Disney success lies outside U.S.
Streaming growth counters Netflix dip, yet inflation looms
Walt Disney Co. has eased concerns about the future of streaming video by picking up 7.9 million new Disney+ customers, although the company warned supply chain disruptions and rising wages could pressure finances.
Wall Street had been expecting 5.3 million new Disney+ customers from January through March. Disney still has a long way to go to hit ambitious, multi-year targets, but its growth encouraged investors after Netflix Inc.'s losses.
The entertainment giant is working to offset inflationary pressures and challenges in the global supply chain, executives said on a call with analysts on Wednesday.
"Right now, it's very difficult to accurately forecast the potential financial impact due to the fluidity of the situation but you can trust that we are fully aware of it and we're working hard to mitigate any pressure on the margin," said chief financial officer Christine Mccarthy.
Disney needs to average nearly 9.1 million new customers per quarter to reach the low end of its goal of adding 230 million to 260 million Disney+ subscribers by the end of September 2024. Chief executive Bob Chapek reiterated that target on Wednesday.
The world's largest entertainment company has staked its future on building a streaming TV business to rival Netflix, the company that first drew mass audiences to subscription video.
Netflix unnerved Wall Street last month when the company disclosed it lost subscribers in the first three months of 2022 and forecast more defections through June.
The Netflix results hit media stocks and prompted investors to re-evaluate their expectations for online video.
Total subscriptions for Disney+, launched in November 2019, reached 137.7 million, the company said Wednesday, with help from new releases including Marvel's Moon Knight series and Pixar movie Turning Red.
“In spite of less-than-optimal results overall, because of the positive streaming numbers, Disney will do well," said Shahid Khan, partner at Arthur D. Little, a technology and management consulting firm.
"As households rationalize their streaming choices, given the inflation, Disney+ will become one of the top choices and will become a real threat to Netflix.”
Disney reported adjusted earnings per share of $1.08 (all figures U.S.), below analyst forecasts of $1.19, according to IBES data from Refinitiv, affected by an increase in the effective tax rate on foreign earnings.
Revenue came in at $19.2 billion, below the $20.03-billion consensus estimate. The company said revenue took a $1-billion hit from early termination of a film and TV licensing agreement so that Disney could use the programming on its own streaming services.
Disney's theme park business continued a strong rebound after extended pandemic-related closures and attendance restrictions.
Operating income at the parks unit totaled $3.7 billion, a 50 per cent increase from a year earlier.
However, closures of theme parks in Asia due to COVID-19 could reduce operating income by up to $350 million in the fiscal third quarter, the company said.
Disney's quarterly results show a path for signing up a quarter-billion subscribers: international expansion. But furious growth in customers outside the United States is not so certain to bring bumper profits.
Its stock fell as much as 5.5 per cent to a two-year low of $99.47 in early trading Thursday, after over half a dozen analysts cut their price target on the stock.
"The market is now worried the combination of that subscriber guidance and rising costs to compete more broadly with non-disney brands will result in a less impressive business at steady state," said Moffettnathanson analyst Michael Nathanson.
The service is poised to launch in 42 countries this summer, said one Disney source, expanding its global reach to 106 countries. It will produce roughly 500 shows in local languages around the world to attract subscribers in these markets.
More than half of its quarterly subscriber gains came from Disney+ Hotstar in India, where subscribers pay an average of 76 cents a month. In the United States, customers pay $6.32 on average.
Operating losses for the company's streaming business, which also includes ESPN+ and Hulu, rose to $877 million in the quarter, triple the losses from a year ago, reflecting higher programming and production expenses.
Spending on programming is expected to increase by more than $900 million in the third quarter, as the company invests more deeply in original content and sports rights.
"We believe that great content is going to drive our subs, and those subs then in scale will drive our profitability," said Chapek.
"So we don't see them as necessarily counter. We see them as sort of consistent with the overall approach that we've laid out."
Paolo Pescatore, an analyst with PP Foresight, predicted Disney+ will continue to grow as it expands to new markets and offers enticing content to stream, such as the Oscar-winning animated film Encanto. But that may not be a financial success.