Paramount Braces for Wider Streaming Losses, Declining Ad Revenue in Q3 Earnings

Paramount Global (PARA) is slated to report its third quarter 2022 earnings results after the market close on Thursday, November 3rd. The media conglomerate is bracing for wider losses in its direct-to-consumer streaming segment and a continued decline in linear advertising revenue.

Analysts Forecast Wider Streaming Losses, Declining Ad Revenue

According to Bloomberg consensus estimates, Paramount is expected to post a direct-to-consumer (DTC) loss of $438 million for the quarter. This would mark a widening from the $424 million loss in Q2 and $343 million loss in the year-ago period.

The company has stated that streaming losses will peak this year as it continues investing heavily into content and marketing for its Paramount+ streaming service. However, Wall Street is increasingly concerned about the lack of a clear path to profitability.

“We think leverage and a path to break-even at DTC are the key strategic concerns,” wrote Wells Fargo analyst Steve Cahall in a note ahead of earnings.

Meanwhile, Paramount’s linear advertising revenue is likely to suffer another double-digit percentage drop amid broader ad spending headwinds. Analysts forecast a 12% decline compared to last year after a 10% drop in Q2.

However, the company’s digital advertising through its ad-supported streaming service Pluto TV has remained resilient. This will help offset linear declines to some degree.

Streaming Subscriber Growth in Focus

Paramount+ currently has about 61 million total subscribers, making it a relatively small player compared to leaders like Netflix and Disney+. A key metric in the report will be net subscriber additions.

Analysts expect Paramount+ to add 1.8 million net new subscribers during the quarter. This would represent a deceleration from 2.7 million adds last quarter, reflecting intensifying competition in the streaming space.

The service got a boost last quarter from the premiere of Top Gun: Maverick on the platform. There were no major tentpole film releases last quarter, potentially contributing to slower growth.

Positives: Free Cash Flow Rebound, M&A optionality

While losses are expanding, Paramount should see a bounce back in free cash flow generation last quarter due to low content spending. The metric is expected to turn positive at $163 million compared to negative cash flow so far this year.

Lower spending is attributed to ongoing strikes by the actors and writers guilds which have halted productions. Paramount also recently delayed the next Mission Impossible film to 2025 amid the turmoil.

The company’s strong portfolio of assets also gives it options to pursue mergers and acquisitions. Last quarter, Paramount sold its Simon & Schuster book publishing unit to KKR for $2.2 billion.

Showtime and BET are among assets rumored to be potential divestitures to raise more cash. As a relatively small player, Paramount is also viewed as an attractive acquisition target for larger media firms.

CEO Hints at More Media Consolidation

During a conference last year, Paramount CEO Bob Bakish suggested further media consolidation could be on the horizon.

“Consolidation has been the rule in business for a long time, certainly been the rule in media,” Bakish said. “So, it’s hard for me to bet on anything other than consolidation will happen in the future.”

Any dealmaking could help Paramount improve its balance sheet position and reduce debt. The company has been focused on paring down debt and improving free cash flow.

Strategic Initiatives Target Profitability by 2024

Paramount has said it expects to return to positive free cash flow and earnings growth by 2024. Several strategic initiatives have been undertaken with this goal in mind.

The company recently integrated its Showtime platform into Paramount+ and raised prices across streaming tiers. Layoffs, restructurings and a dividend cut were also announced earlier this year.

The Showtime integration and NFL season launch should boost direct-to-consumer revenue by nearly 40% year-over-year in the third quarter.

But the path to profitability remains unclear with losses still expanding. Investors will be watching closely for signs of improvement in the earnings report and any updates to the company’s projections.

Shares Have Struggled in 2022

It’s been a difficult year for Paramount stock, which has plunged 50% in 2022 compared to a 10% gain for the S&P 500. The shares have suffered from the streaming losses, ad market challenges and recession fears.

Any upside surprise in the report or optimism from management could give the stock a much-needed boost. But substantial uncertainty lies ahead for Paramount as it navigates its way through a shifting media landscape.