Disney profits miss estimates as streaming costs rise, ad sales soften

Disney profits miss estimates as streaming costs rise, ad sales soften

(Bloomberg) — Walt Disney Co. shares fell to their lowest level since the early days of the pandemic after the entertainment giant said it is reviewing costs and seeking “meaningful efficiencies” after revenue missed Wall Street estimates.

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Losses at the company’s direct-to-consumer arm, powered by the Disney+ streaming service, more than doubled to $1.47 billion in the fourth quarter, due to higher programming costs and the cost of global expansion. Weakness in ad revenue from cable TV also hurt Disney’s performance.

Sales, at $20.2 billion, came up about $1 billion from analysts’ estimates. Earnings, excluding certain items, fell to 30 cents a share, missing the average estimate of 51 cents from analysts surveyed by Bloomberg.

Disney shares fell as much as 12% Wednesday to a low of $88.25. It is the largest share drop during the day and the lowest the shares have traded since March 2020.

CEO Bob Chapek, nearly three years into that position, is facing a pivotal moment where the company’s massive investments in streaming must pay off. Chapek reiterated his forecast that Disney+ will be profitable in fiscal 2024. He said price increases and the introduction of a new ad-supported version will help the company’s direct-to-consumer unit reach that goal.

“Our financial performance this quarter represents a turning point as we peaked DTC operating losses, which we expect to decline going forward,” Chapek told investors on a call Tuesday.

Although spending on content will remain close to $30 billion next year, the company is trying to reduce spending in other areas of the business, such as marketing. Core Disney+ subscribers will increase only slightly in the first quarter, Disney said, before accelerating in the second quarter. The company predicted high single-digit growth in operating income and sales for the financial year 2023.

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The company beat expectations for streaming subscribers in the fourth quarter, signing up 12.1 million new customers on its flagship Disney+ service alone. Total subscribers, including those for the Hulu and ESPN+ products, rose to nearly 236 million. The numbers come after rival Netflix Inc. beat internal forecasts as well as Wall Street expectations in the latest quarter, adding 2.41 million customers.

Disney has made streaming a major focus for growth. On December 8, the company will begin selling the ad-supported version of Disney+ for a monthly price of $8. The price of the ad-free version will jump 38% to $11 per month. The company reported a decline in average revenue per Disney+ subscriber, as more customers subscribed through a discounted bundle with the company’s other services. The combined offer now accounts for approximately 40% of domestic subscribers.

“Our experts say ad layers could be more profitable for Disney+ than its traditional tier,” said Third Bridge analyst Jamie Lumley, adding that “Disney is in a better position than Netflix” because of existing ad infrastructure through Hulu and ABC.

Profit at Disney’s theme parks unit more than doubled to $1.51 billion, due to higher attendance and increased guest spending, but fell short of analysts’ estimates. Hurricane Ian reduced operating income by $65 million.

“The park number is much lower than we expected,” Bloomberg Intelligence analyst Geetha Ranganathan said on Bloomberg TV. Inflation can reduce consumer demand in what has been a strong growth area.

“These results don’t look so rosy anymore,” Ranganathan said.

Revenue from Disney’s traditional TV business, which includes networks such as ESPN and ABC, fell 5% due in part to weakness in ad sales. Profit rose 6% to $1.74 billion due to lower programming costs in cable TV, particularly for sports. Disney reduced the number of Major League Baseball games broadcast this season under a new contract.

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(Updates shares in the first and fourth paragraphs.)

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