Disney: Three-Year Outlook "Big Pie" Still Needs to Be Digested Slowly

Hello everyone, I am Dolphin Jun!

$Disney(DIS.US) On February 5th, Eastern Time, Disney released its Q1 results for fiscal year 2025 (CY25Q1) before the US stock market opened. The main highlight is in profitability, where the operating profits of the three major businesses significantly exceeded market expectations despite unremarkable revenue:

1) Entertainment business profits hit a new high, but subscription numbers are weak. The entertainment business mainly includes cable television, film sales, and streaming services (excluding ESPN+). The first two performed well this quarter; on one hand, the high box office of "Moana 2" finally lifted the content sales business out of three years of losses, marking the start of the 2025 film cycle; on the other hand, domestic cable television temporarily halted its decline due to political advertising during the US elections.

However, in terms of streaming subscriptions, despite starting to crack down on account sharing at the end of September, Disney+ does not seem to have achieved the same results as Netflix. This quarter, Disney+ saw a net decrease of 700,000 users in both domestic and international markets, possibly due to "price increases + intense competition," especially since Netflix released several blockbuster contents this quarter.

Despite upcoming releases like "Guardians of the Galaxy 3" and several popular TV series sequels, management expects a slight decline in subscription numbers in the second quarter.

2) The sports business experiences seasonal fluctuations, bundling improves content monetization efficiency. The season was packed with events, attracting a large number of viewers and generating significant advertising revenue. However, there was also high cost pressure this season, causing profit margins to drop to 5%. Nevertheless, market expectations were originally lower, but the company expanded the user base of ESPN+ through bundling with Disney+, improving profitability through content resource reuse. Although the company had to cancel the Venu plan launched in collaboration with Fox and Warner Bros. due to antitrust lawsuits earlier this year, the ESPN flagship version (integrating all sports content from cable channels) is set to launch as planned in August 2025.

3) The experience business also performed well during the holiday peak season this quarter. However, due to hurricane impacts, Disney in Florida closed for one day and suspended one route. On December 20th, the new cruise "Disney Treasure" began operations, which also started to incur some costs, affecting the operating profit margin of domestic business. International parks have rebounded from the diversion effects of the Paris Olympics, returning to growth, with slight increases in both visitor numbers and per capita spending.

Despite strong profit performance in the first quarter, the company did not raise its profit guidance for fiscal year 2025 (still expecting high single-digit growth), which may disappoint some investors hoping for an upward revision to double-digit growth. The management's lack of confidence in raising the full-year guidance also indirectly indicates that the short-term pain of transitioning cable television to streaming will persist for some time.

Dolphin's Viewpoint

As a conglomerate, it could have served as a highly defensive overall ecosystem to compete with rivals. However, the rapid changes in the industry, accelerated by the pandemic, led to the hasty launch of Disney's streaming service without adequate investment in series content. At the same time, the pandemic significantly impacted theme parks and delayed film production, leaving Disney in a difficult situation for three years.

Therefore, after the pandemic subsided and Iger returned to management, Dolphin has been closely monitoring Disney's turnaround journey. Iger's approach has been to streamline operations to reduce resource waste and friction costs, focusing on what shareholders care about most: "profitability." Meanwhile, there has been a gradual transition from cable media to streaming, with accelerated migration actions in the past year.

During this period, the pain of performance is hard to avoid, as it involves directly cutting an asset that could originally contribute up to 50% of operating profit. However, streaming is the trend, and the market is willing to give streaming a higher valuation, making the transformation imperative.

However, due to a relative lack of content (especially series content rather than movies) and the overwhelming strength of competitors, Disney+'s user growth has not shown explosive performance. Therefore, finding the right positioning to fill the quality series pipeline while ensuring group profitability (long-term shareholder demands) is crucial for a true breakout moment. A positive sign is that this quarter's content investment reached $5.5 billion, a year-on-year increase of 21%, slowly filling the investment gap caused by the Hollywood strike.

Although the market may be somewhat disappointed that the profit guidance for 2025 has not been raised, objectively speaking, Disney has basically completed the most important goal since Iger's return—improving profitability. However, the efforts for transformation and growth have not yet yielded significant results. After management outlined a three-year plan last quarter, Disney's market value has already returned to over $200 billion, which corresponds to an EV/EBITDA valuation level of about 10x for FY26. Whether it can further increase significantly depends on the streaming business to drive growth and guide institutions to restore a higher valuation based on SOTP.

