Disney: Short-term Pressure but Guidance Unchanged, Can Iger Turn the Tide Before Leaving?

Hello everyone, I am Dolphin Research!

$Disney(DIS.US) released its Q4 FY2025 (CY25Q3) earnings before the U.S. market opened on November 12th, Eastern Time. The third-quarter performance slightly missed expectations overall, with revenue under pressure, especially from the theme parks, which are the largest contributors to earnings. The delayed competitive impact has become apparent. Although the company's profitability was slightly better and it maintained its relatively positive guidance for 2026 without adjustments, the market seems to lack confidence.

Specifically:

1. DTC net user growth rebounded beyond expectations: In the fourth quarter, streaming media user growth continued to rebound, with Disney+ adding 4 million net users (bundled packages) and Hulu increasing by 8.6 million (driven by the resumption of cooperation with Charter and brand globalization), both exceeding market expectations. The growth was mainly driven by high-quality content, the globalization of Hulu, and the unified bundling of internal streaming media, with 80% of new users choosing the Disney+, Hulu, and ESPN three-in-one package.

2. Parks underperformed, competition did have an impact: Last quarter, the park business seemed unaffected by Epic's competition, with more of a natural slowdown, especially as official website bookings still grew 5-6% year-on-year. However, actual domestic park attendance fell by about 4% year-on-year (calculated by Dolphin Research), which we attempt to explain as Epic's competitive impact mainly affecting local visitors, thus not reflected in booking figures.

However, the company's official next-quarter booking growth rate has also slowed to 3%. Following this trend, it is expected that the park's core business may still face a decline in the first quarter, with the revenue contribution from the two newly operated cruise ships not fully realized in the current period. The cruise business is a major growth line for the FY2026 experience business. However, upfront investment costs and operational costs also need to be amortized first, so there is still pressure on revenue and profit next quarter.

This may also be the main point of dissatisfaction with the financial report, but the company stated in the conference call that fourth-quarter park demand was not weak, and Epic's competitive impact is controllable, and the impact on Disney is far less than on other peers. Currently, all parks are expanding, including a new theme park in Abu Dhabi, and five more cruise ships will be put into operation in the coming years.

3. ESPN's new version received positive feedback: Fourth-quarter sports business growth was flat, in line with expectations. Besides the slow growth due to declining viewership, the restructuring impact of India's Star (reflected in investment income after divestment) also occurred within the cycle. However, the new version of ESPN, which integrates cable and streaming content, is currently operating well, with subscription growth mainly from:

1) Users of existing multi-channel subscriptions; 2) New users who have never accessed ESPN, some of whom directly chose the highest-level ESPN package. Additionally, benefiting from events held this quarter, such as the US Open, NFL, and college football games, ESPN achieved an 8% increase in advertising revenue.

4. Content cycle is not over yet: Fourth-quarter content sales revenue fell by 26%, mainly due to the high base from last year's global top two blockbusters, "Inside Out 2" and "Deadpool and Wolverine." However, the content cycle is not over, and the company's FY2026 film slate remains rich, with sequels to "Zootopia," "Avatar," "Toy Story," and "The Devil Wears Prada" to be released successively.

5. Cable business will continue to be weak: It remains the weakest business line, continuing to decline by 16% in the fourth quarter. The pressure next quarter is also significant, not only due to the industry trend of cable TV but also because of the political ad increment during last year's U.S. election.

6. Increasing shareholder returns: The improvement in cash flow allows Disney to further increase its operational space for shareholder returns. The company aims to repurchase $7 billion next year and distribute a dividend of $1.5 per share, doubling and increasing by 50% compared to this year, respectively, corresponding to a current market value of about $190 billion, with a combined yield of 5%, which is quite good in a rate-cutting cycle.

7. Key financial indicators at a glance

Dolphin Research's View

Disney's fourth-quarter performance was not satisfactory, especially as it has recently been embroiled in several controversies, with the suspension of the Jimmy Kimmel show and the broadcasting rights dispute with YouTube having the most significant impact. Two days after the financial report, YouTube and Disney reached an agreement to resume broadcasting Disney's channels on YouTube.

However, what truly disappointed the market after the earnings, according to Dolphin Research, was mainly the weakness in the theme parks. The resilience in booking growth last quarter led the market to underestimate the competitive impact, with the actual negative growth in attendance differing from the booking figures, possibly due to changes in local visitor demand. Although the company claims the competitive impact is controllable and less than that of other peers, the slowing booking growth rate still makes it difficult for the market to accurately assess the sustainability of the competitive impact.

