On value, investing, and everything in between

Fixing the House of Mouse

Feb 07, 2023

In our first article in this series, we discussed how Disney created a nightmare for itself by chasing bad money (streaming) with good (the rest of its business empire).  In our last article, we discussed, the financial disaster that is Disney’s balance sheet.    For the final article in this series we are going to look at how to right the wrongs of the last several years at Disney.  If you haven’t read the previous 2 articles, I’d recommend reading those two first.

Disney’s issues amount to two major problems: loading up on debt to take the back catalog of Fox under its umbrella and spending too much money on new content for Disney+.   In short, the way to solve the first problem is to actually solve the second problem (so you have money to pay down the debt).  At its peak before the Disney+ debacle, Disney was generating $8.8B in free cash flow.   Let’s see how we got the $8.8B number.  We are using Disney’s 2018 annual report (page 65 if you’d like to follow along)

Figure 1.  Page 65 of Disney’s 2018 annual report which shows the Conslidated Statements of Cash Flows

To estimate Free cash flow we take the total cash from operations ($14,295M or $14.2B) and subtract the capital expenditures ($4,465M or $4.4B) which gives us $9.8B in free cash flow

For 2017 and 2016 free cash flow was: $8.2B and $8.4B.  The three year average here was $8.8B.  

So how did this all occur under our noses?  Between 2018 and 2021 we need to dig in to understand where the expenses came into play and where the money evaporated from free cash flow.  To do so we have to start by looking at the income statement for 2018 (Figure 2, page 62 of the Disney 2018 Annual Report ) and and 2021 (Figure 3, page 67 of the Disney 2021 Annual Report )  Disney’s revenue increased from $47B to $61.7B during that time.  

 Table 1. A summary of Disney’s revenue performance and operating income








Revenue (Services)







Cost of services














Operating Income







Table 1.  Changes in Service Revenue, Service Expenses, and SG&A over the last 6 years.  The Operating income is not a summation of the top 3 rows but is presented here for comparison

Figure 2.  Disney’s 2018 Income Statement

Figure 3 Disney’s 2021 Annual Report, Income Statement

As we can see from Table 1, Disney’s revenue increased due to the rise in subscribers from Disney+, but it’s costs also increased by a greater amount.   Disney also had to increase SG&A to increase headcount to support Disney+ and spend more money on advertising.  The end result? A drop in operating income from $14.4B to $3.7B during that time period.   During this timea another expense creeped in to service the debt: interest.   Interest expenses went from $260M in 2016 to $1.4B in 2022.   The rise in cost here is just the interest payments they are required to make, and doesn’t include the payments on the principal of the debt.  

So what is Disney really to do? The answer lies in cutting expenses.  They have blown out their budget for revenue that is not profitable.  Streaming services are a giant money pit because all the revenue goes into creating new content.   Disney doesn’t get any more revenue from users consuming more content. 

Imagine if a household of 4 (2 adults, 2 children) went to the movie theater to see the latest Disney movie: they would spend between $50 and $60 per trip.   A family spending $10 per month on Disney+ could consume that movie and more but Disney would not see any incremental revenue for it.  

Disney needs to release content to its traditional (and highly profitable) business lines: movie theaters and cable networks.   Cable networks maybe fading as cord cutting accelerates but it will still be more profitable to release their for the next 4-6 years than it will be to release to a streaming service.

Disney has to reduce expenses, pay down debt, and maximize its profit.  Disney+ may get Wall Street excited, but Disney shareholders should not accept it.  This is an unmitigated disaster and they need to right the ship.  


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