Disney (DIS) – Q2 2024 Earnings Review – May 7, 2024
Demand
- Disney roughly met revenue estimates. Some media pundits are calling this a miss, which is technically correct. But the miss was smaller than 0.1%.
- Direct-to-consumer (DTC) (streaming) revenue rose 13% Y/Y.
Disney missed total subscriber estimates. This was solely related to India, where it sold a majority stake in its operations and has pivoted its approach there. Importantly, Core Disney+ Subscribers (which are higher value and represent its sole focus area for this product) roughly met expectations. It was technically a small beat, but like with revenue, the difference was a rounding error, so we’ll call it in line.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profitability & Margins
- Beat $1.11 EPS estimate by $0.10.
- Beat EBIT estimate by 5.1%.
GAAP margins were hard hit by a $2 billion restructuring and impairment charge from its Star India business. This is a non-cash charge. It was inevitably coming after selling a majority stake in this business as well as dramatically pivoting its strategic approach in that country. We just didn’t know precisely when it was coming.
This was Disney’s 2nd best FCF margin result in two years and its best EBIT margin result in 9 quarters. EPS rose by 30% Y/Y, FCF rose by 21% Y/Y and EBIT rose by 17% Y/Y.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $6.6B in cash & equivalents.
- $3B in investments; $1B in vacant land.
- $39.5B in debt.
- Share count rose slightly Y/Y. Repurchased $1 billion in shares during the period.
Guidance & Valuation
- Raised annual EPS guide from $4.60 to $4.70, which met estimates.
- Raised annual FCF guide from about $8B to more than $8B vs. $8.5B estimates.
Disney reiterated its cost savings target for the year. This, to me, when paired with the profit raises, means demand for fiscal Q3 and Q4 is expected to be slightly better than expected.
Disney trades for 23x 2024 earnings, with earnings expected to grow by 25% Y/Y.
Call & Release Highlights
Streaming Profitability & Entertainment Overall:
The entertainment portion of Disney’s streaming business turned profitable ahead of schedule. Higher pricing in North America (UCAN), better than expected cost savings, strong live TV subscriber fees for Hulu and more ad revenue all drove the outperformance. Earlier-than-expected profits are set to revert to losses in Q3 due to India content rights seasonality. After that, the segment will permanently inflect to positive EBIT in Q4 and beyond. Disney also reiterated that its streaming business overall (including sports) will turn profitable in Q4 as well. It sees continued margin expansion in 2025 as this business morphs into a real profit driver.
Core Disney+ subscribers got a boost from the previously signed Charter bundle deal. This led to 8 million domestic subscriber gains Q/Q. Subscribers within this bundle are engaging at expected rates. Conversely, price hikes and wholesale tweaks ex-UCAN led to roughly 2 million net subscriber losses internationally (as expected). Average revenue per user (ARPU) rose by 13% Y/Y internationally via price hikes; ARPU fell slightly Y/Y domestically due to Charter wholesale mix shift. Disney sees subscriber growth being flat in Q3 and resuming in Q4.
- Domestic U.S. Disney+ subscribers rose 17% Y/Y (helped by Charter).
- Total Hulu subscribers rose by 1% Y/Y to 50.2 million.
- ARPU fell Y/Y for Hulu and Hotstar due to lower advertising revenue.
Linear:
As expected, linear declines were across the board:
- Linear revenue fell 8% Y/Y; linear EBIT fell 22% Y/Y.
- Content sales & licensing fell 40% Y/Y (lack of theatrical releases).
- Overall streaming EBIT margin was -0.3% vs. -12.1% Y/Y.
Scripted Content & Licensing:
Disney has greatly cut back on its film pipeline to lean into only its best brands. This week will be the first real test of that change, with the new Planet of the Apes movie set to hit theaters.
From a scripted series perspective, Shogun is tracking to be FX’s most watched show ever. It has driven the 2nd largest amount of Hulu sign-ups of all time for a single program (behind Black Panther Wakanda Forever). Specifically, 17 of the top 20 shows on its streaming platforms were from its linear business. These notes hammer home the idea that linear and streaming audiences are still quite incremental. No reason to blow up the linear channel while it’s still generating considerable value and profit. Linear is dying… but as it dies… the continued profit will help Disney bridge the DTC evolution gap as it ramps streaming cash flows.
