Walt Disney (DIS) Did Not Deliver Entertaining Earnings Yesterday, But We Are "Going To Disneyland" This Morning (To Buy More Shares).

11 Nov 2021 8:00 AM EST

Portfolio holding Disney reported disappointing results with its fiscal fourth quarter earnings release on Wednesday after the closing bell, as revenue of $18.534 billion (+26 % YoY) missed expectations of $18.791 billion while diluted earnings of $0.37 per share came up short versus the $0.50 consensus. Operating income of $1.587 billion missed expectations of $2.024 billion, though free cash flow of $1.522 billion came in better than expectations of $529 million.

“This has been a very productive year for The Walt Disney Company, as we’ve made great strides in reopening our businesses while taking meaningful and innovative steps in Direct-to-Consumer and at our Parks, particularly with our popular new Disney Genie and Magic Key offerings,” commented CEO Bob Chapek on the release. “As we celebrate the two-year anniversary of Disney+, we’re extremely pleased with the success of our streaming business, with 179 million total subscriptions across our DTC portfolio at the end of fiscal 2021 and 60% subscriber growth year-over-year for Disney+. We continue to manage our DTC business for the long-term, and are confident that our high-quality entertainment and expansion into additional markets worldwide will enable us to further grow our streaming platforms globally.”

Disney Media and Entertainment Distribution (DMED): segment revenue of $13.084 billion (+9% YoY) and operating income of $947 million (-39% YoY) missed expectations of $13.413 billion and $1.069 billion, respectively. Within this segment:

• • 1. Linear Networks revenues of $6.698 billion (-4% YoY) missed expectations of $6.866 billion, though operating income of $1.642 billion (-11% YoY) edged out the $1.567 billion consensus.

  • Within the subsegment, Domestic Channels revenue fell 5% YoY while operating income decreased 14% from the year ago period as the subsegment negatively impacted by a decrease in Broadcasting sales, which suffered from “lower results at ABC and the owned television stations,” and to a lesser extent, a decline in Cable related sales “due to lower affiliate revenue, an increase in marketing costs reflecting more titles premiering in the current quarter, and, to a lesser extent, lower advertising revenue.”

  • International Channels sales were also down, falling 3% YoY, however, operating revenue was up a solid 49% YoY “due to a decrease in programming and production costs and higher advertising revenue, partially offset by lower affiliate revenue.”

2. Direct-to-Consumer sales of $4.56 billion (+38% YoY) was largely in line with the 4.569 billion the street was looking for while an operating loss of $630 million (68% greater YoY) was more than the $452 million of red ink expected.

• • The increased operating loss can be attributed to “higher losses at Disney+, and to a lesser extent, ESPN+, partially offset by improved results at Hulu.”

  • Within the subsegment, Disney+, ESPN+ and Hulu of 118.1 million, 17.1 million and 43.8 million, respectively, compare with expectations of 127.5 million, 16.45 million and 44.85 million, respectively.

  • As for average revenue per user (ARPU) at Disney+, ESPN+ and Hulu, results of $4.12, $4.74 and $84.89, respectively, compare with expectations of $4.20, $4.50 and $85.0, respectively.

  • The direct-to-consumer segment, Disney+ in particular — which will celebrate its 2-year anniversary on Friday, is a large focus for investors as growth here was key to supporting shares throughout the pandemic. That said, the Disney+ subscriber results have come in a bit soft in recent quarters. However, on the call, Chapek reiterated the team's forecast to reach between 230 million and 260 million paid Disney+ subscribers by the end of fiscal 2024 — at which point the team also expects the segment to achieve profitability. Perhaps the largest contributor to the lagging subscriber numbers is a lack of content versus competitors such as Netflix. However, Chapek attempts to change this in 2022 “We are nearly doubling the amount of original content from our marquee brands, Disney, Marvel, Pixar, Star Wars and National Geographic coming to Disney+ in FY '22, with the majority of our highly anticipated titles arriving July through September. This represents the beginning of the surge of new content shared last December at our Investor Conference 2.0.” Management expects “Disney+ subscriber net adds in the second half of fiscal 2022 will be meaningfully higher than the first half of the year,” and that the services will realize peak losses in FY2022 as production delays reduced FY2021 losses and pushed them out to FY2022.

