Disney at 10 year lows - further slowdown after Q2 results? 📊

The largest U.S. entertainment company, Disney (DIS.US) has released its Q2 report. For more than 2 years, its shares have been in 'disfavor' with Wall Street and are cheapening on a wave of an uncertain macroeconomic outlook, underperforming Disney+ streaming services and future uncertainty about consumer activity. The result? Disney shares are at 2014 price levels, when the company's revenue was down more than 40%. They are gaining less than 1.5% today before the US market opens.

New CEO, new Disney?

Q2 results beat earnings-per-share forecasts but revenue disappointed - the market remains uncertain about a double-digit price hike for streaming services and lower (but still high) costs.  Wall Street's pre-opening trading indicates that the market did not receive the report positively enough to decisively break the disastrous streak in a wave in which the iconic company's shares have depreciated nearly 60% from their 2021 peaks. The theme park business turned out to be strong, in line with forecasts, but the uncertainty in the markets is mainly due to Disney's 'TV-streaming' activity:

• Revenues: $22.3 billion vs. $22.51 billion forecast (3.8% y/y growth)
• Earnings per share (EPS): $1.03 vs. $0.99 forecasts and $1.09 in Q2 2022
• Disney+ subscriptions: 146.1 million vs. 154.8 million forecasts (7.4% decrease k/k)
• Disney+ losses: $512 billion vs. $777 million forecasts and $1 billion in Q2 2022
• ESPN subscriptions: 25.2 million vs. 25.8 million forecasts (revenue per user $5.45 vs. $5.69 forecasts) 
• Hulu subscriptions: 48.3 million vs. 48.7 million forecasts
• Media and entertainment revenue: $14 billion vs. $14.36 billion forecasts (0.8% y/y decline)
• Traditional media profits: $1.89 billion (23% decrease y/y)
• Operating income from media and entertainment distribution: $1.13 billion (18% decrease y/y)
• Disney theme parks revenue: $8.36 billion vs. $8.25 billion forecast (13% increase y/y)
• Total operating income of parks: $3.56 billion, -0.2% y/y, $3.4 billion estimate
• Net profit from theme parks: $2.43 billion vs. $2.39 billion forecast (11% y/y increase)

Spending down stock up?

• Iger is restructuring, with Disney aiming to save $5.5 billion by 2023 - but in a commentary on the results, he indicated that the savings could be even greater. Management cut capex in Q2, a bright spot in the report. The report showed that content spending at Disney+ was lower, and is expected to be $27 billion this year versus the 'standard' $30 billion in previous years. This was indirectly 'helped' by a strike of actors and screenwriters in Hollywood.
• Disney is optimizing the schedule of new projects by which it reported lower-than-forecast capital spending. Weak customer traffic at the Florida parks was offset by a sizable increase in profitability at the international amusement parks, reflecting a fairly strong consumer and a seasonally strong second and third quarter of the year for the parks. It appears that amusement parks now represent the surest business point, with the long-term prospect of growing cash flow thanks to a strong global brand and a wealth of content broadcast over decades.

Weaker TV segment

• Bob Iger suggested as early as Q1 that revenues from TV channels (which before the pandemic accounted for half of Disney's revenues) are likely to cease to be the financial core of the company. The traditional services business, in the form of ABC and ESPN, among others, is facing declining viewership driven by lower cable subscribers. This has resulted in weaker advertising sales, and the company has also cited higher sports broadcasting costs.
• Iger, however, is not laying down his arms, recently not ruling out a complete resale of ESPN. For now ESPN announced a long-term agreement with casino operator Penn Entertainment Inc. to license its TV channels. Penn will make payments totaling $1.5 billion over 10 years and grant Disney (ESPN) $500 million in stock purchase warrants. 

Streaming weak and subscription increasingly expensive

• Disney estimates that streaming services will reach profitability in 2024 with these projections certainly not assuming a scenario of a deeper recession, which could definitely dampen optimism. Disney+ subscriptions continue to decline, and competition in the streaming industry remains stronger than ever (Netflix, Paramount, etc.).
• The drop in Disney+ customers well below forecasts is largely due to the non-renewal of broadcasts of the Indian Premier League's popular cricket games in India. However, this does not change the fact that subscriptions are declining. Markets are not sure about the legitimacy of Disney's decision, the company wants to raise service prices by up to 27%.
• Certainly, the decision is the result of cold calculation and the still strong image of the 'global consumer' in the company's key markets. Disney has probably recalculated that any further outflow of subscribers will then be cushioned by significantly higher service prices.
• While this may allow the Disney+ business to see profitability sooner, Disney may find it difficult to increase subscriptions and market share after such a sizable subscription increase. Similarly to Netflix, the company plans to fight against password sharing - however, Wall Street is not sure if this will be enough to save the entertainment giant's overall performance.

Summary

The overall picture of the report remains mixed but the ongoing slowdown in media revenue and profitability may foreshadow that Disney will find itself 'at the mercy' of the condition of the global economy in future quarters. Earnings per share came in below forecasts and declined y/y - despite a very strong performance from the high-rent theme parks and a reduced y/y loss of 0.5 billion from Disney+. 

Disney (DIS.US) shares are still near 2014 levels and the bottom of the March ''Covid' 2020 sell-off and Wall Street's disastrous Q4 2022. Source: xStation5