Disney Reported Streaming User Growth & Profit for Parks

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Strong Quarterly Results

The Walt Disney Company reported its financial results for the second quarter of Fiscal Year 2022 (period ended April 2), on Wednesday after the US markets closed. These were overall very strong, with impressive metrics from the streaming services and the domestic parks, which caused Chief Executive Officer Bob Chapek to proclaim that "we are in a league of our own". [1]

Total Revenues grew 23% year over year in Q2 FY2022, to $19.249 billion, although they were lower compared to the $21.819 billion reported in the prior quarter, with the Media and Entertainment Distribution segment remaining the largest contributor.

Total Segment Operating Income increased to $3.699 billion, 50% from a year earlier and was also higher than the $3.258 billion of Q1 FY2022.

The Company commented that during the current fiscal quarter, domestic parks and resorts are generally operating without significant COVID-19- related capacity restrictions, its film and television productions have generally resumed and has generally been able to release films theatrically.

Streaming Services & Disney+ Growth

The direct-to-consumer (DTC) services have become the focal point in the wake of the pandemic, which supported the company, as people were under lockdown at home and turned to streaming. As of April 2, the firm had more than 205 million paid subscribers on its streaming platforms, which include Disney+, Hulu and ESPN+, having added 9.2 million in the reported quarter.

The star of the show is of course Disney+ which has seen a meteoric rise since it launched in late 2019, adding 7.9 million subscribers in Q2 FY2022 and growing its user base to 137.7 million.

During the earnings call, CEO Mr Chapek said those figures keep Disney+ "on track" to reach 230-260 million users by fiscal 2024. Senior Executive Vice President and CFO Ms McCarthy expects "an increase in the second half to exceed the first half", although she warned of potentially slower growth than initially anticipated, given the better than expected H1. [2]

These figures and expectations are in stark contrast with Rival Netflix, which reported a shocking Loss of 200K subscribers during the first quarter of the year and projects a whopping loss of 2 million during the second half.

Disney+ Expansion & Ad Support

However, Disney+ is very "young" compared to the well-established streaming giant Netflix and firmly on a growth path, available in a still relatively limited number of countries. The firm is working on that front, having announced earlier in the year, the expansion in 42 new countries and 11 territories. [3]

Disney+ is already available in some key European countries such as Germany and Spain, but it will now expand to more countries on the continent. This enlargement, which is expected to begin in the summer, will also include countries of the Middle East and Africa.

The California-based firm is also working on introducing a lower-priced subscription offering, that will include advertisements. The new offering is expected to become available in late 2022 in the US and expand internationally over the next year. [4]

During yesterday's earning call, CEO Bob Chapek said that the new advertisement tier is going to "give us the ability to reach an even more broad audience as we expand Disney+ across multiple price points". [2]

As we have commented again, ad-supported tiers may be the future of streaming, given the increasing competition and available options for consumers, as well as the high inflation environment they currently experience.

Netflix which has firmly resisted such subscription tiers, gets ready to reverse its policy following the latest disappointing metrics, since its co-CEO Reed Hastings commented on the post-earnings call, that the firm is now "quite open to offering even lower prices with advertising". [5]

Robust Entertainment Content

The Walt Disney Company is an undisputed entertainment powerhouse, with decades worth of content. More to that, it holds the keys of two of the most important franchises of the industry: the Marvel Cinematic Universe (MCU) and Star Wars.

The latest MCU theatrical release, "Doctor Strange in the Multiverse of Madness" opened to $450 million worldwide this past weekend. This was the highest global opening of the year to date, surpassing "The Batman" from Warner Bros. [6]

This will of course find its way into Disney+, which includes MCU-based TV series and Star Wars themed programs, such as the popular "The Mandaloarian" and the upcoming "Obi-Wan Kenobi". The firm's content is mostly kids-oriented, but Gen-Xers that grew up with Star Wars will have a strong incentive to join the platform, along with more grown-up programming.

