Notable notes from Disney’s earning call

Today, Disney released their 2019 Q3 result. Below are a few points that stood out for me

  • Hulu got 28 million paid subscribers while the figure for ESPN+ stood at 2.4 million
  • The integration of 21 Century Fox had negative impact on Disney’s earning, including the subpar performance of movies such as Dark Phoenix
  • Direct-to-Consumer & International segment expected to make $900 million loss in the next quarter, due to investment in the launch of Disney + and support for Hulu, ESPN+
  • Fantastic results for the studio as per Bob Iger

The studio has generated $8 billion in global Box Office in 2019, a new industry record. And we still have five months left in the calendar year with movies like Maleficent: Mistress of Evil, Frozen 2 and Star Wars: The Rise of Skywalker still to come. So far this year, we’ve released 5 of the top 6 movies including four that have generated more than $1 billion in global Box Office. Avengers: Endgame is now the highest grossing film in history with almost $2.8 billion worldwide. Captain Marvel, Aladdin and The Lion King have each surpassed $1 billion. And with more than $960 million in Box Office to date, Toy Story 4 will likely cross that threshold in the coming weeks. And all of these movies will be on Disney+ in the first year of launch.

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  • The leadership behind the studio will manage the film strategy for 21 CF as well
  • Deadpool, Fantastic 4 and X-Men will be part of Marvel Studios
  • Come this November, users can have access to Disney+, Hulu (ads-supported) and ESPN+ as a bundle for $12.99 a month, well below the total sum of all threes, if subscribed separately
  • “Hotstar had more than 300 million average monthly users, served an unprecedented 100 million daily users and delivered a high-quality streaming experience to 25.3 million simultaneous users, which is a new world record”
  • Disney is discussing deals with Apple, Amazon and Google as distribution partners, deals that are expected to close
  • Focus on marketing for Disney+, per Bob Iger

Disney+ marketing is going to start to hit in later this month, later in August. We’re actually going to allow members of D23 to be the first to subscribe. I’m actually going through a comprehensive marketing plan with the team next week. Comprehensive probably is an understatement. It is going to be treated as the most important product that the company has launched in, I don’t know, certainly during my tenure in the job, which is quite a long time. And you will see marketing both in traditional and nontraditional directions basically digital and analog also significant amount of support within the company on basically company platforms. And then of course all of the touch points that the company has, whether it’s people staying in our hotels, people that have our co-branded credit card, people who are members of D23, annual passholders, I could go on and on. But the opportunities are tremendous to market this. And I feel good about some of the creative that I’ve already seen. But you won’t start to see it until later this month.

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Quick Thoughts

I cannot wait to see the battle of the streamers and how well Disney+ will fare. As a student of business, I am fascinated to see the strategies and execution of Disney+ vs Netflix. Netflix has a huge subscriber base as advantage over Disney+, in addition to a household name (ever heard of “Netflix and chill”?) and some great original content. But Disney has its own strengths as well, including marketing expertise, household name, a great content library and additional revenue streams.

I am thrilled to see how fast Disney+ will be able to sign up folks. The emphasis on marketing, the aggressive pricing of the streaming service, the bundle and the focus on exclusive content in spite of loss from licensed deals show that Disney is dead serious. It will be interesting to see how viewers will react and whether there will be some market share loss by Netflix at the hands of Disney+ and other upcoming streamers.

I honestly don’t know how it will go. As a fan and a consumer, I cannot wait to see.

Disclaimer: I own Disney stocks in my portfolio.

Netflix and CrowdStrike earnings

Netflix earnings

Netflix’s earning gave the bears something to boast about as the streamer reported the first domestic subscriber decline in years and also the biggest miss against forecast ever. Though the missed forecast was felt in all regions, it was even more so where there was a price hike. It begs the question: how much wriggle room does Netflix have to increase its prices?

As the company invested so much money in original content and gave significant discounts to sign up users in markets such as India, squeezing out users in established and lucrative markets can be a solution. Yet, if anything, this quarter showed that it might not be a straightforward solution for the household brand.

Throw in the future fierce competition in Disney, HBO or NBC and the loss of staples such as Friends, The Office or Future Marvel Blockbusters. It’s not unreasonable to cast some doubts over Netflix’s future.

With that being said, it’s not really certain that Netflix’s doom is under way. It is still the biggest streamer out there with 151 million paid memberships worldwide. It is a household name that is familiar with consumers around the globe.

Thought the growth slowed this quarter, adding net 2 million subscribers in 90 days with improved Operating Margin and Contribution Margin is not bad at all.

The huge subscriber base will play to Netflix’s advantages as the more users it has, the more its costs, especially fixed ones such as licensing fees, production or infrastructure, are spread. Netflix’s future competitors such as Comcast, Warner Media or Disney will have to build up their user base from scratch and the cost per user in the beginning will be much higher than that of Netflix.

