Disney (DIS) said a key part of its streaming business turned a profit for the first time, but it expects weaker results from that segment in the current quarter, sending its shares down nearly 10% on Tuesday.
The forecast highlights Disney’s challenges in achieving sustained profitability in streaming, a key priority as its linear TV business shrinks. Overall, CEO Bob Iger’s recent turnaround plan has made investors more bullish on the stock in recent months. The company also just won a high-profile proxy fight against activist investor Nelson Peltz.
In Disney’s fiscal second quarter, the direct-to-consumer (DTC) portion of its entertainment segment, which includes Disney+ and Hulu, posted an operating profit of $47 million, compared with a loss of $587 million in the year-to-date period. previous.
The company said it expects DTC entertainment results to be in the red in the third quarter, driven by losses from its Indian brand Disney+ Hotstar.
Additionally, not all of Disney’s streaming services were profitable in the second quarter. Including ESPN+, total direct-to-consumer losses totaled $18 million, versus the $659 million loss reported in the year-ago period. Disney expects full profitability from streaming by the fourth quarter of this year.
The company reported second-quarter adjusted earnings of $1.21 per share — a beat compared to the $1.10 that analysts surveyed by Bloomberg expected and higher than the $0.93 reported by Disney in the second quarter of 2023.
Revenue was $22.1 billion, meeting consensus expectations and above the $21.82 billion reported by the company in the same period last year.
Disney also raised its guidance for full-year adjusted earnings growth to 25%, up from 20% previously. However, Disney suffered a blow after merging its Star India business with Reliance Industries, reporting an impairment charge of over $2 billion.
KeyBanc analyst Brandon Nispel said in a note following second-quarter results that “soft guidance for streaming entertainment next quarter may dampen enthusiasm. However, today’s news strengthens Iger’s argument that Disney is in the midst of a long-awaited turnaround.”
Nispel also noted that investors may view Disney’s tepid outlook for its Experiences business, which includes theme parks, as a “negative” for the stock. The company said third-quarter operating profit for the segment should be “roughly comparable to the prior year.”
On the earnings call, Disney CFO Hugh Johnston said the company has seen “some evidence of global moderation in the post-COVID travel spike” at its theme parks. He also noted that rising costs and inflation will likely affect profits.
Q2 Highlights: Streaming, Parks Business
In the second quarter, the media giant reported an increase in Disney+ subscriber additions as Charter cable subscribers began receiving free subscriptions as part of their packages.
Disney added more than 6 million Disney+ core subscribers in the second quarter, above its own guidance and easily beating Bloomberg consensus estimates of 4.7 million.
The company has also seen continued positive momentum in average revenue per user, or ARPU, amid recent price hikes and a crackdown on password sharing. ARPU increased sequentially by $0.44 to reach $7.28.
“I think we’re going to see prices go up steadily over time on the streaming service, largely because the content we have is worth paying for,” Johnston told Yahoo Finance executive editor Brian Sozzi on Tuesday.
Meanwhile, the parks business delivered another strong quarter of results, with internal operating income rising to $1.61 billion, compared to $1.52 billion a year earlier.
The company attributed the increase to higher profits from Walt Disney World Resort and Disney Cruise Line, partially offset by lower results from Disneyland Resort.
Meanwhile, ESPN’s domestic operating profit fell 9% year over year to $780 million, hurt by lower affiliate revenue and fewer subscribers as more consumers cut the cord. The company also attributed the results to increased production costs due to the College Football Playoff (CFP) schedule.
The story was similar for domestic linear network revenue in the entertainment division, which fell 11% year over year in the quarter. The segment’s operating profit fell 18%. This was also attributed to lower affiliate revenue coupled with a decline in advertising revenue.
In February, Disney doubled down on sports streaming with the reveal of an upcoming joint venture partnership with Fox and Warner Bros. The company is also working on a separate sports streaming platform for ESPN, expected to debut in fall 2025.
Related to sports, Disney has reportedly agreed to increase its media rights deal with the NBA to $2.6 billion, up from the previous $1.5 billion. The NBA’s current rights deal expires at the end of next season.
Alexandra Canal is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, linkedin, and email her at alexandra.canal@yahoofinance.com.
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