Disney: Q2 2023 Results Coming
What to expect from this 100-year-old company? By Benjamin Tan
The Walt Disney company is marking its centenarian milestone this year, with huge celebrations planned around the globe. 100 years is pretty solid proof of enduring ability to maintain brand relevance and allocate capital over multiple cycles. And it has remained in the Dow Jones Industrial Average index since 1991.
Aside from the political sideshow involving Florida Governor Ron DeSantis, Disney appears to be on a roll. Domestic parks are producing some of the best profitability numbers in years, with Q1 2023 operating income margin at almost 35%. International parks and cruises are recovering as Covid-19 abates and revenge travel takes hold around the world.
As far as Disney films are concerned, the slate looks great for the rest of the year. Kicking off the summer is Guardians of the Galaxy Vol. 3, which is already outperforming, considering it is a threequel. The Little Mermaid, Elemental, Indiana Jones and the Dial of Destiny, Haunted Mansion, The Marvels, and Wish all have the potential to drive better profitability for the studio.
Disney has perfected the art of remakes, reboots, sequels, prequels, and spin-offs. It is especially potent when coupled with vertical integration across almost all possible monetization possibilities, especially merchandising. As long as the hits keep coming, Disney’s franchise flywheel will continue to spin at top speed.
Streaming: Kryptonite or Salvation?
The writing has been on the wall for quite some time now: television is moving away from linear to streaming. Hence the complex merger with 20th Century Fox was conceived back in 2017 to launch a DTC business backed by a comprehensive library of films and television shows through a combination of the two conglomerates.
Disney’s structural pivot into streaming was initially applauded by the markets, especially with the resounding success of Disney+ worldwide. The costs to create a competitor to Netflix ($NFLX) were known, and breakeven was only going to happen in FY 2024. Yet, when Q4 2022 earnings came out, the market was no longer prepared to stomach larger DTC losses.
While DTC is an essential reinvention of Disney’s business model to stay relevant in the streaming era, a more balanced content monetization strategy will be the likely reality going forward. Gone are the days of unlimited content spend - soaring costs for streaming services have rattled the entire industry. The current narrative centers around consolidation, rationalization, and outright exits by smaller players. Bob Iger was brought back as CEO to adapt to these new times. $5.5bn in cost saving measures (inclusive of reduced content investments) have since been announced, with 7,000 jobs on the chopping block.
Q2 2023 Results: What to Look Out For on May 10th
With the release of Q2 2023 results coming on May 10, key items to watch include:
Update on DTC structural profitability. Extrapolating from the current revenue run-rate of $20bn with an average subscriber base of 230mn, a potential annual revenue of $30bn may be expected by end of FY 2024. Not dissimilar to where Netflix is today; yet, it is only expected to breakeven at that point, a far cry from the 20% operating profit margin enjoyed by Netflix. Will Disney update its DTC profitability outlook, given recent cost-cutting measures and maturing operations?
Future of Hulu - will Disney buy out Comcast’s 33% stake, pursuant to the put-call agreement (signed in May 2019) which values Hulu at a guaranteed floor of $27.5bn?
How will Disney balance DTC pivot against optimizing content monetization, including windowing period, content sale, and third party licensing? Will Disney continue to prioritize exclusive distribution of its film and television library on Disney+ and Hulu?
Subscriber growth: Is Disney still targeting 300-350mn subscribers across Disney+, Hulu and ESPN by FY 2024?
Disney+ and bundled pricing
Performance of Disney+ ad-supported tier so far since launch
Outlook of Parks - both domestic and overseas - amid a softer consumer environment
(Author is long Disney)
Please note that this blog will take a two-week summer break between May 23 and 30, and resume weekly publications on June 6.
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