Disney Shares Tumble 9% on Softer Q3 Outlook Despite Nearing Streaming Profitability

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The House of Mouse warned its entertainment DTC business would swing to a third quarter loss after posting a $47 million profit


Disney is getting closer to achieving profitability in streaming, with the entertainment giant narrowing its direct-to-consumer operating losses 97% to $18 million during its second quarter of 2024. But shares of the entertainment giant fell more than 9% on Tuesday after executives warned that they don’t expect to repeat the feat in the third quarter.

In a milestone for the company, when excluding ESPN+, Disney’s entertainment DTC business, which includes Disney+ and Hulu, turned an operating profit of $47 million, compared to a loss of $587 million in the prior-year quarter.

The company warned, however, that it does not expect to turn a profit with entertainment streaming in the third quarter, nor to grow its core Disney+ subscribers in Q3. But Disney continues to expect its combined streaming businesses to turn a profit in the fourth quarter, “with further improvements in profitability in fiscal 2025,” the company noted in its earnings release.

“We’ve said all along our path to profitability will not be linear,” Disney CEO Bob Iger told analysts on Tuesday. “While we’re anticipating a softer third quarter, due in large part to the seasonality of our Indian sports offerings, we fully expect streaming to be a growth driver for the company in the future and we have prioritized the steps necessary to achieve this.”

Here are the top-line results:

Net loss: $20 million, compared to a profit of $1.2 billion a year ago.

Earnings Per Share: A loss of 1 cent, compared to 69 cents in the prior-year quarter. Excluding certain items, EPS was $1.21 compared to $1.11 expected by analysts surveyed by Zacks Investment Research

Revenue: $22.1 billion, in line with the $22.1 billion expected by Zacks analysts

Subscribers: Added 6.3 million core Disney+ subscribers. Disney+ hit 153.6 million paid global subscribers and 22.5 million ad tier subscribers.

Disney’s latest quarterly results underscored the challenges facing competitors to Netflix to catch the streaming leader. Disney, along with Warner Bros. Discovery and Paramount, have touted their efforts to reach streaming profitability and are in a race to get there, in large part because their linear television assets continue to decline.

Tuesday’s results offered nothing fundamentally different about the picture. Even as its entertainment DTC business showed a one-quarter flash of profitability, Disney’s linear business, which accounts for 12.5% of its overall quarterly revenues, fell off another 8% in revenues to $2.76 billion and posted a 22% slide in profits to $752 million.

Disney’s one other bright spot was its performance in its Experiences segment, which saw a 10% boost in revenues to $8.39 billion and a 12% jump in profits to $2.29 billion. Experiences, which includes theme parks and cruise boats, made up 38% of Disney’s overall sales in the quarter.

“The turnaround and growth initiatives we set in motion last year have continued to yield positive results and we are executing against our ambitious strategic priorities with both speed and determination,” Iger said.

Looking ahead, Disney now expects full-year adjusted earnings per share growth of 25% and said it remains on track to generate $14 billion in cash provided by operations and $8 billion in free cash flow in fiscal year 2024. Shares have climbed 13% in the past year, 28.4% year to date and 37.6% in the past six months.

DTC progress a mixed bag

The direct-to-consumer division grew its revenues 12% year over year to $6.19 billion. When excluding ESPN+, the DTC entertainment business posted a 13% revenue increase to $5.64 billion.

Disney+ reported a total of 117.6 million core subscribers for the quarter. The figure included 54 million subscribers in the U.S. and Canada and 63.6 million international subscribers excluding Disney+ Hotstar, which reported 36 million subscribers. 

Domestic Disney+ average monthly revenue per paid subscriber fell 2% to $8.00 due to a higher mix of wholesale subscribers, partially offset by increases in retail pricing. Disney+ core ARPU grew 6% to 44 cents due to price increases for the domestic premium tier and international ARPU growth. That was partially offset by lower ad supported ARPU domestically driven by dilution from entitlements from its carriage deal with Charter Communications.

International Disney+ (excluding Disney+ Hotstar) ARPU grew 13% to $6.66 due to increases in retail pricing and a lower mix of subscribers to promotional offerings. Disney+ Hotstar ARPU fell 45% to $0.70 due to lower advertising revenue.

Hulu reported a total of 50.2 million subscribers, up 1% quarter over quarter. SVOD-only subscribers increased 2% to 45.8 million and SVOD and Live TV subscribers fell 2% to 4.5 million

Hulu’s SVOD-only ARPU fell 4% to $11.84 due to lower advertising revenue, partially offset by increases in retail pricing. Hulu Live TV + SVOD ARPU grew 1% to $95.01 due to increases in retail pricing and a lower mix of subscribers to promotional offerings, partially offset by lower advertising revenue.

