“Re.” “Downward risk.” Wall Street analysts used unusually concerned words as they parsed Paramount Global’s weaker-than-expected first-quarter results and news of a dividend cut on Thursday. “Ouch!” may have been the thinking of some of the company’s insiders and investors. After all, the blow to the share was also pronounced. It was down 25.2 percent to $17.12 as of 10:30 a.m. EST after previously falling to $17.03, close to its 52-week low of $15.29.
“Paramount missed their first-quarter adjusted (operating income before depreciation and amortization (OIBDA) guidance by about 11 percent and cut their dividend, which we view as signs of continued estimation risk,” Wells Fargo analyst Steven Callal, which has an “underweight” rating on the stock with an $11 price target, wrote in a report. While the entertainment conglomerate’s streaming business posted a larger $511 million loss in the first quarter, experts called the result roughly in line with estimates.
But Cahall stressed that Paramount’s free cash flow loss in particular widened. Free cash flow is a profitability metric Wall Street uses to measure how much money companies will have left over if they meet all of their financial obligations. A loss means a company has to tap its cash reserves or use debt. Paramount’s first-quarter free cash flow loss was $554 million, “versus our $234 million loss and (the) Street’s $411 million loss,” the analyst said.
Management responded by cutting the company’s quarterly dividend from 24 cents per share to 5 cents per share. Analysts calculated that this would save Paramount about $500 million annually.
But what does all this mean for management’s goal of returning to positive free cash flow by 2024? “The dividend and increased cash outflow in the first quarter are likely to rekindle discussions around cash generation and what the key drivers are for getting positive free cash flow,” Cahall wrote in a section under the headline “The first cut is the deepest.”
He also emphasized, “We think a dividend cut typically indicates material shifts in management’s views on risk profiles.” Before management said on an earnings conference call that it would continue to pursue key streaming strategies to date, Cahall suggested that “it will be a question for Paramount to reassess its path to direct-to-consumer.” His general conclusion: “Our bias is that the first quarter results and (the) dividend cut are likely to suggest that future (earnings) estimates involve downside risk.”
In the meantime, Wolf research analyst Peter Supinowhich has an “underperform” rating for Paramount stock with a $12 price target, called the company’s latest free cash flow update “concerning.”
Quarterly revenue missed estimates from Wall Street “primarily driven by TV media (unit) softness followed by film, driving the OIBDA down in the first quarter,” he explained. “The weak results translated into much lower-than-expected free cash flow,” which he had predicted at a $86 million loss, while the broader Wall Street expectation was a $203 million loss. That, in turn, caused the quarterly cash dividend to be cut.
Supino also looked at where Paramount’s streaming business stands. Streaming revenue for the first quarter was $1.51 billion, beating the analyst’s $1.45 billion estimate and Street’s $1.45 billion expectation “on higher-than-expected subscription revenue,” he noted. “This led to a slightly better OIBDA of a $511 million loss,” compared to his forecast for a $544 million loss and Wall Street’s $541 million estimate. Paramount+ subscribers reaching the 60 million mark also exceeded expectations. “However, Pluto’s monthly active users fell short of expectations with 1.5 million net additions for 80.0 million MAUs,” compared to its 82.0 million and the Street’s target of 81.8 million, Supino wrote.
Beyond Wall Street, Third Bridge analyst Jamie Lumley also commented on the latest earnings of a major Hollywood player. “Paramount’s results came in with a mix of good, bad and ugly,” he wrote. “While Paramount+ has more than doubled Netflix’s 4.1 million subscribers in the quarter, it’s a steep drop from the nearly 10 million it raked in at the end of 2022. This raises concerns about the platform’s ability to maintain momentum as the company will struggle to deliver big hits like Top gun: Maverick to drive subscriber growth every quarter.”
User growth at Pluto TV “has also slowed, while streaming losses are up 31 percent,” Lumely noted. “Our experts have repeatedly pointed to the renewed focus on streaming profitability across the industry, and these results show that there is still a lot of work to be done at Paramount to scale this business.” His takeaway: “With the continued decline of the legacy TV Media business and weak theatrical numbers, Paramount will likely be weighing its options to revive growth and bounce back from a sharp reversal in quarterly earnings.”
More to come.
