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Disney's Fiscal Third-Quarter Results: A Mixed Bag with Promising Signs
Disney (DIS) recently released its fiscal third-quarter results, which presented a mixed picture against modest expectations. Despite this, there were several optimistic indicators in the company's restructuring plan and streaming strategy, suggesting that CEO Bob Iger's turnaround strategy is gaining traction. Wall Street appears to concur with this positive outlook.
Revenue and Earnings Overview
Disney's revenue rose approximately 4% year-over-year, reaching $22.33 billion. However, this fell slightly short of analysts' expectations of $22.5 billion, as per the consensus estimate by Refinitiv. The company's earnings-per-share (EPS) decreased by 5.5% annually to $1.03, surpassing forecasts of 95 cents.
Concerns about Disney's fiscal Q3 performance have lingered since the company reported its second-quarter results three months prior. The stock lost 13.5% in that period and was barely above breakeven for the year at the close of Wednesday. However, the future looks promising, with shares rising over 2% in after-hours trading to approximately $90 per share.
Disney's Restructuring Plan and Streaming Strategy
For several months, the expectation was not to anticipate significant progress from Disney in the past quarter. Turnarounds and restructuring plans demand time and patience to yield rewards. However, Disney managed to surpass these low expectations, which is a positive sign.
One of the key takeaways from the results was the growth in core subscribers and average revenue per user (ARPU), despite missing the total number of Disney+ subscribers. It's important to disregard the declining subscriber count at the Hotstar service in India, as these are considered low-value subscribers.
Direct-to-Consumer (DTC) Business and the Future
The total losses at the Direct-to-Consumer (DTC) business narrowed, which fuels optimism that losses will continue to decrease over the next 12 months and achieve profitability by the end of fiscal 2024. Disney's comments on Florida tourism on Wednesday evening echo what we've learned from travel companies this earnings season — international travel is resilient, but domestic has softened.
Disney Parks and Future Expectations
The parks business remains a key area to watch. Despite some softness, it continues to be a profit engine for the company, performing above 2019 levels. After a modest dip in early after-hours trading, Disney shares quickly rebounded. Interim CFO Kevin Lansberry announced that the company expects full-year total company revenue and operating income to grow in the high single digits on a percentage basis.
The current consensus had projected Disney's operating income to increase by 3%, implying that Disney is more profitable than what analysts currently credit it for. Some of this may be due to lower content spending related to the Hollywood writers and actors' strike and slightly lower than previously guided capital expenditures.
Disney's Restructuring and Cost Savings Plan
However, it's also a sign that Disney's expansive restructuring and cost savings plan, which is on track to exceed the initial goal of $5.5 billion, is working. We continue to have faith in Iger's plan to restore Disney to its former glory, but we also recognize that our existing price target has been overly optimistic about a quick fix. As a result, we are lowering our price target from $140 to $120, while maintaining our 1-rating on the stock.
Disney's Streaming Business and Future Plans
Starting with the streaming business, many headlines will discuss how subscribers sharply fell from April-quarter levels. However, this narrative is misleading. Global Disney+ subscribers declined to 146.1 million from 157.8 billion, but nearly all of this was associated with Disney+ Hotstar and not Disney's core markets.
It's crucial to distinguish between the two because Hotstar is a fractional average revenue per user service that isn't material to Disney's financial results. These are low-value subscribers that are likely to drop off because Disney refused to pay an exorbitant price to secure the Indian Premier League cricket rights.
Disney+'s Performance and Pricing Strategy
A more accurate way to assess Disney+'s performance is by examining its core markets. These actually increased by about 800,000 subscribers to 105.7 million from April, even as APRU increased to $6.58 from $6.47. This is thanks to higher per-subscriber advertising revenue in domestic markets and price increases in certain international markets.
Disney's pricing strategy and the introduction of an ad tier option appear to be working. The company expects core Disney+ subscriber growth to rebound in its fiscal fourth quarter. Disney clearly believes it can win more by raising prices on its streaming offerings or migrating more subscribers to the advertiser-supported tiers, which the company can profit more from.
