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    The unemployment insurance program is unprepared for a recession, experts say

    The U.S. unemployment rate has drifted upward over the past year, fueling recession concerns.
    The unemployment insurance program buckled during the Covid-19 pandemic under a deluge of claims.
    Experts say the system for unemployment benefits is ill equipped to handle the next economic downturn.

    Job seekers attends the JobNewsUSA.com South Florida Job Fair on June 26, 2024 in Sunrise, Florida.
    Joe Raedle | Getty Images

    Renewed fears of a U.S. recession have put a spotlight on unemployment.
    However, the system that workers rely on to collect unemployment benefits is at risk of buckling — as it did during the Covid-19 pandemic — if there’s another economic downturn, experts say.

    “It absolutely isn’t” ready for the next recession, said Michele Evermore, senior fellow at The Century Foundation, a progressive think tank, and a former deputy director for policy in the U.S. Labor Department’s Office of Unemployment Insurance Modernization.
    “If anything, we’re kind of in worse shape right now,” she said.

    Unemployment insurance provides temporary income support to laid-off workers, thereby helping prop up consumer spending and the broader U.S. economy during downturns.
    The pandemic exposed “major cracks” in the system, including “massive technology failures” and an administrative structure “ill equipped” to pay benefits quickly and accurately, according to a recent report issued by the National Academy of Social Insurance.
    There’s also wide variation among states — which administer the programs — relative to factors like benefit amount, duration and eligibility, according to the report, authored by more than two dozen unemployment insurance experts.

    “The pandemic exposed longstanding challenges to the UI program,” Andrew Stettner, the director of the Labor Department’s Office of UI Modernization, said during a recent webinar about the NASI report.
    The U.S. unemployment rate, at 4.3% in July, remains a far cry from its pandemic-era peak and is low by historical standards. But it has gradually drifted upward over the past year, fueling rumblings about a potential recession on the horizon.
    Policymakers should address the system’s shortcomings when times are good “so it can deliver when times are bad,” Stettner said.

    Why the unemployment insurance program buckled

    Joblessness ballooned in the pandemic’s early days.
    The national unemployment rate neared 15% in April 2020, the highest since the Great Depression, which was the worst downturn in the history of the industrialized world.
    Claims for unemployment benefits peaked at more than 6 million in early April 2020, up from roughly 200,000 a week before the pandemic.
    States were ill prepared to handle the deluge, experts said.
    Meanwhile, state unemployment offices were tasked with implementing a variety of new federal programs enacted by the CARES Act to enhance the system. Those programs raised weekly benefits, extended their duration and offered aid to a larger pool of workers, like those in the gig economy, for example.

    Later, states had to adopt stricter fraud prevention measures when it became clear that criminals, attracted by richer benefits, were pilfering funds.
    The result of all this: benefits were extremely delayed for thousands of people, putting severe financial stress on many households. Others found it nearly impossible to reach customer service agents for help.
    Years later, states haven’t fully recovered.
    For example, the Labor Department generally considers benefit payments to be timely if issued within 21 days of an unemployment application. This year, about 80% of payments have been timely, compared with roughly 90% in 2019, according to agency data.
    It’s imperative to build a system you need “for the worst part of the business cycle,” Indivar Dutta-Gupta, a labor expert and fellow at the Roosevelt Institute, said during the recent webinar.

