Industry Insider: A Look into Disney's 2023 Q1 Earnings Call
Among the many release dates of the newest Disney projects, from Marvel to Star Wars to the remakes of Disney Classics, the one that is most awaited by investors is always the next earnings call. The 2023 Q1 Disney Earnings Call occurred on February 8th and has delineated a clear scenario for what newly reinstated CEO Bob Iger has planned for the company moving forward. Among the various topics, three stood out: the restructuring of Disney in three segments, the reinstatement of a dividend, and a huge 7,000 jobs layoff.
In November 2022, Bob Iger came back as CEO despite his announced retirement in 2020 after holding the position for 15 years. Under the temporary title of executive chairman, he oversaw the transition from his leadership to that of Bob Chapek through the first months of Covid-19, an extremely turbulent time for the company. On one hand, one of Disney’s most profitable segments - then called Parks, Experiences and Products - suffered greatly, as the theme parks were either closed or had restricted capacity, and cruises and guided tours were suspended; moreover, many blockbusters were pulled back from theatrical release, thus cutting box office revenues. On the other hand, one of the very few industries that knew any positive impact from the pandemic was that of streaming services, which Disney had entered only one year earlier with Disney+. The combination of these events brought Chapek to make unpopular decisions, among which the infamous turmoil over Scarlett Johansson’s lawsuit against Disney on the release of Black Widow directly on the streaming platform, thus undercutting potential box office revenues just in an effort to increase the subscriber base of the still new Disney+. Although the lawsuit set a precedent in Hollywood’s history, the main issue was not the legal incident per se, but the fact that it got out of the private meeting rooms and under the public eye: a sign of an unstable leadership. The lawsuit, together with poor financial performance and a still-unprofitable Disney+, led the Board to reappoint Bob Iger as CEO. Even though his return is not a permanent one (he said he will find his successor in the next two years), it gave confidence to investors about the future of the company, with a 10% spike in Disney’s stock price.
As Iger outlines in the 2023 Q1 Earnings Call, his main goal is to rebalance the company’s segments to give more authority and control to the creative heads on the content that is produced - and how it performs. This will ensure quality over quantity, something that was highly overlooked during the pandemic. With the amount of time allotted to social activities reduced to zero, plus an increasing psychological distress whose natural coping mechanism is escapism, the demand for audiovisual content skyrocketed in a completely unnatural way, with studios and production companies focusing on increasing supply so as to match it. The predictable issue that came with it was the subsequent decrease in the quality of that very content: making movies and TV shows is not scalable by just increasing labor, and the creative process cannot be rushed. The return to “normal life”, together with a progressively more crowded space for streaming services and lowering switching costs, makes it essential to prioritize quality over quantity. In fact, Bob Iger underlined that:
“Our company is fueled by storytelling and creativity [...]. And I’ve always believed that the best way to spur great creativity is to make sure the people who are managing the creative processes feel empowered. Therefore, our new structure is aimed at returning greater authority to our creative leaders, and making them accountable for how their content performs financially. Our former structure severed that link, and it must be restored.”
It is following this statement that Iger announces an imminent restructuring of the whole company into three main divisions: Disney Entertainment, ESPN, and Disney Parks, Experiences and Products. Prior to this, ESPN was under the segment “Disney Media & Entertainment Distribution” (DMED), established by former CEO Bob Chapek; the DTC segment remains under Entertainment - with the exception of ESPN+. The changes have immediate action and financial statements will be reported under this new structure by the end of the fiscal year. This is only the first step towards a much larger cost-reduction strategy that also entails cutting 7,000 jobs in the hopes of slimming down organizational nodes and an increase in efficiency in operations.
Other important news for investors is the reinstatement of the dividend by the end of the year. Even though it will be a fraction of the pre-pandemic one, it is positive signaling for the company’s regained profitability after the Covid-19 slump. In fact, the reopening of theme parks made total annual revenues jump from $67 billion in 2021 to $83 billion in 2022; as investors get excited about positive changes in dividends more than their absolute level, this news may be the most tangible sign of a true recovery. Additionally, Iger said that Disney “will no longer be providing long-term subscriber guidance in order to move beyond an emphasis on short-term quarterly metrics” - a statement that hides many levels of subtext. The excessive significance that has been given until now to quarterly results in subscription growth has become unsustainable as the streaming space becomes ever more competitive and the total number of subscribers to any platform reaches its plateau. Netflix had already announced that it would shift the investors’ attention towards revenue instead of subscribers, and now Disney has followed through, also announcing that, according to current financial forecasts, Disney+ is set to become profitable by the end of fiscal 2024.
If the strategy outlined during the 2023 Q1 Earnings Call succeeds in all its many objectives, it would be yet a confirmation that what investors say about Bob Iger’s return is true: he comes back to bring the “Magic”.
