Disney & Datadog Earnings Reviews
Exploring the results of a legacy media titan and a software disruptor.
1. Disney (DIS) – Q2 2024 Earnings Review
a. Demand
Disney roughly met revenue estimates. Some media pundits are calling this a miss, which is technically correct. But the miss was smaller than 0.1%.
Direct-to-consumer (DTC) (streaming) revenue rose 13% Y/Y.
Disney missed total subscriber estimates. This was solely related to India, where it sold a majority stake in its operations and has pivoted its approach there. Importantly, Core Disney+ Subscribers (which are higher value and represent its sole focus area for this product) roughly met expectations. It was technically a small beat, but like with revenue, the difference was a rounding error, so we’ll call it in line.
b. Profitability & Margins
Beat $1.11 EPS estimate by $0.10.
Beat EBIT estimate by 5.1%.
GAAP margins were hard hit by a $2 billion restructuring and impairment charge from its Star India business. This is a non-cash charge. It was inevitably coming after selling a majority stake in this business as well as dramatically pivoting its strategic approach in that country. We just didn’t know precisely when it was coming.
This was Disney's 2nd best FCF margin result in two years and its best EBIT margin result in 9 quarters. EPS rose by 30% Y/Y, FCF rose by 21% Y/Y and EBIT rose by 17% Y/Y.
c. Balance Sheet
$6.6B in cash & equivalents.
$3B in investments; $1B in vacant land.
$39.5B in debt.
Share count rose slightly Y/Y. Repurchased $1 billion in shares during the period.
d. Guidance & Valuation
Raised annual EPS guide from $4.60 to $4.70, which met estimates.
Raised annual FCF guide from about $8B to more than $8B vs. $8.5B estimates.
Disney reiterated its cost savings target for the year. This, to me, when paired with the profit raises, means demand for fiscal Q3 and Q4 is expected to be slightly better than expected.
Disney trades for 23x 2024 earnings, with earnings expected to grow by 25% Y/Y.
e. Call & Release Highlights
Streaming Profitability & Entertainment Overall:
The entertainment portion of Disney’s streaming business turned profitable ahead of schedule. Higher pricing in North America (UCAN), better than expected cost savings, strong live TV subscriber fees for Hulu and more ad revenue all drove the outperformance. Earlier-than-expected profits are set to revert to losses in Q3 due to India content rights seasonality. After that, the segment will permanently inflect to positive EBIT in Q4 and beyond. Disney also reiterated that its streaming business overall (including sports) will turn profitable in Q4 as well. It sees continued margin expansion in 2025 as this business morphs into a real profit driver.
Core Disney+ subscribers got a boost from the previously signed Charter bundle deal. This led to 8 million domestic subscriber gains Q/Q. Subscribers within this bundle are engaging at expected rates. Conversely, price hikes and wholesale tweaks ex-UCAN led to roughly 2 million net subscriber losses internationally (as expected). Average revenue per user (ARPU) rose by 13% Y/Y internationally via price hikes; ARPU fell slightly Y/Y domestically due to Charter wholesale mix shift. Disney sees subscriber growth being flat in Q3 and resuming in Q4.
Domestic U.S. Disney+ subscribers rose 17% Y/Y (helped by Charter).
Total Hulu subscribers rose by 1% Y/Y to 50.2 million.
ARPU fell Y/Y for Hulu and Hotstar due to lower advertising revenue.
Linear:
As expected, linear declines were across the board:
Linear revenue fell 8% Y/Y; linear EBIT fell 22% Y/Y.
Content sales & licensing fell 40% Y/Y (lack of theatrical releases).
Overall streaming EBIT margin was -0.3% vs. -12.1% Y/Y.
Scripted Content & Licensing:
Disney has greatly cut back on its film pipeline to lean into only its best brands. This week will be the first real test of that change, with the new Planet of the Apes movie set to hit theaters.
From a scripted series perspective, Shogun is tracking to be FX’s most watched show ever. It has driven the 2nd largest amount of Hulu sign-ups of all time for a single program (behind Black Panther Wakanda Forever). Specifically, 17 of the top 20 shows on its streaming platforms were from its linear business. These notes hammer home the idea that linear and streaming audiences are still quite incremental. No reason to blow up the linear channel while it’s still generating considerable value and profit. Linear is dying… but as it dies… the continued profit will help Disney bridge the DTC evolution gap as it ramps streaming cash flows.