This is also what Dolphin mentioned in last quarter's commentary, that while a short-term turning point is approaching, there may still be fluctuations (optimistically, a new round of movie cycles is starting; cautiously, theme parks are returning to low growth, and inflation and cruise costs are weakening profit margins). However, if one is willing to believe in management's three-year plan, looking at the longer cycle, there isn't much reason for the current valuation to decline further.

The following is the detailed content of the financial report

I. Understanding Disney

As a nearly century-old entertainment empire, Disney's business structure has undergone multiple adjustments. Dolphin Jun has provided a detailed introduction in "Disney: The 'Beauty Secret' of the Century-Old Princess."

In the past year, there have been significant adjustments at the group level, including changes in leadership and business structure, as well as a shift in strategic focus. Under the new business structure, it is mainly divided into three major segments—[Entertainment], [Sports], and [Experience]:

What are the differences between the old structure and the new structure?

The new structure highlights the strategic position of ESPN, separating the ESPN channel and ESPN+ to form a sports business department, demonstrating the company's emphasis.

(1) The [Entertainment] segment includes: existing linear channels, DTC (excluding ESPN+), content sales, while disposing of some overlapping business lines and low-revenue traditional channels during the departmental integration process.

(2) The [Sports] segment includes: ESPN channel, ESPN+, Star.

(3) The [Experience] segment includes: park experiences, hotel tourism, merchandise consumption, etc., which are similar to previous businesses, but specific financial data may differ from previous figures due to some business adjustments.

2. Investment Logic Framework

(1) The framework change reflects an important strategic adjustment—content and distribution channels are no longer separated into two businesses but are integrated together, with the new business structure being more categorized based on different content.

This may address a fundamental issue—namely, that the same content may be suitable for premiere on different channels. In the past two years, Disney has been entangled in whether popular blockbusters should debut on Disney+ or in theaters first. After attempting simultaneous online and offline releases, it has instead hindered the final box office performance of some popular films. Consequently, actor profit-sharing has been affected, damaging Disney's collaboration with some star actors.

(2) The [Experience] segment has developed relatively mature over the years. With the support of first IP reserves, Disney's theme park business maintains a leading position, more influenced by overall consumption. Under normal circumstances, it can be seen as a stable cash flow.

(3) The [Entertainment] segment essentially involves the production and distribution of Disney films, including several well-known studios, traditional channels, and streaming channels. Therefore, revenue fluctuations are mainly related to Disney's film scheduling and overall film market consumption.

Among them, the streaming business remains Disney's focus for medium to long-term operations. However, in the past two years, it was originally seen as a growth business that could generate incremental revenue and profits while stabilizing Disney's traditional business. But competition in the streaming front has intensified during the pandemic. Disney, lacking the accumulated advantages of original series content, has made huge investments but has incurred significant losses.

As the seesaw's two ends, while streaming development is booming, traditional media's old business cannot thrive alone. With the trend of traditional media declining, streaming cannot be considered a complete increment for Disney, as a significant portion is compensating for the decline of traditional channels(4) Disney's new darling, the sports business, may be a new growth path that has emerged. Although ESPN has been operating within Disney for many years, sports content and related industries are increasingly coming into the sights of more streaming companies, with Netflix also mentioning multiple times their emphasis on sports content and increased investment.

Recently, Disney will partner with its peer Warner Bros. to further integrate its own Fox content, launching a completely revamped ESPN in 2025, essentially doubling down on its bet in the sports arena.

II. Profitability Continues to Improve, Investment Cycle Steadily Opens

The first quarter is a peak season, with Disney Group's operating profit reaching $5.06 billion, a year-on-year increase of 30.5%, and an operating profit margin of 20.5%, up 4 percentage points year-on-year, mainly driven by the entertainment business. Among them:

(1) Streaming (excluding ESPN+ and Star) saw nearly a 10% revenue growth despite poor subscription numbers, thanks to price increases. Costs continued to be strictly controlled, maintaining a 5% operating profit margin, exceeding market expectations.

(2) In film, the release of "Moana 2" further boosted content sales profits in the first quarter. "Moana 2" grossed over $1 billion worldwide, ranking third in global box office for 2024. Thus, Disney has captured the top 1-3 spots in global box office for 2024, marking a perfect conclusion to a bumper year for films.

