Walt Disney (DIS) Pre-Earnings Analysis – What to Expect

The Walt Disney Company (DIS), a leading media and entertainment company, posted mixed results for its fiscal 2023 third quarter. The company reported third-quarter adjusted EPS of $1.03, beating analysts’ expectations of $0.98. Its revenue came in at $22.33 billion, lower than the consensus estimate of $22.53 billion.

The company is set to report its fourth quarter and fiscal full year 2023 financial results on November 8, 2023, after the market closes. Analysts expect DIS’ revenue and EPS for the fourth quarter (ended September 2023) to increase 6.2% and 137.6% year-over-year to $21.41 billion and $0.71, respectively.
For the fiscal year 2023, the company’s revenue and EPS are expected to grow 7.7% and 4.2% from the prior year to $89.09 billion and $3.68, respectively.
Shares of DIS have plunged more than 18% over the past six months and 5% year-to-date.

Let’s review in detail what has happened over the past few months and discuss the key factors that could influence DIS’ performance in the near term:

Recent Developments to Further Streaming Objectives

On November 1, DIS announced that it would acquire the remaining 33% stake in Hulu, LLC held by Comcast Corp.’s (CMCSA) NBC Universal (NBCU) for at least $8.60 billion, a deal that would give DIS complete control of the streaming service. Disney had run Hulu since 2019, when Comcast gave up its authority to Disney and effectively became a silent partner.

On September 11, DIS and Charter Communications, Inc. (CHTR) announced a transformative, multi-year distribution agreement that maximizes consumer value and supports the linear TV experience as the industry evolves. As part of the agreement, the majority of DIS’ networks and stations will be restored to Spectrum’s video customers.

Under this deal, Disney+ Basic ad-supported offering will be included in Spectrum TV Select Video packages. Also, ESPN+ will be included in the Spectrum TV Select Plus Video package, and ESPN’s flagship direct-to-consumer Service will be made available to Spectrum TV Select subscribers upon launch.
In a joint statement, Robert A. Iger, DIS’ CEO and Chris Winfrey, President and CEO at CHTR, said, “Our collective goal has always been to build an innovative model for the future. This deal recognizes both the continued value of linear television and the growing popularity of streaming services, while addressing the evolving needs of our consumers.”

Also, on August 9, Disney+ announced that an ad-supported offering will be available in select markets across Europe and Canada starting November 1 after the successful ad-tier launch in the U.S.

Plans to Double Investment in Parks and Cruises Business

DIS said in a securities filing it will nearly double its planned investment in its parks segment to more than $60 billion over 10 years. With all other divisions struggling, Disney’s theme parks, experiences and products segment has been a bright spot in the third quarter. The division saw a 13% rise in revenue to $8.30 billion, mainly driven by strength from its international parks.

But the company’s domestic parks, particularly Walt Disney World in Florida, have witnessed a slowdown in attendance and hotel room occupancy.

Bleak Financial Performance in the Last Quarter

For the third quarter that ended July 1, DIS reported revenues of $22.33 billion, up 3.8% year-over-year, primarily driven by growth in its parks, experiences and products division. However, its top-line numbers came short of analysts’ expectations.

Revenues and operating income from the Disney Media and Entertainment Distribution segment dropped 1% and 18% year-over-year to $14 billion and $1.13 billion, respectively.

The company reported $2.65 billion in restructuring and impairment charges, dragging it to a rare quarterly net loss. Most of these charges were what DIS called “content impairments” related to pulling content off its streaming platforms and ending third-party licensing agreements. Disney’s net loss was $460 million, or $0.25 per share, compared to net income of $1.41 billion, or $0.77 per share, in the prior year’s quarter.

Excluding those impairments, the company recorded an adjusted EPS of $1.03, compared to $1.09 during the year-ago period.

Subscriber losses also continued, with the company reporting 146.1 million Disney+ subscribers during the third quarter, a decline of 7.4% from the prior quarter. Most subscriber losses were from Disney+ Hotstar, where Disney witnessed a 24% drop in users after it lost the rights to Indian Premier League cricket matches.

Disappointing Historical Growth

Over the past three years, DIS’ revenue grew at a CAGR of 8.7%. However, the company’s EBITDA and net income declined at CAGRs of 5.7% and 28.5%, respectively. Its EPS decreased at a CAGR of 31.1% over the same period.

Also, the company’s tangible book value and levered free cash flow declined at respective 4.6% and 6.5% CAGRs over the same time frame.

Streaming Division Faces Several Challenges

Global media and entertainment conglomerate DIS’ streaming division lost $512 million in the fiscal 2023 third quarter, compared to $1.06 billion during the same quarter of 2022. It brings its total streaming losses since 2019, when Disney+ was introduced, to more than $11 billion.

To make the streaming business more profitable, DIS’ CEO Bob Iger has shifted the focus at Disney+ from quick subscriber growth, which requires expensive market campaigns, to making more money from the existing Disney+ subscribers. The price for access to an ad-free version of Disney+ increased to $13.99 per month beginning October 12, previously $10.99 per month.

The company also increased the price of Hulu without ads to $17.99 per month, a 20% price hike. However, the monthly price of Disney+ and Hulu’s ad-based tiers and the annual price of ad-based Hulu remained unchanged.

“We’re obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier,” Mr. Iger told analysts on a conference call.
Along with this pricing news, the company announced it will roll out tactics to mitigate password sharing.

A primary challenge Disney faces is heightened competition in the streaming industry. Among various video streaming giants, including Netflix, Amazon Prime Video, and emerging entrants such as HBO Max and Apple TV+, DIS must differentiate itself in terms of content quality and pricing to stand out in this crowded market.

Further, as consumers continue to feel the pressure of increasing prices and persistent inflation, they will cut back on their media and entertainment spending.

Continued Issues in Media Business

The company still relies on old-line channels such as ESPN, its flagship sports brand, and ABC for approximately a third of its operating profits. Cord-cutting, sports programming costs, and a soft advertising market hurt these outlets. DIS’ traditional channels had $1.90 billion in third-quarter operating income, a decline of 23% from a year earlier.

It was the second straight quarter in which Disney’s traditional TV business reported a sharp drop in operating income. The company cited lower ad sales at ABC, partially due to viewership declines, lower payments from ESPN subscribers, and increased sports programming costs.

Bottom Line

While DIS’ turnaround plan, including a mix of price hikes across its streaming operations, increasing ads, cutting costs, and other strategic initiatives, could drive long-term growth, the company grapples with several challenges. In August, Disney’s shares hit a new nine-year low below $84 as investors were unconvinced with CEO Iger’s turnaround plan.

The media and entertainment giant posted mixed financial results in the last reported quarter, plagued by streaming woes and increased restructuring costs resulting from pulling content from its platforms.

Further, DIS’ short-term prospects seem uncertain as the company continues to struggle with making its streaming business profitable, improving the quality of its films, and the slowdown in the traditional media business, which is challenged by declining subscribers and a soft advertising market.
Disney also faces heightened competition. The streaming industry is exceptionally competitive, and Disney must strike a proper balance between content quality and prices to stand out in this crowded market and be profitable.

Given its deteriorating financials, decelerating profitability, and uncertain near-term prospects, it could be wise to avoid this stock now.