The Walt Disney Company has reported its third quarter fiscal year 2023 earnings, beating earning expectations and meeting revenue forecasts, but missing on Disney+ subscriber numbers. This covers the good & bad of these results as they related to Walt Disney World & Disneyland, and why despite the strong headline performance for parks, attendance and resort reservations are both down.
Disney Parks, Experiences and Products revenues for the quarter increased 13% to $8.3 billion. Higher operating results for the quarter reflected increases at primarily at the international parks, which were up 94%. This is mostly attributable to Shanghai Disneyland and, to a lesser extent, Hong Kong Disneyland. In the prior year quarter, Shanghai Disneyland was only open for 3 days…so an easy comparison explains almost all of that growth!
By contrast, the domestic Parks & Resorts underperformed comparatively. Even there, Disneyland and Disney Cruise Line continued to show strong results. That wasn’t the case for Walt Disney World or Disney Vacation Club, with the latter receiving a rare earnings call ‘shout out’ for lower unit sales. (Something we’ve known for a while–see our post from a few months ago on the Disney Vacation Club Sales Slump–but it’s interesting to hear the company acknowledge. That’s especially the case as the Villas at Disneyland Hotel are now on sale and several other projects move forward.) Then there’s Walt Disney World…
The company indicated that lower results for Parks & Resorts this quarter were mostly attributable to a decrease at Walt Disney World due to higher costs and lower volumes. In particular, lower volumes were “due to decreases in occupied room nights and attendance.” The increase in costs was attributable to inflation and accelerated depreciation related to the planned closure of Star Wars: Galactic Starcruiser, for which the company is taking a write-off of $300 million in the last two quarters of this fiscal year.
None of this is particularly surprising. We’ve been documenting the slowdown in crowds at Walt Disney World. This also isn’t the first, second, or even third time the company has directly addressed it and indicated that pent-up demand has been exhausted at Walt Disney World. No, the parks are not dead or ghost towns or totally empty, but they’re absolutely down year-over-year.
The parks are slower right now than they were at the same time last year. It’s undeniable and obvious. (I’m sorry if you encountered pockets of large crowds in the last few months, but there has been a drop.) Hopefully this convinces those who have claimed the parks are “busier than ever” otherwise.
We’ll circle back to more in Parks & Resorts in the commentary, but let’s quickly run through some of the other earnings call highlights and lowlights…
Disney CEO Bob Iger told analysts about the unprecedented transformation at the company, with this quarter’s earnings reflecting some of what’s been accomplished. The highlights of this include completely restructuring the company to restore creativity to the center of the business, as well as efficiency improvements to create a more cost-effective and streamlined approach to operations.
In addition, Iger indicated that aggressive cost-cutting across the company has been a success, with Disney on track to exceed its initial goal of $5.5 billion dollars in savings. Disney has also improved the performance of its direct-to-consumer (DTC) operating income by roughly $1 billion in just three quarters, as the company continues to work towards achieving DTC (streaming services) profitability by the end of FY 2024, despite a challenging environment.
To that point, let’s start with a look at how things are going with Disney+ and Hulu (etc.), as the future success of these streaming is a necessary prerequisite to further significant investment at Walt Disney World and Disneyland…
The headline is that Disney+ lost roughly 11.7 million subscribers worldwide for a new total of 146.1 million. If you want to buy into a doom & gloom narrative or have confirmation of your personal grievances with Disney, that 24% decrease might seem catastrophic or like vindication of your views. However, all of the decline can be attributed to a low-priced international version of Disney+ Hotstar in India.
Last year, Disney lost a bid to renew the expensive rights to Indian Premier League cricket matches. “Lost” might be the wrong word, as Disney+ has shifted from a growth at all costs mentality to one focused on profitability and sustainability, resulting in the company significantly pulling back in spending in regions that were never economically viable in the first place. So unless you’re a bitter cricket fan in India, there’s no vindication for you in these numbers.
There is a pretty big bright spot, though: DTC revenues for the quarter increasing by 9% to $5.5 billion and the operating loss decreasing to $0.5 billion from a loss of $1.1 billion. According to the company, the decrease in operating loss was due to a lower loss at Disney+, higher operating income at Hulu and a lower loss at ESPN+.
