There aren't many instances in which Wall Street would celebrate Walt Disney (DIS 0.80%) posting a $400 million loss, but investors just witnessed one of them. The entertainment giant announced in early November that its direct-to-consumer segment, home to the Disney+ streaming service, slashed its operating losses to $400 million from $1.4 billion in the fiscal fourth quarter.
The savings helped cash flow rise this fiscal year to its highest level in five years. Management has aggressive plans for continued cuts ahead, too. The good news is that Disney didn't rely solely on reduced content spending to arrive at that much stronger earnings profile. Let's look at the main factors pointing to an end to losses ahead for this core business unit.
Growth helped Disney a lot in Q4
The biggest lift arrived on the growth side. Disney added 7 million subscribers to its streaming base, mainly from international markets. That expansion came along with rising average revenue per user both in the U.S. and outside of the country. Stronger advertising revenue helped push that metric higher, and so did increased prices. Together, those trends pushed sales higher by 13% year over year in the Q4 period that ran through late September.
Disney amplified those gains by cutting spending in areas like marketing, IT, and distribution. The moves are part of a wider plan to slash costs by $7.5 billion by late 2024. Management had initially targeted $5.5 billion of savings, but it now sees room to produce much more.
Disney's goal is streaming profitability
Disney executives said they are aiming for "significant and sustained profitability in our streaming business," something perhaps comparable to the stellar numbers being generated by industry leader Netflix (NFLX 2.49%). The streaming giant recently hiked its cash flow and profit margin outlook for the year and is on track to convert more than 20% of sales into operating profit in 2024.
Disney is a long way from that figure. "We still have work to do," CEO Bob Iger said in a press release. Yet operating losses have declined in each of the last four quarters. Disney is on track to reach profitability in the streaming segment by late 2024, according to management's latest projection.
Looking ahead
The big question is still whether Disney can generate acceptable annual returns from its pivot into offering content directly to consumers. It has always seemed to have the ingredients needed to make this happen. No company owns a bigger treasure trove of intellectual property paired with marketing expertise, after all.
But these competitive assets haven't yet translated into stellar growth results. Even now Disney trails Netflix on key metrics like membership growth and average revenue per user.
Until Disney can significantly improve on these metrics, investors are better off having modest expectations for the streaming video business. Cost cuts, price increases, and membership growth have put the segment on a path toward overall profitability, and Disney's bigger savings plan allowed cash flow to soar to $5 billion this past year from $1 billion in 2022.
Disney used to routinely generate nearly $10 billion of annual free cash flow, though, before its aggressive pivot into direct-to-consumer sales. It could be several years before shareholders see that level of financial strength again from the entertainment giant. Disney investors were right to celebrate the news, but they should stay tuned for more concrete signs that the rebound is gaining steam.
