Walt Disney (DIS) -) shares edged lower Wednesday ahead of the media and entertainment giant's third-quarter earnings, slated for after the closing bell with investors are likely to focus on containing losses in its streaming division as Disney preps for the launch of ad-supported options and further price increases.
Disney, which recently extended the contract of interim CEO Bob Iger until the end of 2026 following his return to the helm last year, is expected to post a bottom line of 95 cents a share for the three months ended in June, down 12.8% from the year-earlier period.
Group revenue is forecast to have risen by around 5%, to $22.5 billion, thanks in large part to increased growth at its Parks and Experiences division, which will likely offset further pressure in streaming.
Iger, 72, detailed sweeping changes on his return, including a major cost-cutting drive and a new three-part organizational structure focused on Parks, Entertainment and ESPN. He also said Disney would restore its regular dividend, which it suspended during the peak of the pandemic in 2020, by the end of the calendar year.
"We believe the beauty of a diversified media company will be on full display with Disney earnings," said Daiwa Capital Markets analyst Jonathan Kees, who carries a buy rating with a $108 price target on Disney stock. "We expect earnings growth propelled by top-line growth driven by continued parks outperformance and cost savings."
In that respect, investors are likely to focus on the subscriber gains for its streaming services, which includes Disney+, ESPN+ and Hotstar, following a series of price increases aimed at offsetting content and acquisition costs.
Disney Streaming: No Quarterly Profit as Yet
The unit has yet to post a quarterly profit since it debuted in first-quarter 2020, though it narrowed its operating loss narrow to $659 million over the three months through June.
Disney expects the streaming division to be profitable in the coming fiscal year, which begins in October, as it starts to offer ad-support tiers following a similar move by rival Netflix (NFLX) -).
Disney+ paid subscribers fell by 4 million to 157.8 million over the three months ended in March, notching its second consecutive top-line decline, thanks in part to the loss of televised cricket rights in India.
Chief Financial Officer Christine McCarthy said at the time that weakness in the streaming division would "linger" into the three months ended in June.
"We will continue optimizing our pricing model to reward loyalty and reduce churn to increase subscriber revenue for the premium ad-free tier and drive growth of subscribers who opt for the lower-cost ad-supported option," Iger told investors in early May. He detailed plans to launch an integrated Disney+/Hulu app by the end of the calendar year, while also updating plans to roll out an ad-supported service in Europe.
"The truth is, we have only just begun to scratch the surface of what we can do with advertising on Disney+, and I'm incredibly bullish on our longer-term advertising positioning," he said.
The Parks division, which generated nearly $8 billion in revenue over the March quarter with an operating profit of $2.2 billion, will also be in focus. Attendance trends are slowing as Disney increased prices in key markets and consumers pulled back on discretionary spending.
"Our domestic theme parks attendance data is weak for April and May; Disneyland growth due to its 100th anniversary celebration is more than offset by Walt Disney World contraction from comparisons against its 50th anniversary celebration," KeyBanc Capital Markets analyst Brandon Nispel noted in late June. "We worry the 'tough comps' are not properly reflected in" the analyst-consensus estimates.
Disney: Sports-Betting Partnership With Penn
Still, Iger's cost-cutting effort, which he expects to exceed an earlier target of $5.5 billion, is starting to bear fruit. So is his vision for finding a content partner for ESPN that will help offset the ongoing decline in ad revenue and profit from Disney's linear networks division.
Disney, in fact, has agreed terms with Penn Entertainment (PENN) -). The deal will see the gambling group pay $1.5 billion over 10 years, as well as an equity kicker, in exchange for the use of brand rights, promotions and other forms of cooperation as it relaunches under the a new name: ESPN Bet.
"We see the licensing agreement as a step forward for ESPN as it provides better monetization opportunities vs. only a marketing partnership and can better utilize ESPN's broad reach and brand recognition," said KeyBanc's Nispel.
Disney shares were marked 0.16% lower in early afternoon trading Wednesday to change hands at $87.98 each, a move that would peg the stock's year-to-date decline at around 1%.
Since Iger's return in November of last year, however, the stock is down around 6%, compared with a 20.7% gain for the Dow Jones Industrial Average and a 26.5% gain for the S&P 500.
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