Disney CEO Bob Iger will offer a long-awaited update to Wall Street this week on the entertainment giant’s turnaround efforts, as the company looks to boost its stock price and fend off a proxy battle from activist investor Nelson Peltz.
The Trian Fund Management founder is looking to secure two seats on the board for himself and former Disney chief financial officer Jay Rasulo at the annual shareholder meeting on April 3.
Disney is now in a “put up or shut up” situation,” Heritage Capital founder Paul Schatz told TheWrap. “Another bad report and Nelson Peltz may get some hedge funds on his side.”
Since Iger returned to the helm in 2022, the entertainment giant has faced an anemic stock price, creative doldrums and the worsening pressure to be successful with streaming.
Strong earnings and progress on its turnaround efforts could “quell some of the activity and talk around how merited the activist push is,” Third Bridge senior analyst Jamie Lumley added. But a weaker earnings report could add fuel to Peltz’s call for Disney to make faster changes, Lumley said.
Analysts surveyed by Zacks Investment Research are expecting the company to report earnings of 97 cents per share on revenue of $23.74 billion. As of Monday’s close, Disney shares are trading at $96.65 apiece, up 6.5% year to date but down 12% in the past year.
Streaming Profitability and Subscriber Growth
While Disney faces a multitude of challenges, addressing the company’s uncertain direct-to-consumer future is the most important task on Iger’s priority list, analysts said. In a recent research note, MoffettNathanson questioned whether the Disney+ and Hulu combo app will be enough to catch up to Netflix’s scale, and whether more price increases could lead to churn or improved profits.
Disney has previously said that it expects to reach streaming profitability by the end of fiscal year 2024. But it’s unclear if this target will be derailed by a failure to add more subscribers, TD Cowen analyst Doug Creutz pointed out.
Creutz called the 2024 content slate “underwhelming” in a recent note, noting there are no shows that feature high-profile characters from Disney’s respective franchises.
He added that the strikes have resulted in a light film slate with no “Star Wars” installments and Marvel’s “Deadpool 3” as the studio’s only release this year. While Creutz expects “Inside Out 2” to perform well, he pointed out that it likely won’t come to streaming until very late fiscal year 2024 at the earliest.
“Given continued price raises, we are concerned that Disney+ could see a spike in churn this year,” Creutz added.
Bloomberg Intelligence analyst Geetha Ranganathan expects pressure on Disney’s linear networks due to higher sports costs and noted that the studio’s underperforming titles, including “Wish” and “The Marvels,” will weigh on the quarter’s results.
Performance of the parks division will likely continue to be strong, driven mainly by the Disney’s international properties after the company raised prices, Ranganathan said. But she noted that parks will face tough comparisons in the first half of the year due to Walt Disney World’s 50th anniversary celebration and wage inflation.
During the earnings call, analysts will be looking for any additional color on the company’s planned $60 billion investment in parks over the next decade.
Wall Street also will listen for updates on the progress of Disney+’s ad tier and plans for a password sharing crackdown this year, as well as for more clarification on ESPN’s DTC strategy and what Disney hopes to achieve in India as it sells a majority stake in its Star business to Reliance Industries.
Clarity on cost cutting
Investors will also seek more clarity on the company’s ongoing cost cuts, which Lumley said is “hugely important to getting the entire company firing on all cylinders again.”
During its fourth quarter 2023 earnings call, Iger revealed that Disney was on track to generate $7.5 billion in cost savings, up $2 billion from its previous target. Disney raised its annualized content spend reduction target to $4.5 billion from $3 billion, excluding strike impacts and sports rights, which account for over 40%. In fiscal 2024, the company expects capital expenditures to hit $6 billion and content spend to reach $25 billion.
With the recent hiring of new CFO Hugh Johnston, MoffettNathanson hopes that fiscal year 2024 will be a “pivotal year in right-sizing Disney’s DTC vision.” The firm’s focus on cost management is driven by the view that Disney has “hit a wall on subscriber growth.”
By the end of 2024, analysts estimate that Disney will report 121.6 million core Disney+ subscribers, compared to 112.6 million at the end of 2023, and 44.6 million Hulu SVOD-only subscribers, compared to 43.9 million, with Hotstar subscribers remaining flat at 37.6 million. MoffettNathanson also expects Disney to report around $800 million in losses on their entertainment DTC segment. However, it believes Disney’s DTC division has the potential to post earnings before interest and taxes of $1.3 billion and margins of 5% in fiscal year 2025.
“The key is to give investors and analysts confidence that the company is taking aggressive action to close the roughly $4 billion in operating profit gap vs. Netflix at a similar point in time,” MoffettNathanson added. “If so, Disney’s multiple should improve as confidence grows about forward earnings power.”
Peltz proxy battle
The earnings call will also be an opportunity for Iger to weigh in on the goals that Peltz and Trian Fund Management have outlined before the annual meeting, including targeting Netflix-like profit margins of 15-20% by fiscal year 2027 and completing a successful CEO succession.
Peltz and Trian argue that Disney’s operating income, free cash flow and earnings per share have declined by 18%, 50% and 85%, respectively, since 2018 — which it blames on Disney’s board for showing a lack of focus, alignment and accountability.
“We do not believe the current Board can solve Disney’s problems. To Restore the Magic, we need new perspectives, fresh thinking and tangible goals,” Trian said.
In its own notification, Disney asserted it has the right strategy in place, touting its “substantial progress” in making the business more efficient and effective, including a sharpened focus on its brand and franchises, a commitment to cutting costs and a reinstatement of the company’s dividend.
Peltz and former Disney chief financial officer Jay Rasulo, the company added, “do not possess the appropriate range of talent, skill, perspective and/or expertise to effectively support the Board’s ongoing efforts to drive profitable growth and shareholder value creation in the face of continuing, industry-wide challenges.”
The Disney board has recommended its own slate, which includes Iger, Mary Barra, Safra Catz, Amy Chang, Carolyn Everson, Michael Froman, Maria Elena Lagomasino, Calvin McDonald, Mark Parker and Derica Rice, as well as recent appointees James Gorman and Jeremy Darroch.
Given the breadth of the issues facing Disney, Barclays Capital analyst Kannan Venkateshwar argued that “the typical activist playbook of cost cuts, asset sales and capital returns is unlikely to be useful to change the narrative in any material way.” He noted that costs cuts and a higher dividend beyond the previously announced goals might not be feasible.
Over the long-term, Barclays expects Disney to be one of the only legacy media companies with a “revenue growth story,” but added that it’s “tough to see how multiples or estimates go up materially” in the interim given the company’s challenges.
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