ESPN+ subscribers fell 2% to 24.8 million, while ARPU for the streamer rose 3% from to $6.30 due to increases in retail pricing and higher advertising revenue.

Disney plans to begin rolling out its password-sharing crackdown in June, with a broader rollout in September.

Linear struggles continue

In the linear networks segment, domestic revenue fell 7% to 2.27 billion, while international revenue fell 11% to $496 million.

Lower affiliate revenue caused by a dip in subscribers drove domestic operating income to fall 18% to $520 million. It also impacted international operating income, which fell 44% to $92 million.

In Disney’s content sales licensing and other segment, revenue fell 20% to $1.39 billion, while its operating income swung to a loss of $18 million from a profit of $83 million a year ago. The loss reflected lower theatrical distribution results: the studio released no significant film titles during the quarter. In Q3, Disney expects the business to generate “modestly positive operating income and improvement over the prior quarter and prior year.”

Sports still in transition

Iger has pointed to its sports segment, which includes ESPN, ESPN+ and Star India-branded sports channels, as a growth driver but Tuesday’s results were decidedly mixed for the segment.

Sports saw revenue increase 2% year over year to $4.31 billion and operating income dip 2% to $778 million.

ESPN revenue grew 3% to $4.21 billion, including $3.87 billion in domestic revenue and $341 million in international revenue. Operating income fell 9% to $799 million, including $780 million domestically and $19 million internationally. Impacting the segment results were increased programming and production costs attributable to airing an additional College Football Playoff game, lower affiliate revenue driven by fewer subscribers, advertising revenue growth due to increases in rates and, to a lesser extent, average viewership, as well as growth in ESPN+ subscription revenue due to higher rates.

Disney plans to launch a fully direct-to-consumer version of ESPN in fall 2025, and a joint sports streaming venture with Warner Bros. Discovery and Fox this fall. Additionally, it will launch an ESPN tile on Disney+ by the end of the calendar year following its integration of Hulu.

Star India continued to be a drag on earnings. Revenue fell 17% to $105 million and Star’s operating loss narrowed 73% year to $27 million. The operating loss improvement was due to lower programming and production costs
attributable to the non-renewal of Board of Control for Cricket in India rights. That was partially offset by an increase in costs for Indian Premier League matches due to more matches being aired in the current quarter compared to the prior-year quarter.

Disney recorded total restructuring charges of $2.05 billion during the quarter due to “goodwill impairments” related to Star India and entertainment linear networks.

Star India’s impairment charge was a result of Disney entering into a $8.5 billion deal with Reliance Industries to merge Star India with Viacom18 in a joint venture. The deal, which is expected to close in late 2024 or early 2025, will give Reliance and its affiliates a 63% ownership stake in the venture, while Disney will have a 37% stake.

Experiences business a bright spot

Domestic Parks & Experiences operating income grew 6% to $1.6 billion on revenues of $5.96 billion, up 7%, driven by higher operating results at Walt Disney World Resort and Disney Cruise Line, partially offset by lower results at Disneyland Resort.

International revenue grew 29% year over year to $1.52 billion and operating income rose 87% to $292 million, driven by an increase in operating results at Hong Kong Disneyland Resort. Higher games licensing revenue pushed up consumer products results, with revenues rising 3% to $913 million and operating income increasing 7% to $387 million.

While Disney continues to expect “robust operating income growth” in the Experiences segment for the full year, it warned that third quarter operating income will be roughly comparable to the prior year-period, citing an adverse impact from the timing of media and tech expenses, non-comparable items in the prior year in consumer products and the timing of Easter. The segment’s performance will also be impacted by higher wage expenses, pre-opening expenses related to the Disney Treasure and Adventure cruise ships, Disney Cruise Line’s new island Lookout Cay and some “normalization of post-COVID demand,” the company said.

“While consumers continue to travel in record numbers and we are still seeing healthy demand, we are seeing some evidence of a global moderation from peak post-COVID travel while pressures from wages, reopening costs and demand impacts are expected to persist in Q4,” CFO Hugh Johnston added. “We do expect year over year Experiences operating income growth to rebound significantly in the fourth quarter due to fewer comparability or timing factors.”

The latest quarterly results mark the first since Disney defeated activist investors Trian Fund Management and Blackwells Capital during a board vote at its annual meeting in April.


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