Summary
- A brief look at the Q4 earnings shows that the company is holding up well financially even though the parks and studio division are having difficulties.
- The company has created a distribution structure that will determine how content is sold in the marketplace.
- This new distribution team will evaluate the best option for maximum ROI, even if it means some content will bypass theaters and go straight to streaming.
- D+ subscriber count hit 73 million, a great number considering the streaming service's short existence, and it is a very significant part of the reason for the stock's premium.
- The shares are expensive and are only for long-term shareholders, not those with a deep-value and/or shorter time frame.
It's becoming clearer every day - Disney (DIS) is a streaming company. Even once vaccination processes reach a critical mass of efficacy, the company will be leveraging its D+ service with an eye toward positively affecting its stock valuation and cash flows.
But that is to come. Now, the company is highly focused on maintaining as much financial strength as it can as its parks and studio units continue to experience diabolical decimation (along with that decimation comes a suffering merchandising operation, since those two segments help to cross-promote the company's ancillary-product offerings).
The company reported Q4 and full-year numbers on November 12. Expectations were exceeded, cash flow was firmly positive, and CEO Bob Chapek struck a positive tone during the earnings call... especially, not surprisingly, in support of the direct-to-consumer strategy.
I'm going to briefly look at the quarter and then bring in some recent news that is indicative of where Disney may be going in the short term (and perhaps long term) with its windowing strategy for movies. I'll touch upon the expensive valuation of the stock at the end. Disney is a buy in my opinion for the long term, but the question remains: will the stock take a significant rest to the downside at some point?
Q4: A Relatively Positive Report
Things, quite frankly, could have been worse. When your main engine of growth/marketing is essentially challenged to the point of ineffectiveness, it's easy to believe the news is going to be dire. And it was. Yet, Wall Street seems firmly behind the stock, nevertheless. A puzzling mystery, perhaps, especially with theme parks reporting a 60% decline in the fourth quarter and a 37% decline during the full year for the top line. Parks lost over $1 billion over the last three months, and over $80 million over the last twelve months; to emphasize the scale of depression, in the previous fiscal year, income was $6.8 billion. Yet, investors expected as much.
As did they expect the poor performance of the studio segment. The revenue drop for the quarter was over 50%, and it was 13% for the year for the same metric. No losses here (yet), though, as studio brought in a small profit of over $400 million during Q4; during the entire year, profit actually lightly dropped to $2.5 billion versus $2.7 billion. Still, the quarterly decline was much more massive.
Media platforms, of course, helped to offset some of the weakness. Operating income for the quarter and twelve-month frame increased 5% and 21%, respectively, driven by double-digit expansion in revenues. Disney has benefited from its diversified, media-conglomerate approach.
Its newest segment, however, is where the market's intellectual engines of evaluation are focused. Direct-to-consumer expanded its revenue base by 40% and 80% during Q4 and full year, respectively, and reduced its loss by over 20% to well under $600 million in the last three months. The loss for the year expanded by roughly $1 billion to $2.8 billion for the full year, and while one might like to think the quarterly performance may reflect an inflection point, I'm thinking increasing losses will continue to be here with us as the company continues to invest in this division. The company has projected, anyway, that it won't be until 2024 for the flagship D+ product to bring in a surplus. I wouldn't be surprised if the company starts to ramp up investment even beyond original plans to take advantage of current momentum in subscriber growth. D+ is at over 73 million users, while ESPN+ has over 10 million consumers watching its content. Hulu counts over 36 million subscribers to its on-demand and its live products. Subscriber count is where it's at as far as institutional investors are concerned.
The adjusted Q4 loss of twenty cents came in ahead of predictions by over forty pennies, which goes to show how difficult it is for analysts to focus in on a likely earnings scenario during the current crisis. Quarterly revenue, which dropped over 20% to $14.7 billion, was ahead by a significant $600+ million. Quite a difference. And whereas I keep expecting worse cash flows, I was happy to find out that free cash was over $900 million for the quarter and over $3.5 billion for the full fiscal frame. Disney is holding up.