    Potential areas to fix

    Experts who drafted the National Academy of Social Insurance report outlined many areas for policymakers to fix.
    Administration and technology were among them. States entered the pandemic at a 50-year low in funding, leading to “cascading failures,” the report said.
    Today’s system is largely financed by a federal tax on employers, equivalent to $42 a year per employee. The federal government might opt to raise that tax rate, for example, the report said.
    Raising such funding could help states modernize outdated technology, by optimizing mobile access for workers and allowing them to access portals 24 hours a day, seven days a week, for example. It would also make it easier to pivot in times of crisis, experts said.
    Financing is the “biggest pitfall” that has allowed state systems to “really deteriorate,” Dutta-Gupta said.
    More from Personal Finance:This labor data trend is a ‘warning sign’A ‘soft landing’ is still on the tableAverage consumer now carries $6,329 in credit card debt
    Additionally, policymakers might consider more uniform rules around the duration and amount of benefits, and who can collect them, said Evermore, a NASI report author.
    States use different formulas to determine factors like aid eligibility and weekly benefit payments.
    The average American received $447 a week in benefits in the first quarter of 2024, replacing about 36% of their weekly wage, according to U.S. Labor Department data.
    But benefits vary widely from state to state. Those differences are largely attributable to benefit formulas instead of wage disparities between states, experts said.
    For example, the average Mississippi recipient got $221 a week in June 2024, while those in Washington state and Massachusetts received about $720 a week, Labor Department data shows.
    Further, 13 states currently provide less than a maximum 26 weeks — or, six months — of benefits, the report said. Many have called for a 26-week standard in all states.
    Various proposals have also called for raising weekly benefit amounts, to the tune of perhaps 50% or 75% of lost weekly wages, for example, and giving some additional funds per dependent.
    There are reasons for optimism, Evermore said.
    U.S. Senate Finance Committee Chair Ron Wyden, D-Ore., ranking committee member Sen. Mike Crapo, R-Idaho, and 10 co-sponsors proposed bipartisan legislation in July to reform aspects of the unemployment insurance program.
    “I’m pretty encouraged right now” by the bipartisan will, Evermore said. “We need something, we need another grand bargain, before another downturn.”
    Correction: Andrew Stettner is the director of the Labor Department’s Office of UI Modernization. An earlier version misstated his title.

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    Life Time is creating its own pickleball as the sport booms

    Life Time’s CEO and founder said he has created a stronger and faster pickleball.
    The “athletic country club” has invested heavily in pickleball.
    Life Time’s stock is up 57% year to date.

    Life Time has filed a patent to create The Ultimate Pickleball.
    Courtesy: Life Time

    Tired of playing with pickleballs he found inconsistent in bounce and durability, Life Time’s founder and CEO Bahram Akradi decided to take matters into his own hands.
    On Friday, the upscale fitness and lifestyle company announced it has created what it dubs “the ultimate pickleball.” Life Time will debut the ball exclusively at the company’s clubs later this month.

    “This was a problem with the sport and it needed to be solved, so we basically stepped in and solved it,” Akradi said.
    Akradi has gone all in on America’s fastest growing sport since 2021, and he remains bullish on its potential. It’s a key piece of the growth strategy for Life Time, which has seen its stock rise 57% year to date. On Aug. 1, the company raised its full year guidance following a strong second-quarter performance.
    Life Time will soon sell the ball at its racquet sports pro shops and online. The company is still determining what the price will be.
    Life Time’s “athletic country clubs” boast more than 700 permanent pickleball courts. The company plans to reach 1,000 courts by the end of next year.
    “Our goal is to provide the right venues for people to play, the right experience, the right consistency,” Akradi added.

    Akradi said the company has invested between $50 million and $100 million in pickleball already, and the sport has brought in 6% to 7% of Life Time’s membership dues.
    Life Time also hosts professional tournaments at its clubs for Major League Pickleball and the Professional Pickleball Association. The professional organizations use Vulcan as their “official ball,” but Akradi hopes to change that in the future.
    In May, the company announced Lululemon as its official apparel sponsor for tennis and pickleball.
    The company has also teamed up with tennis legend Andre Agassi and top-rated pickleball player Ben Johns to grow the sport further. More

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    JPMorgan Chase is giving its employees an AI assistant powered by ChatGPT maker OpenAI

    JPMorgan Chase has rolled out a generative AI assistant to tens of thousands of its employees, the initial phase of a broader plan to inject the technology throughout the bank.
    The program, called LLM Suite, is already helping more than 60,000 employees with tasks like writing emails and reports.
    The software is expected to eventually be as ubiquitous within the bank as the videoconferencing program Zoom, people with knowledge of the plans told CNBC.
    JPMorgan designed LLM Suite to be a portal that allows users to tap external large language models and launched it with ChatGPT maker OpenAI’s LLM, said the people.

