Disney Q1 earnings

• Quotes…

• On the strength of their business model: “We have diverse revenue streams that span business models and industries, but which all are interconnected to create entertainments most powerful synergy machine. We have the country’s top news organization and the most trusted brand for funneling sports, and our theme parks continue to be the most magical places on earth. In short, our collection of assets and platforms, create capabilities and unique place in the cultural zeitgeist that give me great confidence that we will continue to define entertainment for the next 100 years.”
• On the metaverse: “You want to call it metaverse, you want to call it the blending of the physical and digital experiences, which I think Disney should excel at”….”we realize that it’s going to be less of a passive type experience where you just have playback, whether it’s a sporting event or whether it’s an entertainment offering and more of an interactive lean-forward, actively engaged type experience. And this is a very top of mind thing for us, because we are continuing over time to augment our skills and the types of people that we attract into The Walt Disney Company to reflect the aggressive and ambitious technology agenda that we have. You probably noticed that one of my three pillars is innovation and specifically technological innovation, because we realize that this is going to be an important part of telling story in that third dimension, that lean forward interactive dimension. So it is absolutely top of mind.”

• Strong streaming performance – they now have 196M subs across Disney+, Hulu and EPSN+. That is second only to Netflix, which has a ~220M….Disney’s achieved that in a little over 2 years. Disney+ now has 130M subs, Hulu is ~45M and ESPN has ~21M. Disney+ in the US is 1/3 penetrated of total broadband homes. Slightly over 50% of consumers on Disney+ do not have kids.

• ARPU should steadily rise over time – in Q1 it was better than expected across Disney+, ESPN+ and Hulu. In general, their ARPU is lower than peers and is also weighed down by lower Disney+ fees outside the US, but they will gradually raise prices over time and they have ways (other than sub fees) to make money off of their content w/ advertising, parks and consumer products (especially w/ content like Pixar, marvel, star wars).
• Higher content spend and global rollout will continue to support sub growth – key to this is that they can leverage their content investments better than anyone else. What separates them from Netflix is their LT success in branded storytelling – the quality and depth of their “evergreen” content is a driving force behind their streaming services.
• Strong ad revenue – delivered record advertising revenues as they continue to see strong demand for live sports and streaming and digital businesses. ESPN benefited from the start of a normalized NBA calendar and increased viewership for football.
• Parks set to thrive post-pandemic…

• Record revenue and profits at domestic parks despite capacity constraints and haven’t yet seen return of int’l guests (historically 18% to 22% of Walt Disney World guests come from outside the US).  Q1 rev and op income exceeded pre-pandemic levels w/ per capital spending at domestic parks up more than 40% versus Q1 2019, driven by a more favorable guest and ticket mix, higher food, beverage and merchandise spending.
• This supports the outlook for structurally improved economics post-pandemic as they employ technology to create efficiencies like new tools to personalize guest visits, virtual queues, mobile food ordering, mobile hotel check-in and dynamic pricing to strategically manage attendance.

• Strong balance sheet (~2x levered). FCF should double this yr. and double again next year as they recover from pandemic related disruption and step up in content costs.

Disney Investment Thesis:

1. Disney is a global media and entertainment company that owns a massive library of intellectual property.
2. Their competitive advantage is their evergreen brands and synergistic business model. Disney can create content that builds off existing franchises and can be monetized across all their business, giving them the ability to create higher budget, quality content and an ever growing library of IP.
3. New direct-to-consumer (DTC) initiative will strengthen synergies between businesses and lead to structurally higher margins and higher multiple on recurring revenue business.
4. High quality company with solid balance sheet, strong FCF generation and ROIC.