Disney (DIS) shares tumbled nearly 10% in early trading on Tuesday, despite the company reporting progress in its streaming business and raising its full-year earnings guidance. The mixed reaction from investors highlights the challenges Disney faces in achieving sustained profitability in streaming while navigating declines in its traditional linear TV business and potential headwinds in its theme parks division.
In its fiscal second quarter, Disney's direct-to-consumer (DTC) segment, which includes Disney+ and Hulu, posted operating income of $47 million, a significant improvement from the $587 million loss reported in the prior-year period. However, when including losses from ESPN+, the company's total direct-to-consumer losses amounted to $18 million, compared to a $659 million loss in the year-earlier quarter. Disney reiterated its expectation for full streaming profitability by the fourth quarter of this year.
"I think you're going to see prices steadily go up over time in the streaming service mostly because the content we have is worth paying for," Disney CFO Hugh Johnston told Yahoo Finance's executive editor Brian Sozzi on Tuesday.
The company reported Q2 adjusted earnings of $1.21 per share, beating analysts' expectations of $1.10 and surpassing the $0.93 reported in Q2 2023. Revenue met consensus expectations at $22.1 billion, ahead of the $21.82 billion reported in the year-ago period. Disney also raised its guidance for full-year adjusted earnings growth to 25%, up from the previous 20% forecast.
Despite these positive developments, Disney took a hit after merging its Star India business with Reliance Industries, reporting an impairment charge of more than $2 billion. KeyBanc analyst Brandon Nispel noted that investors might view Disney's tepid outlook for its Experiences business, which includes theme parks, as a negative for the stock. CFO Johnston warned of "some evidence of a global moderation from peak post-COVID travel" at the company's theme parks, along with the impact of rising costs and inflation on profits.
On the streaming front, Disney added more than 6 million core Disney+ subscribers in the second quarter, exceeding its own guidance and beating Bloomberg consensus estimates of 4.7 million. The company also saw positive momentum in average revenue per user (ARPU), which increased sequentially by $0.44 to reach $7.28, driven by recent price hikes and a crackdown on password sharing.
However, Disney's linear TV business continued to face challenges, with domestic operating income at ESPN falling 9% year-over-year to $780 million, impacted by lower affiliate revenue, fewer subscribers, and increased production costs. Similarly, domestic linear network revenue within the entertainment division fell 11% year-over-year, while operating income dropped 18%.
Wall Street analysts offered mixed reactions to Disney's results. CFRA Research analyst Kenneth Leon cut his rating on Disney's stock from "buy" to "hold" and slashed his price target, citing less confidence in the company's ability to realize consistent results in its entertainment and sports units. On the other hand, Bank of America analyst Jessica Reif Ehrlich maintained her "buy" rating and $145 price target, highlighting Disney's collection of "best-in-class premier assets" and near-term catalysts, including updates on strategic priorities and an inflection in DTC profitability.
UBS analyst John Hodulik pointed out that while DTC was profitable excluding ESPN, management expects softer DTC profits in the fiscal third quarter due to challenges at Disney+ Hotstar in India. Wolfe Research analyst Peter Supino maintained his "peer perform" rating, noting better results in DTC and sports, offset by softer linear networks and content licensing performance.
