Disney Earnings: Lackluster Subscriber Growth Remains a Sore Spot Despite Smaller Streaming Losses

Walt Disney Company Stock at a Glance

• Fair Value Estimate: $145.00
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: High
• Morningstar Economic Moat Rating: Wide

Walt Disney Company Earnings Update

Disney DIS posted a solid fiscal third quarter as streaming losses continued to shrink, but Disney+ and Hulu delivered very weak subscriber numbers. Even as the streaming segment remains on course to break even by the end of fiscal 2024, we still believe Disney needs to drive stronger top-line growth to replace declining linear networks revenue.

While the just-announced price increases are one lever for driving revenue growth, we think subscriber growth will also be required over the medium term. We are maintaining our $145 fair value estimate.

Total revenue improved by 4% year over year to $22.3 billion, as the growth at parks and direct-to-consumer outweighed the declines at the linear networks and studios businesses. Adjusted operating income was flat at $3.6 billion, as increased sports programming costs more than outweighed the DTC improvements. DTC revenue improved by 9% to $5.5 billion. Losses in the DTC segment dropped sequentially by $65 million and by $467 million year over year to $594 million.

Disney+ Subscriber Losses

Disney+ ended the quarter with just over 146 million subscribers, as it lost 11.7 million net customers globally in the quarter, including a 12.5 million loss in Hotstar countries. Core Disney+ grew by 800,000 subscribers to 106 million as international added 1.1 million. Average monthly revenue per paid Disney+ subscriber dropped in every area except the United States, which grew by 17% thanks to a price increase in December.

Customer defections due to the price increase remain lower than expected, giving Disney confidence to announce another set of price hikes. While management has indicated more price increases were on the horizon, they are larger than we expected. Disney also announced that a new bundle of the two ad-free tiers will be available for $20. Given the large monthly discount of $12 and the move to place Hulu content inside Disney+, management is pushing subscribers onto a bundle, which drives much higher engagement and thus lower churn.

The new bundle price also explicitly makes the Disney+/Hulu combination a direct competitor to the 4K plans from both Netflix and Warner Bros. Discovery. Beyond the U.S. price hikes, management also announced that the ad-supported plan for Disney+ will be expanded to Europe (EUR 6 monthly), the United Kingdom (GBP 5 monthly), and Canada (CAD 8 monthly). These markets will also see a price increase later this year.

ESPN Inks Penn Gaming Deal

While Iger briefly touched on streaming the full ESPN experience, the more interesting ESPN news was disclosed on Aug. 9 when Penn Gaming announced a 10-year exclusive partnership with the sports network.

ESPN will receive $1.5 billion over the next 10 years, along with $500 million in warrants. ESPN will act as the exclusive media partner for Penn Bet, and the sports betting app will be branded with the ESPN logo. We expect that ESPN will help to market the app and provide lines on-air and online from Penn exclusively.