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

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+ 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 U.S., 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 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.