The company has struggled a bit to combine these two types of content, but the service has added parental control options, which will likely make it more appealing to families. President of Disney Streaming, Michael Paull, had recently twitted that "Grown-Up Marvel Shows Coming to Disney Plus With New Parental Controls". [7]

Profitable Disney Parks, Experiences & Products (DPEP)

The DPEP segment had taken a massive hit from the pandemic lockdown measures, but as the world leaves those behind, it has been recovering. According to CEO Mr Chapek, domestic parks "were a standout" and continued to "fire on all cylinders". [2]

Yesterday's data back these comments, since the segment posted Operating Income of $1.755 billion in Q2 FY2022, making it the fourth straight profitable quarter, although this was lower compared to the $2.450 billion of the previous quarter.

Looking outside the US however, there are still pandemic challenges, from the recent spread in China and the country's strict zero-Covid policy. Its park in Hong Kong was closed for a few weeks at the start the quarter and the one in Shanghai has been closed quarter-to-date, with no reopening date, as per Ms McCarthy. [2]

The Senior Executive Vice President and CFO added that the closures in the Asia theme parks could have an adverse impact in operating income of up to $350 million in the next reported quarter. However, she is hopeful of a rebound when the Covid-related headwinds abate, based on the Disneyland Paris experience.

Potential Headwinds

Despite the firm's push on multiple fronts, solid results and streaming growth, there are pitfalls ahead. Disney+ is a growth story, but more firms jump on the streaming bandwagon which may be getting saturated.

Apple TV+ definitely made a splash, becoming the first streaming platform to win the Oscar for Best Picture with CODA in late March, while HBO with its treasure trove of popular and critically acclaimed TV shows, is also making progress.

With more options for consumers and higher inflation that diminishes their disposable income, Disney+ may face headwinds, but the upcoming ad-supported offering could mitigate that.

On the parks front, recovery is evident, but it is also clear that Covid-19 restrictions are not in the rearview mirror. Furthermore, the company got in some hot water recently with the Florida authorities, where Walt Disney World is located.

The firm has governmental controls around its theme parks, under the Reedy Creek Development District, but Governor de Santis signed a bill last month that would dissolve the district next year. This could strip Disney of its current privileges and special tax status. [8]

Stock Movement

Despite the solid results, investors were probably not impressed, since the stock was down in pre-market, at the time of writing.

DIS.us has entered its third straight negative month, losing around 30% year-to-date, following a negative 202.

Nikos Tzabouras

Senior Market Specialist

Nikos Tzabouras is a graduate of the Department of International & European Economic Studies at the Athens University of Economics and Business. He has a long time presence at FXCM, as he joined the company in 2011. He has served from multiple positions, but specializes in financial market analysis and commentary.

With his educational background in international relations, he emphasizes not only on Technical Analysis but also in Fundamental Analysis and Geopolitics – which have been having increasing impact on financial markets. He has longtime experience in market analysis and as a host of educational trading courses via online and in-person sessions and conferences.

References

1

Retrieved 12 May 2022 https://thewaltdisneycompany.com/app/uploads/2022/05/q2-fy22-earnings.pdf

2

Retrieved 12 May 2022 https://edge.media-server.com/mmc/p/bpj39izv

3

Retrieved 12 May 2022 https://press.disney.co.uk/news/disney+-confirms-42-countries-to-launch-in-europe,-middle-east-and-africa-this-summer

4

Retrieved 12 May 2022 https://thewaltdisneycompany.com/disney-to-introduce-an-ad-supported-subscription-offering-in-late-2022/

5

Retrieved 12 May 2022 https://www.youtube.com/watch

6

Retrieved 12 May 2022 https://thewaltdisneycompany.com/doctor-strange-in-the-multiverse-of-madness-opens-to-450-million-worldwide/

7

Retrieved 12 May 2022 https://twitter.com/mpaull/status/1498754561321832450

8

Retrieved 19 May 2022 https://www.flgov.com/2022/04/22/governor-ron-desantis-signs-legislation-to-create-lawful-congressional-districts-and-remove-special-interest-carveouts/

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