Disney is having a tough year, against broader headwinds from high inflation, tight monetary environment and increased competition. It has been losing subscribers on its streaming services, its linear assets struggle under the cord cutting trends and a weak advertising environment, while its studios division has suffered box office flops. It's highest grossing movie occupied just the fourth place globally, after dominating the top spot last year with Avatar: The Way of Water. 
The results of Warner Bros. Dicovery (WBD.us) highlighted the broader adversities of the legacy media industry. Advertising revenue of its Networks segment slumped more than 10% y/y, due to "audience declines" and "soft advertising markets", while adjusted profits narrowed. Its streaming user base contracted by 700K, despite the improvement in financials. 
Disney CEO Bob Iger is having his hands full since he resumed leadership a year ago, trying to turn things around. He restructured the business to give control back to the creatives, rationalize and improve content output, build on the core strengths of the company, make it more efficient and cut down on spending.
Encouraging Q4 FY23 Results
Wednesday's earnings for quarter ended September 30 were encouraging, showing progress on all segments. They were the first under the new reporting structure, which Mr Iger said "has restored creativity to the center of our company" and has enhanced effectiveness, especially on streaming . He also announced additional cost cuts of $2 billion, bringing the total savings to $7.5 billion.
Total Revenues increased 5% y/y to $21.241 billion, while operating income nearly doubled form a year ago, to almost $3 billion. Both figures though, were worse compared to the previous quarter. 
User Base Expansion
All eyes however where on the frim's streaming services (Disney+, Hulu, ESPN+), which combined added 5.1 million members, in the first user base expansion of the year after three consecutive quarters of losses. The increase was not enough to topple Netflix though, which regained the top spot at the start of the year.
The financials of the streaming business continued to improve, with revenues rising 13% y/y and operating losses narrowing to $387 billion. The company reaffirmed its expectation that the Direct-to-Consumer (DTC) segment will turn profitable before the end of calendar 2024, but the CFO cautioned that progress towards this goal "may not look linear from quarter to quarter". 
The company implemented a key initiative to its streaming offering nearly a year ago, with the addition of an entry-level subscription plan that includes commercials. I have long maintained that this is the way forward for the industry, especially in this high inflation/increased competition environment, since it gives a cheaper entry point to consumers and creates a new revenue stream for the providers. During yesterday's earnings call, Mr Iger touted the success of the ad-supported Disney+, which attracted 2 million users in the US in the reported quarter and accounted for half of the additions.
The entertainment giant now plans to implement another key change: cracking down on password sharing. The CEO said that "implementing stronger standards' will improve the DTC business, but did not offer timeline and does not expects a meaningful impact until 2025. Getting this right and turning sharers to paid members, will create a growth runway.
These policies have worked well for rival Netflix, since the ad-supported tier and the new password policy, helped it to subscriber and revenue expansion.
Live Sports is increasingly important in this challenging and highly competitive environment and Disney is a major player. Alluding to its significance, the firm has dedicated a separate segment to it under the new reporting structure, while CFO Kevin Lansberry noted that 40% of the fiscal 2024 content spend will go to sports.
ESPN's revenue and operating income grew in the last two fiscal years, while FY2023 viewership was the highest in four years, according to the CEO. This highlights the value and resilience of the offering, against the struggles of the linear channels, due to the shift to streaming and advertising softness.
CEO Bob Iger is working to transition ESPN to streaming and make it the "pre-eminent digital sports platform" . The move could unleash its full potential and drive growth, through new subscriptions, increased loyalty and advertising revenue.
Streaming leader Netflix lacks such content, but gets its feet wet with a live one-off Golf Cup competition, to be streamed in the next few days. Tech giant Amazon.com, which expands its streaming footprint, attracted 15.1 million viewers for the Thursday Night Football (TNF) season, according to last month's blowout Q3 results.
On the other hand, this is a challenging endeavor technically, while licensing can be costly and complicated. An important test for Disney is coming up, as ESPN's NBA rights end with the 2024-2025 season.
"New Era of Building"
CEO Bob Iger sounded upbeat about the future of the company and touted a "new era of building" after spending most of the time since his return on fixing things . He has already implemented key changes and continues to push aggressively on the streaming front, while the response to the fee hikes so far show that Disney has pricing power. He also plans to make ESPN a streaming network, in a move that can unlock tremendous value, while exploring a sale of non-core assets.
He is also looking to lower content output and increase quality, to address recent disappointments. Disney is a master in extrapolating the value of its assets and has a deep intellectual property, including Star Wars and the Marvel Cinematic Universe, despite recent fatigue. The Parks and Experiences business remains a growth story, but still the firms intends to increase investments, to roughly $60 billion over the next ten years . Wednesday's results were promising and markets reacted positively, with the stock rising in today's pre-market.
Despite progress, Disney still has a rocky path ahead. The streaming market is getting saturated and the external environment remains adverse. Turning ESPN to streaming and offloading non-performing assets are not easy undertakings and the CEO did not really offer anything new around them yesterday. Furthermore, Disney faces challenges from activist investors, while its stock has erased more than 50% from the 2021 record highs.
Senior Financial Editorial Writer
Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.
With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.
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