Disney: Q3 Earnings Call Confirms Turnaround But Comments Show Peak Negative Sentiment

Summary:

• Disney has undergone an extensive transformation, focusing on cost-cutting, quality content, and growing profits.
• The recent earnings call highlighted positive signs of Disney’s execution of needed changes and its commitment to profitability.
• The company’s emphasis on film studios, parks, and streaming, along with its core intellectual property, will drive growth and value creation.

My recent article about Disney (NYSE:DIS) titled, “Disney: Cost Cutting And Dissipating Negative Sentiment Provide Tailwinds For Stock Appreciation” taught me a bit more about Disney. I discovered that sentiment towards Disney was at peak pessimism. At Seeking Alpha, the comments sometimes are better than the articles and the responses to the article did not disappoint. I still stand by my thesis of Disney’s true value of between $150 and $215 that I discussed in the linked article above. The recent earnings call provided positive signs that Disney is executing the needed change. I discuss my thoughts on the latest earnings call below.

Although the article was spot on about cost cutting which we will discuss later, I seem to have been overly optimistic in regards to sentiment.

My thoughts about the negative sentiment dissipating were challenged a day later when CNN headline placed Disney once again at the front lines of the culture wars. The article, Disney’s governing district in Florida slashes all DEI programs, brought yet more attention towards Disney’s politics despite not impacting Disney as a company.

An article August 10th 2023, titled “Bob Iger is supposed to save Disney. It’s not going according to plan” highlights how in nine months Bob has done little to change Disney’s fortunes. As if nine months was enough time to fix Disney’s problems. They should have talked to the commenters from Disney articles on Seeking Alpha. This could be another sign of peak negativity.

The amount of negative sentiment really surprised me. I typically consider headlines and analysts opinions when I consider sentiment, but I underestimated just how frustrated many people are with Disney.

I underestimated it because it has mostly been a Disney problem. Other companies seemed to be making political decisions and have avoided major controversy or at least sidestepped it.

For comparison’s sake when Apple recently announced over $200 million dollars to be earmarked for social justice and DEI efforts at their recent earnings call. I didn’t hear any backlash, but Disney isn’t Apple and Disney’s biggest demographic is not Apple’s biggest demographic. One operates in Florida and is a global brand and one operates in California and is a global brand. So while people destroy Disney for its “woke” culture, different people seem to celebrate Apple for its inclusivity and diversity. I guess it’s all really a matter of perspective and my commenters were happy to share their opinions and set me straight regarding current sentiment. My personal opinion is that good quality content and profits squash all of these other controversies.

My readers may have disagreed that current negative sentiment was dissipating; but they helped convince me that current sentiment was at peak negativity. Some readers pointed out the lack of profits and high costs, others pointed out poor content, while others complained about a preachiness of political views at the expense of entertainment and profits. Here are a few of the tamer comments for your context.

JK31 said, “Today, Disney teaches controversial gender and race politics with animated lectures that attack beliefs and heritage of a large part of society. And entertainment now seems a secondary priority that is done less well every year.” For a certain demographic it is Disney’s alleged wokeness that has created the problem. My article stated, “Disney has faced criticism from both liberals and conservatives, impacting its reputation and brand image, but these concerns are fading.” Utche 96 wanted to let me know, “I would not agree with the last part of that statement.” Then coroscant 72 replied, “Agree with you. If anything, it looks like both sides are just starting to get pissed off.”

There were many more disparaging comments about Disney than positive ones. They managed to convince me that sentiment towards Disney was at peak negativity and this would most likely continue because the upcoming presidential election and the inclusion of Ron DeSantis almost guarantees Disney will be somebody’s public punching bag for at least another year. Will the punches matter to Disney or will they become background noise to Disney’s more pressing issues.

Disney has heard the complaints and now appears dedicated to cutting costs, relying on quality content over quantity content and focusing more on growing profits and entertainment than promoting public cultural values that are divisive to their client base. The recent earnings call supported these findings.

Earnings Call Highlights

Disney CEO Bob Iger gave a good presentation underpinning that he understood Disney’s current problems and was working to change them. I highlighted the four bullet points that directly address the concerns of my commentators. Cost cuts might have incurred impairment and restructuring charges of $2.65 billion dollars this quarter but they clear the way for increased profits. This also points to the inflection point that indicates perhaps the turnaround is already underway. There just isn’t enough hate to go around for people to stay fever pitch mad at Disney because it appears that Disney now knows the rules of the game they are playing. They said all the right things and more importantly, they didn’t put their giant mickey mouse shoe in their mouth.

More importantly, you know what I didn’t hear anywhere in the content call was commentary that was unrelated to the business. Throughout the earnings call, the Disney CEO and CFO were the only voices heard and they didn’t mention any controversial projects. We didn’t hear any complaints regarding actions in Florida and we didn’t hear any outrage over their treatment by the media, the left or the right. They stayed on message and focused on the business. I think these are good indicators that Disney knows where it is, knows where it wants to be and knows how to get there.

• Disney underwent an extensive transformation in the past eight months, redefining its business structure and focusing on creativity.

• Management changes and efficiency improvements were implemented to streamline operations and enhance cost-effectiveness.

• Aggressive cost reduction measures are set to exceed the initial goal of $5.5 billion in savings.

• The Direct-to-Consumer (DTC) operating income improved by approximately $1 billion in just three quarters, with the aim of achieving DTC profitability by fiscal 2024.

• Disney’s core intellectual property foundation and brands underpin the company’s confidence in its long-term trajectory.

• Growth and value creation will be driven by three main areas: film studios, parks, and streaming, all closely tied to Disney’s iconic franchises.

