Walt Disney Co. — Q3 FY2021 Form 10-Q
Reporting period: Quarter and nine months ended July 3, 2021. Amounts are in U.S. dollars; financial statement figures are in millions unless stated otherwise. Disney reported under two segments: Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP).
Key financial results
| Metric | Q3 FY2021 | Prior-year quarter | Nine months FY2021 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $17.0 billion | $11.8 billion | $48.9 billion | $50.7 billion |
| Net income (loss) attributable to Disney | $918 million | $(4.721) billion | $1.836 billion | $(2.154) billion |
| Diluted EPS from continuing operations | $0.50 | $(2.61) | $1.02 | $(1.17) |
| Segment operating income | $2.382 billion | $1.099 billion | $6.179 billion | $7.502 billion |
| Cash from continuing operations | Not separately provided for quarter | Not separately provided for quarter | $2.934 billion | $5.949 billion |
- Quarterly revenue rose 45%. Services revenue increased 39% and products revenue rose to $1.437 billion from $544 million.
- Nine-month revenue declined 4%. Lower parks, theatrical, home-entertainment and content-licensing activity outweighed growth in streaming and advertising.
- Profit comparison was heavily affected by prior-year impairments. The prior-year quarter included $4.953 billion of goodwill and intangible-asset impairments; the current quarter included $35 million of restructuring and impairment charges.
- Cash and debt: Cash and cash equivalents were $16.070 billion at July 3, versus $17.914 billion at October 3, 2020. Borrowings were $55.838 billion, down from $58.628 billion. Nine-month capital expenditures were $2.468 billion.
- Liquidity: Disney reported $12.25 billion of unused bank-facility capacity. It stated that cash, liquid assets, operating cash flow, capital-market access and borrowing capacity together provided adequate resources for operating needs, debt maturities and planned investment.
Business trends and changes
- DPEP rebounded in the quarter: revenue was $4.341 billion versus $1.065 billion, and segment operating income was $356 million versus a $1.878 billion loss. Many parks reopened, but generally at reduced capacity; cruise operations remained suspended for the nine-month period.
- The nine-month parks result remained pressured: DPEP revenue fell 22% to $11.102 billion and segment operating loss was $169 million, compared with $1.400 billion of income a year earlier. Management estimated COVID-19 reduced nine-month DPEP operating income by approximately $1.6 billion.
- DMED grew revenue but quarterly operating income declined: Q3 revenue increased 18% to $12.681 billion, while segment operating income fell 32% to $2.026 billion, principally reflecting higher sports-programming costs and lower results in Linear Networks. Nine-month revenue rose 4% and operating income rose 4%.
- Streaming expanded while remaining loss-making: Q3 Direct-to-Consumer revenue increased 57% to $4.256 billion and its operating loss narrowed to $293 million from $624 million. Disney+ had 116.0 million paid subscribers at quarter-end, versus 57.5 million a year earlier. Disney+ average monthly revenue per paid subscriber declined 10% to $4.16, partly because of a higher Disney+ Hotstar subscriber mix.
- The nine-month DTC operating loss narrowed to $1.049 billion from $2.539 billion. Disney attributed growth to subscribers and pricing, while noting higher programming, production, distribution and marketing costs.
- Disney reorganized its media and entertainment operations in fiscal 2021 and recast prior-year segment reporting to align with the new DMED structure; segment comparisons should be read on that basis.
Outlook, risks and unusual items
- No broad earnings or revenue guidance is provided in the filing. Disney cautioned that interim results are not necessarily indicative of full-year results and that COVID-19 impacts remain difficult to predict.
- Management expected approximately $1 billion of COVID-related health, safety and operating costs in FY2021. It expected FY2021 capital expenditures to be approximately $0.2 billion below FY2020’s $4.0 billion, reflecting reduced domestic parks investment partly offset by DTC technology and corporate facilities spending.
- Disney had not declared or paid a dividend for FY2021 and did not intend to comment on future dividends until one is declared. It retained the option to raise financing, further defer investment, reduce content spending or take other mitigation measures.
- COVID-19 risks included renewed closures or capacity restrictions, cruise and production disruptions, delayed or fewer releases, changing consumer behavior, higher safety costs, and effects on cash flow, receivables and asset valuations. Management said impacts could continue at least through FY2021; the ultimate duration and severity were unknown.
- In FY2021 Disney entered into approximately $41 billion of new multi-year sports-rights commitments, primarily a new NFL agreement. Expected payments were approximately $3.2 billion in FY2022, $4.2 billion in FY2023, $3.8 billion in FY2024 and $3.8 billion in FY2025.
- Other unusual items included a $217 million non-cash DraftKings valuation loss in Q3, partly offset by a $126 million gain on the sale of a German free-to-air network interest. Nine-month results also included a $186 million fuboTV sale gain and a $98 million DraftKings loss.
- Disney disclosed $2.5 billion of gross unrecognized tax benefits and said these could decrease by $0.4 billion within the next 12 months as tax matters are resolved. Management did not believe pending legal matters were likely to result in a probable material loss.
- After quarter-end, NHL exercised its right to sell its BAMTech interest to Disney for $350 million; closing was expected before FY2021 year-end. Disney also expected the sale of its Fox sports media business in Mexico to close by Q1 FY2022, subject to customary conditions.
Important facts for investors to verify
- Whether park attendance, capacity, cruise sailings and operating profitability continued to recover after July 3, 2021, and how COVID-19 restrictions affected results.
- Streaming subscriber growth, subscriber mix and average revenue per subscriber, alongside DTC operating losses and content investment.
- The scale, timing and profitability of the approximately $41 billion sports-rights commitments, including the effects of sports schedules and contractual costs.
- Cash-flow conversion, debt repayment and liquidity as operating conditions normalize; also monitor the paused dividend and planned capital spending.
- Progress and financial effects of the NHL/BAMTech transaction, the Mexico asset sale, restructuring actions and the disclosed tax and legal contingencies.