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Disney - streaming loses 4m subscribers

Disney's second quarter revenue rose 13% to $21.8bn.

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Disney's second quarter revenue rose 13% to $21.8bn. Despite the higher revenue, operating profit fell 11%, reflecting a 35% drop in the group's linear TV networks. This was caused by higher sports programming and production costs in College Football Playoffs and the NFL at ESPN, coupled with lower advertising revenue.

Losses narrowed in the streaming business, as they fell $659m, compared with $1.1bn the prior quarter. However, this was driven by higher prices and a reduction in marketing spending. The service lost around 4m subscribers, largely in India because of the loss of popular cricket rights. There were also losses in western markets. The market had expected Disney to add 1m subscribers.

A rebound continued in the Parks and Experiences business. Growth at the Shanghai Disney Resort, Disneyland Paris and Hong Kong saw operating profit rise 23% on last year to $2.2bn.

The better performance at Parks helped free cashflow more than double to $2.0bn, while net debt was $38.1bn.

Disney shares fell 4.8% in after-hours trading.

View the latest Disney share price and how to deal

Our View

It's very difficult to stimulate growth with a scythe.

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. We think marketing cuts contributed to the 4m drop in subscribers last quarter. And cost saving measures 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.

Over the long-term, 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
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 11th May 2023