The good news is that Disney's (DIS -9.17%) streaming business lost less money last quarter than it did a quarter earlier. The bad news is that it's still losing plenty of it.
The media giant's direct-to-consumer arm suffered an operating loss of $1.0 billion during the three-month stretch ending in December, despite driving record revenue of $5.3 billion.
It would be easy to conclude the glass is now half-full -- or at least full enough -- for this young endeavor. And most investors did exactly that. Disney shares popped 8% higher in Wednesday's after-hours trading following the post-close release of the fiscal first-quarter figures.
On balance, though, there's still a great deal not to like about Walt Disney in general, and its streaming operation in particular. Chief among these worries are slowing subscriber growth and weakening per-user revenue in North America, and a shrinking subscriber base for its India-focused Disney+ Hotstar.
Not exactly a smashing success
Kudos to Walt Disney for reeling in its quarterly streaming losses. Its direct-to-consumer loss was pared back by $500 million from the prior quarter's loss of $1.5 billion on a mere $400 million improvement in sales. It's the first time since early 2021 the company's offered evidence that this endeavor might eventually turn an actual profit.
Data source: Walt Disney Co. Chart by author.
Except a couple of key metrics suggest this pace of progress isn't sustainable.
The first of these red flags is slowing streaming subscriber growth. As several headlines have pointed out, Disney+ did lose customers last quarter. Only the Disney+ Hotstar platform shed subscribers though... 3.8 million of them, to be exact, bringing the headcount down from 61.3 million to 57.5 million.
Still, Disney+ added a minimal number of new customers everywhere else. The platform's domestic and international customer headcounts only grew from the previous quarter's combined 102.9 million to 104.3 million for the quarter ending in December, and company-wide streaming subscriptions slipped from Q4's 235.7 million to 234.6 million.
Data source: Walt Disney Co. Chart by author. Data is in millions.
Why is subscriber growth slowing down? Good question. It may have something to do with spending less on marketing and promotions.
We don't have the specific spending breakdown. We only know that Walt Disney spent less on selling, general, and administrative expenses last quarter than in it has in the few quarters leading up to Q1, and spent more than $400 million less than it spent on these items during the previous quarter. If the selling budget is where the savings came from, though, that cost-cutting may have been somewhat counterproductive.
There's one thing we do know for sure, however: Profit-improving savings didn't come from lowered programming costs. In fact, the company spent more on streaming content last quarter than it has in any quarter yet. It doesn't seem to have gotten a great deal of bang for those bucks.
The other concern is last quarter's deteriorating per-user streaming revenue figures.
Not every service suffered per-user revenue setbacks, to be clear. ESPN+ saw its average revenue per user (or ARPU) improve from fiscal Q4's levels, as well as grow on a year-over-year basis. Both the North America and international versions of Disney+ saw lower ARPUs last quarter though, and not for the first time.
Data source: Walt Disney Co. Chart by author. Data is monthly.
Granted, the tepid economy could be at least partially to blame. Consumers tend to tighten their purse strings when they're afraid economic headwinds could start blowing in earnest. Advertisers do the same when they fear consumers may not be in a position to respond to an advertisement. As CFO Christine McCarthy commented during the Q4 earnings call three months ago, however, "we do not expect the launch of the advertising-supported tier of Disney+ in December to provide a more meaningful financial impact until later this fiscal year." So these waning per-user revenue metrics do call the actual pricing power of Disney+ into question.
And regardless of the cause, it's certainly not the ARPU lull you want to see headed into a price increase when your subscriber growth is already slowing. It's even more troubling when the weakening per-user revenue metrics are coming from the service generally regarded as Disney's streaming flagship.
Still too many questions (and not enough answers)
It's not the end of the world. Walt Disney operates other businesses besides its streaming ventures. Its theme parks saw 21% growth last quarter. Its film business fared fairly well last quarter, too.
Given the extent to which the company's streaming operation is driving the stock's price, however, know that last quarter's apparent fiscal progress may or may not be built to last. Production and content costs continue to rise in step with revenue growth, and then some. Disney's now just spending less to sell and manage its streaming operation, but it already looks like subscriber growth and ARPU levels are suffering as a result.
You may want to hold off on a new position until it's clearer the company can find a sustainable (read "profitable") streaming budget that still allows for meaningful subscriber growth. It doesn't really seem to have found it yet.
