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The Walt Disney Co. reported its fiscal second quarter earnings Wednesday, with the company largely beating Wall Street expectations on most key metrics, including revenue.
As with every major entertainment company, streaming profitability (or the lack thereof) is among the most closely-watched metrics. Losses in Disney’s direct-to-consumer business continued to decline, falling to $659 million in the quarter, down from $1.1 billion the quarter prior, and from the peak of $1.5 billion from what would be Bob Chapek’s final earnings report as CEO.
In a sign of how the company plans to approach the economics of streaming, CFO Christine McCarthy said on an earnings call that Disney is in the process of reviewing the shows and movies on its services and that it “will be removing certain content from streaming platforms.” McCarthy added that the company will take an impairment charge of between $1.5 billion-$1.8 billion on the content it removes.
McCarthy added that in the company’s next quarter it expects streaming losses to widen by about $100 million.
And Disney CEO Bob Iger added that the company sees both price increases and advertising as growth opportunities. Iger said the company expects to raise the price on its ad-free tier, while keeping the price of its ad-supported tier “modest,” thanks to its superior economics.
“We see that there is going to a substantial growth in digital advertising in this upfront,” Iger said, adding that the company will push further into advertising on Disney+.
And Iger said that the company will create a “one app” offering for Disney+ and Hulu by the end of the year, though the services will remain separate for now.
In other streaming news, the total number of Disney+ subscribers declined slightly to 157.8 million, down from 161.8 million in the prior quarter. However, most of those declines were at Disney+ Hotstar, with Disney+ domestic subs only falling by 300,000, something of a surprise given that the price increase would largely have been felt for most consumers last quarter.
To that end, average revenue per user (ARPU) soared at Disney+, rising 20 percent year over year for domestic users, and 6 percent international excluding Hotstar.
Revenues in the streaming division rose to $5.5 billion (+12 percent).
Total Disney revenues in the quarter were $21.8 billion, up 10 percent from a year prior, with segment operating income of $3.3 billion, a decline of 11 percent from a year ago.
The decline in income is due almost exclusively to continued challenges in the linear TV business. Linear networks revenue fell by 7 percent year over year to $6.6 billion, with operating income in the division falling by 35 percent to $1.8 billion.
Higher sports rights and production costs at ESPN, combined with lower affiliate and advertising revenue, were to blame at cable, while ABC and the ABC stations had lower advertising revenue, continuing a trend that is visible across the market.
Iger said that the company’s plans regarding ESPN have not changed, and that the company will move ESPN to streaming when the timing is right and the pricing has been figured out. He added that “all of these things are connected,” from ESPN to the cable bundle to streaming profitability, and certain things need to be worked out before the company moves forward.
Elsewhere in streaming, Hulu subscribers were more or less flat, with the ad-supported SVOD tier adding 200,000 subscribers, and live TV tier losing 100,000 subscribers. ESPN+ added 400,000 subscribers. ARPU at Hulu declined slightly due to lower ad revenue while ESPN+ ARPU rose slightly thanks to higher ad revenue.
And of course Disney’s theme parks business continued to grow exponentially, with international parks revenue rising by more than 100 percent to $1.2 billion, thanks to the end of COVID-19 restrictions, and domestic parks revenue up 14 percent to $5.6 billion.
The earnings come as Disney and Iger look to shed costs in order to seek profitability in streaming. That included a new org structure, announced last quarter, as well as a reduction of about 7,000 jobs. The company has now had two rounds of layoffs, totalling about 4,000 jobs, and a third round will begin before the summer.
Disney reported $152 million in severance costs in the quarter, and McCathy indicated that it will rise in the next quarter as more layoffs take effect.
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