What happened

Shares of Warner Bros. Discovery (WBD 1.81%) pulled back today after the entertainment company posted weak results in its third-quarter earnings report, missing estimates on the top and bottom lines.

The stock closed down 12.9% on the news.

So what

On a pro forma basis, revenue in the quarter fell 8% in currency-neutral terms to $9.82 billion, missing estimates at $10.36 billion. Even worse, sales declined at all three of its business segments: networks, studios, and direct-to-consumer.

Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) were also down 8% to $2.42 billion. On a generally accepted accounting principles (GAAP) basis, the company posted a per-share loss of $0.95, which includes a $1.9 billion pre-tax amortization charge for an acquisition-related intangible asset and $1.5 billion in pre-tax restructuring charges. The analyst consensus had called for a per-share loss of $0.21.

Streaming subscribers increased 2.8 million globally from Q2 to 94.9 million, but the company's EBITDA loss in streaming expanded from $309 million to $634 million. Revenue also declined in the segment due to the expiration of a partnership with Amazon Channels.

According to CEO David Zaslav,

We are reimagining and transforming the organization for the future while driving synergy enterprisewide, increasing our target to at least $3.5 billion, and making significant progress on our combined DTC product. While we have lots more work to do, and there are some difficult decisions still to be made, we have total conviction in the opportunity ahead.

The company had been targeting $3 billion in cost-savings synergies.

Now what

Warner Bros. Discovery maintained adjusted EBITDA guidance of $9 billion to $9.5 billion for the year but called into question its earlier 2023 EBITDA guidance of $12 billion to $14 billion due to uncertainty around advertising. 

The company is also targeting free cash flow of $3 billion for the year. Based on an EBITDA multiple, the stock looks dirt cheap, but investors have to remember that WBD is carrying $50 billion in debt and the interest that goes with it. Additionally, there could be more restructuring and other one-time charges on the way as it makes progress with the merger.

While the business certainly has potential, given the revenue and EBITDA declines as well as doubts about next year's guidance, it's clear why the entertainment stock fell today.