Walt Disney Contributes To Broad Market Decline On Thursday

Investors bailed in droves from Walt Disney Corp. (DIS) after it reported earnings after the bell on Wednesday, which met or beat analyst expectations on most fronts, but were disappointing on a number of other issues.

Perhaps alarming was a decline in streaming subscribers at Disney+ for the second quarter in a row. Although CEO Bob Iger has told Wall Street that he intended to focus on streaming profitability instead of subscriber growth (as has management at some other large media companies with streaming services), this was interpreted by some to signal slower growth in subs, not a decline.

Secondly, the results at the company’s broadcast division were abysmal. Although cord cutting (where people drop satellite or cable in favor of only streaming content) and cord shaving (where people switch to a cheaper cable or satellite plan) have been going on for a long time, they are getting worst recently.

Many analysts had predicted a slow and steady decline in video subscribers over time, when in fact many multichannel operators have reported accelerating declines.

DISH Network, for instance reported a double digit decline in video subscribers in its most recent quarter. This has resulted in massive layoffs at cable network owners. Paramount Global, for instance, recently announced it was letting a quarter of its workforce go.

Revenue at the linear networks fell 7% from $7.116 billion in the April 2, 2022 quarter to $6.625 billion in the quarter ending April 1, 2023. Operating income in the segment, however, fell a whopping 35% to $1.828 billion during the quarter, down almost $1 billion from the same period last year.

The advertising recession, the decline of the linear TV business, the lack of growth in streaming subscribers and the lack of a deal on an increase in the national debt limit all likely weighed heavily on the minds of owners of shares in DIS.

All of this resulted in a drop of 8.8% to $92.31 for DIS on Thursday, while the S&P 500 sunk 7.0% to 4,131, with a number of analysts cutting their price targets on Walt Disney Company, albeit modestly.

Disney+ in fact lost subscribers last quarter for the first time, and Iger announced a restructuring which included 7,000 job cuts and a $3 billion reduction in content investment.

Disney also announced Wednesday a plan to combine content into one app for Hulu and Disney+, although the two will remain separate services. Iger’s plan to get streaming on a road to profitability also is working, Revenue at the DTC segment rose by 12% from $5.058 billion in the April 2, 2022 quarter to $5.514 billion in the quarter ending April 1, 2023.

The loss at the division was $659 million, down 26% from $887 million in the same quarter last year and down significantly from the $1.1 billion loss in the previous quarter.

On the company’s earnings call, Iger said, “We’re pleased with our accomplishments this quarter, which are reflective of the strategic changes we’ve been making throughout our businesses. We’re also proud of what we continue to deliver for consumers from movies to television to sports, news and our theme parks.”

He noted that cost cutting is on track to meet or exceed their previously announced target of $5.5 billion but acknowledged difficulty on the ad front. “Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting. And when you drill down into the details, you can see why. Over 40% of our domestic advertising portfolio is addressable, including streaming, which we expect will continue to grow over time,” said Iger.

That said, domestic linear ad revenue sank 10% in the most recent quarter despite an increase of 2% at ESPN.

CFO Christine McCarthy said they were removing content from the streaming services that didn’t fit and expect to take an impairment charge of between $1.5 billion $1.8 billion. Iger added…”As we grow the business in terms of the global footprint, we realized that we made a lot of content that is not necessarily driving sub growth. And we’re getting much more surgical about what it is we make. So as we look to reduce content spend, we’re looking reduce it in a way that should not have any impact at all on subs,” he said.

It seems that analysts in general have a positive view of Iger’s announced turn-around plan given their price-target reductions were nominal and many financial targets were met or exceeded. However, some investors appear to remain worried about where the linear business will land and what the potential peak profitability is for the streaming services.