Disney (DIS) said an important part of its streaming business turned a profit for the first time but that it expects weaker results in that segment for the current quarter, sending its stock down nearly 10% on Tuesday.
The forecast highlights Disney's challenges in achieving sustained profitability in streaming, a key priority as its linear TV business declines. Overall, CEO Bob Iger's recent turnaround plan has made investors more bullish on the stock in recent months. The company is also fresh off a win in a high-profile proxy fight against activist investor Nelson Peltz.
In Disney's fiscal second quarter, the direct-to-consumer (DTC) portion of its entertainment segment, which includes Disney+ and Hulu, posted operating income of $47 million, compared to a loss of $587 million in the prior-year period.
The company said it expects DTC results in the entertainment segment to be in the red in the third quarter, driven by losses from its Indian brand Disney+ Hotstar.
Additionally, not all of Disney's streaming services were profitable in Q2. Including ESPN+, total direct-to-consumer losses amounted to $18 million versus the $659 million loss reported in the year-earlier period. Disney expects full streaming profitability by the fourth quarter of this year.
The company reported Q2 adjusted earnings of $1.21 a share — a beat compared with the $1.10 analysts polled by Bloomberg had expected and higher than the $0.93 Disney reported in Q2 2023.
Revenue came in at $22.1 billion, meeting consensus expectations and ahead of the $21.82 billion the company reported in the year-ago period.
Disney also raised its guidance for full-year adjusted earnings growth to 25%, up from the prior 20%. However, Disney did take a hit after merging its Star India business with Reliance Industries, reporting an impairment charge of more than $2 billion.
KeyBanc analyst Brandon Nispel said in a note following the Q2 results that "soft guidance for entertainment streaming next quarter might tamp enthusiasm. In all, though, today's news strengthens Iger's argument that Disney is in the middle of a long-awaited turnaround."
Nispel also noted investors may view Disney's tepid outlook for its Experiences business, which includes theme parks, as a "negative" for the stock. The company said third quarter operating income for the segment should be "roughly comparable to the prior year."
On the earnings call, Disney CFO Hugh Johnston said the company has seen "some evidence of a global moderation from peak post-COVID travel" at its theme parks. He also noted rising costs and inflation will likely register a hit to profits.
Q2 standouts: Streaming, parks business
In the second quarter, the media giant reported an increase in Disney+ subscriber additions as Charter cable subscribers began to receive complimentary subscriptions as part of their packages.
Disney added more than 6 million core Disney+ subscribers in the second quarter, ahead of its own guidance and easily beating Bloomberg consensus estimates of 4.7 million.
The company also saw continued positive momentum in average revenue per user, or ARPU, amid recent price hikes and a crackdown on password sharing. ARPU increased sequentially by $0.44 to reach $7.28.
"I think you're going to see prices steadily go up over time in the streaming service mostly because the content we have is worth paying for," Johnston told Yahoo Finance's Executive Editor Brian Sozzi on Tuesday.
Meanwhile, the parks business delivered another strong quarter of results with domestic operating income surging to $1.61 billion compared to $1.52 billion in the prior year.
The company attributed the increase to higher profits at Walt Disney World Resort and Disney Cruise Line, partially offset by lower results at Disneyland Resort.
Meanwhile, domestic operating income at ESPN fell 9% year over year to $780 million, dragged down by lower affiliate revenue and fewer subscribers as more consumers cut the cord. The company also blamed the results on an increase in production costs due to College Football Playoff (CFP) programming.
It was a similar story for domestic linear network revenue within the entertainment division, which fell 11% year over year in the quarter. Operating income within the segment dropped 18%. This was also blamed on lower affiliate revenue, along with a decline in advertising revenue.
In February, Disney doubled down on sports streaming with the reveal of an upcoming joint venture partnership with Fox and Warner Bros. Discovery. The company is also working on a separate sports streaming platform for ESPN, set to debut in fall 2025.
Related to sports, Disney has reportedly agreed to increase its media rights deal with the NBA to $2.6 billion, up from the previous $1.5 billion. The NBA's current rights deal expires at the end of next season.
Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on X @allie_canal, LinkedIn, and email her at [email protected].
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