Disney: In addition to the approaching turning point, the management also outlined a three-year "big pie."

Hello everyone, I am Dolphin Jun!

$Disney(DIS.US) On November 14th, Eastern Time, Disney released its Q4 results for the fiscal year 2024 (CY24Q4) before the US stock market opened. The trends reflected in Disney's Q4 performance across various businesses have not changed significantly:

1) The streaming business continues to maintain revenue growth and expand profitability under measures such as price increases and account sharing;

2) The experience business is currently under growth pressure due to the waning post-pandemic benefits (in the US) + diversion from the Olympics (Paris) + demand slowdown (Shanghai). The impact cycle of the Olympics and post-pandemic benefits is expected to significantly slow down by the next quarter, coupled with the trial operation of new cruise ships, which offsets some of the impacts from two hurricanes, leading to a rebound in revenue growth;

3) In the entertainment business, movie sales are entering a product cycle and showing strong recovery, while the decline in cable business remains unchanged but has slightly slowed (Dolphin Jun speculates this may be related to the US elections and the Olympics, which could boost advertising revenue and offset some impacts). Therefore, in terms of growth rate, the overall recovery of the entertainment business is the most evident;

Compared to expectations, Disney's Q4 performance is actually unremarkable (adjusted EPS is above consensus expectations, but in line or slightly below the latest expectations from leading institutions). The real reason supporting the market's positive feedback on the Q4 financial report is that the company's guidance for the next three years (25/26/27) is significantly above expectations. This somewhat alleviates market concerns regarding when the experience business will accelerate growth, the impact of divesting the Indian Star business on 2025 profits, and the growth-driving effect of the ESPN flagship launch on 2026.

In simple terms, although the Q4 performance itself cannot yet confirm a real turning point, under the company's guidance, except for the first quarter of fiscal year 2025 (corresponding to the calendar year October-December 2024), which is expected to remain under pressure (due to hurricanes + new cruise ship cost recognition), the growth expectations thereafter indicate that the turning point and medium to long-term growth have been clearly communicated to the market through this financial report.

Based on the company's latest guidance, with a closing market value of $208.4 billion after the earnings release on November 15th, the corresponding adjusted EPS for 2026 is calculated to be below 18x (the company guides for double-digit growth in 26/27, and if we assume a conservative expectation of 15% and 10% growth for 26/27 respectively), which is clearly below the historical average of 20-25xIn the pessimistic scenario mentioned above, the valuation may be higher than the profit growth rate over the past three years. However, even with conservative assumptions, market sentiment during the turning point will be relatively positive. For example, institutions have begun to restore the Sum of the Parts (SOTP) valuation method, leading to a higher overall valuation for Disney. The use of SOTP implicitly suggests expectations for steady growth in various business segments in the future.

The following is a detailed report

1. Understanding Disney

As a nearly century-old entertainment empire, Disney's business structure has undergone multiple adjustments. Dolphin 君 has provided a detailed introduction in “Disney: The 'Beauty Secret' of the Century-Old Princess.”

In the past year, there have been significant adjustments at the group level, including changes in leadership and business structure, as well as a shift in strategic focus. Under the new business structure, it is mainly divided into three major segments—[Entertainment], [Sports], and [Experiences]:

1.1. What are the differences between the original structure and the new structure?

The new structure highlights the strategic position of ESPN, separating the ESPN channel and ESPN+ into a dedicated sports division, demonstrating the company's emphasis.

(1) The [Entertainment] segment includes: existing linear channels, DTC (excluding ESPN+), content sales, while disposing of some overlapping business lines and low-revenue traditional channels during the integration process.

(2) The [Sports] segment includes: ESPN channel, ESPN+, Star.

(3) The [Experiences] segment includes: park experiences, hotel tourism, merchandise consumption, etc., which are similar to previous businesses, but specific financial data may differ from previous figures due to some business adjustments.

1.2. Investment Logic Framework

(1) The change in framework reflects an important strategic adjustment—content and distribution channels are no longer separated into two businesses but are integrated together, with the new business structure being more based on different content.

This may address a fundamental issue—namely, that the same content may be suitable for premiere on different channels. In the past two years, Disney has been entangled in whether to release popular blockbusters on Disney+ or in theaters first. After attempting simultaneous online and offline releases, it inadvertently affected the final box office performance of some popular films. Consequently, actor shares were impacted, damaging Disney's collaboration with some star actors.

