Walt Disney's Financials: A Tale of Twists and Turns

A financial fairy tale of how Disney is bouncing back from financial setbacks caused due to COVID-19 by improving its DSO and FCF.

I was adding Disneyland to my vacation bucket list when the finance geek in me nudged me to look at their numbers.

I dug into Walt Disney’s financials and found that the business side of the Happiest Place on Earth is as enthralling and adrenaline-packed as the roller coaster rides its theme parks offer, filled with highs and lows in its cash flows and coffers.

This vacation season, join us as we unlock the secrets of Walt Disney's accounts receivable metrics to take a sneak peek at Mickey’s money machine.

Dissecting Disney: An Examination of Business Segments

Before we jump into the O2C metrics, it’s good to know the different lines of business at Disney. Disney is a diversified entertainment company with two key business segments:

1. Disney Media and Entertainment Distribution comprising of its TV channels (ESPN, Fox, ABC, etc.), streaming business (Disney+, Hotstar, National Geographic, etc.), and content sales/licensing (e.g. music distribution, theatrical distribution, etc.)
2. Disney Parks, Experiences and Products comprising of theme parks, resorts, cruise lines, merchandise sales, trade name licenses, etc.

While its media business segment contributes to a higher share of revenues, the parks, experiences and product division is more profitable.

The Tale of Walt Disney’s Accounts Receivable Turnover Ratio

How efficient is Disney in collecting its revenue dues? This metric – the Accounts Receivables Turnover ratio (ART) – is key to determining its cash flow success.

Over the last five years, Disney’s ART has remained steady. In fact, it has seen minor improvements over the years as Disney reduced its percentage of credit sales. 

Its theme parks, experiences, and product businesses remain the most profitable. And these are verticals that generally see higher cash sales than credit sales.

ART indicates how many times in a year a company collects from its customers. A higher number indicates faster collections. While Disney has steadily improved ART in the last five years, its average is lower than the industry average of ~9.5 for the entertainment-diversified industry but better than that of competitor Warner Bros (4.4).

A higher number of corporate clients likely keeps Walt Disney’s accounts receivable turnover ratio lower than that of the industry, which is largely fragmented.

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Disney’s DSO tends to peak in December

Another popular O2C metric is Days Sales Outstanding (DSO). It is the average number of days a business takes to collect payments after a sale is made.

Over the last few years, Walt Disney has reduced its DSO by almost 8 days,from a high of 56 days in 2019 to 48 days in 2023. Its highest DSO in the last five years was reported during the pandemic years (68 days in 2020).

Interestingly, a quarter-wise analysis showed that the highest DSO for Walt Disney in any financial year occurred during its Oct-Dec quarter. This could be because of the higher number of bookings (in theatres, parks, resorts, etc.) during the Thanksgiving to Christmas weeks. 

In line with ART, Walt Disney’s DSO is higher than the industry average by almost 10 days but less than that of its competitor Warner Bros by 19 days. 

Disney’s reduced provision for uncollectibles

Disney has reduced its provision for uncollectibles in 2023 ($115 million) compared to the previous five years indicating positive sentiment around its ability to collect payments.

It could also be driven by the fact that Disney has reduced its receivables as a percentage of total sales in the last three years (14% in 2023 vs 15% in 2022 and 20% in 2021), thus focusing on faster cash flow generation.

Walt Disney’s Negative Cash Conversion Cycle

Cash cycle explains how long it takes for a company to turn the money it spent on inventory back into cash. It is impacted by DSO, Days Payable Outstanding (DPO), and Days Inventory Outstanding (DIO).

Walt Disney’s cash cycle was a healthy -48 days for the quarter ending June 2023. In the last three years, the cash cycle averaged -56 days.

The cash conversion cycle deteriorated (reduced) in the last two years (2022 and 2023) primarily due to the shortening of its DPO.

Compared to 2021, DPO in 2023 shrank by 45 days, while DSO and DIO contracted only by 13 days and 3 days respectively. The larger number of days knocked out from its DPO resulted in Walt Disney having to pay its suppliers quicker, leading to a longer cash conversion cycle.

Yet, Walt Disney’s cash conversion cycle is better than the industry average of -3 days between 2019-2023, showing a healthier cash conversion than that of its peers.

Walt Disney focuses on improving free cash flow

How much cash does Disney have is an intriguing question that many ask.

Disney’s free cash flow is a focal point of concern for shareholders as it denotes the available funds for investments and dividends after covering both operating expenses and capital expenditures.

COVID-19 affected Walt Disney’s operating cash flows. The 42% lower operating income in its media business in 2022 along with higher Capex costs decreased Disney’s free cash flow by more than 70% in 2022 ($1.06 billion) compared to 2020 ($3.6 Billion) and a 90% decline from the 2018 levels.

In 2023, Disney was able to bring its free cash flow up to $4.9 billion, boosted by strategic investments and cost cuts to the tune of $5.5 billion. It has even more ambitious plans for 2024.

2024 Plans & Goals

• Achieve a free cash flow of $8 billion by increasing operating profit margins in the Disney Experiences business units and realizing further cost efficiencies ($2 billion).
• Turn the streaming business unit into a profitable one (aimed by Q4 2024)
• Build Disney Experiences into a bigger and more successful cash flow generation business with the release of sequels to some of the blockbusters such as Toy Story, Frozen, Zootopia, and Avatar.

Conclusion

Despite being hit by several internal and external challenges including COVID-19 and troubles with its streaming business acquisitions, Walt Disney is resilient and focused on bouncing back. Its focus on free cash flow is an indicator of its commitment to shareholders.

The consolidation and restructuring of its media business along with stronger working capital metrics suggest that the business is on the right track to achieve its financial goals.

Note: Walt Disney follows the October – September financial year cycle.