Disney cuts costs by $5.5 billion in search of streaming profit

Robert A. Iger slapped Disney’s corporate critics in the face on Wednesday.

In his first earnings report since coming out of retirement to take back the reins of a struggling Disney, Mr. Iger unveiled a new operating structure for the company — one designed to strengthen Disney’s film and television studios and while drastically reducing costs. Content production and distribution, including streaming, will be housed in a single department (instead of two, which have sometimes been at odds) with the exception of sports.

To that end, ESPN and its streaming offshoot will become a separate entity for the first time, a move interpreted as making it easier for the sports giant to be spun off or sold should Disney decide to do so.

As part of the restructuring, Disney expects to cut costs by $5.5 billion and lay off about 7,000 employees, or about 4 percent of its global workforce. The organizational changes effective immediately have been conceived with amazing speed; Mr. Iger only returned to the company at the end of November.

Mr. Iger also announced quarterly earnings and revenue that beat Wall Street’s expectations. Losses in Disney’s streaming division declined $400 million sequentially; Investors braced themselves for half. Despite a flagging economy, Disney’s theme parks in the United States made a whopping $2.1 billion in operating profit, up 36 percent from a year earlier.

In a statement, Mr. Iger said the restructuring would “result in sustainable growth and profitability for our streaming businesses, better position us to weather future disruptions and global economic challenges, and create value for our shareholders.” In late November, Disney’s board of directors fired Bob Chapek as chief executive and reinstated Mr. Iger, who ran the company from late 2005 to early 2020.

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Among other things, Disney is attempting to fend off Nelson Peltz, the corporate robber-turned-activist investor. Mr. Peltz, who is fighting a proxy battle for a seat on the board for himself or his son, wants the world’s largest entertainment company to transform its streaming business, refocus on earnings growth, cut costs, reintroduce its dividend (suspended earlier in the year ). the coronavirus pandemic when much of Disney was shut down) and doing a much better job on succession planning. Mr. Peltz’ Trian Partners has amassed around $1 billion in Disney stock.

Mr. Iger said on Wednesday that Disney’s board would restore the company’s dividend by the end of the year.

Disney shares are up as much as 9 percent in after-hours trading. After a sharp drop in 2022, Disney’s stock price is up 26 percent so far this year.

Operating income for traditional television (the ABC broadcast network and 15 cable channels, led by ESPN) totaled $1.3 billion for the quarter, down 16 percent from a year earlier, underscoring the importance of streaming for the future of Disney underlines. Sales fell 5 percent to $7.3 billion. Disney attributed the declines to lower ad revenue, which reflected a decline in viewership, particularly overseas.

Disney’s cable portfolio has held up better than some of its peers, but people have been cutting cable at an alarming rate — total subscriptions in the United States fell by a record 6.2 percent from October through December.

A decade ago, ESPN had more than 90 million subscribers. The number is now closer to 75 million. Disney has been able to maintain ESPN’s profitability by raising prices. For each subscriber, ESPN now charges cable providers a monthly fee of more than $8, which is by far the highest for any channel. But that era is coming to an end: Analysts say that 2023 will see subscriber fee revenue begin to decline.

As a result, after a period in which they’ve pushed companies like Disney to hunt down streaming subscribers at all costs, investors have switched to a new mindset: Show us the profits. Disney has repeatedly said its flagship service, Disney+, will be profitable by October 2024 — and did so again on Wednesday — but Wall Street has been skeptical. Losses in Disney’s streaming division totaled $1.1 billion for the quarter ended December.

Disney had 234.7 million subscriptions across Disney+, Hulu and ESPN+ in the quarter, up from 235.7 million in early October. (By comparison, Netflix has about 231 million subscribers worldwide after adding 7.7 million in the fourth quarter, well above its guidance of about 4.5 million.)

Disney+ lost approximately 2.4 million subscribers worldwide, bringing the total to 161.8 million. The entire drop came from a budget version of Disney+ in India. (Last year, Disney lost a bid to renew the expensive rights to Indian Premier League cricket games.) Hulu, which does not operate overseas, saw its subscribers rise 2 percent. The sports-oriented ESPN+ also increased by 2 percent.

Disney’s streaming division generated revenue of $5.3 billion, up 13 percent year over year. On December 8, Disney began charging $11 for a monthly subscription to the ad-free version of Disney+, up from $8, a 38 percent increase. The company also introduced a new ad-supported option, which stayed at $8.

In the reorganization, Mr. Iger delegated streaming oversight to two lieutenants: Alan Bergman, previously Disney’s top film executive; and Dana Walden, head of entertainment and news television for the company. They will jointly run a division called Disney Entertainment. Everyone is now viewed outside the company as a potential successor to Mr Iger, whose contract expires in December 2024.

Disney Parks, Experiences and Products operating income totaled $3 billion, up 25 percent from the prior year. Parks and consumer goods sales increased 21 percent to $8.7 billion. The increase in profitability reflected growth in guest spending at Walt Disney World, particularly for line-shortening passes; better results at Disney Cruise Line; and higher yields from parks in France and Japan.

Overall, Disney had revenue of $23.5 billion for the quarter, up 8 percent year over year. Analysts had expected a little less. Excluding comparables, earnings per share for the most recent quarter were 99 cents, down 7 percent from a year ago. Analysts had expected 79 cents.