Once upon a time in a land not very far away, Disney (DIS -1.18%) reigned as the leader of entertainment, reliable for dividends, growth, and profits.
Today, it's still the leader in entertainment, but its long-lasting struggles are are making shareholders antsy.
Disney released another report with nothing that really stood out to excite investors, but it wasn't all bad. Let's go through where it's shining and where it's disappointing, and how investors should put it all together.
There's a lot going on at Disney
Disney operates a vast group of businesses that all work together to create its media empire. It has two reporting segments -- parks and experiences, and media and entertainment.
Parks and experiences includes global theme parks, cruises, and some extras, like resorts. This segment has been driving growth for the company these days, with a 13% sales increase year-over-year in the fiscal third quarter (ended Jul. 1). Operating income was up 11%, so no problems there.
The increase was driven by international parks, where demand was high, especially in comparison to last year's numbers, when some parks were closed for part of the time. Domestically, demand was lower, as post-closure demand is waning and inflation is keeping people from spending. Price increases played a role in the revenue jump as well.
This segment is back to itself, and it's likely to remain in a similar place, fueling overall growth in the near future. There isn't much competition for Disney's theme parks, which are destination locations, and feature Disney's characters from its popular franchises. This is part of the Disney model, which uses its content to populate theaters, streaming, and experiences. Usually these work in synergy to generate high revenue and profits.
It's not all good
But in contrast to parks performance, media and entertainment is struggling. All three of its parts -- linear networks, streaming, and film distribution -- are having their own troubles. Linear networks, which encompass TV and cable stations, have been dealing with cord-cutting for a while and the resulting loss in advertising revenue. Ad budgets are even more pressured now due to advertisers' own challenges with inflation. Linear networks revenue declined 7% from last year in Q3, while operating income dropped 23%.
Disney released several big films recently that didn't become the hits they were expected to, such as the newest Indiana Jones movie. Revenue was only down 1%, but operating loss widened from $27 million to $243 million.
Streaming revenue increased 9%, and operating loss improved from $1.1 billion to $500 million, which is great progress. Management has been coming through on its commitment to get costs under control for streaming, and now the question is whether or not it can bring it to profitability. Most of the streaming companies are now figuring out the balance between content creation, marketing, and making money, and they're all vying for the same eyes.
Disney+ actually lost subscribers in the quarter because it lost the rights to cricket matches in India. Disney+ Hotstar, the bundle in India, lost 24% of membership. Otherwise, it added 800,000 subscribers to the core Disney+.
CEO Bob Iger announced that Disney would be raising prices for the ad-supported tier, which now has 3.3 million subscribers. Disney has raised streaming prices several times since its service's inception less than four years ago, and even though it may be necessary right now to achieve profitability, there's only so high it can go.
The mixed report in total included better-than-expected earnings per share of $1.03 excluding one-time charges, which is always well-received by Wall Street.
Lots of uncertainty ahead
There's no easy fix here. Disney is taking steps to remediate its challenges, but the macroeconomic climate isn't helping. Still, this isn't a case where I would say it'll all blow over when the economy improves, although it will certainly help.
Some of Disney's franchises, which are what fuel the entire model, look like they're getting old, and audiences are searching for fresh faces and content. On top of that, the ongoing Hollywood writers and actors strikes mean that there's not much production going on. Even if they accept new proposals, there's going to be a gap in content, which will impact company economics for at least the next two quarters, if not longer.
Iger maintains that the three core businesses -- film studios, parks, and streaming-- are the roadmap to success and value creation over the next five years, as they work together synergistically to offer customers loved franchises and characters. Disney renewed his contract through 2026, and it's easy to see why it's anxious to have him around to get through this period.
Disney is still the leading global entertainment company, and it's likely to get back on its feet. But until there's more reliable progress in cost cutting and revenue generation, investors might get more for their money enjoying a great Disney movie instead.
