The Walt Disney Company reported mixed results for its third quarter of 2023 on Wednesday, with net income without certain items of $2.96 billion, or adjusted earnings of $1.03 per share, on revenue of $22.3 billion. It had a net loss of $460 million, or 25 cents per share, on a diluted basis.
Analysts surveyed by Zacks Investment Research were expecting adjusted earnings of 99 cents per share on revenue of $22.4 billion.
Streaming struggles
The direct-to-consumer division saw revenue increase 9% year over year to $5.5 billion and its operating loss narrow to $512 million from $1.1 billion a year ago. The decrease in its operating loss was due to a lower loss at Disney+, higher operating income at Hulu and a lower loss at ESPN+. Executives said the DTC division remains on track to reach profitability by the end of fiscal year 2024.
Disney+ reported a total of 146.1 million subscribers for the quarter, a decrease of 11.7 million from 157.8 million in the previous quarter. The figure included 105.7 million core subscribers, including 46 million in the U.S. and Canada, a decrease of 300,00o from the previous quarter, and 59.7 million international subscribers (excluding Disney+ Hotstar), an increase of 1.1 million.
Disney+ Hotstar subscribers fell to 40.4 million from 52.9 million in the previous quarter, a decrease of 12.5 million. The decline follows a Wall Street Journal report that Disney is exploring strategic options, including a possible sale or joint venture, for its digital and TV business in India, which includes Hotstar and Star India.
Average monthly revenue per paid subscriber for domestic Disney+ increased from $7.14 to $7.31 due to higher per-subscriber advertising revenue. International Disney+ ARPU (excluding Disney+ Hotstar) increased from $5.93 to $6.01 due to an increase in average retail pricing and a favorable foreign exchange impact, partially offset by a higher mix of wholesale subscribers. Disney+ Hotstar ARPU remained steady at 59 cents.
Disney said 3.3 million subscribers signed up to its ad-supported Disney+ offering in the U.S. as of the end of the third quarter.
Disney+ plans to roll out an ad-supported tier in select markets across Europe and in Canada beginning Nov. 1. As pricing is updated for various plans later this year, subscribers in the U.S. will have access to a new ad-free bundled subscription plan starting Sept. 6, featuring Disney+ Premium and Hulu (No Ads) for $19.99 per month.
The company is also “actively exploring” ways to crack down on password sharing and plans to “roll out tactics to drive monetization sometime in 2024.”
Hulu reported a total of 48.3 million subscribers, an increase of 100,000 compared to the previous quarter. The figure included 44 million SVOD only subscribers, an increase of 300,000 compared to the previous quarter, and 4.3 million Live TV and SVOD subscribers, a decrease of 100,000.
Hulu SVOD only ARPU increased from $11.73 to $12.39 due to higher per-subscriber advertising revenue, while Hulu Live TV + SVOD ARPU decreased from $92.32 to $91.80. The decrease was driven by lower per-subscriber subscription revenue due to a mix shift of subscribers between bundled services, partially offset by higher per-subscriber advertising revenue.
ESPN+ reported a total of 25.2 million subscribers, down 100,000 from the previous quarter, with the service’s ARPU falling from $5.64 to $5.45 due to lower per subscriber advertising revenue and a higher mix of subscribers to multi-product offerings.
For the fourth quarter, Disney expects a rebound in core Disney+ net adds with growth both domestically and internationally. It also anticipates that DTC ad revenue will continue to benefit from higher advertiser demand at Hulu as well as from the ramp-up of the Disney+ ad tier.
Linear shrinking
Disney’s linear networks segment saw revenue fall 7% year over year to $6.7 billion and operating income plunge 23% year over year to $1.9 billion.
Domestic channels revenue for the quarter decreased 4% to $5.5 billion, and operating income decreased 14% to $1.8 billion. The decrease in operating income was due to lower results at both broadcasting and cable. International channels revenue fell 20% to $1.2 billion, and operating results decreased to a loss of $87 million from income of $166 million. The decrease in operating results was primarily due to lower advertising revenue and an unfavorable foreign exchange impact, while the decrease in advertising revenue was due to lower rates attributable to Indian Premier League (IPL) cricket programming.
The content sales, licensing and other segment saw revenue fall 1% year over year to $2.1 billion and its operating loss widen to $243 million.
