I’ve Got Four Great News Updates and One Heartbreaking One about Disney
As Disney fans, we’ve grown accustomed to the occasional bout of bad news.
Bob Chapek did that to us.
Of course, the Chapek era ended almost exactly one year ago. Now, we’re ready to put that behind us.
I say this because Disney’s recent announcements were almost universally positive. It’s the almost that’s gonna bring a tear to your eye, though.
Here are four great pieces of news about Disney…and one heartbreaking update.
Disney+ Is Succeeding
For Disney’s entire business model to remain sustainable, Bob Iger must achieve two goals.
One of them is Disney+, as Iger intends to rebuild the previous multi-revenue stream stemming from content creation.
Before Netflix disrupted Hollywood, studios earned money through an ironclad system.
First, a movie would enter theaters, where it would earn box office revenue.
This studio system has always favored the content creators over the movie chains, a group that claims only a percentage of ticket sales at its own business.
So, box office earnings often proved profitable, and when they weren’t, studios would take tax write-offs.
Then, a film would debut on VHS or DVD or Blu-Ray. The studio would earn even more from sales.
Eventually, the titles would debut on pay channels like HBO followed by cable channels like TNT/TBS, and finally on network television.
A business like Disney earned money from each one, the equivalent of getting multiple paychecks for doing the same job.
That hadn’t been the case lately due to streaming and the pandemic.
However, Iger stated that Disney+ increased its subscriber totals by nearly seven million.
Disney’s CEO specifically credited three theatrical releases for this subscriber growth.
The arrival of Elemental, Guardians of the Galaxy Vol. 3, and The Little Mermaid on Disney+ elevated the service’s appeal.
Titles like Ahsoka contributed as well, but, according to Iger, it’s the films that mattered the most this quarter.
That growth helped Disney+ lower its financial losses significantly.
Iger expects that Direct-to-Consumer will turn a profit in Fiscal 2024.
When that happens, Disney can spend more on theme park enhancements…we hope. But I’m getting ahead of myself.
People Are Watching More Streaming Ads
While Disney and Warner Bros. Discovery both confirmed that the advertising market has struggled, Disney’s news was better.
That’s why WBD stock fell off the table, while Disney shares increased in value in after-hours trading.
According to Disney executives, the ad-supported version of Disney+ grew by roughly two million subscribers for the quarter.
That total represents 63 percent sequential growth on its own, but it’s much more impressive in a different light.
More than half of American Disney+ subscribers who signed up this past quarter selected the ad-supported version.
So, Disney can distribute more ads to those viewers. In the process, Disney again adds to its revenue totals.
Disney sells that ad space to third-party companies, who air their commercials.
For this reason, Disney would prefer most of its streaming customers to watch ads rather than selecting the ad-free tier.
Based on this quarter’s results, that’s exactly what happened.
Even better, the people watching the ad tier of Disney+ “spent 34 percent more time watching the service.”
In other words, the viewers Disney wants to entice signed up.
Even better, they selected the tier executives preferred and then watched more, which means more ads for which companies pay Disney.
From Disney’s perspective, the system is working.
Disney Is Saving More Money
Okay, you don’t care about this in the theoretical sense, but it also impacts Disney’s willingness to invest in the parks more.
When Bob Iger returned, Disney’s finances were a total mess.
Former CEO Bob Chapek had panicked due to digital content losses, and he made mistakes.
One of the reasons why activist investor Nelson Peltz spoke up was that he believed Disney had grown wasteful.
Now that Peltz is meddling once again – find a hobby, dude – Iger spent part of this week effectively addressing other shareholders.
The CEO was already making his case about why Peltz would do more harm than good.
Iger armed himself with a plethora of information that demonstrated this fact.
The part that got Wall Street’s attention was Disney’s free cash flow and annualized cost savings.
Remember when Disney performed those brutal rounds of layoffs earlier this year?
While the three waves of layoffs felt cruel and unusual, they did accomplish their goal.
Disney unearthed $7.5 billion in annualized cost savings, which is incredible.
Investors would describe entire companies with $7.5 billion in annual revenue as mid-sized, approaching large-cap status.
The fact that Disney just found ways to save that much money annually will make Bob Iger the envy of Wall Street yet again.
Here’s a graphic that underscores the point:
Disney has increased its free cash flow by nearly a factor of five in a calendar year.
That performance should be more than enough to get Peltz off his back in the short term.
Disney Park Revenue Soared
I realize that what you care about the most is the Parks business.
Disney has reconfigured its financial reporting a bit, which means you may see other analysts refer to this segment as Experiences rather than Parks.
In most instances, they’re synonymous, at least when we talk Disney revenue.
During this most recent quarter, the Experiences segment expanded its revenue by 13 percent, with operating income spiking 31 percent.
Disney basically netted $1.76 billion from $8.16 billion in park revenue for the quarter, which is a staggering sum.
Iger described this division as “a growth story.” He also bragged that “we are managing our portfolio exceptionally well.”
Since Disney recently announced it would double capital expenditures at the parks, Iger entered a kind of selling mode this week.
The CEO pointedly commented that Disney has almost doubled its return on invested capital at its American parks.
In other words, whenever Disney built a Pandora – The World of Avatar or Star Wars: Galaxy’s Edge, it made almost twice as much as it invested.
The comparison isn’t one-to-one, but you may think of it in these terms.
Reports suggested that Star Wars Land cost more than $1 billion. Based on Iger’s math, that would suggest Galaxy’s Edge has returned $2 billion.
That’s a theoretical rather than an example Disney cited, but you get the point.
The parks pay for themselves…and then some. This knowledge makes what I’m about to tell you that much more perplexing…
The Heartbreaking Update
Disney doesn’t bait-and-switch its customers often. However, that’s what has apparently happened this fall.
In September, Disney hosted Destination D23. As part of that exhibition, Parks Chairman Josh D’Amaro spoke about what’s next.
The well-liked executive promised changes coming to the parks, starting with Disney’s Animal Kingdom.
Later, Magic Kingdom and Disneyland Resort would add some new attractions and themed lands as well.
So, we’d all at least hoped for some context regarding upcoming developments.
If Disney wanted to announce a fifth gate at Walt Disney World, that would be swell, too.
What happened instead? I’ll let Gene Wilder tell you:
Yeah, that’s pretty accurate. During the boring financial caveats part of the earnings call, Disney’s new CFO snuck in something devastating.
Disney isn’t planning for its massive investment in park expansion to happen anytime soon.
Apparently, when Disney hinted at a second Disney Decade, management only meant the second half of the decade.
Here is Scott Gustin summarizing the misleading nature of what Disney has done:
Maybe it's just me – but I'm not sure "turbocharge" is an appropriate term if your 10-year plan for investments in the Experiences segment will "ramp up towards the back half of that 10-year period" with "gradual increases" in the first few years.
— Scott Gustin (@ScottGustin) November 8, 2023
I fear that Disney has modified its original plans to accelerate park expansion.
Now, we’re looking at a timeline that’s closer to 2028 than 2024. I am utterly mystified by this sudden turnaround.
Presumably, Disney told fans what they wanted to hear at Destination D23.
Now, Iger is telling Wall Street investors what want to hear, which is that Disney will prioritize free cash low over short-term park growth.
Hopefully, the truth lies somewhere in the middle, and this setback proves to be a hiccup.
If not, Disney is going to disappoint a lot of fans.
Overall, what happened this week was terrific, but this one sticking point would outweigh all the positives combined.
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Feature Photo: Disney