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Disney’s Growth Continues, But at a Slower Than Projected Rate

Ticker symbol: DIS

The Walt Disney Company published a mixed second quarter report that, while missing on certain key metrics, showed strong growth in its flagship subscription streaming business Disney+. While many feared that the company’s subscriber base would shrink after a strikingly poor report from rival Netflix, Disney’s relatively small user base means that the runway to growth for the company remains robust for now.

The company did miss Wall Street expectations on the top line and earnings, casting a small shadow over the strength of the overall report. It reported second quarter adjusts EPS of $1.08 which was short of the $1.17 expected. Revenue came in at $19.25 billion for the quarter, versus the $20.11 billion analysts were modelling.

Share declined in the afterhours, trading down 2% to $103.25. The company did beat on the most closely watched metric of all: Disney+ subscriber count. The company reported total subscribers for the eponymous service of 137.7 million versus analyst expectations of 134.4 million. Other Disney offered subscription services were slightly weaker.

Hulu reported subscribers of 45.6 million against the expected 46.6 million, while ESPN+ reported 22.3 million while estimates called for 22.5 million. Despite missing estimates, the company still reported growth in all three major services, allaying investors’ fears of the company losing subscribers. Hulu grew 11% year over year, while ESPN+ was up a strong 62% in the same period.

The Disney Parks business, which accounts for a third of the company’s revenue, easily beat estimates, reporting $1.76 in operating income, more than the $1.61 billion analysts expected. Despite the Omicron variant affecting the first month of the quarter, reopening in the U.S. drove strong attendance figures for the Parks as the company nears pre-COVID levels of activity in the U.S. without significant pandemic related capacity restrictions in place.

Per-attendee spend at the Parks in the U.S. was up 40% from the same period in 2019, which is further proof that the Parks division can be as much of a boon to the company’s performance as new ventures such as streaming. Still, the company is suffering from some of its international parks, resorts and cruise-ship operations operating under strict rules, travel restrictions and closures. The company’s Shanghai resort, for example, closed due to COVID restrictions in mid-March and currently remains closed.

The company’s movies business, however, continues to struggle due to difficult macro dynamics for the industry. Despite having the number one movie in the box-office at the moment, “Doctor Strange”, and one of the most anticipated movies in recent memory debuting in December, “Avatar: The Way of Water”, theater ticket sales in the U.S. are roughly half of what they were in 2019. The company’s Studios business, while not traditionally a large earnings contributor individually, does drive the rest of Disney’s downstream businesses.

Everything from children’s toys, to rides and attractions at the Parks division, to the content behind the Disney+ streaming service relies on the company generating strong intellectual property in its Studios division. Going forward, the company offered guidance of 230 to 260 million subscribers for its Disney+ service. Netflix, for comparison, reported 221.6 million total subscribers in its recent earnings call. Management did provide guidance that the growth rate of Disney+ would slow towards the second half of the year.

Disney also expects to expand aggressively internationally, adding the service to 50 new countries in calendar 2022. The company also expects to spend less on its content slate that previously guided, cutting expenditures by $1 billion to $32 billion for the fiscal year. In Parks, the company is adding new rides and attractions, which will allow it to keep driving attendance even as ticket prices are increased.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.