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Disney - push into gaming and savings on track

Disney's first quarter revenue of $23.5bn was flat compared to last year. Within Entertainment, there was a 7% decline...

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Disney's first quarter revenue of $23.5bn was flat compared to last year. Within Entertainment, there was a 7% decline, led by linear (traditional) networks and content sales. The direct-to-consumer business, which includes Disney's streaming brands, saw a 15% increase. This included the effect of price rises, offsetting the expected decline in Disney+ subscribers.

There was a 35% revenue increase in international theme parks, helping Experiences revenue rise 7% overall.

Operating profit was 27% higher at $3.9bn, which reflected narrowing losses in the streaming business. There was free cash flow of $886mn, compared to a $2.2bn outflow the previous year.

Disney's on track to meet, or exceed, its $7.5bn annual savings by the end of the 2024 financial year.

The group also announced a $1.5bn investment to acquire an equity stake in Epic Games.

The shares rose 6.7% in after-hours trading.

View the latest Disney share price and how to deal

Our view

Disney is still a maker of fairytales, but investors care a lot more about its streaming business than its theme parks these days.

A lot of bets were hedged on the launch of Disney+, and the group also owns brands including Hulu. Growth has been phenomenal and the service quickly emerged as a worthy opponent for industry titans. The part that gives Disney an edge is its pre-existing stable of intellectual property. It has a pre-loaded, and pre-approved, content cupboard. Disney is well placed to capture demand. But every story has a villain.

Disney+ has grappled with eye watering costs. Getting a streaming service off the ground is not a cheap undertaking. Nor is attracting and retaining customers, especially in the early stages. That's why CEO Bob Iger has been hauled out of retirement - to plug the hole in the bottom of Disney's streaming profit bucket. There are signs that this is working, but there is still work to be done. The competitive landscape is also very tricky. While we admire Disney's position, consumers are fickle beings, and there's no guarantee Disney will reign supreme.

Streaming being a long-term success is important because Disney's broader media business is heavily exposed to traditional linear TV. Cable to you and me. We think the likes of ESPN is a great asset, especially its streaming potential, but the legacy industry is in structural decline.

Then there's the theme parks. These are another way for Disney to juice the same intellectual property for cash over and over again. We continue to think parks are a strong asset, with loyal fans likely to flock to the gates for years to come. But this part of the business is more likely to see peaks and troughs. A tough economic landscape will see families reduce spending, and events like lockdowns decimated profits. We like the theme parks, but they are unlikely to stoke high-octane growth.

The need for more exciting revenue streams is where the $1.5bn investment in an equity stake in Epic Games comes in. The way in which media users are spending their time is shifting towards other activities other than TV, including gaming. We're supportive of further gaming content but would like some more details on the strategy.

Disney is carrying a fair whack of debt - $40.5bn at the last count. A lot of that's a hangover from the mega merger with Fox. The group's substantial free cash flow means we aren't overly concerned, but debt management could take precedence over the medium term and will need to be monitored.

Disney is an excellent business with compelling growth opportunities. Market sentiment will continue to be driven by growth in the streaming business, as well as how quickly losses can be narrowed, and that could lead to ups and downs.

Disney key facts

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.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 8th February 2024