Disney (NYSE: DIS) announced its fiscal third-quarter earnings after market close on Wednesday, surpassing expectations. The company unveiled a groundbreaking partnership, revealing that its flagship sports network ESPN had struck a monumental $2 billion deal with Penn Entertainment (NASDAQ: PENN) to introduce ESPN Bet, a distinctive sportsbook.
However, the quarter saw Disney+ subscribers fall short of estimates, initially causing a dip in after-hours trading. Remarkably, during the earnings call, the stock rebounded as Disney disclosed that its capital expenditures for the full year 2023 would amount to $5 billion, a reduction from the earlier forecast of $6 billion.
In another significant move, Disney confirmed its plan to reinstate dividend payments by the close of 2023, leading to a noteworthy 5% surge in its shares.
The company reported a total of 146.1 million Disney+ subscribers, marking a 7.4% decrease from the previous quarter. This drop was largely attributed to losses in its Indian brand, Disney+ Hotstar, which saw a substantial 24% decline in users on a sequential basis. It’s worth noting that Disney viewed Hotstar’s impact as minimal due to its lower average revenue per user (ARPU). In the domestic market, which includes the United States and Canada, there was a marginal 1% decline in users.
Amid its vigorous cost-cutting initiative targeting $5.5 billion in savings this year, Disney achieved a notable reduction in streaming losses, which amounted to $512 million for the quarter. This figure stands in stark contrast to the prior-year period, which incurred a loss of $1.1 billion, surpassing estimates of a $777 million loss. The previous quarter reported a streaming loss of $659 million, and the first quarter of the year reported a loss of $1.1 billion.
Since resuming the CEO position in November and recently agreeing to an extension until the end of 2026, Bob Iger has maintained a relentless focus on enhancing profitability.
Iger consistently reaffirmed the company’s projection of achieving streaming profitability by the close of fiscal 2024. This outlook hinges on innovative revenue streams, such as Disney’s newly introduced ad-supported tier, alongside strategic price adjustments aimed at reducing losses and elevating key metrics like ARPU.
For the quarter, Disney posted revenue of $22.33 billion, slightly below the projected $22.51 billion. Adjusted earnings reached $1.03, exceeding the anticipated $0.99.
Disney’s revenue from Parks, Experiences, and Products exceeded expectations, reaching $8.33 billion compared to the projected $8.25 billion. Operating income stood at $2.43 billion, surpassing estimates of $2.39 billion and outperforming Q3 2022’s total of $2.19 billion.
Analysts, however, remain cautiously optimistic about the future of Disney’s parks segment, given signs of dwindling demand and concerns over potential margin pressures due to inflation.
Earlier this year, Disney responded to consumer feedback by announcing crucial updates to its parks reservation system and annual passholder program. These changes aimed to address issues related to extended wait times and high ticket prices.
Advertising revenues experienced turbulence, mirroring trends in the industry. Linear network revenue declined by 7% in the quarter, falling short of the anticipated 6% decrease.
In tandem, Disney’s media and entertainment division fell short of revenue expectations, recording $14 billion for the quarter as opposed to the projected $14.36 billion. This segment’s performance was hindered by underwhelming studio outcomes, influenced by lackluster theatrical releases such as “The Little Mermaid” and Pixar’s “Elemental.”
Uncertainty looms over ongoing developments in Hollywood, ESPN’s direct-to-consumer push, and the future of Disney’s television assets.
Iger expressed openness to exploring strategic options for Disney’s traditional TV assets, even hinting at the possibility of a sale. He reiterated Disney’s willingness to consider strategic partnerships for ESPN, potentially involving joint ventures or partial ownership, to facilitate a seamless transition to streaming.
With ESPN’s entry into the sports betting arena through the launch of ESPN Bet in collaboration with PENN Entertainment, investors anticipate further insights into the network’s trajectory.
Recently, ESPN and PENN Entertainment unveiled their partnership to establish ESPN Bet, a branded sportsbook, marking ESPN’s inaugural venture into sports betting. Rather than introducing its proprietary sportsbook, ESPN is licensing its brand to Penn Entertainment.
As part of the agreement, Penn Entertainment will pay ESPN $1.5 billion over the next decade, while ESPN will hold warrants for approximately 32 million shares of PENN valued at $500 million, vesting over the same period.
Earlier this week, PENN Entertainment returned Barstool Sports to its founder Dave Portnoy after acquiring the brand. This strategic move has paved the way for ESPN’s latest collaboration.
During the call, Iger noted, “We’ve engaged in discussions with several entities over a substantial period. This achievement has been a longstanding objective, driven by our belief in the potential to significantly enhance engagement with ESPN consumers, particularly among the younger demographic.”
Iger underscored that the full transition to direct-to-consumer for ESPN is not a matter of “if” but “when.” The company is meticulously evaluating all aspects of this pivotal decision, encompassing pricing strategies and optimal timing.
According to sources familiar with Disney’s plans, the company has engaged in preliminary discussions with major sports leagues, including the NFL, NBA, NHL, and MLB, regarding potential strategic partnerships. Reports indicate that former Disney executives Tom Staggs and Kevin Mayer have joined as advisors to assist Iger in ESPN’s seamless transition to streaming. Notably, Variety recently highlighted their involvement.
While uncertainties persist, media experts and analysts caution that the shift to full-scale streaming may prove intricate, particularly when juxtaposed against consumers’ preferences for bundled cable services, which could affect the cost dynamics.
Later this year, Disney will initiate reporting with ESPN as an autonomous standalone unit, providing a fresh perspective on the company’s performance.
As Disney navigates challenges and seeks to invigorate its streaming business, the entertainment giant is adopting a two-pronged approach: raising prices and expanding advertisements on its streaming service. Disney intends to implement a price increase for its ad-free streaming service in the US during the autumn season. Furthermore, Disney+ will introduce an ad-supported model in the UK, Europe, and Canada in November.
The conglomerate is grappling with a spectrum of concerns, encompassing lackluster film results and a substantial decline in television advertising revenue. Even Disney’s iconic parks are not immune to stressors, as evident from a slight dip in attendance at its Florida amusement park during the three months ending on July 1. This trend coincides with a contentious relationship between Disney and Florida Governor Ron DeSantis, who has openly criticized the company for being overly “woke.”
Disney last traded at $89.25 on the NYSE.
Information for this story was found via Yahoo Finance, BBC, and the sources mentioned. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.