Disney Form 10-Q Summary
Business context and period. The Walt Disney Company reported fiscal second-quarter and six-month results for periods ended April 1, 2023, compared with periods ended April 2, 2022. Its reported segments were Disney Media and Entertainment Distribution (DMED) and Disney Parks, Experiences and Products (DPEP). Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Quarter ended April 1, 2023 | Prior-year quarter | Six months ended April 1, 2023 | Prior-year six months |
|---|---|---|---|---|
| Total revenue | $21.815 billion | $19.249 billion | $45.327 billion | $41.068 billion |
| Net income attributable to Disney | $1.271 billion | $470 million | $2.550 billion | $1.574 billion |
| Diluted EPS from continuing operations | $0.69 | $0.26 | $1.39 | $0.89 |
| Cash provided by continuing operations | Not presented separately for the quarter | Not presented separately for the quarter | $2.262 billion | $1.556 billion |
Quarter revenue grew 13% year over year; six-month revenue grew 10%. Comparisons were affected by a $1.023 billion prior-year revenue reduction from early termination of content license agreements. Quarter net income from continuing operations was $1.488 billion, versus $597 million. The quarter’s net income attributable to Disney and EPS also benefited from a DraftKings investment gain and higher DPEP operating income; DMED operating income declined.
Segment performance, quarter: DMED revenue was $14.039 billion and operating income was $1.119 billion, down 42%. DPEP revenue was $7.776 billion and operating income was $2.166 billion, up 23%. Approximate operating margins, calculated from reported segment figures, were 8.0% for DMED (14.3% prior year) and 27.9% for DPEP (26.4% prior year).
Streaming and media: DTC revenue rose 12% to $5.514 billion. Its operating loss narrowed to $659 million from $887 million, an approximate loss margin of 12.0% versus 18.1%. Subscription fees increased 18%, while advertising revenue declined 16%. Total Disney+ paid subscribers were 157.8 million, down 2% from the prior quarter; Disney+ Core subscribers were 104.9 million. Linear Networks operating income fell 35% to $1.828 billion as revenue declined 7%, including weaker advertising and affiliate fees. For the six months, DTC losses widened to $1.712 billion from $1.480 billion.
Parks: Quarter revenue growth reflected higher attendance and guest spending, and increased resort and vacation revenue. International parks and resorts returned to operating income of $156 million from a loss of $268 million in the prior-year quarter. Higher labor, infrastructure, operating and guest-offering costs partly offset revenue growth.
Cash flow, debt and liquidity
- Six-month operating cash flow was $2.262 billion. Investing cash outflow was $2.541 billion, including $2.430 billion of parks, resorts and other property investment. Operating cash flow was $168 million below that capital investment.
- Cash and cash equivalents were $10.399 billion at April 1, 2023, down from $11.615 billion at October 1, 2022. Total borrowings were $48.518 billion, including $3.452 billion current and $45.066 billion long-term.
- Current assets were $28.263 billion and current liabilities $28.056 billion. Disney reported $12.25 billion of unused bank facility capacity and said it met its interest-coverage covenant by a significant margin.
- Financing cash outflow included a $900 million purchase of MLB’s redeemable interest in BAMTech and $1.0 billion of borrowing reductions. Disney stated that cash, operating cash flows, capital-market access and borrowing capacity together were adequate for expected requirements.
Changes, outlook and unusual items
- CEO Bob Iger returned in November 2022. Disney announced a reorganization into Disney Entertainment, ESPN and Disney Parks, Experiences and Products, with reporting under the new structure expected by fiscal year-end. Restructuring charges may continue.
- Disney expected a $1.5 billion to $1.8 billion content impairment charge, largely in fiscal third quarter 2023, following a review of content, primarily on DTC services. The company did not expect material cash expenditures for that charge.
- Management expected fiscal 2023 produced and licensed content spending, including sports rights, to be roughly comparable with fiscal 2022 spending of $30 billion. Fiscal 2023 capital expenditures were projected at approximately $5.6 billion, compared with $5.0 billion in fiscal 2022. The filing does not provide earnings or revenue guidance.
- Quarter restructuring charges were $152 million, primarily severance; six-month charges were $221 million, primarily severance and costs of exiting Russia. The quarter included a non-cash $149 million DraftKings gain. Six-month other income also included a $28 million business-sale gain.
- NBCU may require Disney to purchase its 33% Hulu interest, or Disney may require NBCU to sell, beginning January 2024. The redemption price is the greater of fair value or a guaranteed $27.5 billion floor; NBCU’s interest was recorded at $8.8 billion. The redemption valuation involves significant judgment.
- Management said it did not believe the disclosed legal actions had caused a probable material loss. Gross unrecognized tax benefits were $2.7 billion; Disney said these could decrease by $0.1 billion in the next 12 months as tax matters are resolved.
Risks and investor checks
- Verify whether parks growth and DTC subscriber and pricing trends can offset continued declines in linear viewership, advertising and affiliate revenue, while reducing streaming losses.
- Track the timing and amount of the expected content impairment, restructuring costs, and the effects of the new segment structure on costs and reported results.
- Assess Hulu’s valuation and potential 2024 cash or financing needs against the $27.5 billion floor, as well as debt maturities, interest costs and liquidity.
- Monitor planned content spending and capital expenditures against operating cash generation; results are seasonal and interim performance is not necessarily indicative of full-year results.
- Consider risks from economic conditions, content performance and costs, changing consumer behavior, regulation and legal developments, foreign exchange, and disruptions to travel or production. The filing also notes Florida-related actions and threats that could affect operations and profitability.
- The filing reports that a Writers Guild of America work stoppage began May 2, 2023, after the quarter ended. A prolonged stoppage could disrupt production and reduce revenue. Verify subsequent developments and their effects.