- Disney shares edged higher after the company’s Q3 report
- Commentary from management appeared to convince investors the company is making significant progress with its cost savings initiatives
- Could the stock be on the verge of moving up now?
Walt Disney (NYSE:DIS) shares rose more than 3% in early Thursday trade after the entertainment giant reported better-than-expected results for the third quarter and offered an upbeat outlook.
Disney reported Disney+ subscribers for the fourth quarter that beat the average analyst estimate. The company said it had 150.2 million subscribers at the end of the quarter, a figure over 3 million higher compared to the consensus.
How Disney Performed in Q3
Disney earned 82 cents per share in the quarter to easily overcome the average analyst estimate of 69 cents. Revenue jumped 5.4% to $21.24 billion, missing the expected $21.43 billion.
The top-line weakness was driven by lower entertainment revenue – $9.52 billion vs. $9.77 billion expected. Experiences revenue came in at $8.16 billion, somewhere in line with expectations, while Sports revenue was reported at $3.91 billion.
While the Entertainment segment missed analyst expectations for revenue, it easily topped operating income estimates – $236 million vs $165 million expected. Experiences generated an additional $1.76 billion while Sports added a further $981 million in Q3 operating income. Overall, Disney generated almost $3 billion in Q3 operating income.
Robert A. Iger, Chief Executive Officer, The Walt Disney Company said:
“Our results this quarter reflect the significant progress we’ve made over the past year,”
“While we still have work to do, these efforts have allowed us to move beyond this period of fixing and begin building our businesses again.”
Disney said results were impacted by changes totaling $1.02 billion, mostly consisting of $721 million of goodwill impairments related to the general entertainment and international sports linear networks.
Iger added that Disney is on track to achieve roughly $7.5 billion in cost reductions for the fiscal 2023 year. This is a major positive update as Disney was previously expecting to identify savings in the region of $5.5 billion.
Hence, the company now expects “to grow free cash flow in fiscal 2024 significantly versus fiscal 2023, approaching levels last seen pre-pandemic.” On the earnings call, Disney said it expects to generate $8 billion in FCF for the next fiscal year.
Sorting Out Hulu, ESPN Next?
On the streaming front, Disney said that it had ESPN+ subscribers 26 million at the end of the quarter, while Hulu attracted 48.5 million paying users. Hulu and Live TV subscribers stood at 4.6 million.
“We continue to expect that our combined streaming businesses will reach profitability in Q4 of FY24, although progress may not look linear from quarter to quarter,” the company said.
Walt Disney recently announced it is set to acquire a remaining 33% stake in Hulu from Comcast (NASDAQ:CMCSA) for at least $8.6 billion, a move that will grant Disney full control over the streaming service.
Disney has overseen Hulu's operations since 2019 when Comcast relinquished its authority to Disney. The final deal price may increase after an appraisal of Hulu's fair market value, a process expected to conclude in the coming year.
Hulu, founded in 2007, initially served as a platform backed by entertainment conglomerates to provide an online space for their TV shows. Disney joined the venture in 2009, intending to offer content from ABC, ESPN, and the Disney Channel. A decade later, Disney gained majority control of Hulu when it acquired 21st Century Fox.
Investors and certain shareholders have pushed Disney’s management to offer more clarity on plans for Hulu and ESPN. The return of Bob Iger as CEO also made the company more focused on cost cuts.
“As we look forward, there are four key building opportunities that will be central to our success: achieving significant and sustained profitability in our streaming business, building ESPN into the preeminent digital sports platform, improving the output and economics of our film studios, and turbocharging growth in our parks and experiences business,” Iger added.
The company is cracking down on non-paying users and has implemented price increases for ad-free versions of Disney+ and Hulu, with the cost rising by 20% to 27%. CEO Bob Iger stated in August that these increases were intended to encourage consumers to opt for the more affordable ad-supported versions of these channels, which remained unchanged in the subscription price.
The company’s sports network was recently valued at $24 billion by Bank of America (NYSE:BAC) analysts. Accordingly, Disney could welcome interest from Apple (NASDAQ:AAPL) and other major businesses that seek to increase exposure to sports leagues.
Disney made a move in the M&A direction after recently disclosing the financial performance of ESPN, which revealed a decline in sales and profits at the network. Iger has expressed the company's intention to retain ESPN while exploring options to create a streaming app for the network.
This might involve forming a joint venture or finding a buyer for a minority stake in ESPN. Based on this plan, approximately 36% of ESPN would be available for sale, with Disney aiming to maintain a majority 51% stake and accounting for the 20% stake held by media company Hearst, according to Bank of America’s analysis.
For Needham & Company’s Laura Martin, a seasoned media analyst, not just ESPN but the entire Walt Disney company may be purchased by Apple. Martin has been discussing a potential mega-deal for some time now as she believes Disney’s assets would be a perfect fit for a tech company like Apple.
"Outside of fundamentals, we do believe Disney will be purchased during the next three years... Takeover premiums have historically been 30% -40% above the public trading price for media companies," analyst Laura Martin said.
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Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.