    JPMorgan Chase has rolled out a generative artificial intelligence assistant to tens of thousands of its employees in recent weeks, the initial phase of a broader plan to inject the technology throughout the sprawling financial giant.
    The program, called LLM Suite, is already available to more than 60,000 employees, helping them with tasks like writing emails and reports. The software is expected to eventually be as ubiquitous within the bank as the videoconferencing program Zoom, people with knowledge of the plans told CNBC.

    Rather than developing its own AI models, JPMorgan designed LLM Suite to be a portal that allows users to tap external large language models — the complex programs underpinning generative AI tools — and launched it with ChatGPT maker OpenAI’s LLM, said the people.
    “Ultimately, we’d like to be able to move pretty fluidly across models depending on the use cases,” Teresa Heitsenrether, JPMorgan’s chief data and analytics officer, said in an interview. “The plan is not to be beholden to any one model provider.”
    The move by JPMorgan, the largest U.S. bank by assets, shows how quickly generative AI has swept through American corporations since the arrival of ChatGPT in late 2022. Rival bank Morgan Stanley has already released a pair of OpenAI-powered tools for its financial advisors. And consumer tech giant Apple said in June that it was integrating OpenAI models into the operating system of hundreds of millions of its consumer devices, vastly expanding its reach.
    The technology — hailed by some as the “Cognitive Revolution” in which tasks formerly done by knowledge workers will be automated — could be as important as the advent of electricity, the printing press and the internet, JPMorgan CEO Jamie Dimon said in April.
    It will likely “augment virtually every job” at the bank, Dimon said. JPMorgan had about 313,000 employees as of June.

    ChatGPT ban

    The bank is giving employees what is essentially OpenAI’s ChatGPT in a JPMorgan-approved wrapper more than a year after it restricted employees from using ChatGPT. That’s because JPMorgan didn’t want to expose its data to external providers, Heitsenrether said.
    “Since our data is a key differentiator, we don’t want it being used to train the model,” she said. “We’ve implemented it in a way that we can leverage the model while still keeping our data protected.”
    The bank has introduced LLM Suite broadly across the company, with groups using it in JPMorgan’s consumer division, investment bank, and asset and wealth management business, the people said. It can help employees with writing, summarizing lengthy documents, problem solving using Excel, and generating ideas.
    But getting it on employees’ desktops is just the first step, according to Heitsenrether, who was promoted in 2023 to lead the bank’s adoption of the red-hot technology.
    “You have to teach people how to do prompt engineering that is relevant for their domain to show them what it can actually do,” Heitsenrether said. “The more people get deep into it and unlock what it’s good at and what it’s not, the more we’re starting to see the ideas really flourishing.”
    The bank’s engineers can also use LLM Suite to incorporate functions from external AI models directly into their programs, she said.

    ‘Exponentially bigger’

    JPMorgan has been working on traditional AI and machine learning for more than a decade, but the arrival of ChatGPT forced it to pivot.
    Traditional, or narrow, AI performs specific tasks involving pattern recognition, like making predictions based on historical data. Generative AI is more advanced, however, and trains models on vast data sets with the goal of pattern creation, which is how human-sounding text or realistic images are formed.
    The number of uses for generative AI are “exponentially bigger” than previous technology because of how flexible LLMs are, Heitsenrether said.
    The bank is testing many cases for both forms of AI and has already put a few into production.
    JPMorgan is using generative AI to create marketing content for social media channels, map out itineraries for clients of the travel agency it acquired in 2022 and summarize meetings for financial advisors, she said.
    The consumer bank uses AI to determine where to place new branches and ATMs by ingesting satellite images and in call centers to help service personnel quickly find answers, Heitsenrether said.
    In the firm’s global-payments business, which moves more than $8 trillion around the world daily, AI helps prevent hundreds of millions of dollars in fraud, she said.
    But the bank is being more cautious with generative AI that directly touches upon the individual customer because of the risk that a chatbot gives bad information, Heitsenrether said.
    Ultimately, the generative AI field may develop into “five or six big foundational models” that dominate the market, she said.
    The bank is testing LLMs from U.S. tech giants as well as open source models to onboard to its portal next, said the people, who declined to be identified speaking about the bank’s AI strategy.

