Disney’s first-quarter revenue grew 5% to $24.7bn. In the Entertainment division, declines in linear (traditional) networks were more than offset by 9% growth in direct-to-consumer content, which includes Disney’s streaming brands. Experiences, which included theme parks, rose by 3% and Sports was broadly flat.
Operating profit rose 31% to $5.1bn (+15% expected), as the consumer and licencing segments lapped unprofitable quarters last year.
Free cash flow fell 17% to $739mn, due to much higher levels of investment. Net debt was broadly flat over the quarter, ending at $39.8bn
Disney+ subscribers fell 1% from the start of the quarter, and the company expects a ‘modest’ decline over the second quarter. There was no change to full year guidance, looking for high single-digit underlying EPS growth.
The shares were flat in pre-market trading.
Our view
The muted reaction to first quarter results doesn’t quite do Disney justice. This was a strong quarter, with the only slight niggles being a soft outlook for Disney+ subscriber growth in the coming quarter and perhaps disappointment that guidance hasn’t been raised.
On the first point, growth of Disney+ has been phenomenal and the service quickly emerged as a worthy opponent for industry titans. Despite a soft second quarter outlook, we see scope for subscriber growth over the year once some of Disney’s latest titles like Moana 2 make their way to the streaming platform.
Disney’s edge is its pre-existing stable of intellectual property. It has a pre-loaded and pre-approved content cupboard. 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 customers, especially in the early stages. But with most of the groundwork now in place, operations are being streamlined. And new subscribers can be added with little additional cost, meaning any new subscription revenue largely flows straight down to the profit line.
But the competitive landscape remains very tricky, and Disney is a long way behind industry leader Netflix when it comes to pricing power and subscriber loyalty.
Streaming needs to be a long-term success because Disney's broader media business is heavily exposed to traditional TV. 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 Experiences segment (theme parks, cruises, etc) which is still Disney’s largest profit driver. 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.
At nearly $40bn, Disney is carrying a fair whack of debt. A lot of that's a hangover from the mega-merger with Fox. The group's improved and substantial free cash flow means we aren't overly concerned.
There’s no denying it, Disney’s an excellent brand. But growth in the streaming business is likely to be the main driver of sentiment in the near-term. We’re happy profits are flowing in from this side of the business, but given the highly competitive landscape, we’d like to see more evidence of progress before getting too excited. And as always there could be ups and downs along the way.
Environmental, social and governance (ESG) risk
The media industry’s ESG risk is relatively low. Product governance is the key risk driver, alongside business ethics, labour relations and data privacy & security.
According to Sustainalytics, Disney’s management of ESG risk is average.
Disney’s audit committee oversees cybersecurity and data security risks, and detection processes are periodically tested. But it’s not disclosed whether privacy risk assessments or external security audits are conducted regularly.
Disney key facts
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