Is Disney suddenly giving off Netflix vibes?
The media giant reported powerhouse streaming numbers in its fiscal fourth quarter, with flagship service Disney+ surging to 164.2 million global subscribers, but some key financial metrics fell short of Wall Street expectations.
Total revenue of $20.15 billion in the period ending October 1 increased 9% over the year-ago quarter. Earnings per share, meanwhile, tumbled 19% to 30 cents on a diluted basis. Wall Street analysts’ consensus forecast for revenue was $21.44 billion and EPS was 56 cents. Of course, comparisons between Disney and Netflix are inexact given their substantially different balance sheets, but Netflix’s recent challenge has been persuading the Street of its viability as a profit engine, not just a cultivator of debt-financed subscriber growth. Disney, by contrast, has been able to leverage its broader business mix to generate more substantial returns as a company even as it funds its streaming ambitions, but the fiscal Q4 numbers suggest a go-go streaming player with a less-than-resounding story in its traditional operations.
Investors reacted to the earnings miss by sending Disney shares down as much as 7% in after-hours trading. They closed the regular session at $99.90, off a half-point. Like other media stocks, Disney’s has endured a beating lately, losing more than one-third of its value in 2022 to date.
The company’s Media and Entertainment Distribution division saw its revenue slump 3% in the quarter to $12.7 billion, while Parks, Experiences and Products jumped 36% on the continued bounce-back of theme parks and travel following lengthy Covid setbacks.
Direct-to-Consumer revenue for the quarter increased 8% to $4.9 billion and operating losses increased by $800 million to $1.5 billion. The increase in operating loss was due to a higher loss at Disney+ and a
decrease in results at Hulu, partially offset by improved results at ESPN+, the company said. The $1.5 billion is being positioned as the peak loss for streaming, with red ink starting to dry up in fiscal 2023.
Disney+ jumped 12.1 million subscribers from the previous quarter. Although the growth curve was less steep for the other two services in the portfolio, Hulu and ESPN+, the former reached 47.2 million subscribers and the latter ESPN+ got to 24.3 million. Taken together, the tally of 235.7 million direct-to-consumer subscribers exceeded Wall Street expectations by several million. The company has projected having between 300 million and 350 million streaming subscribers by the end of fiscal 2024 and also says it will turn a profit at Disney+ by that time. Indications are that it remains on track to hit those goals.
The quarterly story was less rosy on the traditional TV front. Linear Networks revenue for the quarter decreased 5% to $6.3 billion, and operating income increased 6% to $1.7 billion. One lagging component of the Linear Networks unit was International Channels, whose revenue fell 18% to $1.1 billion, with operating income also down 18%. The company blamed the downturn on lower operating income from channels that operated for the entire current and prior-year quarters, partially offset by a benefit from channel closures.
Disney came into the earnings report with some momentum after a spotty stretch in the early part of 2022. CEO Bob Chapek earlier this year found himself under intense scrutiny both internally and from figures like Florida Gov. Ron DeSantis over the furor – from the right and left – over the company’s position on the state’s “Don’t Say Gay” legislation. Chapek admitted making mistakes, but has been given a vote of confidence by the board of directors and a multi-year contract extension.
“The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate,” Chapek said in the earnings release. “By realigning our costs and realizing the benefits of price increases and our Disney+ ad-supported tier coming December 8, we believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future.”
