Disney earnings show ‘parks are clearly firing on all cylinders’: Analyst

RBC Media Analyst Kutgun Maral joins Yahoo Finance Live to discuss quarterly earnings for Disney, consumer spending, economic drivers, and the outlook for profitable growth.

Video transcript

- Disney investors are all smiles as the company reported a 72% rise in revenue for parks year over year, along with unveiling new price hikes for its individual streaming services. The media giant did lower its Disney+ subscriber expectations to $215 million to $245 million by 2024, but reaffirmed profitability for the streaming business by that year.

Joining us now to discuss is RBC Media analyst, Kutgun Maral. Kutgun, good to see you here this morning. So you're staying at an outperform rating on Disney, what's your biggest reason for staying with that aggressive rating?

- Yeah, absolutely. Thanks for having me. And I think the parks are clearly firing on all cylinders over here. They've seen no abatement of demand. And the modernization of the consumer and the guests remains incredibly strong and well above pre-pandemic levels going back to fiscal 2019. And I think going into earnings, there was certainly a fear from investors who had been nervous and wanting to be on the sidelines ahead of a potential guidance cut to the Disney+ net adds, Disney+ subscriber targets.

And I think when you look at the details in terms of their new outlook on the core Disney+ subscribers that are outside of the India markets with Hotstar, the numbers over there and the estimates haven't really shifted all too much. They've gone from, at the midpoint, expecting 160 million previously to now 150 million subscribers at the end of 2024.

And I think in the context of the slowdown that investors have seen at Netflix, the broader macro and geopolitical issues that we're all familiar with, along with the price hikes that management outlined last night, I think it's a very benign revision to estimates. And I think, more importantly, it'll serve as a clearing event for investors that, again, have wanted to be involved with the stock but were worried. And now, they get to increase their exposure and partake in the great part story and the evolving direct to consumer opportunity.

- Whenever new platforms launch, especially in the streaming landscape, there's a ton of new subsidized accounts that may come online. We're now removed from that. So what kind of baseline growth have you seen that Disney is able to lock in on the Disney+ and the broader streaming subscriber front?

- Yeah. I mean, I think every single streaming service will continue to lean into distribution partnerships in the United States and globally. Just in the quarter alone, Disney announced a new deal with Verizon expanding their partnership to some of Verizon's prepaid plans, for example. But I think the most important thing is that most of the growth going forward will continue to be driven by customers through international market launches and the strength of the content.

And what really excites me about the story over here is in last night's earnings in the third quarter, core Disney+ net adds were in line with expectations. But there is certainly momentum heading into next quarter where management expects an acceleration on the back of a lot of the-- I think they had over 50 market launches in June. And the content slate just looks incredibly attractive when you move forward. And I think that will continue to propel the subscriber growth ahead and increase conviction in the revised 2024 subscriber targets.

- Kutgun, on don't laugh me off my own show here, but let's go inside the park. This may be simple, but how does Disney continue to have such strength in its parks business when it is such an expensive and increasingly expensive trip for households? I think that performance really surprised a lot of folks on the street, and especially alongside economic growth slowing in this country pretty sharply.

- Absolutely. And I think we've certainly been concerned about the impacts of a macro slowdown and pressures that consumers are seeing and how that might result in softness, not only in attendance, but business ability to drive-through pricing. And what we're finding out is when you listen to Comcast, when they talk about their parks, and when you listen to Disney there is a divergence between the consumer on the low end and the pressures that they're seeing, as well as the middle to upper end of the consumer, which they might be feeling some pressure, but they're not necessarily changing their spending habits.

- Let me just jump in? What is it about that experience? Are there new rides in Disney parks that are driving this? Has the food improved? I mean, how granular do you look at it?

- It's improved dramatically. I think over the last few years, management has invested tremendously in technology in the guest experience and making the whole event incredibly immersive. So if you go to Orlando into the Star War Land, you're in Tatuine. You don't get a Coca-Cola beverage, you don't get a churro, you get something that you would probably see in a "Star Wars" movie. And they're able to upcharge and drive pricing through that immersive experience.

And that has certainly evolved over the last few years as they've not only introduced new rides, but again, tweaked the way that they could improve what the attendees are experiencing at the parks, along with a lot of more nuanced technological improvements around the reservation system and really managing how and when guests come in.

And the real trick over here and what really gives us confidence going forward is that demand is still far in excess of supply. And so, to the extent that we do see a slowdown, you could certainly see Disney lean into its reservation system and open up, for example, its annual passes, have a number of blackout dates. They could remove those or tweak those to drive attendance to the parks just so people come in and spend money, for example.

And so, there's just a lot of things that they're doing in over the last few years through COVID when there was a disruption and the parks were shut down, they were able to really revamp the cost structure and the technological experience to get to a point where we are today where we're seeing massive per cap spends that we think are sustainable.

- Kutgun, I imagine that the $5,000 caliber crystal drink in that "Star Wars" Hyperspace Lounge is certainly a net add or beneficiary to margins as well here. So we'll see how that helps out Disney in that parks experience. But particularly here, this is still an era of revenge travel or some of that revenge spending playing itself out in this most recent quarter. How much more difficult does that make the comps for Disney this time next year?

- It certainly does. And I think there's an element that no one really knows of how much of this performance and this strength is just continued pent-up demand flowing through the system and how much of it is sustainable. And when we look at our crystal ball, I think we have to go through-- we think about pre-pandemic the parks have always been very successful.

And the improvements that they've made over the last few years suggests that even if attendance slows down, again, they'll be able to tweak and lean into the number of levers they have to drive the economics over there as they manage yield as well. And so, there are a number of ways that they can mitigate any softness as we move forward.