To The Moon

$Walt Disney(DIS)$ released its Q4 fiscal year 2023 earnings report after the market closed on November 8. Benefiting from cost-cutting measures and better-than-expected growth in streaming subscriptions, the company exceeded profit expectations, leading to a 3% increase in after-hours trading.

Q4 Earnings Rerview

In terms of revenue and profit,

• Disney generated $21.24 billion, a 5% year-on-year increase, slightly below the expected $21.4 billion. The main contributor to this growth was the company's Parks segment, which has now been renamed as Experiences.

  

• Disney has recently restructured its revenue structure, making it difficult to compare with historical data. The company has reorganized its segments into Entertainment, Sports, and Experiences, which simplifies the overall structure.

• Breaking down the new segments, Entertainment generated $9.52 billion in revenue (a 2% increase), Sports generated $3.91 billion (flat growth), and Experiences generated $8.16 billion (a 13% increase).

• In terms of operating profit, the adjusted EBIT reached $2.98 billion, surpassing the expected $2.62 billion.

• Operating profit for each segment is as follows: Entertainment had a profit of $236 million (compared to a loss of $608 million in the same period last year), Sports had a profit of $981 million (a 14% increase), and Experiences had a profit of $1.76 billion (a 31% increase).

  

Streaming Metrics

• Disney+ surpassed expectations with over 150.2 million subscribers, exceeding the estimated 147 million, adding nearly 7 million core subscribers.

• Hulu's total subscriber count remained at 48.5 million, unchanged from the previous quarter and lower than the expected 49.21 million.

• ESPN+ had 26 million subscribers, which is slightly lower than the expected 26.3 million.

Investment Highlights

Firstly, Disney's cost-saving measures in streaming exceeded expectations.

The company aimed to restructure and improve efficiency to restore creativity at the core of its business, as emphasized by CEO Bob Iger. Disney exceeded its initial target of saving $5.5 billion and actually saved $7.5 billion. This improvement in profitability is the highlight of this quarter, especially considering that the cable, parks, and media businesses have strong monetization cycles. The overall EBIT reached $2.9 billion, surpassing the market expectation of $2.6 billion.

Secondly, streaming rebounded after a decline last quarter due to price increases.

Disney+ raised the price of its ad-free version by 27%, from $11 to $14 starting from October 12. Hulu's ad-free version also increased by 20% to $18. The minimum prices for Disney+ and ad-supported Hulu will remain unchanged. Disney also introduced a bundle package for ad-free versions of Disney+ and Hulu, priced at $20 per month. The subscription package with ads will increase from $13 to $15 per month.

Disney also launched an ad-supported version of its Disney+ service in multiple European markets and Canada in November. Of course, more importantly, the streaming business has reduced its losses, with net profit and loss improving from -29% last year to -7%, and it is expected to start making a profit next year.

At the same time, the short-term impact of the writer's strike can reduce some content-related expenses, but the medium-term impact is a reduction in content volume and the delay of some film and television works, such as some Marvel blockbusters. Disney+'s content coverage is relatively less than that of Netflix, so to a certain extent, there may be greater fluctuations in user subscriptions. Investors can observe further impacts from the subscription performance in the next 2-3 quarters.

Thirdly, there is optimism about the future outlook.

Bob Iger pointed out four key development opportunities: 1. Achieving significant and sustained profitability in the streaming business, 2. Building an excellent digital sports platform for ESPN, 3. Improving production volume and economic efficiency in the film studio, 4. Accelerating growth in the theme park and experience business.

Among them, ESPN is a very large proportion of Disney's business. It has been doubted by investors because traditional cable media has been losing market share to streaming media. However, Bob is optimistic about its progress after becoming a streaming platform. He even emphasized on the conference call that ESPN ranks first on TikTok.

In fact, all of this is considered from a profitability perspective. After all, Disney is a company that is particularly responsible to shareholders. The departure of former CEO Bob was mainly due to the significant losses in the streaming business, which shareholders could not tolerate.

Valuation and summary

Disney's stock price has been very weak this year, and in October it even hit its lowest point since 2014. The poor market sentiment is also related to its overall performance and investor expectations.

However, the decline in its valuation multiples is even more pronounced, and currently, from a performance perspective, it is also approaching or has already reached a low point. Whether the current market capitalization of $150 billion is reasonable or not also depends on whether optional consumer spending can continue to maintain the status quo next year.