Business context and reporting period
The Walt Disney Company’s unaudited Form 10-Q covers the fiscal third quarter ended July 1, 2023, and the nine months then ended. Comparisons are with the quarter and nine months ended July 2, 2022, except balance-sheet comparisons, which are with October 1, 2022. Financial amounts below are in U.S. dollars; billions are used unless stated otherwise.
Disney reported under two segments during the period: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP). The company announced a reorganization into Disney Entertainment, ESPN and Disney Parks, Experiences and Products, with reporting under the new structure planned to begin with fiscal 2023 annual reporting.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Change or context |
|---|---|---|---|
| Revenue | $22.330B | $21.504B | Up 4% |
| Income (loss) from continuing operations before tax | $(0.134)B | $2.119B | Includes a $2.650B restructuring and impairment charge |
| Net income (loss) attributable to Disney | $(0.460)B | $1.409B | Includes the content impairment and restructuring charges |
| Diluted EPS from continuing operations | $(0.25) | $0.77 | Company attributed the decrease principally to the content impairment charge |
For the nine months ended July 1, revenue was $67.657B, up 8%; income from continuing operations before tax was $3.762B, down 23%; net income attributable to Disney was $2.090B, down 30%; and diluted continuing-operations EPS was $1.14, versus $1.66. The prior-year nine-month revenue comparison included a $1.023B reduction from early termination of content licenses.
Q3 segment results showed contrasting trends. DMED revenue was $14.004B, down 1%, and segment operating income was $1.134B, down 18%. DPEP revenue was $8.326B, up 13%, and segment operating income was $2.425B, up 11%. These segment figures exclude certain corporate items, interest, taxes and restructuring and impairment charges; they are not consolidated operating income.
Within DMED, DTC revenue rose 9% to $5.525B and its operating loss narrowed to $512M from $1.061B. Linear Networks revenue fell 7% to $6.690B and operating income fell 23% to $1.889B. Disney+ Core paid subscribers were 105.7M at quarter end, up 13% year over year; Disney+ Hotstar subscribers were 40.4M, down 31%. DPEP’s growth reflected higher park attendance, guest spending and resort and vacation revenue, while operating costs also increased.
Consolidated costs and expenses were $19.689B in the quarter, up 3%; the filing does not provide a single consolidated operating-margin figure. Q3 interest expense, net, was $305M versus $360M. For the nine months, it was $927M versus $1.026B; gross interest expense rose, but higher interest and investment income and other items more than offset that increase in the net figure.
For the first nine months, operating cash flow from continuing operations was $5.064B, compared with $3.478B; investing cash use was $3.259B, including $3.595B of investment in parks, resorts and other property; financing cash use was $2.127B. Cash and cash equivalents were $11.458B at July 1, versus $11.615B at October 1, 2022. Borrowings totaled $47.189B, comprising $2.645B current and $44.544B long-term. Disney had $12.250B of unused bank facility capacity and stated it met its interest-coverage covenant by a significant margin. Total current assets were $30.174B and current liabilities were $28.234B.
Material changes and unusual items
- Content impairment and restructuring: Q3 charges were $2.650B, including a $2.4B content impairment charge associated with removing content from DTC services and terminating certain third-party licenses, plus $210M of severance. The content charge included $2.0B for produced content and $0.4B for license terminations; Disney paid approximately $0.3B in cash to terminate the licenses. Nine-month restructuring and impairment charges totaled $2.871B.
- Media pressures: Linear Networks revenue and operating income declined, reflecting lower affiliate and advertising revenue, including fewer subscribers and weaker advertising. DMED nine-month operating income fell 46% to $2.243B, while DPEP nine-month operating income rose 20% to $7.644B.
- Other income and expense: Q3 included a $90M gain on the DraftKings investment and a $101M charge related to a legal ruling. The nine-month period included a $169M DraftKings gain and a $28M business-sale gain, partly offset by the legal charge. The prior-year nine-month period included a $726M DraftKings loss.
- Hulu obligation: NBCUniversal’s 33% Hulu interest is subject to a put/call arrangement beginning January 2024, with a redemption value based on the greater of fair value or a $27.5B guaranteed floor for Hulu’s equity. Disney recorded the redeemable noncontrolling interest at $8.9B. An arbitration over the parties’ rights and responsibilities was pending; Disney said the outcome and potential payment could not be reasonably estimated.
Outlook, management commentary and risks
Disney expected fiscal 2023 produced and licensed content spending, including sports rights, of approximately $27B, compared with $30B in fiscal 2022. It expected fiscal 2023 capital expenditures of approximately $5B, comparable to fiscal 2022. Management said the content-spending reduction reflected lower produced-content spending, including the estimated impact of the WGA and SAG-AFTRA work stoppages, partly offset by higher sports-content spending. The filing cautions that nine-month results are not necessarily indicative of full-year results and describes significant seasonality.
Management said liquidity resources were adequate for operations, contractual obligations, debt maturities and planned investment. It also noted it could take measures such as reducing capital spending or content investment, raising financing, or not declaring dividends. No specific consolidated earnings or revenue guidance was provided in the supplied filing text.
Key risks include continued declines in traditional TV distribution and advertising, DTC profitability and subscriber churn, content performance and cost, labor stoppages affecting production and releases, economic and travel disruptions affecting parks, foreign-exchange movements, regulation and legal developments, and cybersecurity and intellectual-property risks. Disney said higher discount rates and declining projected revenue streams at media and entertainment businesses could reduce reporting-unit fair values; its planned annual goodwill assessment under both old and new segment structures could result in goodwill or intangible-asset impairment.
Legal matters include a securities class action filed in May 2023 alleging misstatements about Disney+ costs and subscriber growth; Disney said it would defend the case and could not estimate a potential loss. A related derivative complaint was filed August 4, 2023, also described as early-stage with loss not reasonably estimable. The filing also identifies a $2.7B balance of gross unrecognized tax benefits, which could change as open tax matters are resolved.
Most important facts for investors to verify
- Whether DTC losses continue to narrow and subscriber growth translates into sustainable revenue and profitability, particularly given the Hotstar subscriber decline.
- How much of the $2.650B Q3 charge is nonrecurring, and whether further restructuring, content or goodwill impairments arise.
- The outcome and valuation implications of the Hulu arbitration and the potential January 2024 purchase of NBCUniversal’s interest.
- Whether parks growth and margins hold up as attendance, costs, consumer demand and international conditions change.
- The duration and financial effects of the writers’ and actors’ work stoppages, including impacts on production, releases and the stated content-spending outlook.
- Cash generation, debt levels and liquidity alongside planned capital spending, upcoming obligations and unresolved legal and tax matters.