Julio Aguilar
Just when you think you’ve discovered something in the market, you’re sure to be in for some surprises. One such case was when, after the market closed on 9th February, the management team the walt disney company (NYSE:DIS) announced financial results covering the first quarter of the company’s 2023 fiscal year. Until the earnings release, I had some expectations. However, the company remained mixed on several issues. Given the general pessimism around that particular firm and the market more broadly, I would have anticipated a significant drop in the share price in response. Instead, the company’s shares declined marginally as the market opened. Between these new developments and the positives announced during the quarter, I’d make the case that the company still certainly offers some attractive upside. But that upside path may be a bit more tumultuous than expected.
Streaming hit…kind of
In an article I wrote leading up to the company’s earnings release, I mentioned that the streaming numbers would be incredibly important. Honestly, I expected the company to report continued growth in the number of subscribers for the Disney+ platform. But I was surprised just the opposite. The company actually saw the number of subscribers drop from 164.2 million to 161.8 million. Interestingly, though, this data isn’t all bad. However, first we need to understand where the decline came from.
the walt disney company
According to the management, the number of domestic customers, which are from the US and Canadian markets, is expected to increase from 46.4 million in the last quarter of the company’s 2022 fiscal year to 46.6 million in the first quarter of 2023. Disney+ and Hotstar tie-in subscribers grew from 56.5 million to 57.7 million. These, together with domestic customers, are referred to as core customers for the company. In the span of just one quarter, the number jumped from 102.9 million to 104.3 million for a sequential gain of 1.4 million.
the walt disney company
The weakness came from Hotstar customers. It fell from 61.3 million to 57.5 million. At first glance, this may indicate some pain for the company. However, the situation is not that bad. I am saying this because we need to consider the ARPU declared by the company. During the first quarter, the company experienced a decline in ARPU in both domestic and international markets (the latter excluding the Hotstar tie-in). Domestically, the drop was from $6.10 per month to $5.95 per month. In the international market, it ranged from $5.83 per month to $5.62 per month. But when it comes to Hotstar setup, the company has actually registered an increase in ARPU from $0.58 per month to $0.74 per month. This may not seem like such an important step. But on its own, this would translate to an additional $84 million per year in revenue, compared with no increase in ARPU, with the company’s subscriber base up by the end of the first quarter. This increase was actually enough to increase the overall ARPU for Disney+ from $3.91 per month to $3.93 per month. Looking at the number of global customers, this works out to an additional $38.8 million per year in revenue if we keep the number of customers where it ended the first quarter.
Outside of Disney+, the entertainment conglomerate reported some other positive developments. For example, the number of subscribers to ESPN+ grew from 24.3 million to 24.9 million in the quarter. With this the ARPU increased from $4.84 per month to $5.53 per month. Meanwhile, the number of Hulu subscribers grew from 47.2 million to 48 million, with monthly ARPU climbing from $19.18 to $19.53. These improvements were instrumental in increasing the company’s annual streaming revenue to $20.53 billion. This compares to $19.98 billion if we use data for the fourth quarter of fiscal year 2022. This means that, while streaming may not have posted the growth I anticipate, it should underpin overall revenue and cash flow growth.
pain points have improved
Over the past year, Disney has been under attack for ‘woke up’. Many of its critics believe that this will ultimately hurt its business model. Regardless of your own personal opinion on these matters, it cannot be denied that the company is showing surprising strength in other aspects of its operations. Most notable include its parks, resorts, and other related properties. Under the Parks & Experiences segment, the company reported domestic revenue in the latest quarter of $6.07 billion. This is up 26.5% from the $4.80 billion reported just a year ago. Meanwhile, internationally, revenue rose 27.1% to $1.09 billion from $861 million.
