Walt Disney (DIS) – Earnings Review – February 8, 2024
Demand
Disney missed revenue estimates by 0.6%. It met core Disney+ subscriber guidance and slightly beat Hulu subscriber estimates. Core Disney+ subscribers fell Q/Q due to price hikes going live. Core Disney+ revenue per user rose by more than $1 Y/Y as a result. Streaming revenue rose by 14% Y/Y to reach $6.08 billion.
*The 3 revenue reporting segments are new with no data from Q1-2021; Core Disney+ Subs is also a newer disclosure with no comparable data from Q1-2021.*
*Park re-openings through fiscal year 2022 helped growth a lot.*
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Profitability
- Beat EBIT estimates by 9.2%. Expense discipline drove the outperformance.
- Beat $1.04 earnings per share (EPS) estimates by $0.18. EPS rose 23% Y/Y.
- Beat $0.88 GAAP EPS estimates by $0.16.
- Beat -$350 million free cash flow (FCF) estimates by $1.2 billion. It reiterated annual FCF guidance, which means this was largely expense timing-related.
Source: Brad Freeman – SEC Filings, Company Presentations, and Company Press Releases
Balance Sheet
- $7.2 billion in cash.
- $3 billion in investments.
- $41 billion in total debt.
- Share count rose by 0.4% Y/Y.
Disney plans to raise its reinstated dividend payment by 50% from January 2024 to July 2024. It has been reauthorized by its board to repurchase shares and announced a $3 billion buyback to be conducted this year.
Guidance & Valuation
Disney reiterated its $8 billion 2024 FCF guide, which is 1.3% better than expected. It also guided to at least $4.60 in fiscal year 2024 EPS, which is at least 5.0% better than expected. It now expects to do at least $7.5 billion in annual cost savings vs. $7.5 billion previously. Finally, it will do at least as well as its previous guidance of slow Y/Y OpEx growth.
Disney trades for 23x 2024 earnings and 28x 2024 FCF. EPS is set to grow by 22% this year while FCF is set to grow by 63%.
Call & Release Highlights
ESPN:
Disney talked extensively about ESPN. Iger alluded to sports leagues realizing they want to own more of their distribution, which meshes very well with Disney’s rumored ESPN/NFL partnership. In other news, leadership talked about the ESPN, Warner Brothers, and Fox deal this week. The three will combine all sports content rights to launch a non-exclusive, consolidated app across the various streaming services, like Max. Disney’s unit economics on a subscriber won through this new bundle will be identical to what it’s paid for ESPN subscribers via linear outlets.
Next fall, a bit later than expected, Disney will launch a standalone ESPN streaming app and also an option to bundle with Disney+ and Hulu. This will include all of its content rights, ESPN Bet, interactive e-commerce features and a deep array of stats to cater to sports nerds like myself. Disney wants ESPN to be the “premium digital sports brand” and is growing more confident in sports being a high-return investment area.
Despite linear’s rapid decline, ESPN continues to grow traffic Y/Y, enjoy strong advertising demand and set viewership records across several events. This is the lone healthy piece of linear remaining, and Disney will be fully in charge of when the direct-to-consumer shift occurs.
As an important aside, sports EBIT margin was helped by timing of the College Football Playoff and NFL Divisional Round. Normalized for these items, ad growth was strong this past quarter and is looking even stronger for the current quarter.
Gaming:
Disney announced a $1.5 billion equity stake in Epic Games – the creator of Fortnite. Fortnite has toyed with using Disney intellectual property (IP) in its universe, which has been very well received from gamers. Now, the two will work to create a new, co-branded immersive universe to interact with the Disney brands and characters that gamers know & love. The demographic shift to gaming-based screen time has been strong for younger generations. This is Disney’s move to claim a bigger part of the tailwind. It has had plenty of success with licensing nine $1 billion gaming titles; it wants to enjoy a more direct financial benefit from this content resonance. Disney will look to use this relationship as another content distribution channel too.
Films:
Disney led the content industry for Oscar, Emmy and Golden Globe nominations. The firm had a few successes in 2023, but also far too many disappointments and too much cash burn. Iger has obsessively looked to right-size film budgets and shifted to a focus on content quality rather than quantity. Disney has thrown out several projects in the film pipeline and, today, Iger feels “great about the path the film studios are on.” All of these studios are leaning into their very best brands and franchises to finally give the people what they want: elite entertainment.
Its 2024 slate will include Taylor Swift’s Era Tour film while 2025 will include new Captain America, Zootopia and Avatar films. We’ll finally get a new Star Wars film in 2026 along with Frozen 3 and a new Toy Story.
Streaming:
The Hulu, Disney+ bundle beta testing “far exceeded” all expectations. It’s driving down churn even more than anticipated. It will fully launch next month. Like Netflix, Disney sees a large opportunity to restrict paid sharing to drive subscriber growth. It thinks the percentage of its viewers impermissibly accessing accounts is similar to Netflix before it cracked down. Later this year, account holders will be prompted to pay for added profiles and sharers will be prompted to purchase their own accounts. It sees a subscriber growth tailwind coming from this starting late in calendar 2024.
Disney reiterated its path to positive streaming EBIT by this fall and told us it’s “never been more confident” in this being a sustainable business with 10%+ EBIT margins. Music to my ears. Bluey was the #1 most streamed show in the USA in recent weeks, while Disney owns 6 of the 10 most streamed movies from 2023.
From an advertising perspective, Disney successfully launched the subscription tier across Europe and Canada this past quarter. It now has 1,000 global ad buyers vs. 100 a couple quarters ago.
- Revenue per user to rise Q/Q again next quarter due to continued impact of price hikes. It will also go live with its Spectrum Charter Disney+ bundle, which will offset a portion of this help while leading to 5.75 million subscriber adds Q/Q.
- International Disney+ Core subscribers to fall Q/Q next quarter due to price hikes.
- It is highly confident in steady subscriber compounding over the long haul.
- It will bundle Disney+ and Star+ in Latin America starting later in the year.
- Disney expects to close its deal for the remaining Hulu stake this year.
Parks & Experiences:
Hong Kong and Shanghai parks were the standouts this quarter, but all performed well vs. expectations. Walt Disney World was again weak as expected. This is related to lapping its 50th anniversary while comps there will remain tough through next quarter. It remains optimistic about strong EBIT growth for the segment this year.
Linear:
Ad and affiliate revenue remain highly challenged due to ongoing cord cutting. This is why streaming profits are so vital for Disney. That must turn into the cash cow to replace this decades-long profit driver. It’s not ready to be that replacement just yet, which has created a large transition headache and, I believe, a weak stock.
Take
This quarter gave me everything I wanted. The likelihood of beating its schedule to streaming profits is growing, the long term margin guide is highly encouraging and the cost base reset is poised to drive multi-year profit compounding well over 10%+ (20%+ this year). Adults have re-taken charge of this company and seasoned operators with deeply relevant experience are now making their marks. The foundation for a turnaround has been laid and Disney is beginning to rediscover its magic. It has the brands, the balance sheet and the infrastructure to keep being a content powerhouse. It’s now merging these strengths with better execution. That needs to continue and I’m increasingly confident that it will. The 2023 thesis is fully coming to life as Disney comes back to life too. It’s running a rational business and taking care of shareholders… finally.
