Disney Earnings (And More)

Disney cut its direct-to-consumer streaming losses by nearly $300 million to a $138 million operating loss (an 86% year-over-year improvement), raised the dividend, and announced a $3 billion stock buyback—all while making a slew of big announcements that excited Wall Street and pushed Disney shares up more than 6%. But with activist investor Nelson Peltz still making trouble and an ominous loss of 1.3 million Disney+ subscribers, Iger still has his work cut out for him – especially when top global competitor Netflix just added 13.2 million global subs to its rolls in Q4. But pockets of strength abound, with Hulu adding 1.2 million subs perhaps partly because of the recent bundling strategy with Disney+ and ESPN+. And speaking of ESPN, Disney strategically timed that big announcement of a new streaming sports joint venture with Fox and Warner Bros. Discovery to coincide with earnings. It puts to bed much of the speculation around how and when Disney would follow through on previously teased plans to unleash ESPN into a fully DTC product and, in typical Iger dealmaking fashion, shocked many by combining the sports assets of three competitors that normally try to outbid each other for the best sports rights. Combined they will cover roughly 85% of the U.S. sports rights market through what Iger described as “the equivalent of a multi-channel, sports-centric tier via app,” which is set to debut this year, with a separate ESPN app still planned for 2025. The venture won’t launch without controversy: Within days of the announcement, sports-centric virtual MVPD Fubo issued a statement questioning “the underlying motives and implication of this joint venture” and suggesting that “every consumer in America should be concerned about the intent behind this joint venture and its impact on fair market competition.” It’s unclear whether antitrust authorities might step in, but much could depend on how noisy media industry competitors get. Interestingly, Comcast’s NBCUniversal and Paramount Global – both of which control substantial sports rights – reportedly didn’t get a call to join the partnership, although it’s doubtful either would have been interested considering NBCU’s interest in feeding its linear sports interests and Paramount on the sales block and loath to complicate that process.

Apparently not content to simply generate buzz off the sports venture, Disney also threw in the announcement this week of a $1.5 billion investment in Epic Games to create a gaming ecosystem that combines Disney’s considerable intellectual properties with the “Fortnight” gaming ecosystem to create what Iger described as “a transformational new games and entertainment universe.” No one is quite sure what that means yet, but it sounds big and bold. And in a world in which some analysts are writing the obituary of “old media,” big-and-bold bets project a certain confidence that’s perhaps of more value than ever. Disney and Epic have partnered for years, with “Star Wars” and other IP finding its way into Epic products – but this seems like a New Hope. Consider that Disney also has a close relationship with Apple in respect to the new (and expensive) Vision Pro “spatial computing” device that has been beating early sales expectations. While no one mentioned the Vision Pro or VR gaming in relation to the deal announcement, creating a Fortnite-fueled, virtual reality universe may end up paying dividends if Apple manages to reinvigorate VR gaming with a popular device that boosts down-market sales of the Oculus Quest 3 and other VR headsets. Disney may also be watching Netflix, which hasn’t done much in gaming yet but has started to get serious about it, even recently partnering with Rockstar Games to release “Grand Theft Auto: The Trilogy” combining several GTA games into one product – and providing more market research to Netflix as it considers branching out further into the gaming world. Netflix doesn’t even provide or promote its games through its core streaming platform yet. Expect Disney, Netflix, and others to increasingly step up their gaming efforts as that multi-billion dollar market evolves. Of course, it’s easy to forget amid all the announcements and news that Disney also released its financials, with total revenue roughly flat at $23.5 billion buoyed by sports and parks growth despite a 7% decline in entertainment revenue. However, Disney continues to slash overhead, cutting more than $500 million in G&A expenses in the most recent quarter and on track to meet or exceed its $7.5 billion annualized savings target by year-end. Those efforts have helped to boost operating profit significantly, with Disney reporting $3.9 billion in quarterly operating income, up a whopping 27% year-over-year. But that comes amid a huge decline in linear TV revenue, which plummeted to $2.8 billion, down 12% YOY, even as DTC revenue jumped 15% YOY to $5.5 billion. But CFO Hugh Johnston vowed that DTC revenue will “grow substantially,” with profitability by this fall and “ultimately double-digit operating margins” as DTC becomes “a key earnings growth driver for the company.”

Next? Wall Street seems to like Disney’s direction. While Iger and company still have plenty to prove, this earnings period felt a little different than the last few as Disney starts to break out from the pack. With Paramount on the block and WBD still facing big debt issues, Disney does have certain advantages – although it remains like its peers saddled with a legacy linear business that competitors like Netflix, Amazon, and Apple don’t face. Also key to Disney’s DTC growth is a planned password sharing crackdown that kicked in on January 25 for new subs and will hit existing subs on March 14, with Johnston teasing “a number of tactical actions” that will uncover “a pretty good sized opportunity” for revenue. “And it’s one of the things that gives us confidence in our subscriber growth numbers,” he said. Considering that this will all come as the sports jv gets underway means that Disney has a complicated but potentially lucrative next few months.