Disney needs to show investors it has a plan to make streaming profitable — and stop hemorrhaging money

When Walt Disney (DIS) reports fiscal first-quarter earnings on Wednesday, we’ll be looking to see how the entertainment giant plans to rein in spending, while also forging a path to profitability in its troubled streaming business. Disney will report its latest earnings results just over two months after CEO Bob Iger returned to the corner office with a mandate to clean house and drive growth through cost cuts, particularly in streaming. Disney’s direct-to-consumer unit, which includes streaming platforms Disney+, Hulu and ESPN+, has yet to reach profitability — losing nearly $1.5 billion last quarter. Those loses spurred Disney’s board to push out then-CEO Bob Chapek and bring Iger back to the top job. Management has since repeatedly said they expect Disney+ to become profitable by 2024 and should start to see losses subside in the fiscal first quarter. In a filing with the U.S. Securities and Exchange Commission last month, Disney said its board is “overseeing key strategic changes,” including “implementing [a] cost reduction plan” and “prioritizing streaming profitability.” Iger broadly outlined the tenants of that approach in a town hall with Disney employees upon his return. “Instead of chasing subscriptions with aggressive marketing and aggressive spending on content, we have to start chasing profitability,” he said. “In order to achieve that, we have to take a very, very hard look at our cost structure across our businesses.” While Iger hasn’t yet laid out specifics for the company’s cost cuts, analysts expect gradual reductions to begin in Disney’s programming budget. “The heaviest wave of content spend has passed them,” Tim Nollen, an analyst at Macquarie, told CNBC. “I don’t think they will necessarily say they intend to reduce their investment costs but I think you’re passed the heaviest investment phase, so cost should incrementally ease from here,” he said. The fiscal first-quarter results also come as Disney faces pressure from activist investor Nelson Peltz of Trian Partners. Peltz has been waging an ongoing proxy battle to gain a seat on Disney’s board — a move the Club would endorse in order to pressure Disney to get its financial house in order. Trian currently holds a nearly $1 billion stake in Disney. Analysts are expecting Disney to deliver earnings-per-share of 78 cents, down about 26% year-over-year, while revenue should climb 7% annually, to $23.37 billion, according to estimates compiled by Refinitiv. Managing costs When Disney+ first launched in 2019, Disney committed to a growth-at-all-costs spending strategy to compete in the streaming wars with big players like Netflix (NFLX), Amazon (AMZN) and Apple (AAPL). But as Disney’s expenses kept increasing to build out the burgeoning service, losses accelerated. In 2021 Disney spent $25 billion to produce original content, and the following year expanded its budget to $33 billion. Those investments attracted 235 million streaming subscribers as of the company’s fiscal fourth quarter , surpassing Netflix’s 223 million subscribers. But Disney’s average revenue per user came in lower than expected in that quarter, at $3.91 each, compared with analyst’s forecasts for $4.24 a user. Looking forward, investors “should expect less incremental content with the focus on trying to deliver product that matters without overserving the customers and driving losses,” Michael Morris, an analyst at Guggenheim Partners, told CNBC. Disney rival Netflix, which started cutting back its cash spend on programming in 2022 when its subscriber count began to plateau, “sets a precedent” for the industry, Morris said. Netflix spent $16.8 billion in 2022, down roughly 5% year-over-year. “In the case of Disney, with a cash content budget in excess of $30 billion, I would think that they would look at that budget and say, how would we get the most out of this rather than growing this?” he added. Beyond cost discipline, Morris explained, Disney is likely to try to stem losses by growing revenue “through a combination of pricing power and subscriber additions.” Similarly, Macquarie’s Nollen said Disney’s advertising-based subscription tier for Disney+ is “a lever Disney can pull to raise revenue.” But layoffs could also be on the horizon. “We’ve seen lots of companies across media and technology laying off staff recently, so I wouldn’t be surprised if they talked about a workforce reduction,” he said of Disney management. Iger in November said he didn’t have plans to lift a hiring freeze that had been implemented by his predecessor weeks prior. Analysts and investors will also be looking on Wednesday for any commentary from management on Disney’s plans to acquire Comcast ‘s (CMCSA) minority stake in Hulu, and whether it may move to spin off ESPN+. “It’s an important asset to Disney as a compliment to Disney+” Nollen said of Hulu. “It’s a successful streaming service with different genres from Disney and ESPN. It’s a bundle of content that attracts many subscribers.” Comcast is the parent company of NBCUniversal and CNBC. Meanwhile, Disney’s parks segment — which includes theme parks, resorts and cruises, and merchandise — has been a free cash flow driver and accounts for most of the company’s earnings. But investors are concerned about softer consumer demand in a slowing economy. “We see indications of a strong but inevitably slowing rate of growth in domestic parks attendance,” analysts at Guggenheim Partners wrote in a recent note. The Club take We’re looking forward to hearing Bob Iger’s remarks during Disney’s earnings webcast on Wednesday, the first since his return. Iger, who previously served as Disney’s CEO for 15 years before stepping down in 2020, has a solid track record of delivering profits at the company. But with the media industry at a critical turning point, he’ll be faced with key questions from analysts and journalists over how Disney intends to deal with runaway spending, while continuing to invest in content and making the streaming operation profitable. At the same time, Disney could use an activist investor like Peltz to shake things up on the board and help Iger achieve his goals. “Lots of angry people ask me why I support Nelson Peltz for the Disney board, and I give a simple answer: What has this board done for its shareholders other than wipe out more shareholder money?” Jim Cramer said last month. But if the company delivers on cost cuts and lays out a plausible plan for streaming, the stock could move higher. After falling more than 40% in 2022, shares of Disney are up more than 25% year-to-date. (Jim Cramer’s Charitable Trust is long DIS, APPL, AMZN. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

Bob Iger poses with Mickey Mouse attends Mickey’s 90th Spectacular at The Shrine Auditorium on October 6, 2018 in Los Angeles.
Valerie Macon | AFP | Getty Images

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