The company’s quarterly report Wednesday, the first under the returning leader, comes as the entertainment giant looks to fend off activist investor Nelson Peltz
Disney’s returning CEO Bob Iger will face Wall Street’s glare again Wednesday as investors seek answers on the entertainment giant’s strategy moving forward, including how it plans to make Disney+ profitable and what the future holds for Hulu and ESPN. And his famed diplomatic skills will be put to the test as he seeks to reassure analysts and contend with a restive investor the company has dismissed as “oblivious” to the streaming future.
As of Oct. 1, Disney boasted a total of more than 235 million streaming subscribers across its services, including 164.2 million at Disney+, 47.2 million at Hulu and 24.3 million at ESPN+. However, the company posted a nearly $1.5 billion streaming loss for the quarter — the final straw that led to the ouster of Iger’s successor Bob Chapek. At the time, Chapek reiterated the company’s guidance that Disney+ would achieve profitability in fiscal 2024, adding that it anticipated the division’s losses would begin to shrink starting in the first quarter of 2023.
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“With Bob Iger back at the helm, all eyes are on whether the streaming business can stem its losses,” Third Bridge analyst Jamie Lumley told TheWrap. “This is a top priority as Disney looks to reignite optimism around this part of the business that, while it has maintained strong subscriber growth, has increasingly become a weight on earnings.”
Lumley noted that Wednesday’s results will be the first to reflect the launch of Disney+’s $8 per month ad-supported tier, a move aimed at adding a new revenue stream and keeping its subscriber growth going.
“Following Netflix’s reportedly lackluster rollout, how Disney+ Basic is faring is a big question,” Lumley said. “Our specialists have highlighted that while the launch was timely by giving an option for cost-conscious consumers in a potential recessionary environment, a weak economy will also make gaining subscribers more challenging.”
Looming over Disney’s earnings is its proxy fight with activist investor and Trian Fund Management founder Nelson Peltz, who owns approximately 9.4 million common shares valued at roughly $1 billion.
Peltz, who has been pushing for a seat on Disney’s board, argued in a letter on Thursday that the company has failed to “instill a culture of accountability,” “properly plan for leadership succession,” “align incentives with shareholders by personally owning stock” or “heed constructive shareholder input.”
The letter notes that Disney shareholders have collectively lost over $120 billion in market value after the company’s stock plunged 44% in 2022, that its earnings per share have declined 50% since 2018 due to ballooning costs, and that the company’s strategy has caused debt to skyrocket and cash flow to plummet, leading to “the continued elimination of the dividend paid for 57 straight years.”
Peltz has promised to create a plan that will turn Disney’s streaming business into “the leader in streaming,” repair the company’s balance sheet by focusing on “operating efficiently, investing wisely, maximizing cash flow,” repay debt in an orderly fashion to restore Disney’s dividend as soon as possible, and undertake concerted efforts “to develop internal talent, plan for succession several layers down into the organization and foster a new generation of leaders.”
In response, Disney’s board of directors has said Peltz doesn’t understand the company’s businesses and “lacks the perspective and experience to contribute to the objective of delivering shareholder value in a rapidly shifting media ecosystem.” They added that the election of Peltz would “threaten the strategic management of Disney during a period of important change in the media landscape.” In a filing Tuesday, Disney turned up the rhetorical heat, saying that Peltz’s “assessment of Disney seemed oblivious to the secular change that had been ongoing in the media industry.”
Wells Fargo analyst Steven Cahall said in a Jan. 24 note to clients that Disney’s best defense against Peltz is a higher stock price.
“We expect DIS to back away from FY24 DTC subscriber targets, in favor of empowering content creation and streaming profitability,” Cahall wrote. He predicted that Disney+ will have 126 million core subscribers by 2024, short of the company’s current subscriber guidance range of 135 million to 165 million.
The bank also expects Disney to announce a roughly $2 billion DTC cost reduction program focused mostly on non-programming costs. Cahall estimates that Disney’s non-content costs account for 30% of its revenue, compared to Netflix’s 21.5%, and that the cuts could pull forward DTC profitability to an earlier point in fiscal year 2024.
LightShed Ventures general partner Rich Greenfield said in a Jan. 18 blog post that Peltz’s proxy fight is a distraction and that Iger and Disney need to focus on whether the company’s “current asset mix can fuel long-term success or whether they need to add/remove assets to reposition the company for growth.”
Heritage Capital president Paul Schatz told TheWrap he believes Disney’s stock has 25% to 40% upside thanks to Iger’s return and that Peltz being a thorn in the company’s side will “only be good for shareholders.”
Gerber Kawasaki managing partner Hatem Dhiab told TheWrap that Disney buying out Comcast’s minority stake in Hulu in 2024 is “probably the best thing they could do” and that it could be funded in part by spinning out ESPN. He estimates that ESPN could be valued anywhere from $15 billion to $20 billion-plus. Under the put/call agreement from 2019, Disney guaranteed a sale price for Comcast’s Hulu stake that represents a minimum total equity value of $27.5 billion.
But Greenfield speculates that Disney may potentially have other plans for Hulu following a Bloomberg report that the company is exploring licensing its content to third parties to stem the losses in its streaming business.
“We sense investors would view a Disney sale of Hulu quite favorably as it would clarify their streaming strategy, reduce leverage, and improve DTC profitability,” Greenfield wrote in a Feb. 7 blog post. “That said, most investors struggle to see a logical buyer of Hulu beyond Comcast and are unclear how Disney would handle the significant number of Disney+/Hulu bundled subs and the substantial original programming that Disney entities have created for Hulu.”
Despite Hulu’s well-known brand and streaming share, he argues that there “has not been enough focus on the lack of break-out, zeitgeist-worthy content.”
“It is hard to see why Hulu is a must-have asset regardless of whether or not Disney chooses to continue investing in adult-focused programming for Disney+ or pivot solely to kids/family programming. And when you look at the failure of Hulu content to truly break out, you have to wonder how much Disney would even miss the programming that airs on Hulu today,” he added. “Maybe selling Hulu with all of its programming is the best outcome for Disney, particularly if it leads to a higher-value exit and enables Disney to focus on what it does best, meaning kids/family franchise content that can be leveraged across all of its business lines.”
“It will force the company to maximize shareholder value sooner than later,” he said.
Shares of Disney have climbed approximately 23% year to date but are still down about 30% from the 52-week high they marked less than a year ago.
Lucas Manfredi
Lucas Manfredi is a TV Business reporter with TheWrap. He has a Bachelor of Science in Television-Radio from Ithaca College. He can be reached at lucas.manfredi@thewrap.com.