LOS ANGELES – Disney on Thursday reported an 82% decline in quarterly operating income, the result of steep losses at its coronavirus-devastated theme park division and the postponement of major movie releases.
But Wall Street had already decided that Disney’s overall results for the quarter, the fourth in the company’s fiscal year, would be “apropos of nothing,” as Todd Juenger, an analyst at Sanford C. Bernstein, wrote in a Nov. 2 research report. Investors are confident that Disney’s theme park empire will come roaring back when a vaccine is deployed — and all they really care about, at least for the moment, is streaming, streaming, streaming.
To that end, Disney said its flagship streaming service, Disney+, had 73.7 million subscribers as of Oct. 3, surpassing the low end of its initial five-year goal after only 11 months. Disney also owns Hulu (36.6 million subscribers, up 27% from a year earlier) and an ESPN-branded streaming service (10.3 million, triple the number from a year earlier). Disney will soon introduce Star, an overseas version of Hulu stocked with programming from Disney properties like ABC, FX, Freeform, Searchlight and 20th Century Studios, which Rupert Murdoch sold to the company last year.
Streaming is not yet a profitable business for Disney — far from it. Losses in the company’s direct-to-consumer division totaled $580 million in the quarter (which was less than analysts had feared), bringing losses for the fiscal year to $2.8 billion. Streaming-related losses are expected to peak in 2022, as rollout costs decline and content expenses normalize, with Disney+ profitability expected by 2024, according to analysts.
Disney shares rose roughly 5% in after-hours trading, in part because overall results (losses of 20 cents a share, after adjusting for one-time items, compared with per-share profit of $1.07 a year ago) were better than investors had expected. Despite the wreckage wrought by the coronavirus pandemic — Disneyland in California has been closed since March, with no reopening on the horizon — Disney shares have declined only 4% for the year.
Disney faces an increasingly competitive streaming environment. HBO Max, CBS All Access (soon to be renamed Paramount+), Peacock and Apple TV+ are determined to make inroads. Netflix and Amazon continue to pour billions of dollars a year into original programming. Disney+ also must contend with an expiring promotion. Starting this week, Verizon customers who signed up for Disney+ through a one-year free offer have to start paying ($7 a month) or cancel.
To keep subscribers and sign up new ones, Disney+ needs more original content, analysts say. The problem: Some shows and films have been delayed because of a pandemic-related production halt. “Soul,” a Pixar film, will bypass theaters in most of the world and premiere on Disney+ on Dec. 25. Disney said Thursday that “WandaVision,” the first of eight Marvel series headed for the service, will debut Jan. 15.
“It’s very clear to us that new content adds subscribers,” Bob Chapek, Disney’s chief executive, said on an earnings-related conference call. He said he was “very pleased” with its recent “premiere access” experiment with “Mulan,” which was offered on Disney+ for a premium price of $30 in September. He indicated that more Disney movies would be distributed that way, something sure to send shivers through movie theater chains. “We saw enough very positive results to know that we have something here in terms of the premiere-access strategy,” Chapek said.
Disney will hold a virtual investor day Dec. 10 to further detail its direct-to-consumer strategies. Some investors hope that Disney will use the session to announce a more pronounced foray into sports streaming. “We’re going to put a lot of wind in the sails of our Disney+ business,” Chapek said on the conference call.
Chapek, who took over as Disney’s chief executive in February, recently restructured the company to push streaming closer to Disney’s heart. The new setup involves splitting Disney’s television operation into two divisions — one focused on content creation (with a “primary focus” on content for streaming) and the other on distribution (with full oversight of profits and losses). How it will work is still unclear, at least to those outside the company, but the reasoning is obvious: The traditional TV business is sputtering. Newly cost-conscious consumers are canceling their cable and satellite service in larger numbers, putting pressure on ad sales and subscriber fees. A lot of people have switched to à la carte streaming options; Disney+ has made Disney Channel irrelevant for many families, for instance.
Chapek maintained that his reorganization was going well. “Despite the disruption in everyone’s roles, we have 100% buy-in,” he said.
Disney Media Networks, a division that includes ESPN and ABC, was helped by the pandemic, at least from a fiscal standpoint, as production shutdowns and a shift of college football games to later quarters lightened costs at ABC. Ad sales benefited from an extra week in the quarter, a quirk of Disney’s fiscal reporting structure. The division had operating profit of about $1.86 billion, a 5% increase from a year earlier.
It was another brutal period for Disney’s theme park and consumer products division, where operating profit plunged $2.5 billion, resulting in a loss of $1.1 billion. Walt Disney World in Florida reopened in July with limited capacity, but other major properties, including Disney Cruise Line, remain closed because of the coronavirus.
Chapek said that Disney World, which had reopened at 25% capacity, recently lifted restrictions to 35% “while still adhering to the guidelines that are stipulated by the CDC for 6-foot social distancing.” Reservations for Thanksgiving week are “almost at capacity,” Christine M. McCarthy, Disney’s chief financial officer, said on the conference call.
Disney’s theme parks have long been watched as a bellwether for the broader economy. It is unclear whether the masses — now contending with pay cuts and job losses — will be able to afford Disney vacations when the gates do reopen. It took two years for Disney’s parks division to fully recover from the last recession.
Chapek said reservations for late next year and “all of 2022” are “extremely strong.”
Overall, Disney had a net loss in the quarter of $710 million, compared with a profit of $777 million a year earlier. McCarthy said the coronavirus cost the company $3.1 billion in operating income (and $7.4 billion since March). Revenue totaled $14.7 billion, a 23% decline.
Chapek emphasized that Disney was carefully managing its balance sheet. To that end, Disney will not pay a dividend for the second half of its fiscal year. (It previously suspended the first one.) Disney is also in the process of laying off 28,000 workers at its parks and consumer products division. ESPN has also announced layoffs.
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