Letter to the saver

Walt Disney makes a profit in streaming. Focus on efficiency

Scenario. Achieved operational profitability of video on demand drives business: competition, however, remains strong. Challenge on theme parks and cruises

by Vittorio Carlini

25 November 2024

6' min read

Translated by AI

Versione italiana

6' min read

Translated by AI

Versione italiana

In the presentation of Walt Disney's latest quarterly report, there is one chart that is more interesting than the others. It is the chart that signals the turnaround in a key area for the 'dream factory' business: video streaming.

The video on demand

The document describes the development of the operating profitability (operating income) of the so-called Combined DTC streaming business. That is, the group's different platforms: from Disney+ to Hulu to Disney+ Hostar and Espn+. Well: in the last quarter of the fiscal year 2023-2024 (ended end of September), the segment achieved an operating income of USD 321 million. This figure allows Disney, over the full year, to post an operating income of 134 million. The shift, in fact, is important. On the one hand, the video streaming business had recorded a deficit of USD 2.6 billion in 2022-2023; and on the other hand, only in the second quarter of the just concluded fiscal year did it - in fact - reach break-even. Consequently - in line with what had been indicated by CEO Robert Iger - the area in question came to contribute positively to the company's profitability.

ANNI FISCALI A CONFRONTO

The motivations

On closer inspection, the result is the consequence of a mix of causes. A first reason is the increase in revenues (streaming without considering Espn+ grew by 15%) due, in turn, to the expansion of advertising (+14%) and subscription revenues. The latter, for a 10% share, rose thanks to higher retail prices. Another 6% share, however, was attributable to the increase in subscribers. Specifically, in the last quarter, Disney+ subscribers (both in North America and around the world) grew by 4.5 million to 122.7 million. Hulu, for its part, managed to take home the expansion of 0.9 million new subscribers (52 million total subscribers).

Another motivation, in line with the company's general strategy, is cost containment. Operating expenses, still mainly concerning Disney+ and Hulu in 2023-2024, were EUR 17.7 billion compared to EUR 17.8 billion a year earlier. One might say: not such a significant drop (-1%). In reality, compared to the expansion of turnover, the result should not be underestimated: maintaining cost control while the business grows is a healthy operation that companies do not always manage to achieve.

I SEGMENTI OPERATIVI

The competition

Having said that, is it all doom and gloom? The reality is more difficult. The streaming world, in a sector that is consolidating, is characterised by strong competition. 'Social networks such as YouTube,' explains Augusto Preta, founder of It media consulting, 'can erode market shares, both with premium and self-produced content from users. In addition, there are the well-known ones such as Netflix. The big 'N' has not a few weapons on its side to counter the Magic Kingdom. Among others: technology, augmented by artificial intelligence. The Californian group - is the indication of the experts - is in a vanguard position in the use of algorithms capable of capturing the user experience of subscribers. A competence which, on the one hand, allows for potentially interesting productions for customers; and which, on the other hand, enables the creation of a more efficient and personalised offer. Not only that. On the specific content front, Netflix, thanks to its presence in multiple markets and its obligation to invest in local productions, is able to articulate and differentiate its offer even more. An offer on single markets that, as in the case of 'Squid Game' or 'House of Cards', can turn into a global success. Of course: Disney has a good archive of films and cartoons. Moreover, as the Avod (Advertising video on demad) model is carving out its role in streaming, having experience in managing generalist TV is important. And the Mickey Mouse house - evidently - has expertise on this front that others do not have. That said, however, the underlying theme of competition - together with that of cost containment and business expansion - remains fundamental. "Also because,' Preta points out, 'Netflix often plays the pioneering role in changing the business model'. For example? "Precisely in Avod", among the large groups, "it was the first to take the first steps. Being the one who sets the pace in the market is no small thing'

Il business aziendale dello streaming

Average revenue per user

Beyond individual considerations, the do-it-yourselfer, when 'tackling' this area of business, has to sound out the business. In what way? For example, with regard to the first line of the balance sheet, by analysing the dynamics of Arpu. That is: the average monthly revenue per subscriber. Well: in 2023-2024, both the Arpu of Disney+ (US and Canada) and Disney International (formerly Hotstar) rose by 13 and 11% respectively. Hulu's average revenue per customer increased by 1% (Svod only) and 5% (Live TV plus Svod). In other words: the dynamic is positive. True! A further step - again for the do-it-yourselfer - is to compare such trends with those of the competition. And yet - notwithstanding that the comparison is very complex because it has to take into account so many variables such as, for example, different tariff plans - just monitoring the trend of such indicators is important.

So far, some suggestions on streaming. Walt Disney, however, divides the business into three major areas: Entertainment, Sports and Experiences. The first includes, besides streaming itself, traditional TV (from the ABC television network in the USA to National Geographic). In addition, again in Entertainment, revenues from the production of films and TV series are accounted for. The second division, on the other hand, includes television and video on demand in the area of sports. Finally: the Experiences segment. This includes the business, both domestic and international, of amusement parks and theme cruises.

Yes, cruises and theme parks. On this front, the dream factory has invested (and will invest) a lot. The segment grew by 5% in 2023-2024. The largest contribution to turnover came from park admissions (+7%). Resorts and holidays followed, with cruises (+3% from the highest average price for cruises) playing the leading role. Merchandising, on the other hand, declined. Against these figures, despite the expansion of costs, the segment's operating income increased to EUR 9.3 billion (+318 million compared to 12 months earlier). In contrast, the operating profitability of the Sports division decreased. Operating income amounted to EUR 2.4 billion compared to EUR 2.46 billion in 2022-2023. Two factors essentially weighed in here. The first is the higher expenses in programming and production (e.g. for the payment of football rights). The second - apart from the decline in linear TV subscribers - is the higher losses in the Star India channel.

Against such a backdrop, Walt Disney's last quarter figures - both in revenues and adjusted earnings per share (EPS) - exceeded estimates. A condition, combined with the indicated estimate for the first quarter of 2024-2025, which pleased the market. On the stock exchange - immediately after the publication of the accounts - the share gained more than 11%. The increase - moreover - was also caused by the long-term forecasts released by the company itself. In 2024-2025 the adjusted EPS is expected to rise to a high single-digit percentage. In 2025-2026 and 2026-2027, on the other hand, the forecast is for adjusted earnings per share to grow in the double-digit percentage range. The jump in the market, therefore, is not surprising. However, some experts have pointed out that - given the many variables at play (just think of the recent hurricanes in the US that will affect the current quarter's numbers) - offering such a long-range outlook may be risky. The company - in its conference call with analysts - seems to take a different view. The 'fanta'-economic habitat, which characterises the Magic Kingdom, allows - this is the indication - integration (and synergies) between the different business segments. Not only that. The growth of subscribers -which, for example in streaming, has low incremental costs and therefore higher margins- together with the global presence and the validity of the content (the company recalls the successes of Inside Out 2 and Deadpool & Wolverine) allow visibility on the business and return on investment. As always, time (gentleman) will tell whether the arguments will be supported by facts. In the meantime, since the beginning of the year, the stock is up more than 20 per cent. According to Barron's, the current P/e (over the last 12 months and thus over the fiscal year) is, as of 21/11/2024, 42.5 times. That is a high level. True! The GAAP forward-looking indicator, according to Seeking Alpha, falls to 23.8 (20.1 the median of the reference sector). And yet, the quote is currently very 'pulled'. Consequently, the saver must be careful and proceed with caution.

Stock performance

Vittorio CarliniRedattore
Luogo: Milano
Lingue parlate: Italiano, Inglese
Argomenti: Finanza, Tecnologia, Analisi fondamentale
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