Disney: 2020 Q1 Earnings
A recap of Disney’s 2020 Q1 Earnings, including a summary of major talking points and key data from financial statements.
“In total, we estimate that the COVID-19 impacts on our current quarter income from continuing operations before income taxes across all of our businesses was as much as $1.4 billion.” – Christine McCarthy, CFO
Disney’s diversified business has always been a key strength, allowing them to monetize their beloved IP in many different ways and continue to build brand strong loyalty. As COVID-19 has spread across the world, Disney’s unparalleled ability to attract fans in one place has come to a standstill. Theme Parks have been shut down, movie theaters are closed, live sports are postponed, and most TV production has been halted. While the impact started to hit China in January, most U.S. businesses continued through mid-March, meaning there was limited impact on the Q1 financials. However, taking a closer look at each of the segments, it’s clear to see that it might be awhile before these businesses recover.
Shanghai Disnleyland had started the year off strong, but was forced to close on January 25th. After 3.5 months, the park is set to open next week (May 11th) with strict government-required health procedures. The park has a capacity of 80,000 people per day, but the government is limiting that to 30% (24,000) and Disney will probably start even lower. While it’s too early to say how other Parks will open, they will most likely utilize this gradual increase in guests. As a result, even when Parks do open, it will take time for them to get back to their normal levels of activity.
Over the course of the last decade, the Marvel Cinematic Universe has been at the center of Disney’s success at the box office, culminating in the record -breaking Avengers: Endgame. After the Infinity Saga has concluded, Disney was poised to start another wave of Marvel films, focusing on less heralded characters, starting with the release of Mulan in March. With theaters around the world closed, this title has now been pushed back to July 24, along with the postponement of other franchise titles. While some countries are re-opening theaters in the coming weeks (Hong Kong, Norway, Czech Republic), the U.S. and China (the 2 biggest box offices) are still primarily closed. These blockbuster films are able to drive revenue to other parts of the business, and need box office performance of $1B to be considered successful. There should be hesitancy of releasing Mulan if there is no consumer appetite for going to the movies in social distancing settings. On the other hand, theaters are not going to want to re-open and ramp up their costs just to play old library titles that would not command an audience. With Christopher Nolan’s Tenet scheduled to release on July 17, and Mulan a week after, there should be some marketing beginning over the next month. The velocity of their promotional activity should give a better indication of whether these release dates will remain intact.
The sudden postponement of professional sports leagues across the world has had a severe impact at ESPN, the worldwide leader in sports. The postponement hit just as many leagues were entering the final stretch of the regular season, leading into playoffs, which is where the majority of advertising dollars are generated. As with other media companies, they have seen a swift decline in advertising driven by the lack of demand. The network has pivoted quickly to air “new” programming such as Esports competitions, classic sports events, and their library of 30 for 30 documentaries. There were some bright spots with the NFL Draft setting viewership records last month, and the continued success of The Last Dance after moving it up from its original June release. The recent move to air Korean League Baseball gives them more live sports programming, but with air dates in the middle of the night (EST), it’s unlikely to garner much viewing or have an impact on their contract obligations. While The New York State Attorney General has entered the mix by calling for customer rebates on sports channels, it is unlikely that will happen. ESPN is in long-term partnerships with the sports leagues, and even if games are cancelled, will have time to find solutions to meet any programming requirements.
Bob Iger abruptly resigned as CEO in February, to become Executive Chairman and focus more of his time on the creative side of the business as Disney leans into its streaming future. The shutdown of productions limits his ability to make any immediate impact, but may be beneficial as it gives him to take a step back and map out the future for Disney. The acquisition of 21st Century Fox last year was another bold bet on the value of content and IP, and integrating such a massive studio into the unique culture of Disney is no easy task. The films they inherited have struggled mightily, but there is plenty of IP to mine, as they look to create more franchises to complement the ones at LucasFilm, Pixar and Marvel. Those properties have developed a rabid fan base, which has helped drive the early success of Disney+, even despite the lack of new, original content. Disney+, has over 50M subscribers less than 6 months after launching, and continues to enter new territories around the world. While the low price, and further discounts, make it an affordable product for many families, the speed at which its been able to scale has been remarkable, as it starts to approach the low-end of their 5 year projection (60M). This shift to DTC has been the lone bright spot at the company over the past few months, and the value of streaming has never been more obvious. While the linear Pay-TV ecosystem provides significant cash flow, there should be greater investment towards Disney+ (as well as Hulu and ESPN+) in the coming years.