    Friend or foe?

    Heitsenrether charted out three stages for the evolution of generative AI at JPMorgan.
    The first is simply making the models available to workers; the second involves adding proprietary JPMorgan data to help boost employee productivity, which is the stage that has just begun at the company.
    The third is a larger leap that would unlock far greater productivity gains, which is when generative AI is powerful enough to operate as autonomous agents that perform complex multistep tasks. That would make rank-and-file employees more like managers with AI assistants at their command.
    The technology will likely empower some workers while displacing others, changing the composition of the industry in ways that are hard to predict.
    Banking jobs are the most prone to automation of all industries, including technology, health care and retail, according to consulting firm Accenture. AI could boost the sector’s profits by $170 billion in just four years, Citigroup analysts said.  
    People should consider generative AI “like an assistant that takes away the more mundane things that we would all like to not do, where it can just give you the answer without grinding through the spreadsheets,” Heitsenrether said.
    “You can focus on the higher-value work,” she said.
    — CNBC’s Leslie Picker contributed to this report.

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    Container explodes on cargo ship at China’s key Ningbo port

    A hazardous goods container exploded Friday on a ship operating in China’s Ningbo port, vessel owner Yang Ming Marine Transport Corp. told CNBC in a statement, citing a preliminary investigation.
    No casualties or injuries were announced to date.
    The Liberia-flagged ship had arrived in Ningbo after last calling at Shanghai, according to MarineTraffic tracking data.

    An aerial photo is showing containers at Beilun Port in Ningbo, Zhejiang province, China, on April 11, 2024.
    Nurphoto | Nurphoto | Getty Images

    BEIJING — A hazardous goods container exploded Friday on a cargo ship in China’s high-traffic Ningbo port, Taiwanese vessel owner Yang Ming Marine Transport Corp. told CNBC in a statement.
    No casualties or injuries were announced to date. The incident took place on the YM Mobility ship and led to a fire, which has been brought under control, the owner said. All people on board were safely evacuated.

    The Liberia-flagged ship had arrived in Ningbo after last calling at Shanghai, according to MarineTraffic tracking data. State-owned port operator Ningbo-Zhoushan said the ship was docked at the Beilun 2 container terminal, according to a post on Chinese social media.
    The port operator and Yang Ming both said the cause of the incident was not yet clear.
    Yang Ming added that the owner of the goods had declared it under dry, cold storage, without need for plugged-in electricity, according to a CNBC translation of the Chinese-language statement.
    The incident did not immediately appear to significantly disrupt major shipping lines.
    Ningbo-Zhoushan is China’s second-highest traffic port, located in eastern China’s Zhejiang province. Shanghai is the busiest port in the world, followed by Singapore and then Ningbo-Zhoushan, according to Lloyd’s List.
    — CNBC’s Ruxandra Iordache contributed to this report. More

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    Delta says chaos after CrowdStrike outage cost it $380 million in revenue

    Delta Air Lines on Thursday said last month’s CrowdStrike outage and subsequent mass flight cancellations cost it some $550 million.
    That includes a $380 million revenue hit in the current quarter and an associated $170 million expense.
    Delta has said the carrier will pursue legal action against Microsoft and CrowdStrike to recoup the cost of the incident.

    A Delta Airlines Airbus A319-114 aircraft taxis at Los Angeles International Airport after arriving from Las Vegas on May 5, 2024 in Los Angeles, California. 
    Kevin Carter | Getty Images

    Delta Air Lines on Thursday said last month’s CrowdStrike outage and subsequent mass flight cancellations cost it some $550 million and reiterated that it is pursuing damages against the company as well as Microsoft.
    The financial impact includes a $380 million revenue hit in the current quarter “primarily driven by refunding customers for cancelled flights and providing customer compensation in the form of cash and SkyMiles,” the Atlanta-based airline said in a securities filing.