From a content licensing point of view, Q3 results should materially improve based on planned theatrical releases. This revenue is lumpy. Furthermore, it hinted at entertaining more content licensing deals with Netflix. It won’t just start licensing everything, but does think there are a couple more opportunities here.
The Hulu Bundle, a Planned ESPN Tile & Engagement:
Hulu was added to Disney+ in March for an in-app bundling option. The results thus far have been “encouraging. Later this year, it will add an ESPN button to Disney+ with a plethora of sports content to drive better retention. This will be step one of Disney’s plan to move ESPN to direct-to-consumer (DTC) next fall. It will not stop offering ESPN on linear channels after this happens. This is a big part of improving its engagement (along with things like better content recommendations). Nielsen had been reporting a negative engagement trend for Disney+ which more recently turned positive. Maybe Hulu is already helping.
Sports:
EBIT declines in sports were driven by timing of content rights. It had an extra College Football Playoff (CFP) game and an extra NFL playoff game for this period compared to the Y/Y result. Improvements in Star India profitability as that segment trims content spending helped to offset this headwind. ESPN enjoyed some nice ratings wins during the quarter. Caitlin Clark single-handedly drove women’s March Madness records, while Monday Night Football set two decade viewership records as well.
Iger is confident in securing a long term deal with the NBA.
ESPN+ will still be a service once ESPN goes DTC.
Advertising Demand & Password Sharing:
Importantly, ESPN domestic ad sales rose by high single digits Y/Y when removing the positive impact of additional CFP and NFL games. Through April, demand for ESPN ads has been quite healthy, with sales accelerating.
Overall, the Disney+ product now has 22.5 million ad tier subscribers. With Google and The Trade Desk partnerships, Disney is committed to building a best-in-class tech stack here to drive better targeting and reporting for advertisers. That is the best way to fund hefty, consistent content spending needs. It is dealing with sharp industry supply growth thanks to Netflix entering the space, but sees strong demand overcoming this short term headwind through the year and into 2025.
The password sharing crackdown has not yet begun. It will begin testing this month and will broadly roll-out in September.
Experiences:
International growth in Hong Kong was a standout; Walt Disney World accelerated EBIT growth now that it has lapped the 50th Anniversary. Disneyland grew traffic, but results fell due to wage programs adding costs compared to the Y/Y period.
In Q3, the Experiences segment should have roughly 0% Y/Y EBIT growth. This is due to one-off items like cruise pre opening costs, higher Disneyland wages in the Y/Y comp, media and tech expenses and Easter timing. It’s also seeing some demand normalization following the post-Covid peak and evidence of some moderating travel. Despite this, it reiterated annual guidance for the segment and told us that strong forward bookings point to “robust” continued growth.
It just secured preliminary approval for its planned Disneyland expansion from the Anaheim City Council. Disney plans to bring Avatar to this park once it gets final approval. It sees several opportunities across the segment to consistently grow traffic and profits in the coming years.
Domestic revenue rose 7% Y/Y with EBIT rising 6% Y/Y. Ticket price increases helped drive growth here.
International revenue rose 29% Y/Y with EBIT rising 87% Y/Y. Ticket price increases and more traffic helped drive growth.
Important CFO Macro Quote:
“We don’t see much trading down at our parks. The lower end consumer appears to be making more budget choices, but we aren’t seeing that ourselves. We tend to serve more of a high income consumer. If anything, as consumers decide to consolidate streaming services, we may be the beneficiaries of that.” – CFO Hugh Johnston
f. Take
I understand that the stock is selling off, but that doesn’t change my view of this being a very positive quarter. Profit targets were boosted despite maintained cost savings guidance. Streaming EBIT is right on schedule (actually a little ahead). Bookings within the experiences segment point to resilient demand amid worsening macro. The overall subscriber miss doesn’t bother me in the least, as Disney is now a minority owner of Star India. And? Core Disney+ subscriber growth was slightly ahead of expectations. Anyone calling this a bad report is looking at how the share price reacted. I would tell them to read this review before coming to that conclusion. Or don’t… just more inefficiency for me to take advantage of. I’m pleased with the results.
