Disney (DIS) reported in-line fiscal 2023 second-quarter results after the closing bell Wednesday, thanks to strength in its theme parks business. However, a miss on subscriber count and moving pieces related to management’s restructuring plan caused shares to sink more than 4% in after-hours trading. We still stand by CEO Bob Iger’s vision for the company. Revenue increased about 13% year-over-year to $21.82 billion, beating analysts’ expectations for $21.78 billion, according to the consensus estimate compiled by Refinitiv. Earnings-per-share (EPS) fell 14% on an annual basis to 93 cents, matching forecasts. Botton line We’ve been saying for weeks that fiscal Q2 was not the one to rush in and get in ahead of. Disney’s future earnings potential is still very promising thanks to the continued strength at the cash-generating theme parks and the upcoming profitability at streaming. But the company’s cost structure was too high coming into this year, and it will take time for management’s $5.5 billion savings plan to materialize. Furthermore, the direct-to-consumer (DTC) business is still several quarters away from reaching its highly awaited inflection point where it no longer drags down the operating results of the entire company and instead provides a positive contribution to earnings. Higher prices — even at the cost of some subscribers — and the advertising tier should help the business. Once Disney can prove that it can run a profitable streaming business at scale, the market will be more willing to ascribe a higher valuation to it. Until then, we look forward to seeing how the changes Iger and his team have in store play out. Disney lost its way for a few years, culminating back in November in the firing of Iger’s handpicked successor Bob Chapek and the return of Iger himself to the helm. However, the company is in the early days of becoming a more sustainably profitable company. Quarterly commentary Starting with the streaming business, we were pleased to see fiscal Q2 direct-to-consumer operating losses narrow to $659 million, as seen in the DMED Operating Income section above. That was a smaller loss than expected and smaller than a loss of $887 million in the year-ago period. Not represented in the table, the Q2 loss was also smaller by $400 million quarter over quarter. The quicker Disney can get this business to profitability, the higher the value the market will give it. However, some of the DTC outperformance was due to timing shifts, which will move into the fiscal third quarter, causing losses to widen by about $100 million versus Q2. This pegs next quarter’s losses at about $759 million versus estimates of $657 million. But the quarter-to-quarter increase is only expected to be a “blip,” according to CFO Christine McCarthy with significant improvement in the quarters ahead. Disney+ subscribers of 157.8 million, as seen in the Subscriber Data section, fell short of expectations by a wide margin as domestic subs declined partly due to the impact of past price increases, which helped domestic average revenue per user (ARPU) increase by 20%, which is a common trade-off that occurs when price increases are pushed through. During the earnings call, Iger mentioned this quarter’s results demonstrate the product’s pricing elasticity. Furthermore, management acknowledged churn could be a potential issue for one more quarter before returning to domestic sub-growth in the fiscal fourth quarter. It’s worth mentioning that most of Disney’s decline in subscribers was due to its Disney+ Hotstar offering in India. However, it’s not worth dwelling on this too much since each subscriber there generates such a small amount of revenue. To put it in perspective, a Disney+ Hotstar APRU is only 59 cents compared to a domestic APRU of $7.14. In today’s market where profits are crucial, it’s important for Disney not to chase after “low-value” subscribers that don’t offer much revenue potential. As for theme park sales, this profitable growth engine remains in great shape, jumping nearly 38% to $6.76 billion in fiscal Q2. Management called out the international parks as a bright spot in the quarter, which more than doubled from a year ago. Behind the strength were higher attendance and improved financial results at Shanghai Disney Resort, which bounced back from lockdowns, as well as Disneyland Paris and Hong Kong Disneyland. Domestic Park attendance increased 7% from last year, but operating income was slightly below last year’s levels due to cost pressure from wages and other inflationary trends. Iger’s Strategy Updates Alongside fiscal Q2 results, we got some more news on the strategic changes Iger has for the company, about six months into his return as CEO. Here’s what is of note. The company is on track to meet or exceed its $5.5 billion cost savings target but the impact will start to show up in the results in fiscal year 2024. Disney plans to soon offer a one-app experience that integrates Hulu content with Disney+ for domestic customers. Management believes this will improve the customer experience, create more opportunities for advertisers, grow engagement, lessen churn, and reduce costs. It’s clear that Disney sees advertising as an essential component of its streaming strategy. The ad tier on Disney+ is expected to launch in Europe by year-end. The company plans to put through another price increase on its ad-free Disney+ tier later this year. Disney plans to remove certain content from its streaming platform, which will result in an impairment charge of $1.5 billion to $1.8 billion recorded next quarter. Additionally, Disney plans to produce lower volumes of content for streaming — but in a way, that should not impact subscriber growth. Management likely wants to do away with some of their “fringe” content that doesn’t appeal to the masses. (Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Disney CEO, Bob Iger speaking with CNBC’s David Faber after announcing Disney restructuring on Feb 9th, 2023.
CNBC
Disney (DIS) reported in-line fiscal 2023 second-quarter results after the closing bell Wednesday, thanks to strength in its theme parks business. However, a miss on subscriber count and moving pieces related to management’s restructuring plan caused shares to sink more than 4% in after-hours trading. We still stand by CEO Bob Iger’s vision for the company.