The increase in operating loss was due to lower TV/SVOD and theatrical distribution results. Lower theatrical distribution results reflected the performance of “Doctor Strange In the Multiverse of Madness” in the prior-year quarter compared to “Guardians of the Galaxy Vol. 3,” in the current quarter and marketing costs for “Indiana Jones and the Dial of Destiny,” which was released in most territories in the last few days of June. The current quarter also included the release of “Elemental” and “The Little Mermaid,” while the prior-year quarter included the release of “Lightyear.”
For Q4, Disney expects the content sales, licensing and other segment to generate operating losses up to $100 million worse than the fourth quarter of 2022.
Hotel writedown
Disney’s Parks, Experiences and Products segment saw revenue climb 13% to $8.3 billion, and segment operating income increased 11% to $2.4 billion. Higher operating results for the quarter reflected increases at the company’s international parks and resorts, partially offset by lower results at its domestic operations and its merchandise licensing business.
Writedowns taken for the soon-to-close Star Wars: Galactic Starcruiser hotel in the form of “accelerated depreciation” were a factor in the disappointing performance of Disney’s domestic theme parks in the third quarter. Domestic parks attendance grew slightly year over year, and operating income for the segment was nearly 30% higher compared to 2019, interim CFO Kevin Lansberry said on the call.
Referring to anticipated “cost pressures” in the fourth quarter, Lansberry cited increased labor wages and “$150 million of remaining accelerated depreciation for the Galactic Starcruiser.” Excluding the Starcruiser, Lansberry said, “we are still expecting full year total company revenue and segment operating income to grow at a high single digit percentage rate versus the prior year.”
Rethinking Disney
The latest quarterly results come as CEO Bob Iger has extended his contract through 2026 and has been restructuring the company with the goal of cutting $5.5 billion in costs, including 7,000 layoffs. Iger returned to Disney in November following the ouster of his hand-picked successor, Bob Chapek.
“We made important management changes and efficiency improvement to create a more cost effective, coordinated and streamline approach to our operations. We aggressively reduced costs across the enterprise. And we’re on track to exceed our initial goal of $5.5 billion in savings,” Iger told analysts on Wednesday’s earnings call. “I’m pleased with how much we’ve gotten done in such a short period of time, but I also know we have a lot more to do.”
Looking ahead, Iger said that the film studios, parks and streaming businesses would “drive the greatest growth in value creation over the next five years.”
During the call, he announced plans to reduce both the quantity and cost of upcoming motion pictures. He also said that Disney would cut its content budget for fiscal 2023 by $3 billion to approximately $27 billion in total spending, in part due to the SAG-AFTRA and Writers’ Guild of America strikes.
He also reiterated that the company is “thinking expansively and considering a variety of strategic options” for its linear TV business. In July, Iger told CNBC that ABC, FX, National Geographic and Freeform “may not be core” to the company.
“While linear remains highly profitable for Disney today, the trends being fueled by cord cutting are unmistakable,” he told analysts. “However, we’re fortunate to have an array of extremely productive television studios that we will rely on to continue providing exceptional content for audiences well into the future.”
Additionally, Disney is on the hunt for and has already had “some conversations” with potential strategic partners for ESPN that can help with distribution or content, with possible options on the table including a joint venture or an ownership stake. Iger has said that a taking ESPN fully direct-to-consumer is an “inevitability.”
“We’ve received notable interest from many different entities, and we look forward to sharing more details at a later date when we’re further along in this process,” Iger said on the earnings call.
Iger has brought in former Disney executives and Candle Media co-CEOs Kevin Mayer and Tom Staggs to consult on the company’s streaming strategy and linear TV business, with the pair set to work with ESPN chairman Jimmy Pitaro to analyze and develop strategic options for the sports network.
During the CNBC interview, Iger also reiterated plans to buy out Comcast’s minority stake in Hulu as early as January 2024 for a price tag of at least $9 billion. The company plans to combine Disney+ and Hulu into one combined app offering by the end of the year.
“We’re very comfortable with our current liquidity position. We’ve got about $11.5 billion of cash on our balance sheet, got about $10.5 billion worth of revolving credit facilities and commercial paper,” Lansberry said on the earnings call. “So we’re going to have plenty of future cash flow to help fund all of this going forward.”
During the quarter, Disney recorded $2.4 billion in charges related to the removal of content related to its DTC services and the termination of certain third party license agreements and $210 million from severance.
It also recorded a charge of $101 million related to a legal ruling, largely offset by a $90 million gain on its investment in DraftKings, which was sold in the current quarter.
Disney shares climbed as much as 3% in-after hours trading on Wednesday following the earnings announcement.