    The incident, in which it canceled some 7,000 flights, also meant a $170 million expense “associated with the technology-driven outage and subsequent operational recovery,” the carrier said, adding that its fuel bill will likely be $50 million lower because of the scrubbed flights.
    Delta struggled more than its competitors to recover from the July 19 outage, which took millions of Windows-based machines offline around the world. The disruptions occurred at the height of the summer travel season, stranding thousands of Delta customers, a rare incident for the carrier that markets itself as a premium carrier that gets top marks for reliability.
    “An operational disruption of this length and magnitude is unacceptable, and our customers and employees deserve better,” CEO Ed Bastian said in the filing. “Since the incident, our people have returned the operation to an industry-leading position that is consistent with the level of performance our customers expect from Delta.”
    Delta’s cancellations in the days after the outage topped its tally for all of 2019. The U.S. Department of Transportation last month said it is investigating Delta’s response to the outage and flight cancellations.
    CrowdStrike responded in a statement on Thursday that Delta “continues to push a misleading narrative” and said that the company’s chief security officer was in “direct contact” with Delta’s chief information and security officer “within hours of the incident, providing information and offering support.”

    In a letter to CrowdStrike’s attorney on Thursday, Delta’s lawyer David Boies said 1.3 million customers were affected by the outage and that it shut down 37,000 Delta computers.
    CrowdStrike and Microsoft lawyers earlier this week fired back at Delta, saying they reached out to offer Delta help. Microsoft on Wednesday suggested that Delta hasn’t invested enough in its technology compared with rivals.
    “If CrowdStrike genuinely seeks to avoid a lawsuit by Delta, then it must accept real responsibility for its actions and compensate Delta for the severe damage it caused to Delta’s business, reputation, and goodwill,” Boies said in the letter to CrowdStrike on Thursday.
    About 60% of Delta’s “mission-critical applications” and their data depend on Microsoft and CrowdStrike, he said, adding that the disruption “required significant human intervention by skilled crew specialists to get Delta people and aircraft to the right locations to resume normal, safe operation.”

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    E.l.f. Beauty sales jump 50% on gains in color cosmetics and skin care, launch of Bronzing Drops serum

    E.l.f. Beauty beat Wall Street’s quarterly estimates on the top and bottom lines as sales jumped 50%.
    Tarang Amin, CEO of the cosmetics company, said its new Bronzing Drops serum has been wildly popular.
    Despite the big sales beat, the beauty retailer posted cautious guidance.

    Courtesy: e.l.f Beauty

    E.l.f. Beauty’s growth story is still going.
    The cosmetics retailer on Thursday blew past quarterly estimates again, posting a 50% gain in sales. 

    The company’s sales soared to $324.5 million in its fiscal first quarter, leading it to raise its full-year guidance. That increase follows a staggering 76% jump in the year-ago quarter.
    CEO Tarang Amin told CNBC the company saw growth across its categories. He added that its Bronzing Drops serum quickly became a best seller on the company’s website after its launch during the quarter.
    Here’s how the cosmetics company performed compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

    Earnings per share: $1.10 adjusted vs. 84 cents expected
    Revenue: $324 million vs. $305 million expected

    The company’s reported net income for the three-month period that ended June 30 was $47.6 million, or 81 cents per share, compared with $53 million, or 93 cents per share, a year earlier.  
    Sales rose to $324.5 million, up about 50% from $216.3 million a year earlier. 

