Stay patient, Disney's spring is near

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$Disney(DIS.US) On August 6th, Eastern Time, Disney released its third-quarter results for fiscal year 2025 (CY25Q2) before the U.S. stock market opened. The overall performance for the third quarter was in line with the company's positive trend, but compared to expectations, it was mixed. The negative market feedback post-results was mainly due to dissatisfaction with the guidance increase.

Specifically:

1. DTC continues "quality" growth: The third quarter saw a net increase of 1.7 million streaming users, basically meeting market expectations, mainly driven by the release of popular films like "Moana 2" and "Andor" on the platform. Integrating different resources clearly improves monetization efficiency, with the DTC segment's profit margin continuously increasing for four consecutive quarters, reaching 5.6% in the third quarter.

In terms of guidance, the company expects the total number of Disney+ and Hulu subscriptions to increase by over 10 million quarter-on-quarter next quarter, exceeding market expectations. The incremental subscriptions mainly come from Hulu, due to the resumption of cooperation with cable company Charter.

2. Competition impact not as significant, park business target raised: The market's expectations for the theme park business have also experienced some fluctuations. The key influencing factor is the competition diversion brought by the new opening of Universal Epic in Orlando at the end of May.

Market sentiment shifted from initial conservatism to seeing the diversion weaken. In terms of actual performance, domestic park revenue grew by 10% in the third quarter, mainly driven by per capita spending, with visitor numbers flat year-on-year, slightly weaker than the 2% growth in the previous quarter. Considering the price increase itself suppresses visitor numbers, this indicates that the competitive impact of Epic is relatively controllable.

International parks rebounded in both visitor numbers and per capita spending this quarter after a weak performance last quarter due to a lower base.

The cruise business within the parks is the highlight of fiscal year 2026, with two new routes (Destiny, Adventure) planned to open at the end of the year, expected to bring significant increments, and the current website traffic is considerable.

In terms of guidance, the company raised this year's profit target: from 6-8% growth to 8% growth.

3. Sports focus on new ESPN version: The third quarter sports business growth was flat, slightly below expectations. Besides the slow growth due to declining ratings, the restructuring impact of India's Star (reflected in investment income after divestment) also occurred within the cycle. The flagship version of ESPN+ will be released on August 21st, expected to boost user subscriptions and advertising revenue.

4. Movies still in content cycle: Third-quarter content sales revenue slightly exceeded expectations, but due to a higher base, year-on-year growth slowed significantly.

Currently, Disney is still in the content cycle, with major releases this quarter including "Elio," "Thunderbolts*," and "Lilo & Stitch," all performing well at the box office, but last year's global box office leader "Inside Out 2" puts pressure on growth and monetization efficiency year-on-year.

Looking ahead, expecting "Zootopia 2 "and "Avatar: Fire and Ash "to release this year.

5. Cable business further weakens: This is the weakest performing business of the current period, down 15% year-on-year. Besides industry trends (Nielsen data shows further decline in cable TV share), there are also reasons for Disney's proactive adjustments to cable TV under its own strategy.

6. Overview of key financial indicators

Dolphin Research's View

The third-quarter performance in segmented businesses was mixed, with overall numbers basically meeting expectations. However, in this earnings season, only solidly exceeding expectations can receive positive feedback, making it seem like a trailing performance in the market's eyes.

Especially with possible dissatisfaction with the guidance increase (【Experience】operating profit, overall EPS, as shown in the red text in the chart below), optimistic bulls might have expected better performance. However, Dolphin Research believes that despite the slow pace of recovery, different businesses face different short-term relief changes, causing slow overall group progress, but the positive trend is certain.

Especially the factor with the greatest impact on current performance—the impact of Epic Universal competition, can be said to have already demonstrated "the overall controllability of competitive impact" in this performance. As the marginal decline in Epic's opening heat continues, the impact on Disney World will further converge, reducing more doubts on Disney's subsequent recovery path.

Finally, looking at valuation, due to different segmented businesses being in their respective significant change cycles, and different businesses having varying future value and market recognition, this may not reflect the value changes within the overall group perspective. Therefore, Dolphin Research tends to adopt SOTP segmented valuation, disrupting and re-evaluating based on streaming media, parks, movies, and cable TV four segments. As shown in the chart below, the total value attributable to the parent company is nearly 245 billion (slightly increased compared to the previous quarter's review of 230 billion), with about 18% space compared to the current market value of 210 billion.

I. Understanding Disney

As a nearly century-old entertainment kingdom, Disney's business structure has undergone multiple adjustments, which Dolphin Research has detailed in "Disney: The "Rejuvenation" of the Centenarian Princess".

In the past year, major adjustments at the group level have involved not only a change in leadership but also a change in business structure and strategic focus. Under the new business structure, it is mainly divided into three major segments—【Entertainment】,【Sports】,【Experience】:

Difference between the original structure and the new structure?

The new structure mainly highlights ESPN's strategic position, separating ESPN channels and ESPN+ to form a sports business unit, showing the company's emphasis.

(1)【Entertainment】business includes: original cable channels, DTC (excluding ESPN+), content sales, while disposing of some duplicate business lines and low-yield traditional channels during department integration.

(2)【Sports】business includes: ESPN channels, ESPN+, Star

(3)【Experience】business includes: park experiences, cruise tourism, consumer goods, etc., similar to previous businesses, but specific financial data still has some discrepancies due to business adjustments.

2. Investment logic framework

(1) The framework change reflects an important strategic adjustment—the separation of content and distribution channels into two businesses is no longer the case, but rather integrated together, with the new business structure more divided based on different content.

This may solve a problem from the source—that the same content may be suitable for debut on different channels. In the past two years, Disney struggled with whether to release popular blockbusters on Disney+ or in theaters first, and after trying simultaneous online and offline releases, it dragged down the final box office performance of some popular films. Consequently, actor revenue sharing was affected, damaging Disney's cooperation with some star actors.

(2)【Experience】business has developed relatively maturely over the years, with the first IP reserve supporting Disney's theme park business leadership position, more influenced by overall consumption. Under normal circumstances, it can be seen as a stable cash flow.

(3)【Entertainment】essentially involves the production and distribution of Disney films, including several renowned studios, traditional channels, and streaming channels, so revenue changes mainly relate to Disney's film scheduling and overall film market consumption power.

Among them, the streaming media business remains Disney's future medium to long-term business focus. However, in the past two years, originally intended as a growth business to gain incremental revenue and profit under Disney's traditional business stability, the front-end streaming media competition accelerated to a fever pitch during the pandemic. Disney, lacking the accumulated advantage of self-produced series content, suffered huge losses despite massive investments.

As the two ends of the seesaw, while streaming media development is booming, the old business of traditional media naturally cannot remain unaffected. With the trend of traditional media declining, streaming media for Disney cannot be considered a complete incremental, as a significant portion compensates for the decline of traditional channels.

(4) Disney's new favorite【Sports】business may be the newly derived growth path. Although ESPN has been operating within Disney for many years, sports content and related industries are increasingly entering the vision of more streaming media companies, such as Netflix, which has repeatedly mentioned their emphasis on sports content and increased investment.

Recent changes include Disney teaming up with Warner Bros. and integrating its own Fox content to launch a new version of ESPN in 2025, equivalent to further betting on the sports track.