What We Learned From Disney’s Earnings Report and News Deluge

Disney (DIS) shares gained 12% on Thursday after the entertainment titan’s earnings beat and a flurry of announcements with a focus on digital content, in what could point to gaining confidence in Chief Executive Officer Bob Iger’s turnaround plan and streaming strategy in the face of pressure from activist investors.

Disney said it’s pushing deeper into gaming with an investment in Fortnite maker Epic Games, adding the Taylor Swift Eras Tour movie to its streaming library on Disney+, and releasing a new Moana movie this year. Its ESPN is partnering with Warner Bros. Discovery (WBD) and Fox (FOXA) to offer a joint sports streaming service. Disney also raised its dividend and said it plans to buy back $3 billion in shares this year.

The moves are all part of Disney’s plan to “return to a period of sustained growth and shareholder value creation” with an emphasis on its streaming businesses that could help stave off pressure from activist investors gunning for board seats.

The Trian Group, which beneficially owns $3 billion of Disney stock, has previously called on the company to add Nelson Peltz and Jay Rasulo to the board, saying that the company’s lack of focus, alignment, and accountability have contributed to declining financial performance and harmed shareholders.

Iger, who returned to the company as CEO in late 2022, told CNBC Wednesday that the earnings beat is “the result of a team that is motivated, that is focused and now all of us are very optimistic.”

“The last thing that we need right now is to be distracted in terms of our time, our energy by an activist or activists that, frankly, have a completely different agenda and don’t understand our company, its assets, even the essence of the Disney brand,” he said.

Teaming Up With WBD and Fox on Sports Streaming

Disney’s ESPN is teaming up with Warner Bros. Discovery and Fox to develop a joint sports streaming service that is scheduled to launch in the fall of 2024, the company announced shortly before reporting earnings.

The sports streaming app is to combine offerings from traditional broadcast television networks and ESPN+ streaming as together the companies have the rights for some content from the National Football League (NFL), the National Basketball Association (NBA), and the FIFA World Cup, among others.

Bank of America analysts said they see the new streaming initiative as a “skinny sports bundle” that “comes on the heels of several years of cord-cutting which have put tremendous pressure on the [profit and loss (P&L)] of the entire media ecosystem.”

The analysts added that “it appears this new product is being targeted at the ‘cord cutters/cord-nevers,'” consumers who dropped traditional cable TV service in favor of streaming and those who have only ever relied on streaming, which the firm says accounts for about half of the 125 million broadband subscribers in the U.S.

Bank of America also noted that Paramount (PARA) and Comcast’s (CMCSA) NBCUniversal were absent from the venture as Disney works to compete with other media giants in streaming.

Tackling Gaming With $1.5B Epic Games Investment

Disney announced it is investing $1.5 billion in Epic Games to launch “a groundbreaking new games and entertainment universe that brings together Disney’s beloved brands and franchises with the hugely popular Fortnite.”

The company has an existing relationship with Epic Games as the pair have previously collaborated to bring Marvel and Star Wars characters to Fortnite.

The move is the company’s latest and biggest push into gaming, with CEO Iger saying that, “given the demographic trends and given the success of Fortnite,” the Epic Games partnership is the right move for Disney.

Disney has tried its hand at creating its own games but ultimately found more success in licensing its intellectual property (IP) to existing video game makers like Electronic Arts (EA). “We’re good at making movies and television shows and theme park attractions and cruise ships and the like, and we just never managed to demonstrate much scale on the publishing side of games,” Iger said in a 2019 earnings call during his first stint as Disney CEO.

From Theaters to Disney+, New Content Feeds Streaming Ecosystem

Disney announced a Moana sequel that is set to be in theaters in November, adding to the company’s list of upcoming films that build on existing franchises including “Captain America: Brave New World,” the “Fantastic Four,” and “Avatar 3.”

The new movies will “not only reach global audiences in theaters, but as we’ve consistently demonstrated, they will become important anchors on our global streaming platforms, driving subscriptions and engagement,” Iger said on Disney’s earnings call.

Iger nodded to the success the company has found in offering its movies on streaming, reporting that “the original ‘Moana’ film from 2016 recently crossed 1 billion hours stream on Disney+ and was the most streamed movie of 2023 on any platform in the U.S.”

The company announced that Taylor Swift’s concert movie, “Taylor Swift | The Eras Tour (Taylor’s Version),” will stream exclusively on Disney+. Disney has benefited from offering third-party content on its streaming platforms, Disney+ and Hulu, with Iger noting that the entertainment company received 27 Golden Globe nominations and won for FX’s “The Bear” and Searchlight’s “Poor Things.”

Disney’s streaming services make revenue from subscriptions and advertisers. The company said it “grew to over 1,000 global advertisers in the first quarter,” which is a “ten-fold increase from launch.”

International Parks Drive Profit While Disney Focuses on Cost-Cutting Measures

Disney parks reported “record performance,” according to UBS analysts, with Hugh Johnston, Disney’s Chief Financial Officer (CFO), saying that “every one of our parks was profitable in Q1.”

Johnston noted that the parks’ profitability gives Disney “an incredibly solid foundation to build upon as we invest significantly to turbocharge growth in this business.” He added that the record-setting performance was “primarily driven by our performance at Shanghai and Hong Kong theme parks.”

The entertainment giant has focused its efforts on cost reduction as revenue lags to drive earnings. Disney is “on track to meet or exceed $7.5 billion in cost savings as we continue to look for further efficiency opportunities across the company,” Iger said in his opening remarks on the latest earnings call. Johnston noted that the company realized “over $500 million in SG&A and other operating expense savings across the enterprise in the first quarter.”

Disney also announced Wednesday a $3 billion stock buyback program in the 2024 fiscal year with a cash dividend of 45 cents a share payable in July.

Disney shares finished Thursday up 11.5% at $110.54, after rising as high as $112.77 during the session.