Skydance shares fell nearly 8% on Tuesday, leading the S&P 500 decliners, after the media group published its first earnings report since the merger of Paramount Skydance and Warner Bros. Discovery. The stock closed 7.6% lower at $8.04, wiping out the previous session's gain.

The fall came even though the underlying Paramount business grew in the quarter. Investors were instead focused on what the report did not contain: no financial results for Warner Bros. Discovery, no full-year guidance for the combined company, a warning about the Warner film slate, and a debt pile of about $87 billion.

A quarter that covered Paramount only

Skydance reported the results after the market closed on Monday. The quarter ended on 30 September, before the purchase of Warner Bros. Discovery closed on 6 October, so none of Warner's numbers were included. Revenue for the Paramount business rose 5% to $7 billion, and Paramount+ revenue jumped 21% in the quarter.

Skydance said it would offer full-year guidance for the combined company when it reports results for the December quarter. Bernstein analyst Laurent Yoon described the quarter as "more of a prologue than Chapter 1 of Skydance's journey following the WBD acquisition", adding that pro forma financials would not be available until sometime before the fourth-quarter print.

Bank of America analyst Jessica Reif Ehrlich said the company remained "in the early innings of a multi-year transformation, as it shifts from a linear-dominated business toward Streaming and Studios", and warned that combining two studios, merging streaming businesses and integrating technology involved "a lot of heavy lifting".

Debt, film warning and the cost-cutting plan

The Warner Bros. acquisition has left Skydance with $87 billion of gross debt and about $10 billion in cash, with net debt of nearly $80 billion. Skydance also warned that underperformance of the Warner Bros. film slate would cut fourth-quarter profit by up to $200 million. Tom Cruise's latest Warner Bros. film, the dark comedy "Digger", finished fifth on US and Canadian charts in its opening weekend in October.

Against that, Skydance detailed plans to deliver $6 billion in cost savings from the acquisition over three years, with 30% of the savings expected in the first year. The company expects to cut at least $2.2 billion from corporate overhead and real estate, $1 billion from marketing costs and about $1.4 billion from technology costs.

Getting there will not be cheap. Skydance said it would incur $1.5 billion to $2 billion in costs in 2027 and $4 billion over the course of its transformation. It expects free cash flow in 2027 to come in at or above breakeven, and it is targeting leverage of 3 times by 2029 and annual free cash flow of $10 billion by 2030.

Streaming bundle and DC Studios changes

Skydance said it would launch a Paramount+ and HBO Max bundle in early 2027, and merge the two services onto the same backend within the first year of closing. Together with premium cable channel HBO, the services reach 203 million subscribers globally. The company also said it would stop disclosing quarterly subscriber figures, following Netflix in shifting the focus to profitability and engagement.

The company announced executive changes on the same day, with James Gunn and Peter Safran stepping down as heads of DC Studios and Marvel veteran Jeremy Latcham named president and chief creative officer. Gunn and Safran will return to creative work at the company.

Analysts want proof before backing the deal

Analyst reaction was cautious. Ehrlich and Yoon both have underperform ratings on the stock, with price targets of $9 and $6 respectively. TD Cowen analyst Doug Creutz, who has a hold rating and an $8 price target, said he remained sceptical that management could create value from the merger when "so many other major media deals have failed", citing high integration and leverage risks. MoffettNathanson kept a neutral rating with a $7 price target, while Guggenheim kept a neutral rating but no price target, citing the lack of historical pro forma disclosure.

Skydance shares are down 28.4% over the past six months and 40% so far this year. The next test comes with the fourth-quarter results, when investors will finally see the combined company's numbers and its first full-year guidance. Until then, as one analyst put it, there are more questions than answers.

Source: The Wrap and BusinessWorld (Reuters).