As the streaming war drags on, will the new services have enough resources or stomach to be in the game? Especially given the expensive investment in releasing quality content regularly and the risk of losing subscribers from price hikes. Of course, one can argue that Netflix can just be patient and play the long game, but on the other side, most of its competitors have resources to spare and other revenue streams to chip in.

I honestly don’t know how Netflix will fare in the future. There is merit on both the bears and the bulls. Because of that, it’s interesting to follow the company.

CrowdStrike Earnings

The cybersecurity firm achieved 100% YoY growth in revenue this quarter. Gross margin increased to 70% in Q1 2020 from 59% in Q1 2019. Subscription revenue, as the more profitable segment, made up 90% of total revenue this quarter, compared to 85% one year ago. Operating loss as % of revenue was -27% in Q1 2020, compared to -70% in Q1 2019.

CrowdStrike

The company’s annual recurring revenue and subscription count growth are still in the 3-digit territory. Operating cash flow is already positive. One concern is that free cash flow is still negative, though it can be attributed to the investment in equipment

A few notable points from their earning call

Next, I will highlight a win that represents our tremendous opportunity to expand within our customer base. This customer is in the public sector, which also speaks to our growing success in that segment of the market. We initially engaged with this large U.S. city back in 2016 on a small deployment of 15,000 endpoints to replace a fossilized AV vendor that was failing to provide protection and value. We replaced that vendor with our combined EDR next-gen AV offering plus OverWatch.

Based on the success of the initial deployment, we expanded our footprint to over 250,000 endpoints the following year. And I’m pleased to report that in Q1 of this year, we have increased coverage to 400,000 endpoints and sold additional cloud modules, including Falcon Discover for IT hygiene, Falcon Device Control, Falcon Spotlight for vulnerability management, and Falcon X for integrated threat intelligence. This is a great example of how we can land a new customer and expand that relationship by adding endpoints and modules over time. Our Falcon platform is one of the most strategic security purchases they have made in many years.

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In addition to winning new customers at a rapid pace, we’re also focused on expanding our relationship with existing subscription customers by deploying additional cloud modules and protecting more of their endpoints. Our dollar-based net retention rate speaks to the efficacy of our solution in our successful land and expand sales model. As of January 31, 2019, we had a dollar-based net retention rate of 147%. While this metric can fluctuate quarter-to-quarter, our benchmark is 120% or above, which we again exceeded in Q1.

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While professional services carry a lower gross margin that our corporate average, it is a small portion of our revenue base and we view it as strategic. We have been able to derive an average of about $3 of subscription ARR for every $1 spent on an initial incident response for proactive services engagement. To be clear, these are customers that are new to CrowdStrike.

In terms of geographic breakdown, approximately 75% of first quarter revenue was derived from customers in the U.S. and 25% from international markets.

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The first post IPO quarter of CrowdStrike looks like a successful one. Really look forward to the company’s future performance in a competitive space.

Weekly readings – 31st May 2019

The Future Of Fashion: From Design To Merchandising, How Tech Is Reshaping The Industry. How technology is affecting the fashion and retail industry.

Investing in the Podcast Ecosystem in 2019. A lot of great findings on the podcast ecosystem

Want a great deal on a house? Find one where someone was murdered.

Grab vs. Go-Jek: Inside Asia’s Battle of the ‘Super Apps’. An interesting story about the heavyweights in Southeast Asia in a race to become the dominant Super App

Hollywood Studios Say They’re Quitting Netflix, But the Truth Is More Complicated. Though it’s true that most of Netflix’s popular shows are titles owned by others, Netflix already has the titled tied up to its platform for a foreseeable future.

Sprint’s 5G network is here, and it’s completely different from what Verizon and AT&T are doing. Top speed/spotty coverage vs reasonably fast speed/better coverage. It’s an important point to know about the 5G battle between AT&T, Sprint and Verizon.

Apple’s Billion Users. A very interesting analysis into Apple’s subscription base and its importance to Apple’s future.

Unsubscribe feature in the subscription world

We are living in the subscription world. Everything from enterprise technology to movies, clothes, food and news is offered on a subscription basis. A prominent feature in the model is that the suppliers allow users a short free trial (usually 7-30 days) before the first payment kicks in. As a consequence, offering an easy “unsubscribe” process is part of the customer experience. Unfortunately, different companies take different paths in this regard.

Take Netflix as an example. The video streaming service is so confident of its offering and obsessed with customer service that it has a feature reminding trial users of when to cancel. It’s smart of Netflix to do so. If users want to cancel trials, they’ll remember to do so. The number of those who forgot is not that many. Plus, being an honest and good company scores a lot of points in the users’ eyes, a far more important benefit in the industry in which there are a lot of alternatives. Technology can be copied, but good will from customers and a beloved brand are much more difficult to replicate.

Credit to Matthew Ball

On the contrary, take Wall Street Journals. If you are a subscriber, you have to call their Customer Center in order to unsubscribe. There is no online feature that allows you to cancel your account. A call to any customer center in the US, as you may know pretty well, isn’t a pleasant experience. They make it much harder for subscribers to leave. Though I subscribe to their service, I don’t appreciate the hurdles I will have to go through to unsubscribe. If there is any alternative coming along in the future with a feature like Netflix’s, a time-consuming call won’t stop me.