(2) The [Experiences] segment has developed relatively mature over the years. With the support of first IP reserves, Disney's theme park business maintains a leading position, more influenced by overall consumption. Under normal circumstances, it can be viewed as a stable cash flow.

(3) The [Entertainment] segment essentially involves the production and distribution of Disney films, including several well-known studios, traditional channels, and streaming channels. Therefore, revenue fluctuations are mainly related to Disney's film release schedules and overall market consumption power.

Among them, the streaming business remains Disney's focus for medium to long-term growth. However, in the past two years, it was originally seen as a growth business that could generate incremental revenue and profits while stabilizing Disney's traditional business. But competition in the streaming front has intensified during the pandemicDisney, lacking the accumulated advantages of self-produced series content, has incurred significant losses despite massive investments.

As the two ends of a seesaw, while streaming media is developing rapidly, traditional media's old business cannot remain unaffected. With the trend of traditional media declining, streaming media cannot be considered a complete increment for Disney; a large part is compensating for the decline of traditional channels.

(4) Disney's new darling, the sports business, may be a new growth path that has emerged. Although ESPN has been operating within Disney for many years, sports content and related industries are increasingly coming into the sights of more streaming companies, with Netflix also repeatedly mentioning its emphasis on and increased investment in sports content.

Recently, Disney will team up with its peer Warner Bros. to further integrate its own Fox content, launching a completely revamped ESPN in 2025, effectively doubling down on its bet in the sports arena.

2. Profitability Continues to Improve, Investment Cycle Steadily Opens

In the fourth quarter, the group's operating profit reached $3.66 billion, a year-on-year increase of 23%, with an operating profit margin of 16%, up 2.2 percentage points year-on-year, mainly driven by the entertainment business. This mainly comes from:

(1) The streaming media (excluding ESPN+ and Star) has shown excellent loss reduction effects, primarily driven by price increases and user growth (strategies such as bundled packages, ad packages, and account sharing) that collectively boost revenue growth, but it is expected that subsequent content spending will continue to increase steadily.

(2) "Inside Out 2" has a global box office of $1.7 billion, and "Deadpool and Wolverine" has a global box office of $1.34 billion, currently ranking as the top 1 and top 2 films at the box office for 2024, making a significant contribution to turning around content sales in the third quarter.

(3) Cable television revenue continues to decline, and profit margins have also decreased year-on-year, mainly because last year's same period was affected by a strike, resulting in lower cost recognition, appearing relatively high. This year has returned to normal—due to the decline in the monetization rate of average costs, it is difficult to avoid a continuous decline in profit margins unless low-efficiency cable channels are further divested. During the conference call, management mentioned that after internal evaluation, they decided not to completely sell off the assets of cable channels.

From the perspective of profit contribution, the profit contribution from DTC has slightly increased due to revenue growth, while the park business has seen a decline in its contribution due to recent pressures. The sports business has increased quarter-on-quarter as summer is generally a peak season for sports events. However, year-on-year, the operating profit of the sports business has still declined by 5%, mainly due to the rising costs of broadcasting rights for NCAA football events

Looking ahead, the company's growth guidance for EBIT and EPS in the fiscal years 2025, 2026, and 2027 is overall better than the market consensus expectations.

(1) In terms of trends, there will be slight headwinds in fiscal year 2025, mainly reflected in the first half of the year (from October 2024 to March 2025):

On one hand, the experience revenue is still affected by the fading post-pandemic cycle bonus, with Q1 impacted by hurricanes. Although the two cruise routes can bring incremental revenue, the short-term confirmation costs are also high, and the general ROI shows a trend of low first and high later. It is expected that the operating profit growth rate of the experience business in 2025 will be in the range of 6%-8%.

On the other hand, content investment will continue to increase in 2025 (after actively reducing projects the previous year + strike impact), but an important factor driving entertainment business revenue—the flagship version of ESPN+—will not be launched until the second half of 2025. The new version of ESPN is highly anticipated by management, not only for its rich sports content but also for the introduction of AI technology to provide targeted recommendations to users, improving the marketing ROI for advertisers.

