Stop. You’re Surrounded By Media

While many market participants gauge the future of media consumption, it appears audiences continue to be found glued to whatever moving picture presents itself in front of them.

Whether it is through video-on-demand subscription (SVoD) via a mobile device, mounted television or personal computer, or sitting in a movie cinema complex, it is the content that apparently continues to be king – not necessarily the mechanics by which it is delivered.

The intensified fight among streaming content services such as Netflix (Nasdaq: NFLX), Amazon Prime (Nasdaq: AMZN), Hulu, HBO Now, Starz Play, CBS All Access (NYSE: CBS) and IMDb TV, among others, for market share, as well as the reliance on a successful film slate at traditional film production houses, including Walt Disney (NYSE: DIS) and Warner Media (NYSE: T) remains squarely intact.

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However, while movie theaters offer a limited selection of mainly first-run film releases, the ability to replay a movie from virtually any time at any time is a profound, and relatively recent evolution from the days of video store rentals.  

According to data and analytics firm Ampere, at the end of the first quarter of 2019, the average U.S. SVoD household had access to a little more than nine years (80,000 hours) of on-demand content from their SVoD providers, almost double the average SVoD household in Q3 2016, which had roughly five years (43,000 hours).

Ampere analyst Toby Holleran noted that the growth has been driven not only by the average household having more SVoD services than their 2016 counterparts but also by an increase in the content available on both Netflix and Amazon.

Holleran pointed out that of the three U.S. SVoD majors, Amazon offers subscribers the most content, providing around 50,000 hours (up from 20,000 in Q3 2016), followed by Hulu at 42,000 hours (a drop from 45,000 in Q3 2016) and Netflix at 36,000 hours (up from 29,000 in Q3 2016).

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A little over 83% of SVoD homes have a Netflix subscription, while more than half subscribe to Amazon. Due to their expansive catalogs, those subscribing to all three services, which comprise more than a quarter of U.S. SVoD homes, have access to almost 15 years of content from these three alone.

Crossing the streams

However, if there is any evidence media consumers also continue to be drawn to traditional theaters to experience the spectacle of the silver screen, it would be AMC Entertainment Holdings’ (NYSE: AMC) Q2 2019 earnings results.

AMC said its revenues in Q2’19 rose 4.4% year-over-year to over US$1.5bn, mainly on the back of record-setting U.S. and International attendance, up 3.1% and 16.6%, respectively, as well as “strong” sales at the concession stand, up 3.9%, and “other” theater revenues, up 10.9%, largely from increases in online ticketing fees.

AMC also boasted that it outperformed the U.S. industry on both an attendance per screen and admissions revenue per-screen basis by around 650 basis points and 260bps, respectively, and after excluding AMC from the U.S. industry statistics, that outperformance grew to 800bps and 400bps, respectively.

Internationally, the industry box office in countries served by Odeon and Nordic’s theaters grew 16.6% and 11.1%, respectively, while across Europe, they benefited from the record-breaking Disney release of Avengers: Endgame.

What’s in a name?

Widely anticipated rollouts of films such as Endgame, which, according to Box Office Mojo, has grossed close to US$2.8bn worldwide on a production budget of US$356m, may also be helping AMC reduce its capital spending and shore up its cash flow.

In Q2’19, the Leawood, Kansas-based movie theater chain generated about US$100m in adjusted free cash flow compared with US$73.9m in the same year-ago quarter. At the same time, the company expects net capital expenditures for the remainder of 2019 to be around US$415m, a decrease of US$35m compared to previous guidance, with full-year 2020 spending to amount to roughly US$300m.

Meanwhile, Endgame is not the only stellar title that bolstered Disney’s latest quarterly earnings.

The media behemoth in its fiscal Q3’19 results posted a 33% year-on-year increase to US$3.8bn in its studio entertainment division, with a 13% uptick to US$792m in segment operating income, which was partly due to an increase in theatrical distribution results.

Those better results were due to the performance of not only Avengers: Endgame, but also Aladdin, Captain Marvel and Toy Story 4 in the current quarter compared to Avengers: Infinity War, Incredibles 2, Black Panther and Solo: A Star Wars Story in the prior-year quarter.

