Disney Earnings Disappoint Despite Hefty Studio Performance

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Disney CEO Bob Iger

The company's studio entertainment revenue showed impressive gains, up 33 percent to $3.8 billion due to 'Avengers: Endgame,' 'Captain Marvel' and 'Toy Story 4.'

Disney shares were falling more than 4 percent after the closing bell on Tuesday after the entertainment giant's quarterly earnings fell short of expectations due in part to difficulties associated with the $71 billion acquisition of 21st Century Fox assets.

"I've been doing earnings calls for a long time, and this is one of our more complicated ones," CEO Bob Iger acknowledged while speaking to analysts on Tuesday. He called the integration of Fox "a complex endeavor," and he singled out the Fox film and TV studio as an underperformer, saying that it was "well below where it had been and well below where we hoped it would be when we made the acquisition."

The exec also noted that he has "a bullish view of the future" despite a lackluster quarter, but that it will be a couple of years before Disney turns around the fortunes of Fox live-action content. The company said it took a cost impairment on Dark Phoenix, a Fox film that made $252 million at the worldwide box office.

The company's studio entertainment revenue showed impressive gains, up 33 percent to $3.8 billion due to Avengers: Endgame, Captain Marvel and Toy Story 4. Iger noted that Disney has already set an annual box office record with five months remaining and releases such as Frozen 2 and Star Wars: The Rise of Skywalker still to come this year. The film studio is "the envy of the industry," he said Tuesday.

Disney studio co-chairs Alan Horn and Alan Bergman "are now redefining 20th Century Fox's film strategy for the future, applying the same discipline and standards behind the success of Disney, Pixar, Marvel and Lucasfilm. They're taking the Fox studio in a new direction," Iger said, with an "all-new development slate that will focus on a select group of high-quality movies" for theatrical release and for Hulu and the upcoming Disney+.

Iger noted that Avatar, Planet of the Apes, Fantastic Four, Deadpool and X-Men are now part of Disney, courtesy of Fox. The latter three are part of the Marvel cinematic universe, which so far consists of 23 movies with global box office of $22 billion. 

Overall, Disney revenue came in at $20.3 billion for its fiscal quarter, while analysts expected $21.4 billion. Adjusted earnings were $1.35 a share, while analysts predicted $1.71.

Disney's direct-to-consumer segment showed a $553 million loss, up from $168 million in the same quarter last year, as it gets ready to launch Disney+ in November. That product, expected to heavily feature Marvel, Pixar and Star Wars content, will compete with Netflix, Amazon Prime Video, CBS All Access and other streamers.

At launch, Disney+ will have about 600 hours of Nat Geo content and 300 hours of Fox content due to its acquisition of Fox, Iger said Tuesday. The exec also said Disney is readying a far-reaching marketing plan for Disney+, adding that to call it "comprehensive is probably an understatement." He added that Disney+ is one of the most important products the company has ever launched.

Also on Tuesday, Disney said it will bundle Disney+, ESPN+ and Hulu's basic tier for $12.99 monthly, while it had previously disclosed that Disney+ alone will cost $6.99 per month.

Iger said that projects based on "reimagined" Fox franchises like Home Alone, Night at the Museum, Cheaper by the Dozen and Diary of a Wimpy Kid will make their way onto Disney+.

"We analyzed the 21st Century Fox opportunity entirely through the lens of our future business," particularly Disney+ and the other DTC assets, Iger said.

Disney's losses at its DTC segment also reflect costs associated with its majority stake in Hulu — Iger noted there's a "clear path" to 100 percent ownership of that asset — and its increasing investments in ESPN+. Disney said Tuesday that it could rack up $900 million in operating losses in the DTC segment in the current quarter.

The media networks segment saw revenue increase 21 percent to $6.7 billion, though ESPN again showed lower viewership, a trend for a few years now as consumers ditch pricey cable and satellite TV services in favor of less-expensive streamers.

Revenue at parks, experiences and products rose 7 percent to $6.6 billion. Galaxy's Edge, the new Star Wars area at Disneyland, didn't live up to attendance expectations over fears of "huge crowding ... some people stayed away just because they expected it would not be a great guest experience," said Iger. Plus, Disney raised ticket prices and surrounding hotels raised room rates in anticipation of the grand opening, and the higher costs scared some away.

As is usually the case, media networks was the most profitable segment for Disney, with operating income rising 7 percent to $2.1 billion. Parks, experiences and products was second, rising 4 percent to $1.7 billion, while studio entertainment was up 13 percent to $792 million.