In the new fiscal year, new cruise routes may partially fill the aforementioned gap in the experience business, but in the short term, due to the confirmation of upfront costs, there is no contribution to profits. Therefore, from a group perspective, the experience business still relies on the content cycle of movies and the steady expansion of streaming media to mitigate the impact.

However, despite various foreseeable pressures in the short term (including the 1Q26 guidance), the company has not made many adjustments to its guidance for FY2026, maintaining its relatively positive growth targets. If following the guidance and market expectations, the current market value of about $190 billion, the forward P/E is only 16x, which is at the bottom of Disney's valuation range over the past five years. By the end of FY26, Iger will end his term, and as one of the iconic leaders, whether he will organize the business for his successor and bring it back on track before then is worth looking forward to.

I. Understanding Disney

As a nearly century-old entertainment kingdom, Disney's business structure has undergone multiple adjustments, which Dolphin Research has detailed in "Disney: The "Rejuvenation" of a Centenarian Princess."

In the past year, significant adjustments at the group level have involved not only a change in leadership but also a change in business structure and strategic focus. Under the new business structure, it is mainly divided into three major segments—[Entertainment], [Sports], [Experience]:

1. What is the difference between the old and new structures?

The new structure mainly highlights the strategic position of ESPN, separating the ESPN channel and ESPN+ to form a sports business unit, showing the company's emphasis.

(1) [Entertainment] business includes: original cable channels, DTC (excluding ESPN+), content sales, while disposing of some redundant business lines and low-yield traditional channels during the department integration process.

(2) [Sports] business includes: ESPN channel, ESPN+, Star

(3) [Experience] business includes: park experiences, cruise tourism, consumer products, etc., similar to previous businesses, but specific financial data still have some discrepancies due to business adjustments.

2. Investment logic framework

(1) The framework change reflects an important strategic adjustment—the content and distribution channels are no longer split into two businesses but integrated together, with the new business structure more divided based on different content.

This may solve a problem from the source—that the same content may be suitable for debuting on different channels. In the past two years, Disney struggled with whether to release popular blockbusters on Disney+ or in theaters first, and after trying simultaneous online and offline releases, it dragged down the final box office performance of some popular films. Consequently, actor revenue sharing was affected, damaging Disney's relationships with some star actors.

(2) The [Experience] business has developed relatively maturely over the years, with Disney's theme park business maintaining a leading position under the support of its first IP reserve, more influenced by overall consumption. Under normal circumstances, it can be regarded as a stable cash flow.

(3) [Entertainment] essentially involves the production and distribution of Disney films, including several renowned studios, traditional channels, and streaming channels, so revenue changes are mainly related to Disney's film schedule and overall film market consumption power.

The streaming media business remains a focal point for Disney's future medium to long-term business focus. However, in the past two years, it was originally a growth business that could gain incremental revenue and profit under the stability of Disney's traditional business. But the competition in the front-end streaming media accelerated to a fever pitch during the pandemic. Disney, lacking the accumulated advantage of self-produced series content, incurred huge losses despite massive investments.

As the two ends of a seesaw, while streaming media development is booming, the old business of traditional media naturally cannot remain unaffected. With the trend of traditional media declining, streaming media for Disney cannot be considered a complete incremental business, as a large part is compensating for the decline of traditional channels.

(4) Disney's new favorite [Sports] business may be a newly derived growth route. Although ESPN has been operating within Disney for many years, sports content and related industries are also entering the vision of more streaming media companies, such as Netflix, which has repeatedly mentioned its emphasis on sports content and increased investment.

Recently, Disney will join forces with peer Warner Bros. and further integrate its own Fox content to launch a brand-new version of ESPN in 2025, equivalent to doubling down on the sports track.

II. Detailed Performance Indicators Chart

1. Streaming subscriptions: Benefiting from the resumption of cooperation with Charter and the "three-in-one" bundling strategy, user numbers surged

2. Operating profit: Next quarter still faces input-output mismatch pressure, but FY26 guidance remains unchanged

III. Content Investment: Rich film reserves, not entering a new investment cycle like Netflix

IV. Business Segment Situation: Cable continues to deteriorate, domestic park competition impact exceeds expectations, sports are average, streaming continues to recover