Does Disney Have a Hulu Problem?

Since Netflix (NFLX 4.17%) reported lower quarter-over-quarter subscriber numbers, other streaming stocks have been under a microscope. But it's not just subscriber numbers that are being called into question. It's also the long-term profitability of the streaming model.

Walt Disney's (DIS 1.54%) direct-to-consumer (DTC) segment -- which includes Disney+, ESPN+, and Hulu -- posted an operating loss of $1.48 billion in the first half of Disney's fiscal 2022, despite better-than-expected subscriber growth.

Although Disney+ is the face of the company's DTC segment, it was actually Hulu that contributed the bulk of operating expenses. Disney owns a 67% stake in Hulu, with Comcast owning the other third. Let's take a deep dive into Disney's DTC segment to see if Disney has a Hulu problem.

Image source: Getty Images.

Big-time spending

In the first half of fiscal 2022, Disney+ programming and production costs were $2.12 billion, ESPN+ racked up $881 million, and Hulu booked a staggering $3.75 billion in programming and product costs -- nearly as much as Disney+ and ESPN+ combined.

The average Hulu + Live TV subscription-video-on-demand (SVOD) subscriber produced $88.77 per month in revenue in fiscal Q2 2022, while the average Hulu SVOD-only subscriber generated $12.77 in revenue per month. And while total Hulu subscribers are 45.6 million, only 4.1 million -- fewer than 10% -- are Hulu + Live TV SVOD.

Is Hulu's performance as bad as it seems?

Despite high programming and production costs, the total estimated quarterly revenue for Hulu for Q2 fiscal 2022 was an impressive $2.68 billion, which easily exceeded its $1.91 billion that quarter spent on programming and production.

Data source: The Walt Disney Company.

Estimated ESPN+ revenue of $316.4 million was less than the service's $454 million in programming and production costs. Q2 fiscal 2022 revenue for Disney+ of around $1.78 billion was far better than its programming and production costs of $1.2 billion.

Costly advertising

So with total streaming revenue coming in at roughly $4.77 billion compared to total programming and production costs of just $3.56 billion, investors may be confused as to why the DTC segment booked an operating loss of $877 million for the quarter. The answer has to do with costs outside of programming and production.

In Q2 fiscal 2022 alone, Disney's DTC segment booked $839 million in other operating expenses, $1.29 billion in sales, general, and administrative (SG&A) expenses, and 98 million in depreciation and amortization. That was enough to wipe out all of the operating profits from programming and production and create a net operating loss.

The silver lining

Digging deep into Disney's financials, it's clear that content spending isn't the main issue for its lack of DTC operating profit; high SG&A expenses are. Disney noted on its Q2 fiscal 2022 conference call that the Disney Bundle (consisting of Disney+, ESPN+, and Hulu) has less churn than any single DTC service on its own. So despite ESPN+ losing money and Hulu aligning less with Disney's movies and parks than Disney+, it seems as though the streaming services are worthwhile.

The main culprit is advertising costs. As Disney's streaming services become more established, it should be able to bring SG&A expenses down. Disney said it plans to spend $32 billion on content in fiscal 2022. But that number should also come down in subsequent years, as Disney pulls in the reins after its big initial push to grab market share in the streaming industry.

In sum, Disney does not have a Hulu problem. It simply needs its streaming services to mature so it doesn't have to spend so much on operating expenses and SG&A expenses.