2. Datadog (DDOG) – Earnings Review
Datadog is a dominant player in the data observability space. Observability simply refers to the practice of monitoring an entire software ecosystem to track issues, vulnerabilities and performance. Other players within this area include the hyper-scalers, Splunk, Elastic, CrowdStrike (through its Humio acquisition) and many more. Datadog splits its observability niche into 3 smaller buckets: infrastructure monitoring, log management and Application Performance Monitoring (APM).
Infrastructure monitoring: provides a holistic view of assets like servers and networks. It automates the collection of traffic and overall usage insights. That means it can more expediently fix and uncover infrastructure issues.
Log (or record of event) management: manages “timestamped records of events” occurring across the entire infrastructure. This also facilitates faster issue remediation and optimization of performance. These logs are organized and utilized within infrastructure monitoring and other use cases to identify things like customer service issues. Log management encompasses the collecting, maintaining, and leveraging of log data. This product routinely supports infrastructure monitoring, BUT there’s a key difference between the two. Log management handles event-based data, while infrastructure monitoring (as the name indicates) handles infrastructure-based metrics.
Application Performance Monitoring (APM): tracks app performance and uncovers/prioritizes performance issues to be remediated.
These three product categories closely tie together.
Because Datadog already handles network viability, security is a wonderfully relevant growth adjacency. Products like Cloud Infrastructure Entitlement Management (CIEM) for example, ensure identity controls are strict and minimum access permissibility is in place. There’s a lot of competition here, but Datadog is no slouch. CIEM diminishes risk of identity attacks in a cloud environment. Its Security Information and Event Management (SIEM) product allows for “long term data log visualization for security investigations.”
“At Datadog, we're focused on helping our customers observe, secure, and take action on their complex systems." – Co-founder/CEO Oliver Pomel
a. Demand
Beat revenue estimates by 3.3% & beat guidance by 3.7%.
Missed billings estimates by 0.8%. It does not guide to billings as that metric is tied to timing of deal closures. It tells investors to focus on revenue and annual recurring revenue (ARR) – like many other software names do.
This was its highest quarter of net new ARR since Q4 2021.
Customer growth slowed to 10% Y/Y this quarter vs. 18% Y/Y last quarter as Datadog stopped enjoying inorganic growth contributions from previous M&A.
Gross revenue retention (GRR) remained in the mid-to-high 90% range. 98%-99% would be great; 95% would be fine. It’s somewhere in that range.
b. Profitability & Margins
Beat EBIT estimates by 25.7% & beat guidance by 26.2%.
Operating expenses (OpEx) rose by 14% Y/Y as it accelerates its pace of hiring to support growth.
Beat $0.34 EPS estimates & beat identical guidance by $0.10.
Beat $0.04 GAAP EPS estimates by $.08.
Beat FCF estimates by 18%.
Gross profit margin was 83.3% vs. 83.4% Q/Q & 80.5% Y/Y. This expansion is being driven by cloud cost efficiencies. Economies of scale and better hyper-scaler bargaining power are likely the two sources of cost efficiency here.
c. Balance Sheet
$2.8 billion in cash & equivalents.
No traditional debt.
$743 million in convertible senior notes.
Diluted share count rose by 11.4% Y/Y; basic share count rose by 3.9% Y/Y.
d. Guidance & Valuation
“Our guidance philosophy remains unchanged. As a reminder, we based our guidance on trends observed in recent months and then we apply conservatism to these growth trends.” – CFO David Obstler
Raised annual revenue guidance by 1.4%, which beat estimates by 0.6%.
Raised EBIT guidance by 9.2%, which beat estimates by 8.3%.
This is despite adding $11 million in incremental OpEx this year via the return of its DASH User Conference.
Raised $1.41 EPS guidance by $0.13, which beat estimates by $0.05.
Q2 guidance was ahead across the board.