From the recent quarters of content investment, although the scale of investment is still declining year-on-year, the rate of decline has gradually slowed down, and a rebound is expected in fiscal year 2025, especially as Disney+ expands into international markets, which requires local investment. This trend of investment cycles can also be seen with Netflix. However, Disney's management has stated that investment will increase moderately and steadily, meaning that while investing, they will also pay attention to ROI.

(2) After passing through a small low point in 2025, the total profit and segment operating profit for 2026 and 2027 will exceed expectations, maintaining a double-digit growth trend overall.

3. DTC: Is the purpose of the price increase to increase AVOD users?

In the fourth quarter, the incremental growth of Disney+ mainly came from international regions, with a quarter-on-quarter increase of 3.2 million. The North American domestic user base saw a net increase of 1.2 million, driven by the box office success of "Inside Out 2," while the original "Inside Out" attracted nearly 1.3 million users on Disney+ to revisit the classic.

The bundled packages, advertising packages, and account sharing plans during the period collectively drove user growth, exceeding overall expectations. Among the new users in the U.S., 60% chose the AVOD package, while 37% of the total subscription volume among existing users was AVOD subscriptions, with a global figure of 30%.

Although the overall growth of streaming media is a well-worn topic, it will still focus on 1) expanding the subscriber base (continuing to promote account sharing and advertising packages); 2) gradually increasing pricing; 3) improving the recommendation engine to enhance user engagement, thereby increasing platform stickiness and better monetizing through advertising and paid subscriptions.

As of the end of this quarter, Disney+ had 159 million subscribers, ESPN+ had 25.6 million, and Hulu had 52 million, totaling 236.2 million subscribers. In the short term, the company's focus on streaming media operations remains on raising prices to reduce losses. A strategic shift mentioned in this conference call is that the management's pursuit of user growth is prioritized over price increases in the short term, with price increases also aimed at guiding users to "be forced" to choose the lower-priced AVOD. The increase in the proportion of AVOD users indirectly lowers the overall ARPPU, making the price increase less apparent overall.

4. Theme Parks: Short-term Disruptions + Demand Continues to Cool

In the fourth quarter, revenue from theme parks and consumer products was 8.24 billion, a year-on-year increase of 1%, continuing to slow slightly. Within the internal structure, park business growth was 0.8%, while consumer products grew by 2.3%. The market has certain expectations regarding the cooling of demand.

Further breaking down the changes in volume and price driving factors: The company did not separately disclose the fourth-quarter situation, but based on estimates from annual data splits, the domestic market remains stable, and it is expected to recover and accelerate growth as the impact of the post-pandemic period passesHowever, international optimism is experiencing a high base, and short-term demand is affected by event disturbances or demand declines, putting certain pressure on overall revenue.

Specifically, the number of domestic visitors is flat year-on-year, but the number of international visitors has declined significantly. On one hand, there is a high base, and on the other hand, the Paris Olympics has diverted some visitors, while Shanghai Disneyland has seen overall demand continue to decline due to changes in the Chinese consumption environment and recent price increases, following a slowdown in the previous quarter.

5. The Movie Product Cycle is Coming

In the fourth quarter, content sales revenue increased significantly by 39% year-on-year, showing a marked improvement compared to the previous quarter. This is mainly due to the release of "Inside Out 2" on June 14, which grossed $1.7 billion at the box office, ranking first globally. Additionally, "Deadpool and Wolverine," released in July, earned $1.3 billion, ranking second.

Looking ahead to 2025, the film slate is very rich. Some newly scheduled hot films include "Captain America: Brave New World," "Lilo & Stitch," "Fantastic Four: First Light," "Zootopia 2," and "Avatar 3," all of which are projects that were delayed due to the pandemic, content adjustments, and strikes over the past two years. In the current stable operating environment, these films are expected to be steadily invested in and scheduled for release, thereby maintaining growth in content sales.

6. Cable Media Focuses on High-Efficiency Operations

In the fourth quarter, cable television revenue still declined by 6.4% year-on-year, unable to resist the major trend of user cord-cutting. However, the short-term slowdown is estimated to be related to the advertising increase from the Olympics and the U.S. elections. From the revenue breakdown, similar to the previous quarter, subscription revenue has declined more than advertising revenue.

Since a large amount of operational data is not disclosed in the performance report, it is recommended that everyone pay attention to the full financial report and the conference call summary, or directly check the "Deep Data" section of the ChangQiao app.

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