Disney: "Where is the bottom" in times of crisis?

Hello everyone, I am Dolphin King! Walt Disney released the third quarter of fiscal year 2023 (CY23Q2) after the U.S. stock market on August 9, eastern time. From this financial report, the most direct feeling is that CEO lger is fulfilling his core responsibility of taking office-but at the same time, the financial report also reflects the current anxiety situation facing Disney's business lines), so it is not a long-term solution to improve profits by reducing losses alone. In early July, after CFO left office, Iger announced that he would extend his term of office to 2026. It seems that he also realized that Disney is going through a painful period that is not simple. It is difficult to make a series of changes in the original two-year term and choose the next successor at the same time. * * Therefore, Dolphin Jun will interpret this financial report around Iger's speech in early July. At the same time, it is also recommended that Disney investors pay special attention to this phone call. It is expected that Iger will focus on the subsequent business plan at the phone call, which can help determine Disney's real business turning point. * * * * The core points of this financial report: * * * 1, streaming media to reduce losses as expected * * In the third quarter of the streaming media continued to significantly reduce losses, the overall group's profitability further improved from 15.1 to 15.9. **But year-over-year, the operating margins of other traditional businesses were lower than in the third quarter of last year. In addition to theme parks because of employee pay increases, consumer costs slightly weakened profitability, cable networks, film and television content sales are due to the revenue side of the impact, mainly advertising revenue. * * On the follow-up to how to improve profitability, Iger mentioned two directions earlier last month, the acquisition of the remaining Hulu stake and the complete shift of ESPN to streaming media. The market's feedback on the initiative is positive, looking only at the speed of the push. * * 2. Subscribers Continue to "Avalanche" * * The third quarter was a complete quarter affected by the loss of IPL copyright content in India, so the loss of users increased significantly (-12.5 million) and exceeded market expectations. In addition, in the third quarter, Disney +'s own content reserve was relatively general, and the number of users in the local market was still slightly lost, resulting in a net loss of 11.7 million subscribers month on month, and the number of users was reduced to 0.146 billion, which was further away from the 0.23 billion's medium and long-term goal. Of course, since the last quarter, the company has gradually stopped mentioning "user goals" and focused on reducing operating losses in the streaming media business. 3, content investment is still shrinking Content is the key to retaining users. Netflix has started to increase content spending this quarter, starting a new investment cycle. However, Disney's investment contraction is slow, so it is still in the stage of slowing investment in the third quarter. Among them, the investment scale of homemade content has shrunk even more severely. It may still be affected by the Hollywood strike wave, and Disney itself is also actively controlling the investment in Marvel TV series. Therefore, in order to make up for the short-term lack of content, Disney has accelerated the procurement of external copyright content. However, we believe that this may only be a transitional action in a special period, not a long-term norm, and it is not good for the company's own brand positioning. 4, Park local demand heat down After more than a year of strength, the theme park business began to see signs of slowing demand in the local market in the third quarter. On the one hand, the number of people entering the park and the average amount of expenses per person have basically not increased; on the other hand, the hotel occupancy rate and the amount of single-person expenses have both declined year-on-year. Combined with WSJ's report last month, the queue length of Disney World in Florida has become shorter, and the consumption discount in the park has increased, which shows that the popularity of park business has declined. Of course, international park demand is still relatively strong, revenue doubled year-on-year, accounting for 20% of the overall park business revenue, mainly due to China is still in the post-epidemic unsealed cultural tourism consumption rebound stage, Shanghai, Hong Kong Disney are still in the benefit period. **List of detailed financial and operating indicators for the fifth and third quarters * *! Dolphin Jun's View **When Iger first announced his appointment, the market was euphoric, but as environmental pressures increased, it quickly realized that it was too early to be happy. Last quarter we prompted Disney's short-term pressures, and the revenue side of the third quarter confirmed our expectations. **** Although the management also said that streaming media will resume growth in the next quarter, the quality of "recovery growth" in the fourth quarter was not so high when users fell more than expected in the third quarter. **** The third quarter results are still early from the business inflection point that the market wants, but in the medium and long term, Dolphin Jun still holds a positive attitude towards the new management. It's just that the change will not be completed overnight, not to mention the short-term pressure of environmental cycles, such as businesses cutting advertising budgets on cable networks and shifting to better Internet advertising, or streaming media platforms that continue to grab a share of the audience; such as the impact of the Hollywood strike; and the ebb and flow of theme parks. * * * Therefore, in addition to paying attention to the management's description of the business strategy in this conference call, Hai * * * * has just noticed that Disney has taken a fluctuating trend of falling first and then rising after the session. After listening to the conference call, it should be due to the stimulation of the news: Iger