Disney Posted Mixed Q3 FY2023 Results & Further Subscriber Losses

Key Points

-Against a difficult backdrop, Disney reported a scarce Net Loss for Q3 FY2023, while its Parks Experiences & Products, division continues to perform admirably.

-It streaming services lost 11.7 million subscribers, in the third straight quarter of contraction, but the segment's financials improved further.

-The results were overall mixed, offering reasons for concern but also optimism. For a brief overview of the key takeaways form Wednesday's report, you can watch Disney Q3 FY23 Results Quicktake: Concern & Promise

Tough Spot

The Walt Disney Company is going through a rough patch lately, as its traditional linear TV assets face headwinds from the cord-cutting trend and soft advertising environment, its Studio division has faced box-office disappointments this year and its streaming services have been losing subscribers. It is not alone though, since other legacy media corporations are also facing hardships, as the latest results from Paramount & Warner showed.

To address those adversities, it reinstated its former CEO late last year, who did not beat around the bush. Mr Iger has undertaken an aggressive restructuring plan to give power back to the creatives, rationalize content output, improve efficiencies and reduce costs.

On Wednesday after US markets closed, the firm reported overall mixed results for the three-months ended July 1 (Q3 FY2023) ^[1], which provided reasons for both concern and optimism.

Profitability Hit

The legacy entertainment behemoth posted a rare Net Loss of $460 million in the reported quarter, a far cry from the profits over the past several quarters. However, this was largely driven by a $2.65 billion restructuring and impairment charge, as part of the turnaround effort.

Its Linear Networks business (broadcast & cable) underperformed. Revenues of $6.69 billion were down 7% y/y and Operating Income of $1.889 billion was down 23% y/y. These are still solid figures, but traditional TV is moving towards obscurity. During Wednesday's earnings call, Mr Iger alluded to that, warning that "the trends being fueled by cord cutting are unmistakable" ^[2]

Total Revenues increased 4% y/y though compared to a year ago, to $22.33 billion. The bright spot was once again the Parks, Experiences and Products (DPEP) division, which continues its post-pandemic vigor, with double-digit y/y growth in both revenues and operating income.

Streaming Business

The Direct-to-Consumer (DTC) division is crucial for the firm's future. It has made great strides in a short period of time, helped by its compelling content and pushed forward on multiple aspects of the business. Yesterday's results showed more sub losses, but also provided update on the ad-supported tier and news around account sharing.

User Base Contraction

After its meteoric rise since the late-2019 launch, the Disney+ flagship streaming service has been relinquishing subscribers recently. This caused the user base of the total Direct-to-Consumer (DTC) division (Disney+, Hulu, ESPN+) to contract for third straight quarter, losing around 5% and 11.7 million members.

After dethroning Netflix over a year ago, Disney conceded the top spot to its rival at the start of the year and the difference widened as of the end of June.

However, the subscriber decline was once again located mainly in Southeast Asia and India, after Netflix lost the digital rights of the important Indian cricket matches. Furthermore, the firm raised prices in late-2022 and plans further hikes later this year. At the time of writing, the lowest price point for Disney in the US is a full US Dollar higher than Netflix ($7.99 vs $6.99).

Given the above pricing moves and the region-specific subscription losses, it looks like the DTC business is holding up pretty well. CEO Bob Iger said that the price increases "better reflect" the value of the product, noting that they "didn't see significant churn or loss" from them. ^[2]

Improved Financials

Despite the new contraction of the user base, financials of the DTC segment continue to improve. Net Loss narrowed to $512 million and the company expects the streaming division to achieve profitability by the end of fiscal 2024 (ie calendar Q3 2024).

Revenues rose around 9% y/y to $5.525 billion. Average Monthly Revenue Per Subscriber for Disney+ Domestic (US & Canada) increased further to $7.31.

Ad-Supported Tier

Disney launched a new subscription tier in the US in December, with the inclusion of advertisements. I have long maintained that such offerings are the way forward for the streaming business, especially given high inflation, intense competition and other factors. It allows companies to develop an additional revenue stream, offer low entry prices and the freedom to not focus squarely on user additions.

Its CEO expressed his optimism around the offering during the earnings call, disclosing that since its inception, 40% of new Disney+ subscribers are opting for the ad-inclusive tier. More to it, the company announced its expansion to select European countries and Canada, starting November 1. ^[3]

Password Sharing

Streaming pioneer Netflix, has been cracking down on password sharing for a while now, since it was posing a headwind to its financial performance. In May, it implemented a broader rollout of the new password sharing policy, which limits access to one household. July's Q2 results showed that the change is working, since it added 5.89 subscribers and the said that "the cancel reaction was low".

Heartened by these encouraging signs, Disney decided to follow its competitor's lead on the matter. This is established as a "real priority" and an opportunity to help grow the business, according to its CEO, who said that they will roll out tactics to "drive monetization" sometime in the next calendar year. ^[2]

ESPN

The Sport-oriented channel is a tremendous asset for Disney, which is highlighted but the fact that it will get its own standalone division under the restructuring plan unveiled earlier in the year. Despite the shift away from traditional TV, ratings continue to increase on the linear channel as per the CEO.

The media behemoth, intends to move the ESPN flagship channels into streaming and Mr Iger reaffirmed this direction yesterday, stressing that this pivot is "not a matter of if but when" ^[2]. This could unleash its full potential and unlock more value for Disney, given the advertising opportunity. It already offers live DTC sports programming with ESPN+, but the streaming expansion could be a game changer.

In a move that will further enhance the sports profile and consumer engagement, it announced ESPN BET. This takes the firm into the sports betting market, in sixteen US states, starting this fall. ^[4]

Concern & Promise

Disney is in difficult spot at this stage, but is already acting to turn things around. Wednesday's results were mixed, highlighting some of the challenges, but also showing promise for a much better future. The Net Loss was a worrying sign, traditional TV is moving towards obscurity, the studio business needs a shake up and the streaming user base shrank.

However, the firm is addressing all those issues, with a series of initiatives. It is not an easy task, but Mr Iger is one the most successful CEOs and if someone can turn things around and reassert Disney's dominance, its him. The firm has a deep IP catalogue and despite some fatigue in the Marvel Cinematic Universe, MCU is still a compelling franchise and so is Star Wars. It has robust sports content and the streaming metrics, show that it actually has pricing power.

Disney's stock is roughly flat on the year, having erased January's rally, as investors contemplate on the firm's challenges and potential. Initial reaction to Wednesday's results was positive, as the stock traded higher in extended trading.