Disney is on the precipice of the entertainment industry’s white whale: Profitability in streaming.
The company reported its fiscal Q2 earnings early Tuesday morning, disclosing that its combined direct-to-consumer businesses of Disney+, Hulu and ESPN+ lost only $18 million last quarter, on revenues of $6.2 billion, and that when ESPN+ is removed from that equation, the entertainment streaming business was actually profitable, with revenues of $5.6 billion and a net profit of $47 million.
While the company warns that Q3 will be choppier thanks to some changes at Disney+ Hotstar, it says that expects the streaming division to be fully in the black in fiscal Q4, and to be a “meaningful future growth driver for the company” after that.
Charter’s big deal with Disney was also a major factor in the quarter, helping to cause Disney+ subcribers to surge by more than 6 million to 117.6 million, however the average revenue per subscriber fell slightly from $8.15 to $8 to reflect the wholesale pricing associated with the deal. Disney CFO Hugh Johnston said on the earnings call that the ad tier now has 22.5 million subscribers, juiced in part by Charter.
Relatedly, Disney’s linear business saw revenue fall by 7% and operating income fall by 18% due in part to the decision to drop Freeform, Disney Junior and other channels from Charter, as well as lower linear ratings overall.
Hulu added 700,000 subscribers, with the Hulu plus Live TV service losing 100,000.
“Our results were driven in large part by our experiences segment as well as our streaming business. Importantly, entertainment streaming was profitable for the quarter, and we remain on track to achieve profitability in our combined streaming businesses in Q4,” Disney CEO Bob Iger said in a statement.
“Looking at our company as a whole, it’s clear that the turnaround and growth initiatives we set in motion last year have continued to yield positive results,” he continued. “We have a number of highly anticipated theatrical releases arriving over the next few months; our television shows are resonating with audiences and critics alike; ESPN continues to break ratings records as we further its evolution into the preeminent digital sports platform; and we are turbocharging growth in our Experiences business with a number of near- and long-term strategic investments.”
On the company’s earnings call, Iger said that it will add an ESPN tile to Disney+ by the end of this year, with a modest lineup of sports programming ahead of ESPN’s flagship launch next year. He added that Disney will officially begin its password sharing crackdown next month in “very select markets.”
“Obviously we’re heartened by the results that Netflix has delivered in their password sharing initiative and believe that it will be one of the contributors to growth going forward,” he added.
Disney generated $22.1 billion in revenue last quarter, up 1 % from a year ago, with operating income of $3.8 billion, up 22%. Its free cash flow in the quarter was $2.4 billion.
As usual, the biggest driver of the company’s finances is its experiences division, which had revenue of $8.4 billion and operating income of $2.3 billion, both up double digits from a year ago.
That being said, Johnston noted that higher costs and new cruise ships will impact the experiences business this year, and he warned somewhat ominously that”we are seeing some evidence of a global moderation from Peak post-COVID Travel while pressures from wages, reopening costs and demand impacts are expected to persist in q4.”
Entertainment segment revenue was $9.8 billion, down 5% from last year, but with operating income of $781 million, up 72% from last year. The sports division, which is mostly ESPN, had revenue of $4.3 billion, and operating income of $778 million.
In film, Iger detailed the company’s plans to dial back its output at Marvel Studios, telling analysts that it will aim for two TV series a year, and two or “at most” three, films per year.
When it cmes to the advertising market, Johnston described the current market as healthy:
“We feel good about the offering we have particularly in terms of the premium offerings that we have ,both in sports as well as with the Disney+ offering,” he said. “The challenge obviously in the advertising market right now is there’s a lot more supply in the market, largely as a result of one of our competitors entering the ad tier. But that said, I think generally speaking, we feel like we’re in a better place than we were a year ago and we have healthy momentum across nearly all the categories.”
And when it comes to succession, Iger once again reiterated that the board is on it, and he is ready to help.
“I’m confident that they will choose the right person at the right time,” Iger said. “And that to the extent that I can, I will participate in a smooth transition.”
Robert Johnson is a UK-based business writer specializing in finance and entrepreneurship. With an eye for market trends and a keen interest in the corporate world, he offers readers valuable insights into business developments.