From a content licensing point of view, Q3 results should materially improve based on planned theatrical releases. This revenue is lumpy. Furthermore, it hinted at entertaining more content licensing deals with Netflix. It won’t just start licensing everything, but does think there are a couple more opportunities here.
The Hulu Bundle, a Planned ESPN Tile & Engagement:
Hulu was added to Disney+ in March for an in-app bundling option. The results thus far have been “encouraging. Later this year, it will add an ESPN button to Disney+ with a plethora of sports content to drive better retention. This will be step one of Disney’s plan to move ESPN to direct-to-consumer (DTC) next fall. It will not stop offering ESPN on linear channels after this happens. This is a big part of improving its engagement (along with things like better content recommendations). Nielsen had been reporting a negative engagement trend for Disney+ which more recently turned positive. Maybe Hulu is already helping.
Sports:
EBIT declines in sports were driven by timing of content rights. It had an extra College Football Playoff (CFP) game and an extra NFL playoff game for this period compared to the Y/Y result. Improvements in Star India profitability as that segment trims content spending helped to offset this headwind. ESPN enjoyed some nice ratings wins during the quarter. Caitlin Clark single-handedly drove women’s March Madness records, while Monday Night Football set two decade viewership records as well.
- Iger is confident in securing a long term deal with the NBA.
- ESPN+ will still be a service once ESPN goes DTC.
Advertising Demand & Password Sharing:
Importantly, ESPN domestic ad sales rose by high single digits Y/Y when removing the positive impact of additional CFP and NFL games. Through April, demand for ESPN ads has been quite healthy, with sales accelerating.
Overall, the Disney+ product now has 22.5 million ad tier subscribers. With Google and The Trade Desk partnerships, Disney is committed to building a best-in-class tech stack here to drive better targeting and reporting for advertisers. That is the best way to fund hefty, consistent content spending needs. It is dealing with sharp industry supply growth thanks to Netflix entering the space, but sees strong demand overcoming this short term headwind through the year and into 2025.
The password sharing crackdown has not yet begun. It will begin testing this month and will broadly roll-out in September.
Experiences:
International growth in Hong Kong was a standout; Walt Disney World accelerated EBIT growth now that it has lapped the 50th Anniversary. Disneyland grew traffic, but results fell due to wage programs adding costs compared to the Y/Y period.
In Q3, the Experiences segment should have roughly 0% Y/Y EBIT growth. This is due to one-off items like cruise pre opening costs, higher Disneyland wages in the Y/Y comp, media and tech expenses and Easter timing. It’s also seeing some demand normalization following the post-Covid peak and evidence of some moderating travel. Despite this, it reiterated annual guidance for the segment and told us that strong forward bookings point to “robust” continued growth.
It just secured preliminary approval for its planned Disneyland expansion from the Anaheim City Council. Disney plans to bring Avatar to this park once it gets final approval. It sees several opportunities across the segment to consistently grow traffic and profits in the coming years.
- Domestic revenue rose 7% Y/Y with EBIT rising 6% Y/Y. Ticket price increases helped drive growth here.
- International revenue rose 29% Y/Y with EBIT rising 87% Y/Y. Ticket price increases and more traffic helped drive growth.
Important CFO Macro Quote:
“We don’t see much trading down at our parks. The lower end consumer appears to be making more budget choices, but we aren’t seeing that ourselves. We tend to serve more of a high income consumer. If anything, as consumers decide to consolidate streaming services, we may be the beneficiaries of that.” – CFO Hugh Johnston
Take
I understand that the stock is selling off, but that doesn’t change my view of this being a very positive quarter. Profit targets were boosted despite maintained cost savings guidance. Streaming EBIT is right on schedule (actually a little ahead). Bookings within the experiences segment point to resilient demand amid worsening macro. The overall subscriber miss doesn’t bother me in the least, as Disney is now a minority owner of Star India. And? Core Disney+ subscriber growth was slightly ahead of expectations. Anyone calling this a bad report is looking at how the share price reacted. I would tell them to read this review before coming to that conclusion. Or don’t… just more inefficiency for me to take advantage of. I’m pleased with the results.