the walt disney company
It was not just revenue that strengthened on this front. Profits also improved year on year. In the domestic market, Parks & Experiences reported an operating profit of $2.11 billion. This is up 35.9% from the $1.56 billion reported a year ago. Meanwhile, international profits increased from $21 million to $79 million. This is a year-over-year improvement of 276.2%. Overall, revenue under these operations increased by 26.6% while operating profit increased by 39.1%. Clearly, there is high demand for the company’s parks, resorts and other related properties. In addition to the parks being hit by the COVID-19 pandemic, the theatrical distribution side of the company was also slammed. There has also been a tremendous improvement in this as compared to last year. Sales came in at $1.14 billion in the first quarter. This is materially higher than the $529 million reported a year ago.
other important notes
On top of the above improvements and challenges the company reported for the first quarter, it also reported some other interesting data points that are worth mentioning. For starters, revenue came in stronger than expected, totaling $23.51 billion. That was actually up from the $21.82 billion reported in the same quarter a year earlier and was $242 million more than analysts expected. On the bottom line, earnings per share came in at $0.70. This compares to $0.63 per share from continuing operations at the same time a year ago. This increased net income from $1.10 billion to $1.28 billion. Adjusted earnings per share, meanwhile, came in at $0.99. That was actually down from $1.06 per share, but it beat analysts’ expectations of $0.20 per share.
Author – SEC Edgar Data
That’s not to say that all of the fundamental data provided by the company was great. Operating cash flow was problematic. It came to a negative of $974 million. By comparison, it was negative $209 million at the same time a year ago. Even if we adjust for changes in working capital, it will fall from $4.47 billion in the first quarter of the company’s 2022 fiscal year to $3.30 billion at the same time this year. As a result of this weakness in cash flow, the debt picture of the company deteriorated somewhat. Net debt for the quarter came in at $39.91 billion. That’s up $3.15 billion from just a quarter ago.
some major events
Based solely on the above results, I would have actually forecast a drop in share price for the company. However, management came out swinging and revealed some key plans. Perhaps most important is a $5.5 billion cost-cutting initiative. Of this, $2.5 billion is expected to be non-material related costs, with approximately 50% of that amount coming from marketing initiatives, 30% coming from labor reductions, and 20% coming from other miscellaneous sources. Of this amount, approximately $1 billion in savings is included in the company’s projections for the 2023 fiscal year. The rest of it will be incremental but is expected to be fully operational by the end of the 2024 financial year. The company is also targeting approximately $3 billion in annual savings in material cost reductions. This does not include expenditure on sports. Besides, we don’t have much to go on.
the walt disney company
To launch this cost-cutting plan, the company said it is reducing its workforce by 7,000. For those worried this could mean no future dividends, the company said it plans to reinstate the dividend by the end of the 2023 calendar year. This is also another positive which can help push the shares higher. And finally, the company has also decided that it wants to reorganize its operations into three separate segments. The first of these will be ESPN, which will include ESPN Networks, ESPN+ and all of its international sports channels. For a long time, analysts and investors alike have questioned whether this would lead to a spinoff or sale of that venture. But the management has indicated that this is unlikely to happen. The second segment will be called Disney Entertainment and will include the company’s portfolio of entertainment media and content businesses globally, including both Disney+ and Hulu. And finally, we’ll have Disney Parks, Experiences and Products, which will include the company’s theme parks, resort destinations, cruise lines and its consumer products, sports and publishing operations. It is likely that this restructuring will be a key driver of the aforementioned cost-cutting that the company is undergoing.
the walt disney company
take away
All things considered, I’m pleased with how the market viewed the financial data reported by Disney. But to be completely honest, I’m a little surprised. In addition to reporting contraction in the number of Disney+ subscribers, the company saw net debt increase and cash flow deteriorate. However, more than offsetting these negatives was a significant improvement in the parts of the business that were hardest hit by the COVID-19 pandemic, with continued growth in its other streaming operations driving stronger than expected revenue and profits, reports Reuters. dividends eventually return, and a massive restructuring initiative that once completed will save shareholders billions of dollars annually. Taking all these things together, I understand why the market is still very bullish on the company and its prospects. And it’s because of what these developments mean that I’ve previously decided to keep a ‘strong buy’ rating on the stock.
Source: seekingalpha.com
