After the markets closed yesterday, The Walt Disney Company (NYSE: DIS) reported their third quarter earnings report from April through June. Although Disney started the fiscal year, in September 2019, on a high note and expected to continue its trajectory, the coronavirus pandemic put an abrupt end to that. However, Disney was able to report mixed earnings yesterday much to the surprise of everyone. Leading yesterday’s call was Bob Chapek, CEO of The Walt Disney Company and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer for The Walt Disney Company.
Every division within Disney was affected when the United States began to shut down in mid-March from their cruise line to theme parks everything ground to a halt. Disney+ was virtually the only product that was not affected as Disney had content already lined up to keep subscribers interested.
According to Barron’s, “Disney announced its actual revenue for the quarter was low at $11.78 billion, while analysts estimated the company earning $12.39 billion. The company reported diluted earnings per share, with shares decreasing 94% to $0.08 from $1.34 in the prior-year quarter.” The 8 cents per share was a surprise as analysts were predicting a 64 cent per share loss.
The reported numbers, when compared to this same time last year, were not a surprise to anyone as attendance at Disney Parks worldwide, which is considered their “cash cow,” during this period was at zero.
According to CNBC, “Disney reported a net loss for the quarter of $4.72 billion due in large part to charges related to its earlier acquisition of Twenty-First Century Fox, including severance and contract termination costs and integration expenses.”
The most significant impact was at the Parks, Experiences and Products segment as most of our theme parks and resorts were closed for the entire quarter and our cruise ship sailings were suspended. In a press release prior to the earnings call Disney stated, “Parks, Experiences and Products revenues for the quarter decreased 85% to $1.0 billion, and segment operating results decreased $3.7 billion to a loss of $2.0 billion. Lower operating results for the quarter were due to decreases at both the domestic and international parks and experiences businesses and to a lesser extent, at our merchandise licensing and retail businesses.”
During this period Disney’s domestic parks and resorts, cruise line business and Disneyland Paris were closed for the entire quarter. “Disney’s Asia parks and resorts were closed for a portion of the current quarter, as Shanghai Disney Resort re-opened in May and Hong Kong Disneyland Resort re- opened in late June (Hong Kong Disneyland Resort closed again in July).”
Additionally, Disney stated that their licensing and retail were also impacted by COVID-19 because of “decreases in licensing earned revenue and lower minimum guarantee shortfall recognition, the closure of our Disney Stores for most of the quarter and the write-down of store assets.”
To sum up how Disney’s divisions did in the third quarter in terms of revenue compared to the same quarter last year: Media Networks: $6.56 billion, down 2%; Parks, Experiences and Products: $983 million, down 85%; Studio Entertainment: $1.74 billion, down 55%; and Direct-to-Consumer and International: $3.97 billion, up 2%. (Source: CNBC.com)
Here are seven takeaways from yesterday’s earnings call.
1 – Disney Parks Worldwide contributed to a $3.5 billion hit to their segment operating income.
2 – Disney streaming services are the bright spot for the company. Bob Chapek said that as of 3 August 2020, Disney+ has surpassed 60.5 million subscribers globally – that is up from 57.5 million subscribers at the end of Q2 2020. He also announced that Disney+ will be available in 9 of the top 10 economies in the world by the end of the year. Initially, Disney had projected to have 60 to 90 million subscribers by 2024. Chapek also said that they now has 100 million paid subscribers across its streaming services, which include Disney+, Hulu and ESPN+.
3 – Disney’s “Mulan” will go directly to Disney+ – for a price. As movie theaters are struggling to reopen and theatergoers hesitant to go into a theater, yesterday Chapek announced that the highly anticipated and much delays “Mulan” will debut on Disney+, in select markets, for $29.99 USD starting 1 September 2020 as a premium video on demand. He said that subscribers in Canada, Australia, New Zealand and parts of Western Europe will also be able to stream the movie at slightly varied prices. The film will be released in theaters where Disney+ is not available – like China. The one catch, as of now, is Disney+ subscribers who choose to pay the premium will in essence be renting the film. Disney said the film will be available to watch anytime as long as someone is a Disney+ subscriber.
Chapek noted that they are “looking at ‘Mulan’ as a one-off as opposed to saying there’s some new business windowing model that we’re looking at.” However, he did not close the door on doing that or something similar in the future. “That said, we find it very interesting to be able to … learn from it and see what happens, not only in terms of the uptake of the number of subscribers that we get on the platform but the actual number of transactions on the Disney Plus platform that we get.”
4 – To further bolster Disney+ new content is coming in the next couple of months. Chapek confirmed that season two of Star Wars “The Mandalorian will be premiering in October 2020. There will also be new content from Marvel including “Loki,” “WandaVision,” and “The Falcon and the Winter Soldier.” “And there’s more great content coming to the service, said Chapek during the call. “Highlights include Disney live actions: “The One and Only Ivan,” which will stream exclusively on the service beginning August 21; and “The Right Stuff,” from National Geographic about NASA’s project Mercury, which is set to premiere this fall.”
5 – Some Disney Parks are making money – though not as much as expected. Alex Quadrani, analyst for J.P. Morgan asked Chapek and McCarthy for “any color” on the opening of Walt Disney World. She asked if “Walt Disney World is eating away the losses in the parks” due to the “surge of corona.” She wanted to know if demand “isn’t as strong as you thought it would be or because you’re just having to keep capacity lower and more careful because of the surge?”
As most Disney Parks Worldwide have reopened (Disneyland in California remains closed due and Hong Kong Disneyland closed down after opening, both because of government restrictions) some of them are making what Chapek and McCarthy call a “net positive contribution.” Previously Disney has said they would not reopen any park if they did not think they would make a profit or as McCarthy said, “generate revenue that exceeded the variable costs.” She said they have been able to do that – Shanghai has “consistently been operating the that net positive contribution area …”
6 – Walt Disney World’s attendance is not all about the locals. Responding to Quadrani’s question about Walt Disney World, Chapek said that they have found that 50% of guests are traveling from a distance and 50% are coming from local markets and in-state. “So, what we’ve done is used our strategy for yielding and made sure that every day, we’re pretty close to the percentage of the park that we can fill and still maintain the social distancing,” answered Chapek. I will say that our research indicates that — and our bookings indicate that, you know, we should be in good shape once consumer confidence sort of returns. And so, we’re very optimistic about that.” McCarthy added, “… we are able to do that, although it is to a lesser extent because of the current COVID situation in Florida. As we said, you know, as that abates, we expect the demand to pick up. But right now, it’s not as high as we had expected, but we’re still in the net positive contribution level.”
7 – Disney is sitting on $23 billion in cash. Jason Bazinet, analyst Citi asked about the money and asked if they could explain why there was so much. Christine McCarthy responded, “The whole company is aligned toward tightening, you know, the belt. And we’ve done, I think, a great job on that. But as we are opening up the parks, remember now, we furloughed over 100,000 people, and we’re bringing them back for the most part.”
“Not all are back yet, but a lot are back,” she added. “So, we will be spending more money just in terms of labor than we did in the third quarter. So, in the fourth quarter, you’ll see some of our costs actually go up to resume some of our businesses. So, I look at this as, as we all know, what kills the company is the lack of liquidity.”
Disney stock rose 5% in after-hours trading on Wall Street after the earnings release.
Feature Image: Wikipedia/coolcaesar
