Walt Disney (DIS 0.07%) reported its fiscal 2020 first-quarter results on Feb. 4. Among the many data points to come out of the report, the media giant noted that earnings exceeded investor expectations on Disney+ subscriber growth. The company previously revealed it had signed up 10 million customers on the first day of release for the streaming service, but the growth since then has been positively surprising.
On the negative end, the company pointed out that the outbreak of novel coronavirus that is believed to have originated in Wuhan, China, and spread throughout the country is causing disruptions in its theme parks in Asia. The virus impact is lower in its Hong Kong park only because expectations were already lowered due to ongoing political unrest in the region.
Let's dig deeper into Disney's quarterly report and see what it might entail for investors.
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Disney+ subscriber growth
For the Disney+ streaming service, reaching 28.6 million subscribers (26 million subscribers by the end of the quarter, and over 2.6 million more in January 2020) surprised many and is quite an accomplishment -- especially considering that CEO Bob Iger said the company had forecast a total of 60 million to 90 million subscribers by 2024. The current total has analysts questioning whether the initial forecast needs to be raised.
The monthly average revenue per user (ARPU) for Disney+ was higher than expected in the quarter. Before the release, expectations had been that the service had gained more sign-ups from the deal with Verizon Communications, which gave some of its new customers a one-year free subscription to Disney+; those discount sign-ups were expected to lower the monthly revenue per user figure. Surprisingly, only 20% of new signups came through Verizon and had less of an impact.
Disney+ is going to launch in additional countries in March, which will add more subscribers, but will also increase marketing costs associated with the expansion. Disney+ will launch in several more countries, including the U.K., Ireland, France, Germany, Spain, Italy, Switzerland, and Austria. It will also launch in India on March 29, through its Hotstar service. The company has high hopes for large subscriber increases in India as Hotstar has an estimated 300 million monthly active users that could be potential customers.
The impact of the coronavirus on its parks
The two theme parks that will face the most significant impact from the coronavirus outbreak are the Shanghai Disney Resort and the Hong Kong Disneyland, which are both closed, and will remain so until further notice. Disneyland in Hong Kong has been closed since Jan. 26; Shanghai Disney Resort stopped operations on Jan. 25.
What makes matters worse is that the park closures happened at the most inopportune time: the Chinese New Year holiday. That holiday is typically a very popular time to visit Disney's parks in Shanghai and Hong Kong. As a result, the financial loss to the two parks will be more significant.
Disney estimates that at its Shanghai resort, the closure will reduce operating income by $135 million in the second quarter; at Hong Kong Disneyland, it estimates the closure will lower operating income by $40 million. Both figures, however, assume the parks will be closed for only two months.
What this means for investors
For Disney investors, the rapid increase of signups for Disney+ is an encouraging sign. It is evident that customers are very interested in the streaming service, and the price point is appealing. Moreover, Disney+ is preparing to launch in several countries in March, and the 28.6 million sign-ups already have Disney optimistic about the service's reception in new markets.
The financial fallout from the coronavirus outbreak is still unknown but the speculation is that it is unlikely to cause significant financial damage to the company, so long as it doesn't cause park closures longer than two months. A greater negative outcome is more likely if closures are prolonged beyond that two-month window.
Investors should continue to monitor the company in the near term; updated reports surrounding the coronavirus and the rollout of Disney+ to new markets are likely to cause this blue-chip stock's price to show some short-term volatility.