All of this is huge. Again, losing money was always the plan with Disney+ as the company focused first on user acquisition and taking market share from Netflix (and preventing new market entrants from eclipsing them). Disney was largely succeeding at that, but spending got a bit out of control–at the behest of Wall Street, which wanted more growth and spending. Until it didn’t. (As previously noted, we’re critical of Chapek for a lot of things, but not the Disney+ approach–he was playing the cards he was dealt at the time.)
In any case, Disney also announced that it will raise the price on its ad-free streaming tier of Disney+ this fall, launch ad-supported tiers in Canada and Europe, debut new bundle options, and crack down on password sharing. From the perspective of a Walt Disney World and Disneyland fan first and foremost, all of this is great news.
Yes, I know I just “cheered” on a price increase. I don’t care. This was always going to happen and, spoiler alert, all of the streaming services are going to cut back on spending and increase prices. They all had the growth over profitability mindset, and are now pivoting. Consider it another example of the end of the millennial lifestyle subsidy. In my view, the faster DTC increases prices and attains profitability, the faster the next pivot happens–to investment in Walt Disney World and Disneyland.
Disney also discussed its ambitions in the streaming world, and how that will extend to ESPN. “Taking our ESPN flagship channels direct to consumer is not a matter of if, but when,” Iger said. “The team is hard at work looking at all components of this decision, including pricing and timing.”
Prior to the earnings call, Disney announced that ESPN and Penn Entertainment have entered an exclusive licensing arrangement that expands the ESPN brand into the growing world of $port$ betting. Under the terms of the partnership, Penn will pay ESPN $1.5 billion in cash over the 10-year period, and grants $500 million of warrants to buy approximately 31.8 million Penn shares.
“This licensing deal will offer a compelling new experience for sports fans that will enhance consumer engagement,” Iger said. “We’re considering potential strategic partnerships for ESPN, looking at distribution, technology, marketing, and content opportunities where we retain control of ESPN,” Iger added. “We’ve received notable interest from many different entities, and we look forward to sharing more details at a later date when we are further along in this process.”
It’s been a rough year for Disney’s film studios, with several blockbusters bombing at the box office or failing to meet expectations due to bloated budgets, subpar quality, or both. Iger spoke indirectly to that: “we are focused on improving the quality of our films, and on better economics – not just reducing the number of titles we release, but also the cost per title. And we’re maximizing the full impact of our titles by embracing the multiple distribution windows at our disposal, enabling consumers to access our content in multiple ways.”
“By focusing on big franchises and tentpole films, we’re able to generate interest in our existing library,” he added. “For example, we’re seeing tremendous engagement on Disney+ with the previous Guardians of the Galaxy films, the original Avatar, and the first four Indiana Jones movies.
On a positive note, Pixar’s Elemental has shown strong legs. Its opening weekend in June brought in an anemic $30 million, but it has since crossed the $400 million mark. That’s about five times its domestic opening weekend haul, which is a rare accomplishment in a theatrical world that sees most moviegoers buy a ticket the opening weekend. In fact, the only other Pixar film to accomplish this feat is Toy Story.
Personally, I’m cheering for the success of Elemental. As someone who is absolutely sick of remakes, reboots, sequels, and cinematic universes (e.g. 90% of Disney’s studio output), I want original ideas to succeed–and for more of them to be made. In my view, it’s really unfortunate that so much of Pixar’s (excellent!) original output in 2020-2021 went directly to Disney+ and didn’t make as big of an impression on pop culture as a result. Anyway, here’s hoping for more of this and less of the live action remakes.
Turning back to Parks & Resorts, Iger talked about how this division “sets Disney apart” and discussed some of the additions on the horizon. “We’ll be opening new Frozen-themed lands at Hong Kong Disneyland and Walt Disney Studios Park in Paris, as well as a Zootopia-themed land at Shanghai Disney Resort. Later down the road, we will be bringing an Avatar experience to Disneyland.” (“Later down the road” doesn’t exactly instill confidence that anything is happening anytime soon.)
Iger pointed out that Disney Cruise Line showed strong revenue and operating-income growth in the third quarter. Current Q4 booked occupancy for the existing fleet of five ships is at 98%, and Disney Cruise Line will be expanding our fleet by adding two more ships in fiscal 2025 and another in fiscal 2026, nearly doubling our worldwide capacity. Keep in mind that although DCL had resumed during this timeframe last year, there were still COVID protocol in place and bookings were soft as a result.
