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Disney erases after-hours gains despite subscriber beat, Q2 earnings miss estimates

·Senior Reporter
·6 min read
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Disney (DIS) reported second quarter financial results after the bell on Wednesday that missed on both the top and bottom lines, although net additions for its fledging streaming platform Disney+ came in above estimates, causing shares to climb as much as 5% in after-hours trading.

However, Disney quickly erased those gains during the company's earnings call after CFO Christine McCarthy warned that the tough economic environment, enhanced by inflationary pressures, supply chain disruptions and a tight labor market, could weigh on margins.

McCarthy also warned on softer subscriber growth, saying, "While we still expect higher net adds in the second half of the year versus the first half, it's worth mentioning that we did have a stronger than expected first half of the year."

Here are Disney's second quarter results compared to Wall Street's consensus estimates, as compiled by Bloomberg:

  • Revenue: $19.25 billion vs. $20.11 billion estimate

  • Adj. earnings per share: $1.08 vs. $1.17 estimate

  • Disney+ subscribers: 7.9 million vs. 4.5 million expected

"Our strong results in the second quarter, including fantastic performance at our domestic parks and continued growth of our streaming services—with 7.9 million Disney+ subscribers added in the quarter and total subscriptions across all our DTC offerings exceeding 205 million—once again proved that we are in a league of our own," Disney CEO Bob Chapek said in a press release.

"As we look ahead to Disney’s second century, I am confident we will continue to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger, more connected, and magical Disney universe for families and fans around the world," the executive continued.

After competitor Netflix's (NFLX) big subscriber miss last month (the first time the company had lost subscribers during a quarter in 10 years), analysts were cautiously optimistic when it came to Disney+, although a deceleration compared to previous quarters was expected.

The company added 11.7 million subscribers in the first quarter of 2022, sharply topping analyst estimates. On a year-over-year comparison basis, the media giant reported a net add of 8.7 million in Q2 2021.

The overall subscriber decline comes as inflation remains high, consumers cut costs, and competition intensifies. A lag in content has also been cause for concern.

Still, Disney plans to spend a whopping $11 billion on streaming content this year, as part of its overall $26 billion budget for TV and film production. To compare, Netflix spent $17 billion on content in fiscal year 2021, with plans to hit $18 billion in 2022.

Chapek explained on the earnings call that "great content is going to drive our subs" and that increased subscribers will, therefore, drive profitability. He also noted that the platform's upcoming ad-supported offering, set to hit the U.S. later this year, will create more choices and opportunity for subscribers.

Disney+, which will open in 53 new markets in the the third quarter of 2022, has 137.7 million global subscribers to date, above expectations of 134.4 million.

The company reiterated its target to bring on 230 million to 260 million subscribers to the service by the end of fiscal 2024. For context, Netflix's subscriber count sits at 221.64 million global subscribers.

Beyond Disney+, the company will also lean on the theatrical rebound, with top titles like "Thor: Love and Thunder" and "Avatar: The Way of Water" set to debut later this year.

Parks, experience and consumer products business

But streaming was not the only positive growth story for Disney this quarter.

The entertainment mecca's parks, experience and consumer products business swung to an operating profit of $1.76 billion, surpassing expectations of $1.6 billion and just below last quarter's operating profit of $2.5 billion. Revenue for the segment came in at $6.7 billion, nearing its pre-pandemic total of $7.6 billion in the final quarter of 2019.

Unlike the shaky streaming side of the business, analysts remain fairly confident that Disney's sprawling theme parks — a consistently important element to the company's bottom line — will see continued robust growth amid the reopening trade. Chapek also doubled down during the earnings call, saying the parks segment, up 110%, is firing on "all cylinders."

Still, possible headwinds include inflation impact and recession fears.

"Disney’s share price seems to fall daily as fears mount on both [direct-to-consumer] and recession for Parks,” Wells Fargo analyst Steven Cahall said in a recent note.

"We think sentiment on both is overdone. While recessionary fears may prove more temporary — and we expect solid Parks results — DTC is a proper Show Me story," he continued.

Visitors drive past a sign welcoming them to Walt Disney World on the first day of reopening of the iconic Magic Kingdom theme park in Orlando, Florida, on July 11, 2020.
Visitors drive past a sign welcoming them to Walt Disney World on the first day of reopening of the iconic Magic Kingdom theme park in Orlando, Florida, on July 11, 2020.

On the earnings call, Disney CEO Bob Chapek was surprisingly not asked about the company's public battle with Florida Governor Ron DeSantis, who revoked the company's special tax district after Disney vowed to fight the Parental Rights in Education Act, or what critics have dubbed the "Don't Say Gay" bill.

The controversial bill, which will go into effect on July 1, states, "Classroom instruction by school personnel or third parties on sexual orientation or gender identity may not occur in kindergarten through grade 3 or in a manner that is not age appropriate or developmentally appropriate for students in accordance with state standards." Parents will be able to sue districts over violations.

Chapek initially decided not to speak publicly on the matter, opting instead to work behind the scenes in an attempt to soften the legislation. It didn't work.

The executive eventually reversed course following intense backlash over his belated response to the bill. He publicly denounced the act during the company's annual shareholder meeting on March 9, in addition to directly apologizing to employees in a company memo.

Chapek, whose contract expires on February 28, 2023, has dealt with a fair amount of controversy during his tenure. In addition to the DeSantis drama and "Don't Say Gay" fallout, the executive came under further scrutiny following a now-settled breach-of-contract lawsuit with "Black Widow" actress Scarlett Johansson last summer.

Disney has a market cap of just over $190 billion. Its shares, which hit a 52-week low of $104.79 earlier on Wednesday, have fallen more than 30% year-to-date.

Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 or email her at alexandra.canal@yahoofinance.com

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