• Emphasis on improving film quality, reducing costs per title, and maximizing distribution windows to enhance content impact.

• Expansion of theme lands in Disney parks, including Frozen and Zootopia, as well as the introduction of an Avatar experience, bolstering the appeal of Disney’s brands.

• The Parks and Experience segment exhibited strong growth, particularly in the Cruise Line, international parks, and engaging guest experiences.

• Disney’s Direct-to-Consumer business is strategically refocused on sustained profitability, rationalizing content, enhancing user experience, and optimizing advertising potential.

Kevin Lansberry the Interim CFO added these thoughts: I highlighted the D2C profitability by 2024, the continued growth of Parks, and the outlook of capital appreciation because these comments directly relate to the importance that Disney is currently putting on profits.

• Diluted earnings per share: Q3 diluted earnings per share, excluding certain items, were $1.03, a decrease of $0.06 compared to the prior year.

• Disney+ subscribers and economics: Disney+ core subscribers grew by almost 800,000 during Q3, with international growth offsetting modest domestic net losses. Focus on overall economics rather than pure subscription growth.

• Disney+ ARPU: Disney+ core ARPU increased sequentially by $0.11, driven by higher advertising revenue per subscriber domestically and price increases in certain international markets.

• Hulu and ESPN+ subscribers: Hulu and ESPN+ subscribers were comparable to Q2, with Hulu remaining profitable in Q3 due to increased advertising revenue.

• D2C profitability timeline: Working towards D2C profitability by the end of fiscal 2024; meaningful improvement in D2C losses expected by the middle of fiscal 2024.

• Content sales and linear networks: Content sales operating results declined by over $200 million versus the prior year, and linear networks’ operating income decreased by $580 million due to various factors, including lower advertising and higher programming costs.

• Parks, Experiences and Products: The segment contributed to earnings and free cash flow growth, with both revenue and operating income increasing by more than 10% compared to the previous year.

• Outlook and capital allocation: Expecting full-year total company revenue and segment operating income to grow at a high-single digit percentage rate versus the prior year; focusing on long-term free cash flow growth and shareholder returns, with the intention of recommending increased shareholder returns over time.

My Thoughts

I find the bullet points to be the key parts of the earnings call and they can help us evaluate Disney’s growth and future profitability.

Disney’s extensive transformation within the past eight months, centering on restructuring its business structure and prioritizing creativity, is a pivotal step that underscores the company’s commitment to adapt and evolve. The implementation of management changes and efficiency improvements reflects a strategic effort to streamline operations and enhance cost-effectiveness, ultimately contributing to improved profitability.

The aggressive cost reduction measures signify Disney’s newfound dedication to fiscal discipline and operational efficiency. This approach not only bolsters short-term financial performance but also positions the company for sustainable growth and profitability in the long run.

The remarkable improvement in Direct-to-Consumer (DTC) operating income by approximately $1 billion in just three quarters is a tangible testament to Disney’s focused efforts. The ambitious goal of achieving DTC profitability by fiscal 2024 is a crucial milestone that speaks to the company’s strategic shift towards a more digital-centric business model. This transformation aligns with the evolving consumer landscape and sets the stage for Disney’s future revenue generation.

The recognition of Disney’s core intellectual property foundation and iconic brands as cornerstones of its confidence in long-term trajectory is significant. By leveraging its film studios, parks, and streaming services as growth drivers, Disney demonstrates a keen understanding of its brand’s enduring appeal and its ability to captivate audiences across different platforms but it must execute on this vision.

The emphasis on enhancing film quality, optimizing distribution strategies, and expanding theme lands within Disney parks underscores the company’s commitment to delivering high-value entertainment experiences to consumers. This approach not only drives revenue but also strengthens brand loyalty and engagement.

The focus on achieving DTC profitability by 2024, the robust growth of the Parks, Experiences, and Products segment, and the commitment to capital appreciation align with Disney’s dedication to enhancing shareholder value through sustained profitability and growth.

The provided financial details also hold significance. The improvements in D2C operating results, growth in Disney+ subscribers, and the increase in average revenue per user reflect Disney’s ability to attract and monetize its digital audience effectively. The company’s emphasis on these metrics indicates its strategic focus on maximizing revenue potential in the streaming domain.

Disney’s transformative journey, cost-efficiency measures, DTC expansion, and commitment to leveraging its core strengths for growth. These efforts, combined with specific financial metrics, paint a comprehensive picture of Disney’s strategic direction and their turnaround.

New Risks

The most concerning risk for Disney could very well be the writer’s and actor’s strike. Disney needs to produce quality content in order to win at streaming and a lack of writers and actors will slow that process. If Disney becomes a central point of political contention in the upcoming elections, Disney could have difficulty focusing on business. This could also pose a major risk to attracting future advertising dollars. Disney’s massive size could also be a risk in regards to a turnaround. A company of Disney’s size cannot quickly maneuver. It must instead think ahead and strategically design its future. Fierce competition in streaming and content will also dictate Disney’s future success.

Conclusion

Disney has started to turn the ship around. Cost cuts provided a major temporary setback of $2.65 billion in 3rd quarter restructuring charges, but they make Disney a leaner company capable of creating future profits. Negative sentiment likely has risen to near maximum pessimism, but as a contrarian investor I believe that is typically the best time to buy. We rate Disney a strong buy and hold to our previous target of $150-$215. Investors should expect to begin to see Disney’s progress by the 1st quarter of 2024. If current strategies to improve earnings work as expected, D2C becomes profitable, parks continue to grow and costs remain a target of management, Disney should appreciate significantly. As always, please do your own due diligence before buying any stock and good luck investing.

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Analyst’s Disclosure: I/we have a beneficial long position in the shares of DIS either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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