announced at the conference that * * * Naifei's effect of cracking down on account sharing is obvious to all, so the market is hard not to YY Disney after the implementation of the effect. **** Valuation, short-term Disney is in the performance trough, from the current market consensus expectations of Forward EV/EBITDA, valuation is in the historical lower range. Under Dolphin Jun's expected assumptions, if performance does not deteriorate beyond expectations and can grow steadily after fiscal year 2024, then SOTP valuation 210 billion in the medium term, corresponding to the current there is still some room for upside. * * * * Under conservative expectations, if the group's EBITDA corresponds to the valuation low of 8x in the past five years, then the valuation 150 billion is obviously low by only 6% compared with the current market value 160 billion. The upward momentum that drives valuations to shift to our neutral expectations comes from the inflection point signal at the operational level. * * * * Interpretation of this season's financial report * * * * 1. know Disney * * As an entertainment kingdom for nearly 100 years, Disney's business structure has also undergone many adjustments. Dolphin King has introduced it in detail in "Disney: 100-year-old Princess's" Yan Shu ". The latest business structure is presented here for investors to have a preliminary understanding before reading the results. 1, Disney's business structure mainly includes four pieces, film and television entertainment, cable television, streaming media, theme parks and retail. 2, [theme park and commodity retail] years of development has been more mature, the first IP reserve blessing, Disney theme park business leading position is stable, more affected by the overall consumption. Under normal circumstances, it can be regarded as a stable cash flow. 3, [Film and Television Entertainment], [Cable TV], and [Streaming Media] are essentially doing the production and distribution of Disney films, so the change in revenue is mainly related to Disney's film scheduling and overall film market spending power.! graphical user interface description has been automatically generated * * 2. streaming media to reduce losses as desired * * reducing streaming media losses and bringing profit improvement to the group as a whole is the first important task of Iger's return. In the third quarter, while streaming media continued to reduce losses significantly, the profitability of the overall group further improved from 15.1 per cent to 15.9 per cent. But year-on-year, the operating margins of other traditional businesses were lower than in the third quarter of last year. In addition to the theme park because slightly weakened profitability, cable networks, film and television content sales are all because.! ! After the sharp loss reduction of streaming media, the drag on the overall profitability was also significantly reduced. However, the profit margin of the content sales business in the third quarter weakened month on month due to the poor box office of some films released in the current period and the release of "Indiana Jones and the Dial of Destiny (Raiders of the Lost Ark 5)" at the end of the quarter. However, for the group itself, the profit pillar is still and.! The picture includes a schedule description that has been automatically generated * * Lack of 3. content is the key reason for the loss of users * * The third quarter was a complete quarter affected by the loss of Indian IPL copyright content, so the loss of users increased significantly (-12.5 million) and greatly exceeded market expectations. In addition, in the third quarter, Disney +'s own content reserve was relatively general, and the number of users in the local market was still slightly lost, resulting in a net loss of 11.7 million subscribers month on month, and the number of users was reduced to 0.146 billion, which was further away from the 0.23 billion's medium and long-term goal. Of course, since last quarter, the company has gradually stopped mentioning "user goals" and focused on reducing losses in the streaming media business.! Chart, line chart description has been automatically generated! Chart, Waterfall Chart Description Automatically Generated In the third quarter, the company continued to ease the pressure on revenue growth from user churn through price increases. At the conference call, management revealed that it would continue to raise prices for Disney + and Hulu.! Graphic Description Automatically Generated Disney has been relatively proud of its content investment in the past year, but it is gradually reducing its budget in the last two quarters due to the pressure of profitability. In addition, the strike wave in Hollywood has also stalled the progress of Disney's home-made content (down 28% year-on-year) and can only rely on accelerating the purchase of short-term supplementary content from external copyrights (up 14% year-on-year).! Chart description has been automatically generated In contrast, Netflix began to enter a new content investment cycle this quarter. It is recommended to pay attention to the changes in Disney's content investment after the strike wave gradually eases. If it continues to shrink, it may affect the content output in the next year, and then affect the effect of price increase and crackdown on shared accounts.! Chart, Bar Chart Description Automatically Generated Streaming media needs episodes to support subscription stickiness, but Disney is better at movies, so it used to be more inclined to move classic old dramas to Disney +. From the follow-up Pipeline, although there are some Marvel IP episodes, it was revealed at the beginning of this month that Disney is cutting back on its investment in Marvel episodes, or may affect the launch plan of these reserve episodes.! Table Description Automatically Generated * * 4. blockbusters piled up, but feedback was mediocre * * Content sales revenue 2.08 billion in the third quarter, down 1.4 from a high base, mainly due to a decrease in TV/SVOD distribution revenue.! Chart Description Automatically Generated! Chart, Bar Chart Description Automatically Generated Although the total number of films released