Disney Delivers 26.5M Disney+ Subscribers
Disney (DIS) just delivered a stellar quarter beating on both the top and bottom line while continuing to roll out its growth initiatives via streaming. Disney’s growth rotation is still in the early stages with its remediation of its ESPN property and flurry of growth initiatives to meet the demands of the modern day media consumption trends. In the backdrop, the company continues to dominate the box office year after year with a long pipeline of blockbusters in the queue. Additionally, its Parks and Resorts continue to be a growth avenue with tremendous pricing power albeit the corona virus will damper its Shanghai and Hong Kong operations. Disney is going all-in on the streaming front and acquired full ownership of Hulu and the company is launched its Disney branded streaming service. Disney Plus launched on November 12th with all of its content (Marvel, Star Wars, Disney and Pixar) which will be a formidable competitor in the ever expanding streaming wars both domestically and internationally. As a result of its strong Q1 numbers, Disney has hit near all-time highs of ~$150 per share. I’ve been behind Disney for a long time, especially through this transition back to growth when the stock traded below $100 and I still feel that the company offers a compelling long-term investment opportunity given its growth catalysts that will continue to bear fruit over the coming years.
Disney Plus, Hulu, ESPN Plus and Q4 Earnings:
Disney’s Q1 earnings easily beat analysts’ expectations with strong gains in its streaming platforms such as ESPN Plus, Hulu and Disney Plus. Disney beat on both the top line revenue and bottom line profit. EPS came in at $1.53, beating by $0.09 per share and revenue came in at $20.86 billion, beating by $50 million. Revenue grew by 36% year-over-year and for the fiscal year.
Disney Plus subscribers came in at 26.5 million, well ahead of expectations that were ~20 million. ESPN Plus subscribers came in at 6.6 million and Hulu subscribers came in at 30.4 million. Hulu saw a 33% year-over-year growth in subscribers.
Disney’s business across the board came in strong, posting growth in every category. Revenue by segment: Media Networks, $7.36 billion (up 24%); Parks, Experiences and Products, $7.4 billion (up 8%); Studio Entertainment, $3.7 billion (up 106%); Direct-to-Consumer and International, $4.0 billion (up 334%). Total operating income rose 9% to $4 billion.
“We had a strong first quarter, highlighted by the launch of Disney+, which has exceeded even our greatest expectations,” said Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company. “Thanks to our incredible collection of brands, outstanding content from our creative engines and state-of-the-art technology, we believe our direct-to-consumer services, including Disney+, ESPN+ and Hulu, position us well for continued growth in today’s dynamic media environment.” (Figure 1).
Bob Iger, CEO
Figure 1 – Disney Plus brought in 26.5 million subscribers in Q4 2019.
Corona Virus Impact:
Disney is expecting to take a $175 million hit from the recent coronavirus outbreak if its Hong Kong and Shanghai Disney parks remain closed for two months. Needless to say, a negative financial impact will result due to the coronavirus outbreak.
“The current closure is taking place during the quarter in which we typically see strong attendance and occupancy levels due to the timing of the Chinese New Year holiday,” Christine McCarthy, chief financial officer at Disney, said during an earnings call Tuesday. “The precise magnitude of the financial impact is highly dependent on the duration of the closures and how quickly we can resume normal operations.”
McCarthy said the company expects an impact of $135 million on second-quarter operating income from the Shanghai park and about $40 million from the closure of the Hong Kong park.
The company had already disclosed that its Hong Kong park had been underperforming due to protests in the region. Between coronavirus and the unrest in Hong Kong, operating income at the park is expected to decline by $145 million in the second quarter. Last quarter, operating income in the Hong Kong park declined by $55 million
In the U.S., the opening of new parks and attractions, including the Star Wars: Galaxy’s Edge lands and the Rise of the Resistance ride, provided a boost. Iger said on the call that Rise of the Resistance has “done extremely well” in terms of attendance and higher guest spending.
Disney’s well rounded business model will mitigate the operating losses at these parks. Analysts were more concerned with the level of spending it will require in order to build out the necessary infrastructure for its future of streaming and expansion into other geographies such as India.
Disney’s Comprehensive Streaming Efforts (Hulu, Disney+ and ESPN):
Hulu will finally be a wholly owned asset of Disney now that Comcast has agreed to sell its stake in Hulu by 2024. Disney has taken full operational control of Hulu and now breaks out the numbers in its earnings reports. Taken together, Disney will take total control of the streaming service, after it bought out Fox's share while WarnerMedia sold its 10% back to Hulu, leaving Comcast as the only non-Disney owner. Comcast could sell its remaining stake at a total-company valuation of $27.5B or whatever Hulu is appraised at in 2024. Comcast is guaranteed $5.8 billion for its Hulu stake.
“Hulu represents the best of television, with its incredible array of award-winning original content, rich library of popular series and movies, and live TV offerings,” Disney CEO Bob Iger said in a statement. “We are now able to completely integrate Hulu into our direct-to-consumer business and leverage the full power of The Walt Disney Company’s brands and creative engines to make the service even more compelling and a greater value for consumers.”
Disney’s future of streaming includes ESPN Plus which was launched in 2018 to a mixed skeptical reception among shareholders and consumers upon its debut. Due to precipitous declines in ESPN viewership via traditional cable, Disney was cornered to remediate its ESPN business and evolve to the cord cutting consumer. Recently, Disney announced a key milestone for its streaming platform, reaching over 6.5 million subscribers.
Consumers are now experiencing Disney's stand-alone streaming service (November 12th), Disney+ which includes Pixar, Marvel, Disney, Lucasfilm and National Geographic content. Collectively, Disney’s streaming initiatives are bearing fruit and as Bob Iger stated in a recent interview, its streaming efforts are a marathon, not a sprint. These streaming properties will add a layer of durable, recurring revenue for the company for years to come while addressing the cord cutting and ESPN losses.
All the initiatives that Disney has taken over the previous few years to remediate its business and restore growth appear to be coming to fruition via its Fox acquisition and its streaming initiatives. Disney+ blew out expectations with 26.5 million subscribers in Q4 alone. The coronavirus will likely have a minimal impact on its operations in Shanghai and Hong Kong. Disney continues to invest heavily into its streaming services (Hulu, ESPN Plus and its Disney+ streaming service) to propel its growth and presence within the streaming space. The company is evolving to meet the new age of media consumption demands via streaming and on-demand content. Disney’s streaming initiatives via Hulu, ESPN Plus and Disney+ will continue to be major growth catalysts moving forward. Disney’s business transformation and the realization of these early financial benefits are evident in its Q4 earnings. Disney offers a compelling long-term investment opportunity for the long-term investor as the long term story remains intact.
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