For millions, the questions that swirl overheard every day fuel uncertainty: With the ongoing coronavirus outbreak, when will it be safe to leave our homes regularly? How quickly can a vaccine be formulated? When will theaters and restaurants and schools open their doors again?
For the Walt Disney Co., the underlying issue stemming from the crisis is as much an existential one as a financial one. The company has an enormous stake in our collective desire to return to the world. Theme parks, vacation resorts, movie production, cruises, live sporting events — these are all core to Disney as a business and as a brand. What is the company without those elements that were so quickly shuttered by COVID-19?
When Disney reports second-quarter earnings after the market close on Tuesday, everyone will be closely examining its vital signs. Even the parts of the company that don’t require consumers to leave the house, such as its media networks and consumer products, require others to do so: ESPN can’t broadcast games without athletes; 20th Century Fox Television and ABC Studios can’t produce new shows without hundreds of crew members on sets; Disney shops will not be able to hawk new Black Widow toys over the summer if the release of latest Marvel movie has been delayed until November.
Wall Street analysts are expecting a 45% year-over-year decline in Disney’s fiscal second quarter per-share earnings, falling to 88 cents, on 19.4% revenue growth to $17.81 billion. Hollywood’s working class is also looking for a status update on the company that is a bellwether for a global entertainment industry. Disney like others in the sector have been sent reeling as TV and film production and live events screeched to a halt and theme parks around the world closed to visitors in March.
It’s clear that Disney “sits at the center of the storm for COVID, whether we’re talking parks or studio and the impact on people visiting movie theaters to a knock-on effect or a recession and what that will stimulate for cord cutting,” said Bernstein Research analyst Mike Morton in a recent research note.
To underscore the point: Theme parks and consumer products alone account for 45%, or $6.76 billion, of Disney’s $14.87 billion in operating income in 2019. All of Disney’s parks and resorts, from Paris to Hong Kong to Florida, are currently closed.
The company is “kind of shut down,” noted Bernstein’s Todd Juenger. Disney’s remaining sources of revenue during this period, he said, are: affiliate fees, advertising on its networks, subscriptions to its direct-to-consumer service, some TV licensing deals, and consumer products that are sold on Disney’s sites.
The quarter in focus ended March 31, and therefore only accounted for the first few weeks of most states’ shelter-in-place mandates. But investors will be keen to hear guidance for the current quarter, which has thus far taken place entirely in a period of lockdown. On Monday, influential analyst Michael Nathanson of MoffettNathanson downgraded Disney shares to neutral and cut its price target by $8 to $112. Disney shares closed at $105.50 in trading on Friday.
At the heart of the debate around Disney is how quickly or slowly the company will recover from the current situation, and its perceived strength. To paraphrase Juenger and Morton’s breakdown of the bull and bear cases: Disney is either a strong enough company to withstand a few years of troubled waters, or it’s an entity that will be dragged by a global public health crisis steeped in open-ended uncertainty.
The fortunate have been able to ride out the coronavirus outbreak at home, working remotely and binge-watching TV. On that front, Disney Plus has been the company’s major bright spot over the last month or two, drawing in 50 million paying customers — more like 42 million or so, if you don’t count the Hotstar customers in India who were automatically transitioned to the streaming service — and blowing up expectations.
Shortly after that whopper of a subscriber update, Guggenheim Partners analyst Michael Morris upped his subscriber forecasts to 226 million global subscribers (including 74 million stateside) by the end of fiscal 2024. If those projections bear out, that would put it within spitting distance of Morris’ forecast that Netflix will have 292 million global paying subscribers within a similar time span. That is a huge swing from Disney’s own initial targets of 60 million to 90 million global subscribers by end of fiscal 2024, and a sign of confidence that cord-cutting and streaming adoption trends are likely to ramp up during these confined months.
Look for further updates on subscriptions and production schedules for its “Star Wars” and Marvel original series; as Variety reported exclusively, “The Mandalorian” Season 3 is already in the works. Also expect some exec commentary about the production shutdown’s impact on its bevy of networks (ABC, FX, National Geographic and streamer Hulu) and how ESPN has fared in the face of the near-complete cessation of live sports.
Investors will also be eager to hear Disney’s plans for its theatrical release schedule, as movie theaters in most states remain shuttered. Amid the AMC Theatres-Universal Pictures feud over theatrical windows — brought to a head by the release of “Trolls World Tour,” of all things, on premium video-on-demand, skipping the traditional route — observers should also look for remarks about Disney’s commitment to showing movies in theaters first.
The question of when movie theaters will reopen is also integral to the future of Disney, which raked in $11.1 billion at the worldwide box office last year, including $3.8 billion in the U.S. As Nathanson recently noted of its film studios, which includes Pixar, Marvel and Lucasfilm, “Disney’s share of industry profits (excluding Fox in 2019) went from 29% in 2010 to 61% in 2019!”
This will be the first quarterly earnings call to feature its newest CEO, former theme parks and consumer products head Bob Chapek, who — in a surprise announcement from the company — took over the corner office from longtime chief exec Bob Iger in late February. But Iger is sure to be on hand for the call in a bid to reassure investors and industry watchers of the company’s fortitude. Iger has already been named to Gov. Gavin Newsom’s economic recovery task force in California.
For now at least, Disney doesn’t have to worry about its fans going anywhere: The Los Angeles Times documented some Disneyland (as well as Universal Studios) fans who missed the parks so much that they re-created their favorite rides in their backyards.
And Wall Street believes Disney continues to be well-positioned to survive and thrive. Nathanson forecasts that the top streamers, i.e Netflix, Amazon and Disney, will “emerge with the lion’s share of scripted content creation.”
“We believe Disney is the only company with a big enough lifeboat and the organizational will to come out of these secular changes in a strong position,” he said.