    Following quarter after quarter of outsized growth, Wall Street has come to expect a lot from E.l.f. Beauty. Though it raised its guidance Thursday, the outlook still fell flat after such a big first-quarter beat. 
    For fiscal 2025, E.l.f. now expects sales of between $1.28 billion and $1.3 billion, compared with its previous outlook of $1.23 billion and $1.25 billion. Analysts had expected sales guidance of $1.3 billion, according to LSEG.
    The company now anticipates its adjusted net income will be between $198 million and $201 million, compared with a previous outlook of between $187 million and $191 million. E.l.f. expects adjusted earnings per share to be between $3.36 and $3.41, compared with previous guidance of $3.20 to $3.25. Analysts had expected earnings of $3.42 per share, according to LSEG. 
    Shares fell about 6% in extended trading.
    When it reported fiscal 2024 results in May, E.l.f. disappointed investors with an outlook that came in below expectations. Sentiment later turned around after its finance chief, Mandy Fields, suggested that the company tends to issue conservative guidance. 
    “Last year, we started our guidance at 22% to 24% range, ended the year at 77%,” Fields told analysts at the time. “I’m not saying that we’re promising 77% this year for sure. But what I will say is that gives you a little bit of insight into our guidance philosophy.” 
    On Thursday, Amin told CNBC that Fields takes a “balanced” approach to guidance and prefers to take things one quarter at a time. 
    “If you look at our history over the last five years, these 22 quarters, we typically guide lower than where we eventually come out,” said Amin. “We never want to get ahead of ourselves, and overall the strategy has worked just great … we’re going to take you through what we’re seeing quarter by quarter, and hopefully we continue to kind of beat that.” 
    He added that he isn’t concerned about a consumer pullback in the beauty category and remains “bullish” on the broader environment.
    “We are hearing kind of in the macro, ‘Hey, is the consumer being choosier?’ I’d say if they are, they’re choosing E.l.f.,” said Amin. “So we’re perhaps differently positioned, and if you look over the last 22 quarters, it didn’t matter what was happening in the category, whether it was the pandemic, whether it was inflationary pressures … you name it, we’ve performed well throughout that, and I think it really comes down to our fundamental business model and how we’re different.” 
    E.l.f., a digitally native beauty retailer that was founded in 2004, has gained a newfound relevance among Gen Z and Gen Alpha consumers through marketing that lands with those younger shoppers and meets them where they are on places such as TikTok and Roblox. 
    It’s known for creating value versions of prestige favorites, such as its new Bronzing Drops, which customers compare to Drunk Elephant’s product Sunshine Drops. The prestige skin care line offers its product for $38, while E.l.f.’s retails for just $12.
    “These bronzing drops were the No. 1 requested item from our community, and our community comes to us and says, ‘Hey, there’s a prestige item there. We love them, but E.l.f., help us out. We can’t afford 38 bucks for bronzing drops,'” said Amin. “So we’ll study it. We’ll put our own E.l.f. twist on it and we’ll introduce ours at $12. Went to No. 1 right away on Elfcosmetics.com.”
    The company doesn’t compare its products to any specific brands and instead lets its fan base fill in the blanks.
    “Even though we don’t make the comparison ourselves, there’s like a thousand TikTok videos after we launch this product where people are doing side-by-sides or comparing it,” said Amin. “They’re like, it’s $12 versus the $38 item and actually, I like the E.l.f. one better, the quality’s better.'”
    In July, the company expanded its collaboration with Roblox that enabled users ages 13 and up to buy limited edition products such as its “e.l.f. UP! Pets Hoodie” and mainstays such as its lip and SPF products. 
    During the Olympics, it had splashy marketing campaigns with gymnast Gabby Douglas, a three-time gold medalist, and blind swimmer Anastasia “Tas” Pagonis. It also collaborated with actress Jameela Jamil on the launch of its new Bronzing Drops.
    However, all that marketing doesn’t come cheap and has weighed on E.l.f.’s bottom line. During the quarter, selling, general and administrative expenses increased by roughly $88.6 million to $180.6 million, representing 56% of net sales. The spike in marketing spending contributed to a 10% drop in E.l.f.’s net income. 
    Amin said the company is spending more on marketing this year than last but that was more a result of timing. He added E.l.f. is working to get marketing spend “more consistent” throughout the year as a percentage of sales. 
    “We continue to invest more in marketing because it’s working,” said Amin. “Our marketing ROIs are multiples ahead of the category benchmarks, we’re growing very strong top line. We’re building awareness.” More

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    Paramount Global announces it will cut 15% of U.S. workforce, shares rise on second-quarter earnings

    Paramount Global intends to cut about 2,000 jobs as part of broader cost savings.
    Revenue fell as TV licensing fees dropped 48%, compounding declines in subscription fees and advertising sales.
    Paramount’s streaming division swung to a profit of $26 million.