A dark and uncertain picture

However, Disney’s operations have faced other challenges in the latest quarter, especially since its US$71bn purchase of 21st Century Fox (21CF), which became effective in March 2019.

Operating results at the 21CF businesses reflected a loss from theatrical distribution driven by the performance of Dark Phoenix, while lower TV/SVoD distribution languished due to the absence of titles to compare to the prior-year quarter’s sales of Star Wars: The Last Jedi and Thor: Ragnarok in domestic pay-TV.

Furthermore, Disney underscored the importance of the content with its decrease in home entertainment results, which it said was due largely to lower unit sales of Black Panther in the prior-year quarter compared to Captain Marvel in the current quarter.

Dave Novosel, a senior analyst at corporate bond research service firm Gimme Credit, recently noted that while he is optimistic about Disney’s Direct-to-Consumer & International business, along with the company’s management, it may be a few years before profits are realized.

Disney’s Direct-to-Consumer & International segment has been posting “significant” operating losses, including a US$553m loss in the latest quarter, while the company’s management expects losses to soar to about US$900m in its fiscal fourth quarter.

Novosel estimates the losses will stretch into the next fiscal year “as Disney invests in the technology, content, and marketing required for its upcoming streaming service,” Disney+, which is slated to be launched November 12, adding to the growing congestion in that space.

He said that Disney will be “spending liberally on original content, and even more on licensed content.” Novosel added that management is “optimistic, and rightly so, since the company will have some very attractive content amid a deep library.

“However, by management’s own admission, the service will be losing money through fiscal 2024, with bigger losses in the early going,” and these losses “could be worse than expected if Disney fails to meets its goal of 60 to 90 thousand subscribers by the end of fiscal 2024.”

The potential plus in the +

Disney had been touting its launch of Disney+ at US$6.99 a month compared with Netflix’s Standard plan, which is offered at a monthly rate of US$12.99 – up 18% since around the start of January.

Disney chair and CEO Robert Iger highlighted that Disney+ would present content from the company’s “iconic entertainment brands,” including Disney, Pixar, Marvel, Star Wars, and National Geographic, and will be available on connected TV and mobile devices.

Disney, along with its rival Comcast Corp (Nasdaq: CMCSA), are also the remaining owners of video streaming service Hulu, after telecom giant AT&T recently divested its interests for US$1.43bn, aiming instead to use the proceeds from the sale to reduce debt.

Analysts at Finimize noted that initially, Disney+ will most likely have “significantly fewer hours of content than Netflix. But as Disney churns out more of its exclusive Marvel, Pixar, and Star Wars content – and potentially bundles in Hulu shows to boot – customers may eventually change channels.”

In the interim, Disney is well-positioned to tap the debt markets despite its leverage of around 3.4x following its merger with 21CF.

The company sold US$7bn worth of corporate bonds this past week in six parts to tender Disney and 21CF notes, as well as to prepay its US$3.175bn outstanding principal under its credit facility, and for general corporate purposes.

The deal was well-received, despite competing with a thick crowd of high-grade corporate issuers who have been taking advantage of still ultra-low U.S. interest rates – with an eye on the likelihood of a rate cut by the Federal Reserve’s Open Market Committee later in September.

Cash spreads on the ‘A’-rated transaction’s maturities, which ranged from 2- to 30-years, compressed by around 20bps over the course of the deal’s pricing evolution.

The yield on the 10-year U.S. Treasury note was last bid at around 1.56% intraday Friday, unwound from – but still in spitting distance of – its inversion with the 2-year note, which was last trading at about 1.54%.

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The issuance was jointly lead-managed by BNP Paribas, Citigroup, HSBC, J.P. Morgan, and RBC Capital Markets.

Investors watching developments in the media and entertainment industry will likely be paying attention to Bank of America Merrill Lynch’s 2019 Media, Communications & Entertainment Conference to be held in the week ahead.

Companies slated to attend the event include AMC, AT&T and IMAX Corp (NYSE: IMAX) among several others.

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of the U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.