in the third quarter increased a lot (35%) compared with the same period last year, if you look at the performance of each film alone, only "Guardians of the Galaxy 3" may have achieved 0.85 billion box office standards (0.78 billion and 0.86 billion for the first and second films respectively). The other two IP "The Little Mermaid" and "Raiders of the lost Ark 5" performed very generally, especially "The Little Mermaid", which has the same popularity as IP. The live-action movie "Beauty and the Beast" released in 2017 has the 1.27 billion global box office, and "The Little Mermaid" is only $0.57 billion. In addition to the plot being changed by magic and being criticized, the casting of the mermaid is also difficult to evaluate, and this makes people have to worry about the same pursuit of political correctness of the live-action movie ''Snow White'', which is expected to be released in March next year, but will it also Face a dismal box office? In the follow-up films, "Captain Surprise 2", "Wishes" and "Snow White" are worthy of attention, and the content cycle will wait until the second half of next year.! Graphical User Interface, Table Description Automatically Generated * * The heat of the 4. park is not going to last * * Since the last two quarters, Dolphin King has been worried about when the heat of the theme park will subside. As a result, the local park has cooled down visibly in the third quarter. The revenue 8.33 billion of theme parks and consumer goods in the third quarter still seems to be up 13%. However, the growth rate of park business was 15.6 per cent, down significantly from 23.5 per cent in the previous quarter, with ticket revenue, hotel revenue and cruise revenue all slowing down. The downward trend in consumer goods revenue has eased, mainly due to the hot sales of Disney Princess and Spider-Man products during the release of related movies.! In the third quarter, the number of visitors to parks in the United States and the average cost have not increased. Although Asian regions such as Shanghai and Hong Kong are still in the stage of releasing retaliatory demand after the epidemic (year-on-year + 88%), the proportion of park revenue outside the United States is limited (20%), which may not necessarily make up for the stagnation or even decline in the growth of local park business.! Table Description Automatically Generated * * It is difficult to reverse the trend of 5. cable networks * * Cable TV revenue fell 7% year-on-year in the third quarter, which is the same as the decline in the previous quarter. The main decline is still in advertising revenue (down 14% year-on-year and 15% year-on-year in the previous quarter), which is more relevant to the viewing time of users. Subscription fees and distribution revenue due to the inertia of payment, the impact of streaming media on cable TV is still lagging behind, short-term fluctuations will not be particularly large, the third quarter (-3%) to maintain the same decline as the second quarter.! Nielsen data show that the share of time spent by TV users on cable channels has continued to decline since the beginning of the year. In the medium to long term, cable advertising revenue will continue to be under pressure.! Chart, bar chart description has been automatically generated * * Stable improvement in 6. cash flow * * Net free cash flow inflow of 1.64 billion yuan in the third quarter continued to improve cash flow under the release of earnings and restrained investment. As of the end of the third quarter, the company's book cash 11.5 billion, short-term investment 3.1 billion. In addition, although the company has a total 48.4 billion of long-term and short-term borrowings, more than 90% of them are long-term US dollar notes, and the cash flow situation is not bad. With the further improvement of management's profit requirements, there is no need to worry about cash flow. In comparison, it is the key when there is an operating inflection point on the revenue side, especially when DTC businesses such as Disney + can take the lead.! * * Long Bridge Dolphin "Disney" Related Articles * * * * Earnings Season * * May 11, 2023 Call "Weakness in Streaming Media Subscription and Advertising May Continue to Q4 (Disney 2Q23 Call Minutes)" May 11, 2023 Earnings Review "Disney: How to Shave Your Head to Make Profits?'' February 9, 2023 Call "Future Belongs to Streaming Media, but Needs Reasonable Operation (Disney 1Q23FY Call Minutes)'' February 9, 2023 Financial Review "Legends Return, Disney Begins to Change'' November 9, 2022 Call "Disney: Focus on Profits, open source and cut expenditure (4Q22 call minutes)" November 9, 2022 financial report review "giants take turns to hammer, 100 years Disney can't hold up?" August 11, 2022 Call "Disney: Hot Offline Demand, Lowering Medium and Long-term Streaming Media User Guidelines (3Q22 Call Minutes)" August 15, 2022 "Disney: Theme Park" High Heat "Continues, Streaming Media Running Expansion" May 12, 2022 Call "Disney: Strong Content in the Second Half of the Year, Park Boom Continues, reducing content authorization and closing Asian parks are unfavorable factors (minutes of 2Q22 call)" financial report review on may 12, 2022 "Disney: traditional business accelerates profit release, strives to transfuse streaming media" call on February 10, 2022 "gradually enter content cycle, management is full of confidence in growth targets (Disney call minutes)" February 10, 2022 financial report review "Disney: streaming media growth resumes glory, more beautiful is theme park" November 11, 2021 call "[epidemic interference, Disney content cycle and look at the second half of fiscal year 2022 (call minutes)](https://longbridgeapp.com/topics/1306130?invite-code = 032064) "November 11, 2021 financial report review" streaming media growth collapses, Disney's long transformation road is also difficult? "Depth June 1, 2022" Disney: Streaming Media Bubble Puncturing, Return to Theme Park Life "October 10, 2021" Disney: 100-year-old Princess's "Yan Yan" "October 15, 2021" Can Disney, who keeps "dreaming", have "dream valuation"? Risk Disclosures and Statements for this article: Dolphin Investment Research Disclaimer and General Disclosures