Is Disney in Financial Trouble in 2023?
Every quarter, I provide analysis of The Walt Disney Company’s earnings call. It’s the boring thing CEO Bob Chapek does to appease Wall Street.
However, I needed to take a different approach this time because something different happened.
Disney stock briefly collapsed, and crazy old coot Jim Cramer called for Chapek’s firing.
Wall Street’s sudden, shocking heel turn forced a closer look at Disney’s books and announced intent.
So, we’ve got another year in the books at Disney. Let’s review what we just learned and also look forward to what’s coming next.
The Pink Elephant Dancing in the Living Room
We can talk about a lot of other stuff, but there’s only one number you really need to know about Disney to understand what just happened.
Disney’s streaming media division, its bread and butter, “earned” $4.9 billion for the most recent quarter.
However, Disney wrote down $1.474 billion in losses related to its various streaming services.
So, the company gained $4.9 billion in income but spent nearly $6.4 billion to get there, which isn’t a solid business tactic.
In addition, Disney lost nearly $500 million per month on streaming during its final quarter of fiscal 2022.
For the fiscal year, streaming media cost Disney $4 billion in write-downs. Remarkably, that’s not unexpected, though.
In fact, if you’re persistent enough to review my previous articles – and please don’t do that…live your lives! – you’ll notice a recurring refrain.
Throughout Disney’s transition into a digital company, it has stated that it’ll lose the most money in fiscal 2022 then remain underwater in fiscal 2023.
Chapek and his CFO, Christine McCarthy, have circled fiscal 2024 as the first year where services like Disney+, Hulu+, and ESPN+ will turn a net profit.
I’ve legitimately stated that on MickeyBlog at least 20 times. What’s different now is that it just showed up on a spreadsheet.
Wall Street is really bad about saying, “Oh, that’s totally fine!” about a markdown that will happen in a future quarter/year.
Then, we reach that timeframe, and the loss shows up on the balance sheet, everyone panics and acts shocked. That’s what just happened here.
The Target Moved on Disney
Disney also faces a second pressing matter now. Wall Street’s opinion of streaming has changed.
During the pandemic, investors prioritized eyeballs. They wanted massive streaming subscriber growth, something Disney has achieved at a stunning pace.
Now, the tide has turned. After a similar Netflix earnings call two quarters ago, that company’s stock crashed.
Wall Street analysts suddenly moved the goalposts on the criteria. Virtually overnight, they decided they preferred profitable services over larger subscriber numbers.
Honestly, in business, that’s how this stuff should work. Still, Netflix suffered from a lack of subscriber number increases combined with rising production costs.
Disney faces the inverse proposition. Its subscriber increases for Disney+ were exceptional.
The service increased by 12.1 million customers, 2.8 million more than anyone projected.
Of course, that aspect feeds into a growing narrative. Right or wrong, the prevailing belief among analysts right now is that the more Disney+ grows, the more money Disney loses.
I view these setbacks as temporary and the cost of doing business to achieve former CEO Bob Iger’s vision for the Disney of 2030 and beyond.
Few analysts agree with me right now. All they can see is that Disney went from losing a significant amount of money per month on streaming to losing a massive amount.
In math terms, Disney averaged a loss of $333 million per quarter on streaming in fiscal 2022. Those numbers increased to nearly $500 million in the final quarter, which is 50 percent more.
Coincidentally or not, that was the time when Disney+ claimed its largest subscriber base, 164.2 million.
For its part, Disney also pointed out a 10 percent decrease in per-customer revenue, but price increases start next month.
So, we probably have witnessed the worst or at least close to the bottom. Wall Street didn’t care, though.
Disney Plots Its Future
Everyone involved with Disney agrees on one point. The parks are doing amazingly well. Disney just reported a 34 percent increase in profit in that division.
Even better, operating income, probably the most important aspect, went up by 66 percent, which is massive. And both totals could have been larger.
Hurricane Ian cost the parks division $65 million, which lowered profit and operating income.
The underlying point is that Disney has a plan in place to pay for its digital growth via revenue from other divisions, including the parks.
Still, Chapek and his team have recognized that the company’s finances could be better.
Since we still have another year of financial question marks surrounding digital services, Disney has worried about its economic status.
Like many companies, Disney has identified some worrisome indicators about the economy over the next year.
While the United States economic news this past week was unexpectedly positive, Disney has still quietly implemented a hiring freeze.
In addition, the company will perform a modest amount of layoffs in some divisions. Much of this has been hush-hush thus far, and the timing ain’t great.
After all, we’re only two weeks removed from my piece on Disney’s staffing shortage. Apparently, we shouldn’t expect this situation to improve in the short term.
In fact, Disney faces dual issues here. The labor unions no longer believe that previous deals are enough to account for the rising housing costs in Orlando.
So, Disney’s cast members want more money. Meanwhile, Disney wants to reduce its labor force by a modest amount.
Here’s Chapek’s quote:
“Hiring for the small subset of the most critical, business-driving positions will continue, but all other roles are on hold…As we work through this evaluation process, we will look at every avenue of operations and labor to find savings, and we do anticipate some staff reductions as part of this review.”
What Happens Next?
When Disney announced plans for an advertising tier on Disney+, it projected a significant new revenue stream.
While that will still happen, the company has lowered its expectations. That’s because the bottom fell out on streaming advertising in the interim.
Several streaming services have announced disappointing numbers and lowered projections for calendar 2023.
Disney must lower its expectations as well, which makes the other financial setbacks all the more pressing.
For this reason, I’m now less optimistic about Disney’s 2023. Unless the economy suddenly improves, Disney likely faces another financial crunch of sorts.
This problem will have ripple effects at the parks, where potential enhancements like new rides and themed lands likely suffer delays.
I’m not 100 percent sure about this conclusion, as the parks continue to make money. But we know that Disney’s leadership views it as a digital business.
With the digital brand losing money, Disney must cut costs elsewhere to counterbalance these losses.
If Disney+ advertising proves lucrative, this evaluation changes immediately, though.
In short, we’re all hoping for a successful rollout of Disney+ advertising. It’ll have profound ripple effects on other parts of Disney, especially the parks.
So, for various reasons, Disney’s fiscal 2023 is shaping up a lot like its fiscal 2021…which isn’t great.
Feature Image: Disney