Disney’s international parks were a driver of strong segment results for the quarter as well. “Our Asia Parks have been doing exceptionally well, reinforcing a clear opportunity for continued growth,” Iger indicated. “Both Shanghai Disney Resort and Hong Kong Disneyland have experienced stronger than expected recoveries from the pandemic, and in Q3 they both grew meaningfully in revenue, operating income, and attendance.”
Meanwhile in Florida, Iger noted that the company “saw softer performance at Walt Disney World from the prior year, coming off our highly successful 50th Anniversary celebration.” As a reminder, prior CFO Christine McCarthy braced investors for exactly this on the last earnings call, suggesting that Disney was already seeing the signs of a slowdown then. The aggressive discounting and other measures that started rolling out for 2023 at the end of last year suggest that there have been concerns about the exhaustion of pent-up demand for a while.
“However, Walt Disney World is still performing well above pre-COVID levels: 21% higher in revenue and 29% higher in operating income compared to FY2019, adjusting for Starcruiser accelerated depreciation,” Iger added. It’s worth noting that Disney was once touting per guest spending increases over 2019 in the neighborhood of 40%. While revenue and operating income are different metrics, per guest spending has almost assuredly decreased as compared to last year.
Thanks to increased discounting, resort rates are effectively down year-over-year. In some cases, the percentage savings available via special offers are 5-15% higher. In more extreme examples, there are 20-30% discounts at times when no deals were available at all last year. (This is especially true for October to December, so technically the first quarter of FY2024.)
Conversely, Genie+ and ticket prices have effectively increased, but there’s reason to believe guests are reallocating their spending to account for that. The increased AP and CM discounts for merchandise and restaurants, as well as dramatically improved ADR availability offer indirect evidence of this. Prices are never returning to 2019 levels, but they’re (thankfully) retreating from the absurd highs of last year. Perhaps the spending shifts we’re seeing will help with that.
“Following a number of recent changes we’ve implemented, we continue to see positive guest experience ratings in our theme parks, including Walt Disney World, and positive indicators for guests looking to book future visits. This includes strong demand for our newly returned Annual Passes.”
To the best of my recollection, this is the first time since 2021–prior to the launch of Genie–that guest satisfaction has been brought up as a bright spot. As we’ve reported repeatedly, it’s our understanding that guest satisfaction scores and intent to return or recommend metrics took a big blow following that. Leaders at Walt Disney World and in Parks & Resorts wanted to remedy that, but their hands were tied from above. What we’ve seen in the last several months is a good start at fixing that and we’re glad to see it happen, but it’s just that–a start.
As for Annual Passes, I’m skeptical of this so-called “strong demand.” Back when AP sales resumed, there was a message warning Walt Disney World fans that some tiers were likely to sell out that day. Several months later, everything is available and weekends–when locals are most likely to visit the parks–are still slow. But going from almost nothing to something in terms of AP availability would have a way of exponentially spiking demand–even if it wasn’t to the degree that was originally anticipated. So I guess “strong demand” is still accurate.
Finally, Iger said that the Walt Disney Company is committed to “making numerous investments globally to grow our parks business over the next five years, and I’m very optimistic about the future of this business over the long-term.”
This is what it’s all about for us. This is why we’re so keen on streaming reaching profitability, Disney paying down its debt, ESPN getting into gambling, the company divesting itself of linear networks, etc. It all potentially paves the way for $17 billion investment plans at Walt Disney World and expansion as part of DisneylandForward in California. As we’ve said so many times, we’re standing on the precipice of another “Disney Decade” for the theme parks…as soon as the company is in a position to devote the CapEx necessary to it.
The big development here is the time horizon of the next 5 years. Now, this could be primarily for the international parks, where major construction is already in progress and will debut in the next few months to few years. But it also has me more bullish for Walt Disney World and Disneyland, and I’m really hoping that major announcements are made at the upcoming Destination D23. That seems like it still might be a bit premature, but the necessary prerequisites for a pivot to parks are starting to happen. So we’ll see!
What do you think of Walt Disney Company’s Q3FY2023 earnings and future forecast? Surprised that Disney+ lost almost 12 million subscribers, or unconcerned about cricket? What about per guest spending at Walt Disney World and Disneyland, or other theme park results? Thoughts on a slowdown at Walt Disney World or Disneyland? Predictions about other “levers” the company will pull to boost demand and buoy bookings? Think things will improve or get worse throughout this year? Do you agree or disagree with our assessment? Any questions we can help you answer? Hearing your feedback–even when you disagree with us–is both interesting to us and helpful to other readers, so please share your thoughts below in the comments!