    The Paramount Studios in Los Angeles on April 29, 2024.
    Eric Thayer | Bloomberg | Getty Images

    Paramount Global is cutting 15% of its U.S. workforce, or about 2,000 jobs, part of a broader cost-cutting plan as it prepares for a merger with Skydance Media.
    Paramount has identified $500 million in cost savings, which include the head count reductions, as part of $2 billion in synergies related to its transaction with Skydance. The job cuts, which will begin in the coming weeks and largely conclude by year end, will target the company’s marketing and communications department and employees who work in finance, legal, technology and other support functions, the company said during its earnings conference call Thursday.

    Paramount agreed to a merger with Skydance Media last month. That deal includes a 45-day go-shop period — in which a special committee of Paramount’s board could find another buyer — that concludes later this month.
    Meanwhile, earnings surged as the company’s streaming division swung to an unexpected profit — the first time Paramount has announced a profitable quarter for its direct-to-consumer business.
    Shares climbed more than 5% in after-hours trading Thursday.
    Here’s how Paramount performed in the quarter compared with what Wall Street was expecting, based on a survey of analysts by LSEG:

    Earnings per share: 54 cents adjusted vs. 12 cents expected
    Revenue: $6.81 billion vs. $7.21 billion expected

    Revenue falls

    Second-quarter revenue dropped 11% and missed analyst estimates as licensing, TV advertising and cable subscription sales dropped.

    The revenue drop was the largest miss compared to analyst estimates since February 2020, according to LSEG data. Paramount attributed the miss to a decline in TV licensing revenue, which can be difficult for analysts to model given their start and end dates.
    Paramount+ revenue grew 46% on year-over-year subscriber growth and higher prices. Paramount+ customers decreased 2.8 million from last quarter to 68 million as the company unwound a Korean partnership deal with entertainment company CJ ENM’s Tving streaming platform.
    Paramount’s streaming division turned a profit for the quarter of $26 million after losing $424 million a year ago. Analysts had estimated a loss of $265 million this quarter.
    Paramount reaffirmed it’s on track to reach U.S. profitability for Paramount+ in 2025. The streaming service has raised prices and cut content spend.
    Paramount’s quarterly profit is helped by not having an NFL licensing charge for the period, which will kick in later in the year.
    Shares have slumped 31% so far this year amid declines among cable subscribers and a soft linear TV advertising market.
    Paramount also took a $6 billion one-time impairment charge associated with the decline in its cable networks. It comes on the heels of a $9.1 billion write-down from peer Warner Bros. Discovery on Wednesday.
    The company had to take the charge as an adjustment forced by its transaction with Skydance.

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    Pressure mounting on Warner Bros. Discovery CEO David Zaslav to deliver value for shareholders

    Warner Bros. Discovery CEO David Zaslav is increasingly in need of a win for shareholders.
    Warner Bros. Discovery shares plummeted Thursday after taking a $9.1 billion impairment charge on the decline of its linear business and uncertainty around NBA rights.
    The company may be an activist target given its persistent struggles to boost value, but it’s also possible outside investors would have limited options for alternative strategies.

    David Zaslav attends the world premiere of “The Flash”, in Hollywood, Los Angeles, California, U.S., June 12, 2023.
    Mike Blake | Reuters

    Warner Bros. Discovery CEO David Zaslav needs a win. Soon.
    Since merging Discovery with WarnerMedia in 2022 and immediately slashing billions in costs, Zaslav has struggled to convince shareholders that his company is a worthy investment.