Datadog trades for 70x 2024 earnings with 13% Y/Y earnings growth expected. Its margins are set to contract Y/Y as it accelerates growth spending (and over-earned last year due to prudence here). Profit growth should improve in 2025 and beyond.
e. Call & Release Highlights
The Platform Play:
Datadog has done well to round out its observability suite beyond its initial cloud monitoring niche. Across log management, APM, cloud security and software delivery, it is becoming an increasingly powerful vendor consolidator and efficiency force multiplier for its clients. It allows customers to enjoy an overarching view of data, app performance and infrastructure, with insights on how to optimize every part of an enterprise. And the evidence of this playing out is clear:
10% of its customers now have 8 or more products vs. 7% Y/Y… and it’s not just the three-headed observability product core driving this progress. The 12 products it launched from 2020 to 2022 now represent 11% of total sales, while its new database monitoring tool rapidly reached 1% of total sales. Its non-observability tools crossed $200 million in annual recurring revenue (ARR) during the quarter. The pace of vendor consolidation continues to accelerate, and that favors platforms like Datadog.
Q1 Success & Macro:
Usage growth accelerated in Q1 vs. Q4 while, quarter to date, Q2 usage growth is faster than it was a year ago. It’s now back to usage patterns that it considers to be more normal. Budget scrutiny has not vanished, but it is modestly dissipating as cloud optimization intensity fades away.
Product Innovation & AI:
Bits AI was broadly released during the quarter. This gives incident response managers automated and curated summaries. It also offers a recommended course of action based on this powerful context.
AI integrations within the Datadog platform allow customers to place their first party data right into its ecosystem to uplift model and app creation. It now has 2,000 customers using one or more of these integrations.
The big release within cloud service management was its event management product. This product prioritizes and ranks cloud incidents and alerts to deprioritize false positives (big cost saver) and remediate pressing issues more quickly. This complements Bits AI quite well as Bits AI curates reports and event management tells you which reports to focus on. This happens in a fully automated fashion, with remediation actions as well. Between event management, Watchdog (its AI-powered infrastructure monitoring platform) and its workflow automation tools, Datadog is confident in its AI operations suite being end-to-end.
In log management, it added error tracking tools to combine “millions or errors” into a consolidated list of issues. It also added full-text search for more powerful querying. Finally, Flex Logs is doing very well early on. As a reminder, this is its cost effective means to store and retain large batches of logs. They’re priced at $0.60 per 1 million annually and allow for separation of storage and query costs. This makes it ideal for long term data storage and regulatory compliance. With Flex Logs, storage and computation can scale in a parallel, independent manner. This separation for Datadog unleashes far more data scalability, customization and cost optimization for clients. Conversely, querying from a flex log is slower than for Datadog’s standard log tier. That makes Flex Logs better suited for lower priority data. So far, interest in this product is excellent, as it crossed $10 million in ARR before even fully launching.
More Product news:
Launched mobile app testing for no code examinations on remote devices.
Added Google Cloud to its cloud cost management tool. It now has every hyperscale on that product, which allows it to better optimize cloud consumption for its users.
Wins:
Signed a 3-year, 7-figure expansion deal with an online grocer to bring the client’s product usage from 7 to 14. This win included its newer cloud security tools.
Signed a 7-figure expansion deal with a medical device firm. Its log management solution was becoming a bottleneck with poor inter-department communication and soaring costs. It added 9 Datadog products and displaced 4 point solutions in doing so.
Displaced 4 point solutions as part of a win with a leading athletic apparel company. This company expects to save millions in annual OpEx.
GenAI Monetization:
Datadog was asked how it can enjoy more GenAI monetization than it does today. Leadership reminded us that next-gen AI companies are now 3.5% of its business, vs. 3% Q/Q, but analysts wanted to know why it hasn’t gotten an Azure-type growth uplift. The explanation mimics what we’ve been talking about in other reports. The first wave of GenAI monetization is within the current chip and server boom. Training clusters help hyperscaler growth, but don’t support Datadog usage. Instead, app creation will be what powers Datadog’s GenAI revenue. App creation is in a far more nascent stage than GenAI hardware. The foundation is being laid.
Final Note:
Datadog President Amit Agarwal is stepping down at the end of the year. He will join DDOG’s board.
f. Take
This is another entirely fine report being punished by Mr. Market. Why? Likely because of the billings miss and analysts maybe wanting a larger guidance raise. It’s an expensive name, which has kept me out of what I view as an elite company to date. Expensive inherently means the bar for what is considered a successful quarter is higher. There’s nothing alarming in this report, and the team all but told you the guidance is overly conservative (as it always is). Ugly reaction… not an ugly quarter or anything to panic about.