Disney also announced price increases on its ad-free Disney+ offering starting in October and will expand its ad-tier offering to select markets in Europe and Canada beginning November 1. Taking a cue from Netflix, Disney is "actively exploring" how to address account sharing of its services and plans to address this further in 2024.
Disney Media and Entertainment Distribution (DMED) Segment
In the Disney Media and Entertainment Distribution (DMED) segment, we were pleased to see Direct-to-Consumer red ink in the fiscal third quarter cut in half from a year ago to a loss of $512 million, which was better than the expected $758 million loss. Quarter over quarter, that loss of $512 million was narrower by $147 million. Disney said it continues to expect to reach DTC profitability by the end of fiscal 2024 with more meaningful improvement by the middle of that year.
Also in DMED, the Linear Networks business continues to face significant challenges not only from cord-cutting but also from a weaker advertising market. The growth in advertising revenue from DTC is partially offsetting some of the Linear declines. But headwinds remain across all of entertainment except for sports.
ESPN and Future Plans
This brings us to ESPN, where ad revenue actually increased 4% in the quarter. We didn't get a lot of information on the deal announced Tuesday between ESPN and Penn Entertainment to bring ESPN into the sports betting marketplace world. However, it's a logical step that meets what sports fans have been waiting for.
As for how else Iger is thinking about ESPN, the CEO reiterated that the company is considering potential strategic partnerships for the worldwide leader in sports where Disney retains control. Iger noted that many different entities have expressed interest and he plans to share more details at a later date when the company is further along in the process.
Disney Parks, Experiences and Products (DPEP) Segment
As for the Disney Parks, Experiences and Products (DPEP) segment, revenues exceeded expectations but inflationary cost pressures, like wages and some overall softness at Walt Disney World in Florida, impacted margins, which were down about 3 percentage points from the prior year.
Disney has noticed that some of the post-Covid pent-up demand has leveled off in Florida, likely a result of tourists visiting other markets. Despite the recent tempering of demand, Disney's theme park business was still much more profitable in the quarter than it was before the pandemic.
Walt Disney World's operating income was almost 30% higher versus 2019 when accounting for the accelerated depreciation related to the closure of the Star Wars: Galactic Starcruiser hotel. Thanks to the ongoing strength of Disney's international parks and cruise line business, Disney expects fourth-quarter operating margins at DPEP to exceed the prior year. Since margins were about 27.5% last year, the current consensus of about 22.7% in the September quarters looks significantly low.
In conclusion, while the results were mixed, there are clear signs that Disney's restructuring plan and streaming strategy are working. The future looks promising, and we continue to have faith in Iger's plan to restore Disney to its former glory. However, it's important to remember that turnarounds and restructuring plans require time and patience
Disney's fiscal third-quarter results offer valuable insights for new businesses, particularly those in the streaming and entertainment sectors. Despite mixed results, Disney's restructuring plan and streaming strategy show signs of success, demonstrating the value of patience and long-term planning in business strategy.
For businesses entering the streaming market, Disney's experience emphasizes the importance of focusing on core markets and high-value subscribers. The company's decision to increase prices and introduce an ad tier option, despite a decline in overall subscribers, suggests a focus on profitability rather than sheer numbers. This strategy could be a valuable lesson for new businesses aiming to balance growth and profitability.
Disney's handling of its Direct-to-Consumer (DTC) business also offers a lesson in managing losses and aiming for long-term profitability. Despite ongoing losses, the company's commitment to achieving profitability by the end of fiscal 2024 shows the importance of setting clear, realistic financial goals.
Finally, the company's approach to its Parks, Experiences and Products (DPEP) segment highlights the need to adapt to changing market conditions and customer behavior, particularly in the post-Covid era.
In conclusion, while Disney's third-quarter results were mixed, they offer several valuable lessons for new businesses: the importance of strategic planning, focusing on profitability, managing losses, and adapting to market changes.
Article First Published at: https://www.cnbc.com/2023/08/09/disney-quarter-wasnt-clean-but-we-see-evidence-ceo-bob-igers-plan-is-working.html
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