    Warner Bros. Discovery shares have fallen about 70% since April 8, 2022, the day the merger closed. His tenure has been defined by implementing thousands of layoffs, cutting movies and TV series for tax efficiencies, killing off CNN+ a month after its launch, hiring and firing CNN CEO Chris Licht, getting heckled at Boston University’s commencement by students chanting “pay your writers” during last year’s writers’ strike, and suing the NBA after the league chose not to renew media rights with his company following nearly 40 years in business together.
    Making matters worse for him, Zaslav has long been one of the highest paid CEOs in the country. His 2023 compensation rose 26.5% to almost $50 million. Zaslav’s bonus is tied to increasing free cash flow and reducing debt, a mandate driven by John Malone, the media mogul and influential board member who has championed Zaslav, first at Discovery and now at Warner Bros. Discovery, which has a market capitalization of about $17 billion and $37.8 billion in debt.
    The stock dropped roughly 9% in trading Thursday. The company took a whopping $9.1 billion impairment charge Wednesday given the loss of value in its linear cable networks — which still accounts for more than 100% of the company’s adjusted EBITDA. That means the rest of the company lost money.
    Warner Bros. Discovery blamed “the continued softness in the U.S. linear advertising market and uncertainty related to affiliate and sports rights renewals, including the NBA” for the size of the write-down.
    That’s not music to investors’ ears.

    Part of the argument for why Discovery merged with WarnerMedia was that its diversified suite of content would be a “wonderful partner to advertisers,” as Zaslav said when the deal was initially announced in 2021.
    Injecting uncertainty into the company’s valuation because of a loss of NBA rights also rings hollow given Zaslav’s claim in November 2022 that “we don’t have to have the NBA.”
    “The write-down signifies that this company clearly overpaid for the linear assets as part of the WarnerMedia merger and, given the growing pressures on the linear ecosystem, it also raises a question on what the future cash flows will be on these assets after the potential of losing the NBA,” said Robert Fishman, an analyst at research firm MoffettNathanson.
    Nonetheless, Zaslav projected a message of confidence during the company’s earnings conference call Wednesday.
    “We feel good about where we are,” Zaslav said. “We have to look at all and consider all options, but the No. 1 priority is to run this company as effectively as possible.”

    Fodder for activists

    While the company continues to make progress adding streaming subscribers (gaining 3.6 million in the quarter) and moving closer toward sustained profitability, the decline in linear revenue and associated earnings continues to outweigh the growth in its flagship direct-to-consumer service, Max.
    Warner Bros. Discovery’s failure to gain traction over the past two years suggests it could be a prime target for an activist investor, who could conceivably push for Zaslav’s ouster or, at the least, ask for the divestment of assets such as CNN or the gaming division.
    The company also owns a number of other valuable businesses, including HBO, Warner Bros. studio and DC Comics. LightShed analyst Rich Greenfield has argued it should dramatically scale back its direct-to-consumer aspirations and focus on licensing content to other, larger streamers.
    While Zaslav openly discussed seeking partnerships and mergers during Wednesday’s earnings conference call, finance chief Gunnar Wiedenfels brushed away talk of potentially breaking up the company, citing the benefits of “one Warner Bros. Discovery.”
    “Every day I’m seeing evidence everywhere in the business of the benefits of those strategies,” Wiedenfels said.
    There are two clear hurdles for a potential activist. The first is Malone’s influence over the board. It’s possible an activist fund may be scared away from angling for board seats if it thinks Malone’s power is so great that any suggestions will be rendered pointless.
    The second is that Warner Bros. Discovery is arguably already pursuing the correct strategy given the company’s enormous debt load compared to its market valuation. If Zaslav is also looking for buyers for Warner Bros. Discovery, an activist’s pitch to sell the company may not be additive.
    Warner Bros. Discovery generated more than $6 billion in free cash flow last year, buoyed by a drastic drop in content spending from the writers’ and actors’ strikes. That number will drop to about $4 billion this year as Hollywood has gotten back to work, according to MoffettNathanson.
    Investors will surely want to know how losing the NBA will impact free cash flow in future years, assuming Warner’s lawsuit doesn’t net the company a package of games. But it’s possible that Malone and Zaslav’s strategy of focusing on streaming profitability and costs cuts will eventually pay off.
    Still, it seems clear the pressure on Zaslav to show that he can deliver value is mounting. Looking at its competitors, Disney’s media properties appear on the upswing after several years of pain, and Paramount Global has pulled the rip cord and agreed to a merger with Skydance Media.
    Part of why Zaslav fired CNN’s Licht last year is the narrative around him turned too toxic.
    Now Zaslav in danger of falling into the same trap.
    — CNBC’s Rohan Goswami contributed to this article.

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