Weekly readings 4th May 2019

The Airbnb Invasion of Barcelona. A look at how tourism-related problems got out of hand at one of the hottest destinations in the world, Barcelona.

Netflix Fights to Keep Its Most Watched Shows: ‘Friends’ and ‘The Office’. It’s amazing that “Friends” and “The Office” make up of 5% of the total watching minutes on Netflix and yet the streaming service doesn’t own the rights to those IPs.

The bitter truth behind the Nutella economy. If you care about the ethical aspect of business, you may want to read about this. I understand that there are a lot of products or services that we use everyday come from organizations with a record of questionable ethical practices. However, given that Nutella is pretty popular around the world and in America, you may want to know a bit more about it. And it’s not good for your health!

IHG Sees Room for Improvement in Hotel Revenue Management. The article discusses mainly the attribute-based booking trend in the hospitality industry. Attribute-based booking refers to the model that allows guests to choose from a room level such as number of beds, view and room type to amenities inside the room. Everything is a la carte. It can create the maximum personalization and excitement for guests, but it will require a totally different operations from inventory, marketing to housekeeping and revenue management.

The Most Valuable Company (for Now) Is Having a Nadellaissance. A great coverage on how Nadella revived Microsoft. I really like his no-nonsense style that was shown when he refused to celebrate the $1 trillion valuation.

The fight for the bundle is the war for the future of TV. A nice piece on the state of TV

The making of Amazon Prime, the internet’s most successful and devastating membership program. I found it interesting to read stories on how Prime came into beings. The stories show how great Bezos’ business acumen is

Disney+

Thursday was a big day for Disney as the company announced the much anticipated streaming service called Disney+. You can learn more about it from this link. The top executives went through a lot of aspects of the new service, including programming, roll-out plan, pricing, investment in future original content and forecast financial impact. The service will offer users ad-free access to an incredible library of content owned by Disney, such as Marvel movies, Pixar, Star Wars, Disney and National Geographic. Users will also be enjoying some new original content such as WandaVision, Loki or Falcon and The Winter Soldier. The price is very attractive at $6.99/month or $69.99/year with all content downloadable for offline consumption.

It is a serious challenge to Netflix as Disney has plenty of content that can appeal viewers across demographics, the brand name, the marketing expertise and the financial resources. It can be argued to some extent that Netflix also has a brand name (apparently “Netflix and chill” is quite popular in our society), content (it invests billions of dollars in originals) and the marketing power. But there are two things that Disney has going for them: additional revenue streams and the ability to bundle more.

Firstly, below is the segmentation of Disney’s revenue and operating income. (Figures are from Disney 2018 & 2017 annual reports and in $ millions)

Metric2018201720162015
Revenue – Services        50,869         46,843         47,130         43,894
Revenue – Products          8,565           8,294           8,502           8,571
Revenue – Media Networks        24,500         23,510         23,689         23,264
Revenue – Parks and Resorts        20,296         18,145         16,794         16,162
Revenue – Studio Entertainment          9,987           8,379           9,441           7,366
Revenue – Consumer Products & Interactive Meida          4,651           4,833           5,528           5,673
Operating Income – Media Networks          6,625           6,902           7,755           7,793
Operating Income – Parks & Resorts          4,469           3,774           3,298           3,031
Operating Income – Studio Entertainment          2,980           2,355           2,703           1,973
Operating Income – Consumer Products & Interactive Media          1,632           1,744           1,965           1,884

In 2018, Parks and Resorts’ operating income is almost three times that of Netflix in total, let alone other segments of Disney.

Source: Netflix

I think it’s great for Disney to offer an attractive penetration pricing model to quickly sign up viewers and scale up. Additional revenue streams, in my opinion, can help finance the play. Meanwhile, a Netflix plan is almost twice as expensive as Disney+, at least in the US market. I doubt that Netflix will lower its price to match Disney+’s, given their increasingly big investment in content and troubling negative free cash flow.

Source: Netflix

It’s not a zero-sum game. I believe that a lot of viewers will have both streaming services or even have Netflix exclusively, but on the other hand, some will likely choose Disney+ over Netflix. If the economy is still strong and folks have disposable income to spare, I think it will be beneficial for Netflix. However, if the economy contracts in the future and spending cut is required, I suspect that Disney+ at this current price will appeal more than Netflix.

Secondly, Disney now also has ESPN+, a sports subscription, and Hulu. Disney already said that there was a chance they would bundle Disney+, Hulu and ESPN+ together. It will be even more attractive to viewers.

With all that being said, execution matters. Though it seems Disney has a lot going for them, this is a new territory for them while Netflix is the trail blazer in video streaming services. I am excited about this competition in the future and Disney+ itself, as a big Marvel fan.

Disclaimer: I have Disney in my portfolio, but this post stems from my curiosity and is not an investment suggestion or anything more than just my opinion.