Walt Disney Co (NYSE: DIS) delivered mixed results for the fiscal second quarter to see its shares trade lower on Thursday.
The entertainment titan reported fewer-than-expected Disney+ subscribers and predicts a wider loss for the business this quarter. On a more positive side, the legacy theme parks business excelled once again, benefiting from reopening tailwinds globally.
Disney shares fell 1% on Wednesday ahead of the earnings report and are up 7.4% year-to-date (vs 7.3% of the S&P 500). The stock was down over 7% on Thursday, somewhere in-line with an implied volatility crush of 6.5% that the options market was pricing in heading into the release of quarterly results.
Interestingly, a big bearish options bet was placed on Disney stock going into the Q1 earnings report.
Mixed Results Fail to Calm Investor Concerns
Disney said its revenue rose 13% year-over-year as theme parks saw their sales surge 17% to $7.78 billion. Revenue from the Media and Entertainment business unit increased by just over 3% to $14.04 billion, missing the analyst consensus of $14.16 billion.
Total revenue came in at $21.82 billion, modestly ahead of the analyst estimates as theme parks outperformed relative to expectations. On the bottom line, Disney reported an adjusted EPS of $0.93, which compares to the $1.08 reported for a year-ago quarter and $0.94 that analysts were expecting.
“We’re pleased with our accomplishments this quarter, including the improved financial performance of our streaming business, which reflect the strategic changes we’ve been making throughout the company to realign Disney for sustained growth and success,” said Robert A. Iger, Chief Executive Officer, The Walt Disney Company.
While the overall top and bottom line numbers were not that bad, investor focus remains on the expensive streaming business. The company reported 157.8 million Disney+ subscribers, missing the 163.1 million target.
Overall, Disney saw its operating income drop 11% YoY to $3.29 billion, but still above the $3.18 billion that analysts were expecting. While theme parks generated $2.17 billion in operating income, an increase of 23% YoY and ahead of analyst expectations, the Media and Entertainment segment saw its operating income drop 42% YoY to $1.12 billion.
Streaming Business Struggles Continue
The Street was expecting Disney+ memberships to rise nearly 1% in Q1, however, the actual results showed a 2% decline. The subscriber’s decline was fueled by an 8% drop recorded at India’s Disney+ Hotstar while Disney+ lost about 600,000 subscribers in the U.S.
Overall, direct-to-consumer (DTC) sales rose 12% YoY to $5.5 billion while the operating loss was reported at $200 million, an improvement compared to the $700 million reported a year ago. Disney attributed the improvement to better results at Disney+ and ESPN+, which offset higher operating losses recorded at Hulu.
“The improvement at Disney+ was due to higher subscription revenue and a decrease in marketing costs, partially offset by higher programming and production costs and, to a lesser extent, increased technology costs,” Disney said in the press release.
However, the company warned on the earnings call that FQ3 will likely see operating losses widen for its DTC business by around $100 million relative to the FQ2.
For ESPN+, Disney managed to grow its subscription base while also raising retail pricing. ESPN+ subscribers came in at 25.3 million but average revenue per user (ARPU) was better than expected – $4.44 vs $4.36 expected.
Hulu had 48.2 million subscribers at the end of the quarter. Both ESPN+ and Hulu memberships were lower than what analysts were expecting.
Investor attention heading into the earnings was on the progress that Disney is making in reducing streaming losses.
“We’ve embarked on a significant transformation to strategically realign Disney for sustained growth and success. I’m pleased to say that the strategy we detailed last quarter is working,” CEO Iger said on the call.
Some analysts have long advocated for Walt Disney to spin off its ESPN/ABC business. Wells Fargo analysts pitched this idea recently, which would allow the company to increase its focus on the IP strategy while ESPN could then look at ways to best monetize sports.
For instance, Iger said on the earnings call that this year’s NBA playoffs were the most watched ever across Disney networks. Sale of the Hulu business is also not out of the question, analysts said.
“We think ESPN would go a la carte in streaming as that band-aid is long overdue to be ripped off in a world of accelerating cord cutting,” analysts said in a note to clients.
Speaking about the costs, Iger said Disney remains on track to “meet or exceed our target of $5.5 billion.”
Summary
Disney shares fell Thursday as the company’s FQ2 earnings report failed to quell investor concerns about the streaming business growth. The total number of Disney+ subscribers fell by about 2% as both ESPN+ and Hulu missed analyst targets. On a more positive note, the legacy theme parks business continues to grow and generate profits for Disney, buying more time for the company to focus on cutting streaming costs.