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Disney - mixed bag as streaming subscribers disappoint

Disney reported third-quarter revenue of $22.3bn, up 4%, while operating income was broadly flat at $3.6bn.

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Disney reported third-quarter revenue of $22.3bn, up 4%, while operating income was broadly flat at $3.6bn. Revenue growth was driven by the Parks segment as Asian sites benefited from a reopening and higher ticket prices. But traditional broadcasting weighed on both the top and bottom line, as international channels moved into loss-making territory.

Operating losses were better than expected in the streaming business, narrowing to $512m. But total Disney+ subscriber numbers disappointed, down 7.4% to 146.1m, driven by declines in India due to the loss of popular cricket rights.

Better Park's performance helped drive free cash flow of $1.6bn, up from $0.2bn. Net debt was $35.7bn at the period end.

The shares fell 2.2% in pre-market trading.

View the latest Disney share price and how to deal

Our view

The recovery from parks may be pushing the top line higher, but it's hard to escape the fact Disney is a business facing challenges across pretty much every operating segment.

Bob Iger was brought out of retirement at the end of last year to supercharge efforts and stem losses in streaming. We understand the rationale for keeping costs in-line, but in a time when competition in streaming is hotting up, it's a tough balance to get right. Streaming subscribers fell over the half largely due to Disney losing out on rights to the Indian Premier League (cricket). And cost-saving measures, which to be fair are progressing well, have also meant drastic action, including the loss of 7,000 jobs.

Yet, we're broadly optimistic about the group's foray into streaming. The group's brands include Disney+, ESPN+ and Hulu. The later will soon see content merged with Disney+ and time will tell if this will move the dial. And we're cautiously hopeful the group will come good on its plans to create profit by 2024, but we're reserving judgment until we see results.

Fortunately, we think Disney has a head start on rivals. An excellent content catalogue - whether that's princesses on Disney+ or quarterbacks on ESPN - is one thing - but Disney's ability to sell those products through a variety of channels, multiplies the benefit many times over. Theme parks, computer games, Disney Stores - all help the group squeeze maximum benefit from its content.

Propelling growth from elsewhere is important, because we've probably seen Cable's last hurrah. Disney's so-called linear TV businesses like ESPN and ABC are acting as a drag on profits. We still think cable has room to run, but it's unlikely to be a profit booster.

Instead, theme parks are propping up the bottom line. As travel normalises and tourism resumes, high customer volumes are offsetting the enormous costs that come with running these parks. Disney cruises are filling up again and profits are sailing. Over the long-term, we view parks and experiences as highly resilient assets. In the shorter-term, there's a chance tougher economic conditions could see ticket sales or merchandise revenue weaken.

With time as its ally, Disney has an excellent offering and should hopefully be held in good stead. It's a media powerhouse. The main driver of market reactions will be the speed at which it can grow its streaming business. As we've seen with recent results, the market will be quick to react to disappointing news on that front, so we can't rule out ups and downs.

Disney key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 10th August 2023