(3) Cable television revenue remained flat due to the election and sports programs. The downward trend of cable television will not change, but for Disney, completely abandoning it now would undoubtedly lead to significant losses (cable television profits still account for 20%). Therefore, in the last quarter's conference call, management also mentioned that they would not completely dispose of all cable resources.

From the perspective of profit contribution, the park business has increased its contribution share due to the holiday peak season, while the sports business has seen a decline in profit share due to seasonal effects (more costs recognized for current events), and the profit share from cable media has started to rebound.

Thus, Dolphin believes that Disney's "profit" phase target has basically been achieved, and the next important task is transformation and growth. Combining the medium- to long-term guidance given in the last quarter's conference call, the company expects to drive growth in fiscal year 2025 through "increased content investment," "launching a flagship version of ESPN+," and expanding the crackdown on account password sharingRegarding the first point mentioned above, Dolphin has long anticipated that the lack of content, especially the relatively few high-quality series, is the main reason for Disney+'s mediocre performance. This quarter, content investment reached $5.5 billion, a year-on-year increase of 21%, gradually filling the investment gap caused by the Hollywood strike.

This trend of investment cycles can also be seen with Netflix. However, Disney's management has also provided shareholders with a placebo, stating that investments will increase moderately and steadily, meaning that while investing, they will pay attention to ROI. After all, from a cash flow perspective, Disney is not particularly well-off.

3. DTC: The next quarter will continue to be flat

In the first quarter, core Disney+ saw a decrease of 700,000 users, mainly losing users in international regions. This may be due to the significant increase from "Inside Out" in the previous quarter (which saw an increase of 3.2 million in international regions), while this quarter had fewer blockbuster contents and natural losses due to price increases. However, management expects a similar situation to occur in the next quarter, a trend that the market is unwilling to see.

As of the end of this quarter, core Disney+ had 125 million subscribers, ESPN+ had 24.9 million, and Hulu had 53.6 million, totaling 203 million subscribers. In the previous quarter's conference call, a current short-term strategy was mentioned: the pursuit of user growth should take precedence over price increases, and price increases are also intended to guide users to "be forced" to choose the lower-priced AVOD.

But the actual situation is that the effect is average. Combining with Netflix's situation, Dolphin believes that what truly drives user growth still relies on good content.

IV. Theme Parks: Continuing Slow Growth

In the first quarter, the revenue from theme parks and consumer products was 9.415 billion, a year-on-year increase of 3%, showing a slight rebound. In terms of internal structure, the park business grew by 4%, mainly because international parks have overcome the diversion impact of the Paris Olympics, and demand has rebounded relatively. Consumer products, however, declined by 1.6%, with demand still weak.

Further breakdown of volume and price driving factors: Domestic growth was mainly due to increased per capita spending (price increases), while international growth saw a slight increase in both visitor numbers and per capita spending.

V. Preparing for the 2025 Film Cycle

In the first quarter, content sales revenue continued to grow significantly year-on-year by 34%. Last quarter saw the release of "Inside Out 2" and "Deadpool vs. Wolverine," and this quarter "Moana 2" also performed well. "Moana 2" has surpassed $1 billion in global box office, ranking third in the 2024 box office. So far, Disney has captured the top 1-3 spots in global box office for 2024, marking a perfect conclusion to a bumper year for films.

But it's not over yet. Looking ahead to 2025, the film slate is also very rich. Multiple sequels of major IPs such as "Avengers," "Indiana Jones," "Avatar," "Star Wars," "Frozen," and "Toy Story" will be released this year, many of which are projects that were delayed due to the pandemic, content adjustments, and strikes over the past two years. With the current stable operating environment, there is hope for steady investment and gradual scheduling, thereby maintaining growth in content sales.

VI. Cable Media Focused on High-Efficiency Operations

Finally, let's talk about cable television. In the first quarter, cable television continued to decline by 6.6% year-on-year, with domestic cable television barely holding back the decline due to the clustering of the U.S. elections and sports events.

Since a large amount of operational data is not disclosed in the performance report, it is recommended that everyone pay attention to the full financial report and the conference call summary, or directly check the "Deep Data" on the Changqiao app

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