“A lot of the miss was really on the parks side,” Geeta Ranganathan, senior media analyst at Bloomberg Intelligence, told Yahoo Finance Live (video above), citing parks’ consistent performance so far this quarter.
“We’ve seen them report some really, really amazing numbers in terms of park profitability,” Ranganathan added. “So I think investors may have thought they could expand that. And there were some really good steps that management took, whether it was price increases, whether it was more operational efficiency. But I guess the costs have finally caught up.”
Disney shares fell more than 12% in afternoon trading on Wednesday. Disney shares haven’t fallen more than 10% in response to earnings in at least 20 years.
Disney theme parks that quickly rebounded from COVID-19 amid increased attractions, price jumps and updated technology such as Genie+ appmissed expectations in the quarter as recession fears put pressure on consumer demand.
Revenue from the company’s Parks, Experiences and Consumer Products division was $7.43 billion (vs. estimates of $7.59 billion), with operating income coming in at $1.51 billion (vs. estimates of $1.9 billion). The Disney Resort in Shanghai remains closed amid China’s strict COVID-19 protocols, and the company revealed there is no “reopening date visibility” for the Shanghai location.
Despite the miss, Disney CFO Christine McCarthy said the media giant expects a “strong” holiday season at the parks in the first quarter of 2023 as well.
Disney’s DTC subscriber losses are accelerating
McCarthy also said he expects Disney+’s losses to peak this year, with management forecasting streaming losses to shrink by about $200 million in the first quarter of 2023.
Disney+, Hulu and ESPN+ lost a combined $1.5 billion in the fourth quarter, after losing $1.1 billion in the third quarter.
“We expect our DTC operating losses to narrow going forward and that Disney+ will still be profitable in fiscal 2024, assuming we don’t see a significant change in the economic climate,” Disney CEO Bob Chapek said in the earnings release.
“By realigning our costs and realizing the benefits of the price increases and our ad-supported Disney+ tier coming December 8,” Chapek continued, “we believe we will be on our way to achieving a profitable streaming business that will drive continued growth and generate shareholder value far into the future.”
Disney+ saw net subscribers increase to 12 million in the fourth quarter, beating expectations for just over 9 million. The beat came after the company reported a jump in subscribers in the third quarter (14.4 million) following the launch of new markets and a solid set of content.
The company warned that it expects Disney+’s underlying subscriber growth as well as its Indian service Hotstar’s subscriber numbers to be lower in the first quarter. Content spending is expected to be in the low $30 billion range for all of 2023.
“The narrative here is shifting from just subscribers to profitability,” Ranganathan said, adding that the cost of content is likely to remain high for years to come.
“It’s really about getting efficiencies in those costs,” the analyst added. “It’s about getting more operating leverage in your model while somehow growing the number of subscribers. And that’s what they’re hoping to do…get more ROI with every dollar spent on content.”
Despite recent price spikes, average revenue per user for Disney+ dropped to $3.91 (vs. estimates of $4.29) on the back of an unfavorable foreign currency impact and a higher subscriber mix.
The company will launch its $7.99 supported ad tier in December, one month after that the long-awaited debut of Netflix’s advertising option. Despite the overall slowdown in ad spending, analysts remain optimistic about the profitability prospects of ad-supported plans, especially for streaming companies.
“I think [the ad tier] moves the needle quite significantly,” maintains Ranganathan. “It’s absolutely very, very critical, and they’ve done it at the right time.”