Analyst Sees Disney Cutting $1.3 Billion in Linear Costs
Bob Iger’s first earnings call since returning as CEO set for Wednesday
As The Walt Disney Co. gets closer to announcing earnings on Wednesday and holding Bob Iger’s first call with analysts since his return to the company, predictions about what will transpire are heating up.
Evercore ISI media analyst Vijay Jayant is expecting Disney to beat consensus expectations with its first-quarter numbers. More importantly, Jayant is predicting Iger will come through on the cost cuts Wall Street and investors are looking for.
“There is an opportunity for Disney to use the current advertising downturn to take cost out of the linear business,” Jayant said.
He estimates that if Disney cuts costs to the same degree as NBCUniversal has planned for 2023, that could translate into $1.3 billion in savings over the next several years.
“Additionally, there is opportunity for Disney to improve studio results through a combination of rerouting some direct-to-streaming movies to theaters, better execution and potential windowing changes,” Jayant said. “We see an opportunity to improve studio result by about $500 million by returning the studio to 2020/2021 levels of profitability over the next five years.”
A report by Bloomberg suggested that Disney is also considering licensing some of its films and movies to third parties in an effort to generate additional revenues.
Jayant has raised his fiscal first-quarter estimate for Disney revenue to $23.7 billion, which would be up 17.7% from last year. He lowered his estimate for operating income to $2.2 billion.
The numbers might not be the most important thing Wall Street is looking for.
“We expect 1Q fiscal year 2023 results will take a backseat to management’s updated strategic and operational visions following the recent leadership change and ongoing proxy battle with an activist,” RBC Capital Markets analyst Kutgun Maral said. “Given Bob Iger’s return as CEO was less than just three months ago, we assume the full contours of the new plan are still being shaped and could take more time to be fully articulated to investors.”
In broad strokes, Maral also is looking for a path to direct-to-consumer profitability, a company-wide cost transformation initiative, particularly at the linear networks, and upping operating income growth.
Maral is also looking to see how Iger restructures the company’s media and entertainment division. Iger has said his goal was to give creative executives more control. “From the outside, it’s sometimes difficult to appreciate what implications a profound shift like this might have on a company,” Maral said. “What does management expect?”
On another big-picture issue, Maral does not think this is the right time to spin off ESPN.
Across linear, we think it would be a highly difficult and complicated process to separate ESPN from the rest of the company’s portfolio,” he said. “Perhaps more importantly, we think Disney is still in the early days of tapping into the opportunity with streaming sports and the benefits of being able to drive the broader Disney DTC bundle with Disney Plus and Hulu.”
Maral continues to think Disney will report revenue of $23.3 billion for the quarter — a bit lower than the Wall Street consensus — and operating income of $2.51 billion, 2.8% below consensus.
He predicts net added subscribers to core Disney Plus will come in at 1.5 million, also lower than the consensus of 2.2 million.
Despite the pessimism about Disney’s first-quarter numbers, he considers himself bullish on the stock. Maral set a target price of $130, up from Friday’s close of $110.71.
Last week, in a letter to shareholders urging them to support the company’s slate of directors and reject a bid by Nelson Peltz for a seat on the board, Disney said the board is currently “overseeing important strategic changes that our CEO Bob Iger is executing, such as putting more decision-making into the creative teams, implementing a cost reduction plan, prioritizing streaming profitability and improving the guest experience in our parks.”
On the other hand, Peltz “has demonstrated that he does not understand Disney’s businesses and he lacks the perspective and experience to contribute to the objective of delivering shareholder value in a rapidly shifting media ecosystem,” the letter said. “We are skeptical of his motives and believe he would be disruptive at a crucial period for Disney.” ■
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Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.