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Struggling cinema operators are looking to Dune: Part Two, the sci-fi epic opening this weekend starring Timothée Chalamet and Zendaya, to breathe life into the box office after a lacklustre holiday season and a miserable start to the year.
US cinema owners have suffered from an 18 per cent drop in box office returns so far in 2024, and last year’s Hollywood strikes are expected to result in a weaker slate of films and lower ticket sales. Shares in AMC Entertainment, the cinema chain, fell almost 8 per cent this week due in part to the impact of the strikes.
A good run for Dune: Part Two, which is expected to bring in between $70mn-$90mn this weekend, would provide a much-needed lift.
“Dune: Part Two will pump life into the box office, and not a minute too soon,” said Paul Dergarabedian, senior analyst at Comscore.
Warner Bros Discovery, which produced the $190mn film alongside Legendary Entertainment, needs Dune: Part Two to perform well. Despite having a massive hit last year with Barbie, which grossed $1.4bn, Warner Bros’ studio has also been weighed down by a series of disappointments. Two of its DC Comics superhero films, The Flash and Aquaman, flopped, while the musical version of The Color Purple underperformed during the holidays.
Weakness at Warner studios was a significant factor behind the company’s disappointing results on February 23, which sent the company’s shares to the lowest level since it was formed in a 2022 merger. Warner stock is down 24.6 per cent this year and 64 per cent since it began trading in April 2022.
Over the past week Wall Street analysts have been lowering their financial targets for Warner Bros Discovery — and expressing concern over the company’s decision not to provide earnings forecasts for this year as it has in the past. “I’m not in a position this year to give very specific Ebitda or cash conversion guidance,” said Gunnar Wiedenfels, chief financial officer, in a call with investors.
Like other legacy entertainment companies, Warner is facing a sharp decline in its traditional television business. Once a cash cow thanks to advertising and broadcasting fees, Warner’s linear TV business is losing viewers to streaming — a trend that helped send its ad revenue down 12 per cent in the fourth quarter. “This business is not without its challenges,” David Zaslav, Warner chief executive, said last week.
Its own streaming service, Max, is not earning enough yet to offset the decline in traditional TV, and its number of “direct to consumer” subscribers in the US and Canada fell in the second half of last year. But subscriptions outside of North America grew over the same period, and the business unit that contains the streaming services was profitable for the year. Zaslav said its streaming business would generate $1bn in earnings before interest, taxes, depreciation and amortisation by 2025.
Where investors are giving Warner the most credit is in cutting its debt load, which has been a priority for Zaslav. The company paid down $5.4bn in debt in 2023, bringing its gross debt down to $44.2bn. It stood at $55bn when the merger closed in 2022.
That helped boost the company’s free cash flow — a key metric in determining bonuses for Zaslav and other top executives — which rose to $6.1bn in 2023 from $3.3bn a year before.
But some analysts say this focus on cost-cutting may reduce spending on fresh streaming programmes that are needed to keep subscribers and attract new ones.
“Management has been very focused on cost efforts,” said Laurent Yoon, an analyst at Bernstein. “And the challenge here is having to grow profitably in new markets that will require investments. This will be a delicate balancing act.”
Company officials defended their upcoming streaming slate, pointing to new seasons of White Lotus, Hacks, House of the Dragon and The Last of Us.
Like other traditional entertainment companies, Warner Bros has recently started licensing more of its shows to Netflix, including Band of Brothers and Sex and the City — a reversal of their previous strategy to keep all of its programming on the Max streaming service.
Warner recently announced that it would launch a sport streaming service alongside Disney’s ESPN and Fox, a plan that the companies hope will help capture fans who are no longer subscribing to linear TV networks.
Sport remains the biggest draw for traditional TV, but analysts say the success of the as-yet unnamed service may depend largely on the monthly subscription price. Details on pricing are not expected until closer to the service’s launch in the autumn.
At Warner’s movie studios, Zaslav acknowledged that there were “some real misses” over the past year. But there is hope that Dune: Part Two and another sequel, Godzilla x Kong: The New Empire, will provide some momentum.
And Zaslav has touted a number of projects in the works, noting that Warner has entered partnerships with Tom Cruise and George Clooney.
“We’ve had a challenging couple of years, but we are now very excited about our slate in the year ahead,” Zaslav told investors.
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