  • In terms of global expansion, Chapek noted that Disney+ is now available in Japan, will launch in South Korea and Taiwan on Friday, and in Hong Kong on Nov. 16, before launching in 50+ additional countries including in Central Eastern Europe, the Middle East and South Africa next year. In total, management wants to expand the services reach to over 160 countries (from over 60 today) by FY2023.

  • Touching briefly on ESPN: management spent some time discussing the strong viewership of the NHL and UFC, adding that “90% of the most watched telecasts last year were sports and they continue to perform extremely well.” We found most noteworthy was management’s commentary on sports betting, with Chapek stating, “We're also moving towards a greater presence in online sports betting. And given our reach and scale, we have the potential to partner with third parties in this space in a very meaningful way. Suffice to say, we continue to see enormous opportunity in sports and all of this, the rights deals, our innovative programming and the flexibility achieved through our DTC business, which saw ESPN+ subscribers increased by 66% over the past fiscal year alone. All of this is a testament to the clear ambition we have in sports.”

3. Content Sales/Licensing and Other: sales of $2.047 billion (+9% YoY) missed the $2.198 billion consensus, though the resulting operating loss of $65 million (versus an $86 million profit in the year ago period) was less than the $99 million loss the street was expecting.

Disney Parks, Experiences and Products — where the bulk of the COVID-related headwinds were felt — revenues of $5.45 billion (+99% YoY) slightly higher than $5.427 billion consensus, though operating income of $640 million came up short versus expectations of $937 million. Within the segment:

1. Parks & Experiences: revenues of $4.166 billion (+126% YoY) was better than the $3.978 billion consensus, however, operating income of $22 million was well below expectations of $142 million, though far better than the 1.615 billion loss experienced in the year ago period.

• • Within the subsegment, Domestic sales increased over 270% annually from $935 million in the year ago period to $3.473 billion, while International sales increased 46% YoY to $693 million.

  • Notably, this was “the first full quarter since the pandemic began with all of [Disney’s] parks around the world open to guests albeit with some limits on capacity and the return of [Disney’s] entire Disney Cruise line.”

2. Consumers Products revenues of $1.284 billion (-3% YoY) and operating income of $618 million (-8% YoY) missed expectations of $1.391 billion and $723 million, respectively. The annual decline here “were driven by lower royalties from the licensed game titles, 'Marvel’s Avengers' and 'Twisted Wonderland.'”

Bottom Line

The release was not what we were hoping for, and certainly the reaction of the stock after-hours was disappointing. The situation here was very similar to PayPal, as expectations coming into the print were relatively low and reflected in the share price (shares of Disney down 15% from all time high, remain flat for 2021), yet the stock continues to trade down when the bad numbers come out. Moreover, in September, Chapek spoke at a Goldman Sachs conference and said that Disney+ subscribers growth would be in the low single digit, yet stupid analysts were still estimating for 9 million subscribers growth this quarter, hence the branded "missed estimates." We thought that most investors were prepared for the noisy quarter for Disney has been a notable underperformer this year as the market continuously made new all-time highs. We actually think that comes the next few days, we will see Disney reverse this loss and head higher towards all-time high before the year ends, as the market will forget 2021 earnings and start pricing for 2022, which is when the reopening thesis will be stronger than ever. 

Bottom line, we believe the weakness in numbers here were more attributable to COVID dynamics rather than a fundamental deterioration in consumer demand for Disney services and experiences. With shares now down ~20% from the all-time high reached earlier this year, and trading at a level at which they have found support all year (around $165), we are inclined to view this pull back as a buying opportunity to be taken advantage of ahead of the global roll out and ramp in Disney+ content that will aid subscriber growth, and before the company’s Parks & Experiences business can realize its full potential as we return from Covid lockdowns and travel restrictions. We will be buying more shares of Disney this morning. This is one advantage that we've learned to practice for this earnings season, which is to book profits in high-flying stocks, reserve a good cash position, and be ready to buy on dips (not buying willy-nilly, but buying on strong merits - we did not buy PayPal but rather sold it because that was truly disappointing). Rather than viewing this as a losing position (we're down around 6% in this name), we view this as a good long-term investment going on discount. We want to highlight this practice to subscribers.