Pressure was on Disney CEO Bob Chapek as he opened The Walt Disney Company’s fourth quarter 2022 earnings conference call with the investment community on November 8. Disney had just reported profits below Wall Street’s expectations, dragged down by continuing red ink at Disney+. The company’s streamlining service lost $1.5 billion during its fiscal fourth quarter, more than double the division’s loss in the year-ago-quarter and far worse than investors had anticipated. Cumulatively, during its three years of service the streaming business had now lost an unsustainable $8 billion.
In a soft grandfatherly tone, Chapek began the call by reading a glowing description of what he called a strong year for Disney’s businesses: “…we continued our journey of telling incredible Disney stories, utilizing groundbreaking technology in order to further develop our brands and franchises while customizing and personalizing experiences to make magical memories that last a lifetime.”
It felt as if Chapek was speaking to his most loyal customers, parents who trust Disney to make dreams come true for their children. But shareholders of the company were not seeking fulfilment of fantasies. They wanted reassurance that Disney, as a best-in-class entertainment company, would swing its streaming business to profitability so it could generate ever stronger earnings growth quarter after quarter. From the top, Chapek needed to set the right tone for his audience, but he failed to do so.
He concluded his opening remarks with a tentative forecast for the streaming business: “…assuming we do not see a meaningful shift in the economic climate, we still expect Disney+ to achieve profitability in fiscal 2024, as losses begin to shrink in the first quarter of fiscal 2023.” Investors listening on the call were well aware that the U.S. economic climate very likely would shift. Credit markets were forecasting a recession as skyrocketing interest rates had the economy teetering on the brink of a downturn. Chapek’s hedging gave investors little reassurance about Disney’s profit picture.
Even worse, during the question and answer session, when Barclays analyst Kannan Venkateshwar asked about Disney’s forecast for the streamlining business, Chapek conveyed uncertainty as he argued that Disney would be focused “largely on profitability” though it would have to deliver quality content that would continue to generate subscriber growth. The transcript of the call doesn’t reveal Chapek’s hesitation, but the audio recording, which can be heard here, certainly does: “Uh. If we look at, um, the content that’s going to actually fuel, uh, uh, our subscriber growth and our engagement we’re obviously, uh, managing that very carefully.”
A few sentences later, as Chapek tried to argue that Disney has the power to raise subscription prices without losing many customers he stumbled again, relying upon confusing jargon: “…everything that we've got shows us that we still, uh, have some opportunity for continued, uh, price value exploration on all of our services. So, we believe that.”
The earnings call was “calamitous,” according to The Wall Street Journal, though it did not provide specifics.
Investors want to hear facts, not fantasies. They want problems to be acknowledged and to hear how they will be corrected. When issues are glossed over, or even ignored, it gives the investment community pause, and can cause a loss of confidence in leadership.
Disney stock, which had already lost more than a third of its value in 2022, sank 13 percent the day after the earnings call. Twelve days later, Disney’s Board of Directors ousted Chapek, replacing him with former CEO Bob Iger who had presided over a period of solid growth for the company.
Chief Executives and chief financial officers of public companies need to be extremely well prepared for their quarterly investor conference calls following earnings reports. They must know precisely what concerns are on the minds of investors and what new concerns may be triggered by the earnings results. After anticipating all potential questions, the investor relations team must prepare answers that fully address these concerns, and then rehearse these answers with the executives during a practice session.
Share prices can react violently to earnings misses. But long-term investors and board members are willing to forgive disappointing earnings reports if they have faith that management can right the ship and steer it towards greater profitability. Once that faith is lost, however, a leader’s hold on his or her position can quickly be in jeopardy, as Bob Chapek learned.