By Dan Gallagher
Whoever ends up as Disney's next CEO won't be inheriting a complete fix-up job. That doesn't mean it will be an easy one.
The entertainment giant reported relatively strong results for its fiscal fourth quarter on Thursday morning. They included better-than-expected profits in both streaming and domestic theme parks -- the company's two most important business units. Disney also broke with tradition by giving a more detailed earnings projection for the next two years.
That projection showed two things of particular import to Wall Street. The first is that Disney doesn't expect weakened consumer spending and Universal's planned opening of a grand new park in Florida to cripple its own theme-park earnings next summer. The company projected operating income for its Experiences segment to grow by between 6% and 8% in fiscal 2025; analysts had been expecting growth of only 1% for the year, according to consensus estimates by Visible Alpha.
The second is that Disney expects its entertainment-streaming business, made up of Disney+ and Hulu, to achieve a 10% operating margin in the fiscal year ending in September 2026. That business barely turned a profit in the just-ended fiscal year after losing a combined $5.9 billion over the previous two. Wall Street only had been expecting the operating margin for entertainment streaming to hit 6.6% by fiscal 2026.
The results and forecast boosted Disney's stock price by more than 6% Thursday. That too is a nice change from the past two reports, which sent the shares tumbling. Disney could use the lift; before Thursday's report, the company's stock was up less than 14% for the year to date, lagging behind both the Dow Jones Industrial Average and the S&P 500.
Such a ho-hum performance was still a bright spot compared with most of Disney's traditional media peers. The industry has been laid low this year by the continued meltdown of the cable-TV business and a still wildly unpredictable box office. Disney isn't immune to either: Revenue from the company's linear TV business, which includes advertising and cable affiliate fees, slid nearly 9% in the just-ended fiscal year, while operating income for that business fell even more sharply -- by 16% for the year. Disney's theatrical distribution revenue dropped 29% for the year.
But its box-office performance also got a big lift in the just-ended quarter from blockbusters "Inside Out 2" and "Deadpool & Wolverine." The company also has two more major releases set for this calendar year -- "Moana 2" and "Mufasa: The Lion King" -- that are expected to do very well. The online ticketing service Fandango announced late last month that the first day of presales for "Moana 2" have topped every other animated film this year, including "Inside Out 2," which grossed nearly $1.7 billion globally in its theatrical run.
Even with the overall movie business still struggling to return to pre-Covid levels, movies are a key part of Disney's flywheel strategy, where success in one business feeds the others. Popular movies have long been turned into consumer products and attractions in the company's theme parks. But they are also now important feeders into the streaming operation, where consumption of older movies "spikes significantly" ahead of new big releases, according to comments from Disney Chief Executive Bob Iger on Thursday's earnings call. That plays into the company's strong outlook for the streaming business, with Iger noting that "we have considerable visibility on our content pipeline" for the next two years.
Improving the earnings potential of streaming is key if Disney is to ever restore the magic of its once-mighty bottom line. The company is bigger than it has ever been -- revenue of $91.4 billion for the just-ended fiscal year is a record. But while its annual operating margin of 17% is the highest in five years, it is still well below the 28% range the company commanded in the middle of the last decade, when the cable-TV business was at its zenith.
Fully returning to that level is a job that will likely fall to Iger's successor, who is expected to be named next year. If the company can hit the goals it laid out Thursday, the new boss will at least get a nice starting point.
Write to Dan Gallagher at dan.gallagher@wsj.com
(END) Dow Jones Newswires
November 14, 2024 16:26 ET (21:26 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
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