Disney Earnings: Improved Streaming Results Come at the Expense of Continued Linear Weakness

Key Morningstar Metrics for Walt Disney

• Fair Value Estimate: $115.00
• Morningstar Rating: 3 stars
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: High

What We Thought of Walt Disney’s Earnings

Walt Disney DIS continued to progress on cost reductions and build a path to streaming profitability during its fiscal second quarter. However, promising streaming metrics coincided with the traditional television business continuing to struggle, and the firm provided a muted fiscal third-quarter outlook, especially for its experiences segment. Our concern remains with the bigger picture. Until Disney can show more progress on the collective streaming and linear television trend, we expect overall performance to remain muted. We maintain our fair value estimate of $115 per share.

Entertainment streaming revenue, which excludes ESPN+, grew 13% year over year and reached operating profitability for the first time, but we see streaming as inextricably linked to linear television networks (excluding ESPN), where revenue declined 8% and operating income dropped by more than 20%. There are inklings of progress on the collective business, but we need to see a longer trend and more details than the company has provided. Entertainment streaming and linear revenue grew 5% year over year, while operating margin doubled to nearly 10%.

Unsurprisingly, domestic Disney+ subscribers jumped significantly in the quarter, by 8 million, as many Charter cable subscribers began receiving access through their existing pay-TV packages in January. We were pleasantly surprised that Disney+ domestic average revenue per user still grew 14% year over year and declined only modestly sequentially. We expected a bigger weight from the Charter subscribers. It doesn’t seem this positive surprise resulted from a shift in revenue allocation from the linear networks, as the 8% decline in linear networks revenue marked the best rate of decline in the past four quarters. While we suspect a lower rate of advertising revenue decline caused the improvement, we think it’s unlikely the affiliate revenue decline could be much worse given the overall improvement.