Business context and reporting period
The Walt Disney Company (NYSE: DIS) filed this unaudited Form 10-Q for its fiscal second quarter and six months ended March 30, 2024. Its reportable segments are Entertainment, Sports and Experiences. Comparisons below are with the quarter or six-month period ended April 1, 2023, unless otherwise noted. Dollar amounts are in U.S. dollars.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $22.083B, up 1% | $45.632B, up 1% |
| Income before income taxes | $657M, down 69% | $3.528B, down 9% |
| Net income attributable to Disney | Loss of $20M, versus income of $1.271B | $1.891B, down 26% |
| Diluted EPS attributable to Disney | Loss of $0.01, versus earnings of $0.69 | $1.03, versus $1.39 |
| Segment operating income | $3.845B, versus $3.285B | $7.721B, versus $6.328B |
The quarter’s loss reflected $2.052B of restructuring and impairment charges, principally goodwill impairments, including approximately $1.3B related to Star India and $0.7B related to Entertainment linear networks. The charges materially reduced reported earnings; the filing’s adjusted-item reconciliation estimates their adverse quarterly EPS impact at $1.06. Quarterly effective tax rate was 67.1%, largely reflecting nondeductible goodwill impairments.
Segment trends were mixed. Quarterly Entertainment revenue fell 5% to $9.796B, while operating income rose 72% to $781M; its Direct-to-Consumer (DTC) business reported $47M operating income versus a $587M loss. Sports revenue grew 2% to $4.312B, while operating income decreased 2% to $778M. Experiences revenue rose 10% to $8.393B and operating income rose 12% to $2.286B, supported by higher attendance, ticket spending and resort revenue.
For the quarter, DTC subscription revenue increased 14%; Disney+ Core paid subscribers reached 117.6M, up 12% year over year. Entertainment linear networks continued to weaken: quarterly revenue declined 8% and operating income declined 22%, with lower affiliate fees and advertising. Content Sales/Licensing and Other revenue fell 40%, reflecting weaker theatrical and TV/VOD distribution, and the unit recorded an operating loss.
- Cash flow: Six-month operating cash flow was $5.851B, versus $2.262B. Investing activities used $2.553B, including $2.558B in parks, resorts and other property investment. Financing activities used $10.824B, primarily reflecting the $8.610B Hulu noncontrolling-interest payment, as well as dividends and repurchases. Cash and cash equivalents declined to $6.635B from $14.182B at September 30, 2023.
- Debt and liquidity: Borrowings totaled $46.299B at March 30, 2024, including $6.789B current and $39.510B long-term. The company had $12.250B of unused bank facilities and reported meeting its interest-coverage covenant by a significant margin. Management said available cash, operating cash flow, capital-market access and borrowing capacity were adequate for expected needs.
- Capital returns: Disney paid $549M in dividends during the six-month period and repurchased $1.001B of stock. The Board declared a $0.45-per-share dividend payable July 25, 2024, and Disney targeted $3B of fiscal 2024 repurchases.
Material changes, outlook and risks
- Disney agreed to combine Star India’s businesses with Viacom18 in a joint venture controlled by Reliance Industries; Disney expects to hold 37%. Closing is expected in the first half of calendar 2025, subject to approvals and other conditions. Star India’s assets and liabilities are held for sale, and the transaction valuation could change before closing.
- NBCUniversal exercised its right to sell its 33% Hulu interest. Disney paid $8.6B in December 2023 based on the guaranteed floor value; a further payment may be due if Hulu’s final equity fair value exceeds that floor. The final valuation requires significant judgment.
- Management expected fiscal 2024 produced and licensed content spending, including sports rights, of approximately $24B, compared with $27B in fiscal 2023, and capital expenditures of approximately $6B, compared with $5B. The filing does not provide a clear full-year revenue or earnings forecast.
- Goodwill valuations remain sensitive to forecasts and discount rates. After the linear-networks impairment, that reporting unit had no excess fair value over carrying amount; a 25-basis-point increase in its discount rate or a 1% reduction in projected annual cash flows could each trigger about $0.3B of additional impairment. Entertainment DTC goodwill was approximately $45B, with fair value less than 10% above carrying amount.
- Legal exposures include securities and shareholder derivative litigation concerning alleged Disney+ cost and subscriber disclosures, carriage-related antitrust cases, and Fubo’s challenge to the planned sports-streaming joint venture. Disney said it intends to defend these matters; it could not reasonably estimate possible losses for the described cases. Fubo sought a preliminary injunction, with a hearing scheduled to begin August 7, 2024.
- After quarter-end, Disney acquired an additional 5% interest in Epic Games for $1B and committed to acquire a further 2% for $0.5B in July 2024. The report also highlights risks from competition, consumer acceptance and churn, advertising markets, labor activity, regulation, economic conditions, international developments, weather and content availability.
Important facts for investors to verify
- Whether DTC can sustain profitability and subscriber growth, including Disney+ Core additions, pricing, churn and per-subscriber revenue.
- Whether linear-network declines and theatrical performance continue to pressure Entertainment revenue and goodwill valuations.
- Star India transaction approvals, timing, final consideration and any further impairment; also the final Hulu valuation and any incremental NBCUniversal payment.
- Delivery of the stated fiscal 2024 content-spending, capital-expenditure and share-repurchase plans, alongside cash generation and debt reduction.
- Developments in the antitrust, securities and derivative lawsuits, particularly any injunction affecting the sports-streaming joint venture.