Disney did not give us everything this quarter, but parks and streaming really delivered
Club holding Disney (DIS) reported a good quarter after the closing bell Wednesday, despite missing estimates on headline revenue and earnings. Fiscal second-quarter revenue increased 23% year over year to $19.25 billion. Adjusted earnings came in at $1.08 per share. It’s worth noting that revenue would have been $1 billion higher, if not for the early termination of some licensing agreements to make content available on the company’s direct-to-consumer (DTC) services. Bottom line It wasn’t a perfect quarter, but we were pleased to see our two key watch items — theme park operating income and Disney+ subscriber additions — beat expectations. We had thought a relief rally might be in the cards if Disney+ added more subscribers than expected, considering the stock has dropped 20% since Netflix last month reported a decline in paid subscribers for the first time in more than 10 years, raising questions about peak streaming. Well, Disney+ outperformed like we expected, confirming our view that Disney’s streaming strategy is different and superior to Netflix’s game plan. However, Disney shares were surprisingly down 3% in after-hours trading to about $101. Yes, this is a tough market for all companies. Yes, a wider-than-expected DTC operating loss raises some questions about the path to profitability, even as management reaffirmed its view of when the business will be profitable. Remember, this market no longer wants stocks of companies that give you revenue growth at any cost. Profitability and cash returns to shareholders are paramount. And sure, concerns about inflation could impact margins at the parks. We understand all that, but shares of this iconic company now trade at 21x earnings and have retreated to prices it traded at before the DTC strategy was introduced. We must respect how the market wants to take this stock lower because the market will do what it wants to do. But we’re not changing our long-term view, due to the quality of the franchise, theme park business, and broader DTC strategy, and how all of them together bring more and more people under the Magic Kingdom umbrella to spend more and more money. Q2 segment results Disney Media and Entertainment Distribution: Revenues of $13.62 billion, up 9% year over year, missed estimates of $13.72 billion. Operating income of $1.94 billion, down 32% year over year, beat estimates of $1.8 billion. Within the segment, Linear Networks revenue of $7.71 billion, up 5% year over year, beat estimates of $6.83 billion, and operating income of $2.82 billion, down 1% year over year, exceeded the $2.39 billion estimate. Notably, advertising revenue at ESPN increased 30% year over year. Direct-to-Consumer revenue of $4.9 billion, up 23% year over year, missed estimates of $5.05 billion, and the operating loss of $877 million was larger than the $590 million loss that was expected. We did not like to see a wider than expected operating loss because this is a market that cares all about profitability. Still, we are pleased to see Disney+ add more subscribers than expected as many feared a much weaker result after the Netflix quarter. Disney ended the quarter with 137.7 million Disney+ subscribers, up 8 million from the prior quarter and above estimates of about 135 million. A little over half of those adds were driven by Disney+ Hotstar, a popular streaming service in India, which benefitted from the start of the new Indian Premier League cricket season. Domestic net adds were approximately 1.5 million. Management reiterated their view that they expect Disney+ subscriber growth in the back half of the fiscal year to exceed growth in the first half, but they moderated expectations on the call due to the better than expected first half of the year. This comment was one reason why Disney shares gave up initial after-hours gains. If we look at the math, Disney added 19.6 million subscribers over the past two quarters. The consensus estimate for the end of the September quarter is currently 158.7 million subscribers, implying 21 million in growth from here. This is not a big hurdle, especially considering the strength of Disney’s upcoming content slate. Long term, management reiterated confidence in their target of 230 million to 260 million total paid Disney+ subs by the end of fiscal 2024. Also, management still expects that Disney+ will achieve profitability in fiscal 2024. During the conference call, management said they plan to introduce an ad-supported Disney+ subscription offering in the U.S. by the end of the year and internationally in 2023. Average revenue per user, or ARPU, for Domestic Disney+ was $6.32, up from $6.01 last year. Global Disney+ ARPU was $4.35, up 9% year over year, versus estimates of $4.30. ESPN+ ended the quarter with 22.3 million subscribers versus estimates of 22.67 million. ARPU of $4.73 at ESPN+ was below estimates of $5.10. Total Hulu subscribers hit 45.6 million, slightly below estimates of 46.26 million. Hulu subscription video on demand (SVOD) only subscribers reached 41.4 million versus the 42.19 million expected, with APRU of $12.77 versus $11.10 estimates. Live TV + SVOD subscribers were 4.1 million versus the 4.43 million estimate. APRU was $88.77 vs. $81.83 estimates. Content Sales/Licensing and Other sales of $1.87 billion, down 3% year over year, missed the $2.07 billion estimate, and operating income of $16 million, down 95% year over year, was less than estimates of $84 million. Disney parks, experiences and products: Revenue more than doubled to $6.65 billion, blowing away estimates of $6.29 billion. Operating income of $1.76 billion topped estimates of $1.68 billion. Driving the beat was Parks & Experiences, which reported total revenue of $5.47 billion, up more than 100% year over year, compared to estimates of $5.2 billion. Operating profit of $1.12 billion, also up more than 100% year over year beat estimates of $984 million. Domestic Parks & Experiences reported revenue of $4.9 billion and an operating profit of $1.39 billion. While operating margin slid to about 28% from 32% in the year-ago period, these are still very impressive results. Per capita guest spending, which is a measure of how much an individual spends at the park, was up over 40% versus pre-Covid 2019 levels and 20% over 2021 levels, one year into the pandemic. Increases were seen in admissions, food and beverage, and merchandise. Management is still limiting attendance using its reservation system to optimize the guest experience. If people are happy they will spend more. Management believes the return of international visitors to the U.S. is still in the early days of the recovery. International Parks & Experiences reported revenue of $574 million and an operating loss of $268 million. These results were limited by the closures at Hong Kong Disneyland and Shanghai Disney due to virus-mitigation restrictions stemming from China’s zero-Covid policy. Closures at these two parks could negatively impact operating income by $350 million versus the prior year. Consumers Products delivered flat year over year revenue of $1.18 billion, basically matching estimates of $1.19 billion. Operating income of $638 million, up 14% year over year, exceeded the $559 million expected. (Jim Cramer’s Charitable Trust is long DIS. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. 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