is that But they were very optimistic on their call. They talked about franchising as the next new endeavor, next big thing, how it was going to really help the company sort of get better margins and be similar to how the hotels do franchising or asset-like models. But what's so interesting about it is when you set the bar so low on a company, it's very easy to beat expectations. We, a few weeks ago, wrote a few pieces on the company that were less positive in terms of just the path forward to liquidity and to the ability to sort of execute on this turnaround that they're doing.

18:52Scarlet Fu:So talk a little bit about the unusual way that they're going to achieve this turnaround because they had a debt raise, but they also sold shares that allow people to short it. I didn't quite understand it, but bottom line, they needed money. Right, Scarlett. It was not the most attractive of situations. It basically pushed unsecured holders down further in the capital structure. And it's a convertible note that is senior and then also had that ability that people could hedge or they could short it. They weren't actually receiving any of the proceeds from issuing additional shares. They only received a nominal amount of money from the banks that did the offering.

19:39And so that was that was one of those situations that you kind of scratch your head and you say, OK, about a year ago, the company's equity actually did really well because you had a few activists involved in the company. And at that time, they could have, in theory, issued equity and gotten some money for it. Here they are doing it for free. Now, what's sort of interesting about Hertz is that they've done a few senior convertible bond offerings over the past year and a half to years. And the capital structure is just ugly. It's not one that makes you write home to mom about. So I'm looking at the capital structure, and it's definitely ugly.

20:17And there's really no cash flow, no EBITDA here. They used to crank out$3,$4 billion of EBITDA per year. Now it's just a couple hundred. What happened? What didn't happen, Paul? So in 2022, we sort of said that 2022 was the best it was going to be for both Hertz and Avis. And they hit peaks in terms of EBITDA generation. And that was a combination of coming off of the pandemic, of people revenge spending, of them being able to access, use vehicles at such a rate that was more attractive. And and and also they had significantly reduced their fleets at an attractive rate. And Hertz had come back from our structuring.

21:01Now, after 2022, they both said, oh, let's give some money back to shareholders by way of buybacks. And after that, it's gotten worse and worse. Now, Hertz, of course, had a couple of hiccups. They've definitely been a little bit more experimental than Avis in terms of what they've tried to do to right side the business or or attract customers, attract investors. One of them was when they bought into Tesla and EVs and they didn't understand that if you're visiting a national park in Wyoming, you're not necessarily comfortable having a Tesla. So having a lot of Teslas in your fleet might not necessarily sit nicely with people.

21:40And so you had that. Now, fast forward, they're well past that. But they brought in a new CEO in probably what you'd say is the 11th hour of needing this help. And while they guide for positive EBITDA this year, I would sort of argue that the path to get there is a little bit tenuous, particularly when they're dealing with auto recalls, when they're dealing with just these sort of hiccups that are unexpected.

22:05Scarlet Fu:Yeah. I know a lot of people who actually bought used Teslas from Hertz because they needed to get rid of or trim down their fleet. Jodi, before we let you go, we got to ask you about Six Flags. The amusement park company, the water park operator, they reported results. The stock is down 18%. What are you looking at from a credit perspective? So, Scarlett, what's so interesting about Six Flags is it definitely struck a little bit more positive tone, in my view, when you look at the company on a same park basis. By that, we mean is that they got rid of eight parks, so they sold seven and they closed one last year.

22:43And so stripping out those parks that aren't operating, it actually was relatively positive. Now, there are caveats that, for instance, the adjusted EBITDA numbers, they had a lot of non-cash buybacks or non-cash add-ins that somehow appeared out of nowhere that they didn't have last year. And so you say, OK, were those just sitting there and they were waiting for a time to kind of plug them in? I'm not quite sure. But but I think more importantly, they, you know, they're at a time when they can sort of see a path forward. But I think the expectation is that with the Canada wildfires, with consumer health being a little bit rocky, that the sort of positives that we saw in second quarter might not necessarily be sustainable.

23:28But from a liquidity perspective, they did buy some additional time with their debt issuance earlier this year and with the fact that they're able to meet their Georgia Park put payment, which comes due in a year or in January, I should say. So there are some bright spots to it, but I think it's really early stages. And so as a credit analyst, I still can't sit comfortably with the name, but I do see a scenario when they could get there. Now, four times net leverage target is a little bit far-fetched, something we've heard before from prior management and not something we see anytime soon.