Disney (DIS) CEO Warns of Slowing Subscriber Growth

The Walt Disney Company (DIS) CEO Bob Chapek had double bad news for the entertainment behemoth's investors at the Goldman Sachs Communacopia conference yesterday. Disney Plus, its streaming service, will miss analyst estimates for subscriber growth this quarter. The platform's phenomenal growth has powered much of the increase in Disney's stock price during the pandemic.

Disney's CEO also disclosed that the company has no plans to use its cash flow for share buybacks and dividends, which it suspended at the start of the pandemic, anytime soon. Instead, it will reinvest the money to reinvent its business and to reduce debt. Dividend payments and share buybacks will happen "in the distant future," Chapek said. 

Not surprisingly, Disney's shares fell by 4.2% in the aftermath of Chapek’s comments. However, the shares are on a path to recovery after analysts stepped in to reiterate their positive ratings of the stock and called the market's response "a knee-jerk reaction" and "overblown." As of this writing, Disney stock is changing hands at $173.94, up roughly 2% from a day earlier.

A Streaming Slowdown 

Despite the shuttering of cinemas and its theme parks, Disney's stock price rose for most of the pandemic shutdown as investors bet on subscriber growth for Disney Plus, its streaming service. The service, launched in 2019, is actually an umbrella of streaming channels that Disney has launched or acquired in various parts of the globe in the past couple of years. It raced past the 100 million subscribers mark in roughly 1.5 years and currently boasts more than 116 million subscribers across the globe. 

CEO Chapek told audiences at the Goldman Sachs conference that the platform, and other streaming offerings in the company's stable, would have increases in the "low single-digit millions" this quarter. That estimate is less than the analyst consensus figure of an increase of 17 million subscribers this quarter, according to FactSet. 

While the company has forecast that Disney Plus will have between 230 million and 260 million subscribers by 2024, Chapek cautioned that reaching that figure will not be a "straight line relationship quarter-to-quarter." The CEO explained: "What we're finding out, as you've seen from our last several quarters, is that these numbers tend to be a lot noisier than a straight line."

He cited three reasons for the current slowdown in streaming growth: production delays due to emergence of the new COVID Delta variant; postponement of the Indian Premiere League (IPL) in India, which may have led to subscriber losses at Hotstar, its streaming service targeted at South Asians; and difficulty in finding partners to push Disney's recently launched Star+ streaming service in Latin America.

Chapek added that the company remained "very bullish and confident" about subscriber growth for its streaming services in the long term.

A Distant Disney Dividend  

During Disney's latest earnings call, Chapek had said that it would reinstate dividends in a “normalized operating environment” and when it had “leverage” that was consistent with its single A rating. 

Yesterday, he explained that, in the current operating environment, their priority was to use their cash flow was able to fund new growth business – a reference to Disney Plus. Reducing debt was another priority for the company’s board, he said. Only then would the company reinstate dividends and share buybacks. “That's sort of in the distant future, and we're not going to entertain doing that until we can reach that A (rating) level,” he said. 

To be sure, the company's shift away from dividend payouts is not new news for long-term investors. Disney froze its dividend payout at the beginning of 2020, before news of the pandemic, to use its cash flow on paying down debt for the 21st Century Fox acquisition and growth for its new streaming service. Before the 2020 freeze, the company had announced dividend increases for nine consecutive years. In the last five years of that period, Disney doubled its dividend payout.