DIS Financial Analysis

Analysis Date: 2/6/2025

Business Model

The Walt Disney Company operates through three segments: Entertainment, Sports, and Experiences. Revenue is generated from services and products across these segments.

Revenue Sources

• Services: Primarily includes revenues from theme parks, resorts, cruise line, media networks (affiliate fees, advertising), direct-to-consumer streaming subscriptions, content licensing, and theatrical distribution.
• Products: Includes revenues from merchandise sales at theme parks and resorts, retail stores, and online, as well as merchandise licensing.

Income Statement Analysis

• Revenue increased by 5% year-over-year, driven by growth in services and products.
• Cost of services decreased slightly by 1% year-over-year, while cost of products decreased by 3%.
• Selling, general, administrative and other expenses increased by 4% year-over-year, driven by legal settlement and higher marketing costs.
• Depreciation and amortization increased by 3% year-over-year due to higher depreciation at Experiences.
• Interest expense, net increased significantly by 49% year-over-year, primarily due to lower average rates and debt balances offset by decrease in capitalized interest and unfavorable investment income comparison.
• Equity in the income of investees decreased by 49% year-over-year due to lower income from A+E Television Networks and losses from the India joint venture.
• Income before income taxes increased by 27% year-over-year, indicating improved profitability before taxes.
• Net income attributable to Disney increased significantly by 34% year-over-year, showing strong bottom-line growth.

Balance Sheet Analysis

• Cash and cash equivalents decreased by 8.6%, indicating cash utilization.
• Receivables, net increased by 8.15%, suggesting higher sales or slower collections.
• Content advances decreased significantly by 44.83%, potentially indicating changes in content investment timing.
• Investments nearly doubled, increasing by 99.64%, suggesting a significant increase in investment activities.
• Parks, resorts and other property, net increased by 2.97%, reflecting continued investment in this segment.
• Intangible assets, net decreased by 3.42%, possibly due to amortization.
• Total Assets increased slightly by 0.42%.
• Accounts payable and other accrued liabilities increased by 2.68%.
• Current portion of borrowings decreased by 3.29%, while total borrowings decreased slightly by 0.72%.
• Total Disney Shareholders’ Equity increased by 1.23%.

Capital Allocation

Disney's capital allocation strategy in Q1 2025 includes share repurchases of $0.8 billion, indicating a return of capital to shareholders. The company also invested heavily in Parks, Resorts and Other Property with $2.466 billion, suggesting a focus on reinvestment in its Experiences segment, particularly cruise line expansion. Dividends were also paid, continuing its commitment to shareholder returns. Management commentary in the earnings release mentions targeting a total of $3 billion in share repurchases in fiscal 2025 and approximately $8 billion in capital expenditures for fiscal 2025, primarily in Experiences segment.

Management Commentary

Revenues increased 5% for Q1 to $24.7 billion from $23.5 billion in Q1 fiscal 2024

Income before income taxes increased 27% for Q1 to $3.7 billion from $2.9 billion in Q1 fiscal 2024

Diluted earnings per share (EPS) increased 35% for Q1 to $1.40 from $1.04 in Q1 fiscal 2024

Total segment operating income increased 31% for Q1 to $5.1 billion from $3.9 billion in Q1 fiscal 2024 and adjusted EPS increased 44% for Q1 to $1.76 from $1.22 in Q1 fiscal 2024

Entertainment: Segment operating income increased $0.8 billion to $1.7 billion

Direct-to-Consumer operating income increased $431 million to $293 million

Content Sales/Licensing and Other operating income increased $536 million to $312 million driven by the performance of Moana 2

Sports: Segment operating income increased $350 million to $247 million

Experiences: Segment operating income of $3.1 billion comparable to Q1 fiscal 2024, reflecting a 6 percentage-point adverse impact to year-over-year growth due to Hurricanes Milton and Helene (~$120 million impact) and pre-opening expenses (~$75 million impact in Q1 fiscal 2025) driven by the launch of the Disney Treasure

Domestic Parks & Experiences operating income declined 5%, reflecting a 9 percentage-point adverse impact to year-over-year growth due to the hurricanes and cruise pre-opening expenses

International Parks & Experiences operating income increased 28% vs. Q1 fiscal 2024

Equity loss from the India JV of $33 million in Q1 primarily due to the impact of purchase accounting

Entertainment Direct-to-Consumer: Modest decline in Disney+ subscribers compared to Q1

Sports: Segment operating income adversely impacted by approximately $100 million due to college sports and one additional NFL game, and about $50 million from exiting the Venu Sports JV

Experiences: Disney Cruise Line pre-opening expense of approximately $40 million in Q2

Star India deconsolidated in Q1

Overall Sentiment: Positive. Management expresses confidence in their strategic initiatives and highlights strong performance across studios, streaming profitability, ESPN, and Experiences, while acknowledging some headwinds in specific areas like domestic parks and DTC subscriber growth in Q2.

Recommendation

Rating: Hold

Reason for Rating: While Disney shows strong Q1 results and positive outlook for fiscal year 2025, there are mixed signals. Strong performance in studios, DTC profitability improvement, and Experiences are positives. However, subscriber growth in DTC is slowing, and there are increased capital expenditures. The impact of Star India JV and potential arbitration outcome related to Hulu also introduce uncertainty. A Hold rating is recommended to observe the sustainability of DTC growth, the execution of capital allocation strategy and the impact of restructuring efforts.

Disclaimer: This report is for informational purposes only and not investment advice. The analysis is based on limited information and subject to change. Investing in securities involves risks, including potential loss of principal. Past performance doesn't guarantee future results. Always conduct your own research, understand the risks, and consult a financial professional before making investment decisions.

Generated on: 2/6/2025, 4:51:05 AM