This article published shortly after Disney’s fiscal Q1 results were announced but just before the news dropped about activist investor Nelson Peltz calling off the impending proxy fight.
No one may have uttered the name of Nelson Peltz on Disney’s fiscal Q1 earnings call Wednesday, but boy did he loom like the proverbial elephant in the room.
Bob Iger did his damnedest to try and make analysts forget about the activist investor. And judging by the stock’s after-hours reaction, Disney’s returning CEO gave an A+ performance. Announcements of a soon-to-be reinstated dividend, $5.5 billion of cost savings and a restructuring to give the creatives more control were all music to investors’ ears.
But while neither management nor analysts made mention of Peltz, not even Iger could prevent the activist investor from gathering more ammo coming out of the last quarter.
In Disney’s fiscal Q1, Disney+ lost subscribers for the first time and lost more than $1 billion, the company’s pay TV business revenue fell 5% and operating income declined 16% and debt remains elevated.
Iger reaffirmed that the company still expects Disney+ to turn a profit by the end of fiscal year 2024, but with the planned reduction in spending, one must wonder how the streamer won't continue losing subscribers as a result. On top of that, ARPU (average revenue per user) has been trending in the wrong direction for some time.
To Iger’s credit, many of these issues are out of his control. Macroeconomic headwinds are putting pressure on business, and streaming competition is only getting fiercer. To strengthen the balance sheet, Iger really attempted to convey his commitment to cost savings.
“We are going to take a really hard look at the cost for everything that we make, TV and film,” Iger said on the call. “Things have simply gotten more expensive. We are going to look at the volume at what we make, [and we’re] going to be more aggressive with curation of general entertainment.”
Cost savings are great, but it’s only a strategy that can hold a company over for a few quarters and is rarely seen as an effective long-term strategy. Luckily, Disney has its reliable (for now) theme parks biz, which has been continuing to generate free cash flow to help fund its other less profitable businesses.
The concern with the theme parks business is it’s only as strong as the economy. As of now, consumer spending remains very strong with people still shelling out cash on experiences, but if there were to be some sort of economic recession, as many have been predicting, the theme parks would feel the pain.
With Disney’s largest business, linear TV, rapidly shrinking, the hope was that its streaming services would ultimately backfill those losses. But with profitability at Disney+ still very elusive, there just is no telling whether those hopes and dreams will come to fruition.
It’s hard to imagine the looming proxy battle with Peltz isn’t causing Iger added stress on top of a tough job ahead of him. Unfortunately, after Q1 results it appears Iger will have to pull out a lot more in order to get Peltz to go away. The earnings call Thursday either served as a reminder to investors that Iger is the right person for the Disney turnaround or that maybe having an outsider with aggressive strategies could be better in the long run for the media giant.