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Disney - Disney+ subscribers miss expectations

Sophie Lund-Yates, Equity Analyst | 11 November 2021 | A A A
Disney - Disney+ subscribers miss expectations

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Walt Disney Co Common Stock

Sell: 117.67 | Buy: 117.68 | Change 5.26 (4.68%)
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Revenue rose 26% in the final quarter to $18.5bn, with growth across both divisions, especially Disney Parks, Experiences and Products. Full year revenues were up 3% as theme parks were affected by Covid-19 closures. Quarterly operating profit more than doubled to $1.6bn.

However, profits were lower than the market was expecting. The group also added fewer new subscribers to its streaming services than expected . Disney said, ''although film and television production generally resumed beginning in the fourth quarter of fiscal 2020, we continue to see disruption of production activities depending on local circumstances''.

Disney shares fell 4.6 % in pre-market trading.

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Our view

Disney's back up and running. A deluge of customers returning to its very expensive-to-run theme parks means revenues and profits have been dragged up, after a very tumultuous 18 months.

The underappreciated hero has been the less glamourous broadcast and cable businesses. Revenues have proven remarkably resilient - all the more so when you consider how crucial advertising is to results. These traditional media assets accounted for almost every drop of profits in the tough times of recent quarters - no mean feat when you consider commentators have been forecasting the death of cable for years.

However, this could well be cable's last hurrah, and it can't be relied on to dig the group out of future scrapes as consumer's increasingly turn to digital alternatives. Which explains why the market's had a less-than favourable reaction to missing subscriber growth expectations in its streaming services.

Rapid growth in the group's streaming services earlier in the year, means going toe-to-toe with streaming giant Netflix. The pandemic provided a great tailwind, but we're now seeing the effects of more normal demand, and the landscape is very competitive. To keep existing customers, and attract new ones, you have to spend a lot of money on new content. Ongoing production disruption means Disney's streaming business has become even more of a money pit. So while the long-term potential is still exciting, the division is a long way off contributing to profit.

Fortunately we think Disney has a head start on rivals. An excellent content catalogue - whether that's princesses on Disney+ or quarterbacks on ESPN - is one thing - but Disney's ability to sell those products through a variety of channels, multiplies the benefit many times over. Theme parks, computer games, Disney Stores - all help the group squeeze maximum benefit from its content.

It's not all a fairy-tale though.

The $71bn acquisition of Twenty First Century Fox loaded the business up with debt. Free cash flow is looking much healthier, but that could quickly reverse if rising cases cause any further snap lockdowns in the US.

Despite the uncertain outlook in the short and medium term, Disney still holds plenty of long-term potential in our view. The power of its unparalleled back-catalogue can't be overstated, and should stand it in good stead in the long-run. Our feeling is that coronavirus is a bump in the road, not a derailing of the investment case.

We should add a quick note on valuation here. You'll notice from the box below that the group's PE ratio is currently well above the long-term average. The stellar valuation is partly down to the pandemic-depressed earnings expected this year, but also reflects a genuine investor enthusiasm for Disney's direct-to-customer streaming service. Given the substantial costs associated with delivering success in streaming we worry that enthusiasm may be slightly overblown.

Disney key facts

  • Price/earnings ratio: 34.5
  • Ten year average Price/earnings ratio: 21.9
  • Prospective dividend yield (next 12 months): 1.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Third quarter results

The Media & Entertainment Distribution business saw revenues rise 9% to $13.1bn. The return of live sporting events helped boost advertising revenue, but this was more than offset by increased sports programming costs. Revenue was also lost as a result of film cancellations and deferrals. There was a 38% rise in direct-to-consumer revenue, with the number of Disney+ subscribers increasing 60% to 118.1m. ESPN+ and Hulu subscriptions rose 66% and 20% respectively. Operating profit fell 39% for the division as a whole, with DTC losses widening from $374m to $630m.

Parks, Experiences & Products reported revenues of $5.5bn, more than double the same time last year, as parks and resorts were open for the entire quarter. There was a particularly steep increase in US park revenue. As a result of the higher revenue, operating losses swung from $945m, to a profit of $640m.

Overall, the group recognised $92m in restructuring charges, a significant improvement on the $393m recognised in the same period last year, relating to the reduction in the value of theme park assets, pension settlements and redundancies.

Higher profits fed into a 62% rise in free cash flow to $1.5bn, while net debt was $38.4bn at the start of October, compared to $40.7bn the year before.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.


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