Disney Impresses with Dividend Boost, Narrowing DTC Losses & Sports Streaming Push

Disney Turns the Corner

The legacy media giant went through a rough patch over recent quarters, as its linear networks took a hit from cord-cutting and soft advertising market, lacked box office success and its streaming business lost subscribers last year. This tough period had a negative impact on its stock, which fell to nearly ten-year lows last October and managed to clinch only marginal gains of around 4% in 2023, missing on Wall Street's massive rally. Streaming rival Netflix for example advanced by 65% in the same period.

The poor performance brought challenges by activist investors like Mr Peltz, who wants a seat at the Board of Directors. In a proxy statement earlier in the month, his Trian Group that owns $3 billion of Disney common stocks, accused the firm of "poorly" managing the streaming segment and lacking "clear strategy" around ESPN. ^[1]

However, legendary CEO Bob Iger returned at the helm of the company with a restructuring plan to cut costs, give power back to the creatives, rationalize and improve content and focus on the company's core strengths. There have already been promising signs and this week's results and developments point to further progress. Earnings rose and the company offered upbeat guidance, the dividend was lifted to appeal to investors, while streaming financials improved. Mr Iger announced a series of high-profile moves and said during the earnings call that Disney has "turned the corner and entered a new era". ^[2]

Strong Results & Investor Friendly News

Operating Income rose 27% y/y to nearly 5 billion in the quarter ended December (Q1 FY24) and revenue of $23.49 billion was just shy of last year all-time high. Earnings (excluding certain items) jumped to 1.22/share and executives expect them to rise at least 20% y/y for the full Fiscal 2024. ^[3]

Amidst proxy battles, Disney made some investor-friendly announcements. After not paying dividend for three years, it reinstated it last month and now said it will increase it by 50%, to $0.45/share. Moreover, the Board approved a new share buyback program, targeting 3 billion in repurchase this fiscal year.

Streaming Improvement

Disney's streaming suite contracted last year and conceded the top spot back to Disney, but mamaged to return to growth in the second half. Disney+, Hulu and ESPN+ added a combined 1.8 million users in Q1 FY24, bringing the total to 226.5 million.

More to it, the financials of the direct-to-consumer segment (DTC) continued to improve. Revenues climbed above $6 billion for the first time and operating losses narrowed further to 216 million, with the recent price hikes and the ad-inclusive plan having a positive impact. The company reiterated its guidance for profitability before the end of the year, aiming to turn streaming into a "key earnings growth driver".

The company has hiked prices, but has also launched a cheaper subscription plan with the inclusion of advertisements, developing an additional revenue stream. It now looks to implement another strategic change - cracking down on password sharing. CFO Hugh Johnston offered more color yesterday, saying accounts "suspected of improper sharing" will be notified so that borrowers can create their own accounts. ^[2]

This worked well for Netflix, as it turned borrowers into paid members and created a growth runway that fueled the firm's resurgence. It remains to be seen, if Disney can replicate this success, but its language indicates a heavier hand than its competitor, risking subscriber ire.

All-In on Sports Streaming

Live Sports is becoming increasingly important and Disney is placing greater emphasis on moving its offering onto the digital realm. Just a day ahead of the earning release, it announced a joint venture with media giants Warner and Fox to create a sports streaming super-app. The new service set to launch this fall, will include their relevant linear networks and house key events like NBA, NFL, Formula 1 and more.

Disney however won't stop there and CEO Bob Iger offered more details on his plans to make ESPN a standalone streaming service. He expects this to materialize in the second half of 2025 and will be far more immersive and interactive than the aforementioned joint venture. It will integrate the recently launched betting service (ESPN Bet), fantasy leagues and e-commerce features.

Both these moves can transform the streaming landscape, as sports can draw recurring and committed audiences and provide great advertising opportunities.

Conclusion

It looks like Disney is leaving the recent hardships behind and pushes on multiple fronts, including gaming with the $1.5 billion stake on Fortnite-creator Epic Games ^[4]. CEO Bob Iger has clear priorities, trying to place the company at the forefront of the sports programming digital transition. There is still work to be done but, it looks like he is on the right path and markets have reacted positively and the sock has made a strong start to the year.