Disney says streaming is nearly breakeven, but shares sink 10% on soft guidance

The “Partners” statue of Walt Disney and Mickey Mouse, at Cinderella Castle at the Magic Kingdom, at Walt Disney World, in Lake Buena Vista, Florida, photographed Saturday, June 3, 2023.Joe Burbank | Tribune News Service | Getty Images

Disney reported fiscal second-quarter earnings Tuesday that beat analyst estimates after narrowing streaming losses.

But shares of the company sank 10% as it missed revenue estimates for the fourth consecutive quarter and guided toward a softer third quarter for experiences.

Disney's total segment operating income jumped 17% as the company's entertainment streaming applications — Disney+ and Hulu — turned a profit in the quarter for the first time. When combined with ESPN+, the streaming businesses lost $18 million in the quarter, much narrower than the $659 million loss the division reported a year earlier.

Entertainment streaming revenue (excluding ESPN+) rose 13% in the quarter to $5.64 billion, and operating income was $47 million after a loss of $587 million a year prior. Disney credited increased Disney+ subscribers and higher average revenue per user for the gains.

Disney+ Core subscribers increased by more than 6 million in the second quarter to 117.6 million global customers. Total Hulu subscribers grew 1% to 50.2 million. ESPN+ subscribers fell 2% to 24.8 million.

“Our results were driven in large part by our Experiences segment as well as our streaming business,” Disney Chief Executive Officer Bob Iger said in a statement. “Importantly, entertainment streaming was profitable for the quarter, and we remain on track to achieve profitability in our combined streaming businesses in Q4.”

Here is what Disney reported compared with what Wall Street expected, according to LSEG:

• Earnings per share: $1.21 adjusted vs. $1.10 cents expected
• Revenue: $22.08 billion vs. $22.11 billion expected

U.S. parks and experiences revenue rose 7% to $5.96 billion, and international sales soared 29% to $1.52 billion on increased attendance and higher prices at the Hong Kong Disneyland Resort.

Still, Disneyland Resort in California saw lower profits. On Tuesday, executives said the year-over-year decline was due to cost inflation, including higher labor expenses. They added that third-quarter results for the parks and experiences business will also be weighed down by higher expenses and attendance normalization following a post-pandemic surge in demand.

Disney reported a loss attributable to the company of $20 million, or 1 cent per share, compared with a profit of $1.27 billion, or 69 cents per share in the year-earlier period. Adjusting for restructuring and impairment charges, among other things, Disney reported a profit of $1.21 per share.

Revenue rose to $22.08 billion, up 1% from a year earlier, but still missed analysts estimates of roughly $22.11 billion. This slight miss marked Disney's fourth consecutive quarter of a revenue miss, its longest such streak since 2018.

Traditional businesses struggle

Disney's TV business continued to lag as millions of Americans drop cable TV each year. While ESPN's revenue rose 3% to $4.21 billion, operating income dropped 9% to $799 million. A drop in cable subscribers and higher programming costs attributable to the College Football Playoff led to the decline. ESPN's advertising revenue increased to offset the subscriber losses.

Linear network revenue across Disney's portfolio, excluding ESPN, fell 8% to $2.77 billion. Operating income slumped 22% to $752 million. Disney cited fewer subscribers and a drop in international affiliate fees due to contract rate decreases for the declines. Advertising revenue decreases due to “lower average viewership” were also a factor, Disney said.

Content sales, licensing and other revenue, which includes box office, fell 40% in the quarter to $1.39 billion as Disney didn't have any blockbuster movies in the quarter. Disney noted last year's quarter also included the benefit of the ongoing performance of “Avatar: The Way of Water,” which was released in December 2022 and generated more than $2.3 billion in global box-office sales.

While Disney+ core subscribers — which excludes Disney+ Hotstar in India and other countries in the region — rose during the quarter, executives said on Tuesday's call they don't expect to see customer growth in the third quarter. However, the company expects to return to subscriber growth in the fourth quarter.

The recent deal with cable company Charter Communications, which saw some cable packages receive subscriptions to Disney+'s ad tier, went into effect this past quarter, and helped to drive growth in the segment, although partially diluted average revenue per user.

Despite projecting streaming profitability for the fourth quarter, the company is forecasting a loss in its entertainment direct-to-consumer unit for the fiscal third quarter.

Disclosure: Comcast, which owns CNBC parent NBCUniversal, is a co-owner of Hulu.

This story is developing. Please check back for updates.