Dow Jones entertainment giant Disney posted mixed results for fiscal Q3 late Wednesday as it struggles with slowed streaming growth and high content costs. On Tuesday, Disney-owned ESPN inked a deal with gambling company Penn Entertainment. Disney stock surged Thursday.
Disney announced a 6% decline in adjusted earnings to $1.03 per share while revenue rose 4% to $22.33 billion.
Analysts expected earnings to fall 11.2% to 96 cents per share on 4.6% revenue growth, to $22.49 billion.
Disney reported a major miss for streaming subscriptions. Disney+ had 146.1 million paid subscribers for the quarter, down from 157.8 million in Q2 and 152.1 million last year. FactSet guided Disney+ subscriptions of 155.44 million.
Much of the decline came from India and the Disney+ Hotstar streaming service, which saw subscribership drop 24% to 40.4 million after losing rights to the India Premier League cricket league.
Total subscribers across Disney+, ESPN+ and Hulu were 219.6 million for the quarter, well below forecasts of 230.24 million. Disney reported 231.2 million total subscribers in Q2 and 221.1 million last year.
For the quarter, Disney recorded $2.44 billion in direct-to-consumer-related costs due to removing content from its platforms and terminating third party license agreements.
Still, the operating loss from its DTC channels declined to $0.5 billion from $1.1 billion last year. The company reported lower losses from Disney+ and ESPN+ and higher operating income from Hulu.
Meanwhile, Disney Parks, Experiences and Products revenue jumped 13% over the year to $8.33 billion.
CEO Bob Iger said Disney is "on track to exceed our initial goal of $5.5 billion in cost savings as well as improved our direct-to-consumer operating income by roughly $1 billion in just three quarters."
Streaming Price Hikes
However, the company announced its second set of major price increases in less than a year. Among those hikes were more than 20% increases to the cost of the ad-free versions of Disney+ and Hulu.
Beginning October 12, price of ad-free Disney+ will increase to $13.99 per month, while Hulu and ESPN+ subscriptions will increase to $17.99 per month and $10.99 per month, respectively.
Disney is also exploring ways to crack down on account sharing. Later this year, the company will update its terms and roll out a new sharing policy in 2024.
There are a "significant" number of subscribers that participate in password sharing, Iger noted on the earnings call. It's unclear how the crackdown will convert to subscriber growth, he said. "Obviously we believe there will be some, but we're not speculating."
Iger expects to see some impact in the 2024 calendar year.
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ESPN Enters Sports Betting
ESPN partnered with Penn Entertainment on a gambling sportsbook, the companies announced late Tuesday. Penn Entertainment will rebrand its Barstool Sportsbook as ESPN Bet, which will launch this fall in 16 legalized-betting states where Penn is licensed.
ESPN will use ESPN Bet exclusively. Per the deal, Penn will pay ESPN $1.5 billion cash over 10 years, plus $500 million in warrants to buy PENN stock. In return, Penn will have exclusive rights to the ESPN Bet trademark in the U.S. for the next decade.
"We believe there's an opportunity here to significantly grow engagement with ESPN consumers, particularly young consumers," Iger said on the earnings call. Disney was in discussions "with a number of entities" for a long period of time, but Penn "stepped up in a very aggressive way" with an offer better than competitors, he said.
The deal is a bit of a reversal for Iger, who said in 2019 that he did not see the company getting involved in the gambling business.
PENN stock leapt nearly 20% early Wednesday as it beat Q2 earnings and revenue estimates after the deal announcement.
Cutting Costs
Disney in mid-July extended its contract with CEO Bob Iger through 2026 as the company continues its ongoing transformation plan and searches for a new chief executive. As part of that transformation, Iger implemented a restructuring initiative that included 7,000 layoffs and plans to cut $5.5 billion in costs, including $3 billion from content.
Disney is pulling back on Marvel and Star Wars production as part of the cuts, Iger revealed in a July 13 interview with CNBC. The CEO disclosed he was open to potentially selling an equity stake in ESPN and seeking a strategic partner to help with distribution and content as it transitions to streaming. Disney is also open to selling some of its major television assets, including ABC, National Geographic and FX. Iger noted the properties "may not be core" to Disney, as its traditional cable TV assets and the legacy business model struggle.
Meanwhile, Needham believes Disney will be acquired in the next three years, according to a mid-July research note. The report called Disney's assets the best in the media business. It also pointed out there was no controlling shareholder to block a takeover and no permanent CEO or CFO with a conflicting agenda vs. shareholders.
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Florida Feud
Elsewhere, Disney continues to feud with Florida Gov. Ron DeSantis over legislation banning gender identity and sexual orientation discussions in the state's classrooms. Last week, DeSantis' hand-picked board for the Central Florida Tourism Oversight District, formerly known as the Reedy Creek Improvement District, which oversees the area around Walt Disney World, abolished all of its diversity, equity and inclusion programs.
The CFTOD on Tuesday announced plans to dissolve the district's DEI (diversity, equity and inclusion) committee and eliminate any DEI-related job duties. Additionally, the CFTOD claimed the district's preexisting policies "implemented hiring and contracting programs that discriminated against Americans based on gender and race, costing taxpayers millions of dollars," citing an internal investigation into Reedy Creek.
The CFTOD plans to dissolve the district's DEI committee and eliminate any DEI-related job duties. However, the changes only affect the government, and not the companies operating inside the district, including Disney.
In May, Disney scrapped plans for a $1 billion office development project in Florida. The project had planned to relocate 2,000 employees from California to Florida.
Disney Stock
DIS shares jumped 4.9% Thursday. The stock inched lower Wednesday and is down slightly for August.
Disney stock is up 5.7% so far this year after reporting declining earnings the past three quarters. It is sitting near the bottom of a 29-month decline, and trading narrowly above an almost three-year low notched in December.
You can follow Harrison Miller for more stock news and updates on Twitter @IBD_Harrison
