The high point and low point of Walt Disney’s (DIS) Q4 2020 earnings report

The COVID-19 pandemic has caused a massive disruption to the Walt Disney Company’s (NYSE: DIS) operations over the past few quarters. A day ago, the company reported its earnings results for the final quarter of fiscal year 2020, delivering a 23% decline in revenues and an adjusted loss of $0.20 per share. Despite their weakness, both the metrics surpassed analysts’ expectations.

Disney continues to suffer due to the closures of its parks and resorts due to the resurgence of the health crisis as well as the lack of theatrical releases as movie halls remain closed. However, the company’s streaming division continues to gain strength prompting Disney to reorganize its business to give it more focus.

Good news

The highlight of the fourth quarter earnings report was Disney +. Disney + was projected to be a formidable rival to Netflix (NASDAQ: NFLX) even before its launch and a year later, it appears to be close enough.

At the end of Q4, Disney + had 73.7 million subscribers which far exceeded its parent company’s expectations for its first year and reflected a sequential increase of over 16 million subscribers. The main driver of the subscriber growth was Disney + Hotstar and the IPL season. Disney + Hotstar subscribers now comprise a little over a quarter of the global subscriber base.  

As stressed many times before, Disney’s content has always been its strongest point. The company’s wide range of original and library content has attracted a large audience base. The acquisitions Disney made over the past decade or more provided it with some of the best movie franchises which have significantly helped Disney + become popular. As you can see, Star Wars and Avengers remain favorites.

A few weeks ago, Disney rolled out the second season of the highly popular show, The Mandalorian, to great reviews and response. The much-anticipated Soul from Pixar will release on Disney + on Christmas Day this year.

Over the past year, Disney + has been rolled out in over 20 countries worldwide. Next week, the company will launch the service in Latin America, including Brazil, Mexico, Chile and Argentina. Disney will continue to expand the service into more overseas markets in the coming year.

Not just Disney +, the entire Direct-to-Consumer (DTC) division saw strength during the quarter. The company had more than 120 million paid subscribers worldwide across its streaming services as a whole, helped by a double-digit growth in subscribers for Hulu and a triple-digit jump for ESPN + year-over-year. Operating income for the DTC segment increased by around $300 million year-over-year, exceeding the company’s guidance, thanks to strong performance across all three streaming services.   

Bad news

The low point is that the Parks and Studio businesses continue to suffer. For the fourth quarter, the Parks, Experiences and Products segment saw a 61% drop in revenue while the Studio Entertainment segment posted a 52% decline versus the previous year.

Disneyland Resort and the cruise line business remained closed for the entire quarter. While the resorts in Shanghai, Hong Kong and Paris reopened, they operated at significantly lower capacity for the period. Disneyland Paris has closed again due to a resurgence in COVID-19 cases. Despite operating at reduced capacity, these resorts helped the company recoup its reopening expenses.

Within Studio Entertainment, the lack of significant theatrical releases impacted operating results. This compares to the releases of The Lion King and Toy Story 4 in the prior-year period. On the bright side, despite the disruption, Disney has completed production on several of its projects and the company expects to have 8 new projects up and running by January.

Looking ahead

Going forward, Walt Disney will no longer break out 21CF performance due to the successful integration of these assets and the recent reorganization of Disney’s business.

Disney expects its fiscal 2021 results will continue to see impacts from the COVID-19 pandemic. Within Parks, Disneyland Resort is expected to stay closed at least through the end of the first fiscal quarter.

Within Studio, the company expects theatrical releases, home entertainment, and studio TV SVOD results to see year-over-year declines. Within DTC, operating results are expected to decrease by around $100 million year-over-year, mainly driven by continued investments in Disney +. Results in the international channels business is estimated to drop by around $300 million due to higher sports rights costs, channel closures and the pandemic-related impacts.

Capital expenditures are expected to increase by $550 million in FY2021 versus FY2020 due to higher investments in the media and entertainment distribution businesses.

Disney’s stock was up 1.76% in morning hours on Friday. The stock has gained over 8% in the past one month.

Click here to read the full transcript of Disney’s Q4 2020 earnings conference call