Disney's quarter wasn't clean, but we see evidence that CEO Bob Iger's turnaround plan is working

Published Wed, Aug 9 20238:30 PM EDT

Disney (DIS) reported fiscal third-quarter results after the closing bell Wednesday, and it was another mixed quarter even against low expectations. Still, there were enough pockets of optimism in the company's restructuring plan and streaming strategy to believe CEO Bob Iger's turnaround is working. Wall Street seems to agree. Revenue increased about 4% year-over-year to $22.33 billion, missing analysts' expectations of $22.5 billion, according to the consensus estimate compiled by Refinitiv. Earnings-per-share fell 5.5% on an annual basis to $1.03, beating forecasts of 95 cents. Concern about fiscal Q3 has persisted since Disney reported its second quarter about three months ago. As of Wednesday's close, the stock lost 13.5% in that time frame and was hovering just above breakeven for the year. So perhaps, some hope for the future was good for pop, with shares up more than 2% in after-hours trading to roughly $90 per share. DIS YTD mountain Disney YTD performance Bottom line We've been saying for months not to expect a whole lot from Disney this past quarter because turnarounds and restructuring plans require time and patience to see the rewards, but we were pleased to see Disney exceed the low bar. While the headline results show that Disney missed on the total number of Disney+ subscribers, the right narrative is to focus on growth in core subscribers and average revenue per user (ARPU) and ignore the declining sub count at the Hotstar service in India since those are empty calorie subscribers. Equally as important, the total losses at the Direct-to-Consumer (DTC) business narrowed, providing us optimism that losses will continue to narrow through the next 12 months and reach profitability by the end of fiscal 2024. The parks remain a watch item and what Disney said Wednesday evening about Florida tourism is consistent with what we've learned from travel companies this earnings season — that international travel is resilient but domestic has softened. The parks business, however, is still a profit engine for the company and we are encouraged by how it continues to perform above 2019 levels. After trading modestly lower in early after-hours trading, Disney shares quickly reversed and climbed as Interim CFO Kevin Lansberry said the company expects full-year total company revenue and operating income to grow in the high single digits on a percentage basis. The current consensus had pegged Disney's operating income to increase by 3%, thus implying that Disney is more profitable than what analysts currently give it credit for. Some of this may be due to lower content spend related to the strike by Hollywood writers and actors as well as slightly lower than previously guided capital expenditures. But, we think it is also a sign that Disney's expansive restructuring and cost savings plan – which is on track to exceed the initial goal of $5.5 billion – is working. We continue to have faith in Iger's plan to restore Disney to its glory, but we also recognize that our existing price target has been too optimistic around a quick fix. As a result, we are lowering our price target to $120 from $140. We are keeping our 1-rating on the stock the same. Quarterly Commentary Starting with the streaming business, many of the headlines written Wednesday evening will talk about how subscribers sharply fell from April-quarter levels. However, that tells the wrong story. Indeed, global Disney+ subscribers declined to 146.1 million from 157.8 billion, but nearly all of that was associated with Disney+ Hotstar and not Disney's core markets. It's crucial to make the distinction between the two because Hotstar is a fractional average revenue per user service that isn't material to Disney's financial results. These are low-value subscribers that are practically rolling off because Disney refused to pay an exorbitant price to secure the Indian Premier League cricket rights. The better way to gauge Disney+'s performance is by examining its core markets, which actually increased by about 800,000 subscribers to 105.7 million from April even as APRU increased to $6.58 from $6.47, thanks to higher per-subscriber advertising revenue in domestic markets and price increases in certain international markets. This is a sign that Disney's pricing strategy and introduction of an ad tier option are working. The company expects core Disney+ subscriber growth to rebound in its fiscal fourth quarter. Disney clearly believes it can win more by raising prices on its streaming offerings or migrating more subs to the advertiser-supported tiers, which the company can make more money from. Disney also announced price increases on its ad-free Disney+ offering beginning in October and will expand its ad-tier offering to select markets in Europe and in Canada beginning Nov. 1. Taking a page out of the Netflix playbook, Disney is "actively exploring" how to address account sharing of its services. The company plans to address this further in calendar year 2024. In the Disney Media and Entertainment Distribution (DMED) segment, we were pleased to see Direct-to-Consumer red ink in fiscal third-quarter cut in half from a year ago to a loss of $512 million, which was better than the $758 million loss expected. Quarter over quarter, that loss of $512 million was narrower by $147 million. Disney said it continues to expect to reach DTC profitability by the end of fiscal 2024 with more meaningful improvement by the middle of that year. Also in DMED, the Linear Networks business continues to face enormous challenges not only from cord-cutting but also from a weaker advertising market. The growth in advertising revenue from DTC is partially offsetting some of the Linear declines. But headwinds remain across all of entertainment except for sports. This brings us to ESPN, where ad revenue actually increased 4% in the quarter. We didn't get a whole lot on the deal announced Tuesday between ESPN and Penn Entertainment to bring ESPN into the sports betting marketplace world. However, it's a logical step that meets what sports fans have been waiting for. As for how else Iger is thinking about ESPN, the CEO reiterated that the company is considering potential strategic partnerships for the worldwide leader in sports where Disney retains control. Iger noted that many different entities have expressed interest and he plans to share more details at a later date when the company is further along in the process. As for the Disney Parks, Experiences and Products (DPEP) segment, revenues exceeded expectations but inflationary cost pressures, like wages and some softness overall at Walt Disney World in Florida, impacted margins, which were down about 3 percentage points from the prior year. Disney has noticed that some of the post-Covid pent-up demand has leveled off in Florida, a likely result of tourists visiting other markets. Despite the recent tempering of demand, Disney's theme park business was still much more profitable in the quarter than it was before the pandemic. Walt Disney World's operating income was almost 30% higher versus 2019 when accounting for the accelerated depreciation related to the closure of the Star Wars: Galactic Starcruiser hotel. Thanks to the ongoing strength of Disney's international parks and cruise line business, Disney expects fourth-quarter operating margins at DPEP to exceed the prior year. Since margins were about 27.5% last year, the current consensus of about 22.7% in the September quarters looks way too low. (Jim Cramer's Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . 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Disney CEO Bob Iger speaking with CNBC's David Faber at the Allen&Co. Annual Conference in Sun Valley, Idaho.

David A. Grogan | CNBC