Disney (DIS) reported fiscal third quarter earnings after the bell on Wednesday that beat expectations after the company revealed its flagship sports network ESPN struck a $2 billion deal with Penn Entertainment (PENN) to launch ESPN Bet, a branded sportsbook.
Still, Disney+ subscribers missed estimates in the quarter, causing shares to initially slide in after-hours trading. The stock bounced back during the earnings call, however, after the company said full-year 2023 capital expenditures will total $5 billion, lower than the prior $6 billion forecast.
Disney also said it would resume paying a dividend by the end of 2023. Shares climbed by as much as 5%.
The company reported 146.1 million total Disney+ subscribers, a 7.4% decline from the previous quarter. Analysts polled by Bloomberg had expected a narrower loss of 154.8 million paying users.
The majority of the losses came from its Indian brand Disney+ Hotstar, which saw users drop by 24% on a sequential basis. Disney said Hotstar is not financially material to the company due to its lower average revenue per user, or ARPU. Domestic users, which include those in the US and Canada, dropped by 1%.
Amid Disney's continued efforts to slash $5.5 billion in costs this year, streaming losses came in at $512 million compared to a loss of $1.1 billion in the prior-year period and significantly ahead of estimates of a loss of $777 million. The company reported a streaming loss of $659 million in Q2 and a $1.1 billion loss in Q1.
Bob Iger, who stepped back into the CEO position in November and recently accepted a contract extension through the end of 2026, has remained hyper-focused on profitability.
The executive has consistently reaffirmed the company's outlook of reaching streaming profitability by the end of fiscal 2024, aided by new revenue streams like Disney's recently launched ad-supported tier, in addition to new price increases to help pare losses and lift metrics like ARPU.
Mixed quarterly results
Revenue in the quarter came in at $22.33 billion, slightly below expectations of $22.51 billion. Adjusted earnings were $1.03 compared to the $0.99 expected.
Disney Parks, Experiences, and Products revenue beat expectations of $8.25 billion to hit $8.33 billion in the quarter. Operating income came in at $2.43 billion, ahead of estimates of $2.39 billion and above Q3 2022's $2.19 billion total.
Analysts have remained cautious about the future of the parks segment, however, as demand appears to have slowed, coupled with heightened risks to margins amid inflation.
Earlier this year, Disney announced long-awaited updates to its parks reservation system and annual passholder program following intense backlash from consumers over lengthy wait times and sky-high ticket prices.
Advertising continued to be bumpy, echoing the results of competitors. Linear network revenue fell 7% in the quarter compared to the year-ago period, missing estimates of a 6% drop.
Meanwhile, the company's media and entertainment division missed revenue estimates of $14.36 billion to hit $14 billion in the quarter. The segment was dragged by dismal studio results following the disappointing theatrical releases of films like "The Little Mermaid" and Pixar's "Elemental."
Iger reaffirmed he would take an "expansive" look at the entertainment giant's traditional TV assets, signaling the potential for strategic options that could include a sale. He also reiterated the company is open to strategic partners for ESPN, either through a joint venture or part ownership, to enable it to make the transition to streaming.
The future of ESPN
As ESPN officially enters the sports betting arena, investors will likely have even more questions when it comes to the future of the network.
Late Tuesday, ESPN and Penn Entertainment announced they will be launching ESPN Bet, a branded sportsbook. This marks the network's first foray into the world of sports betting. ESPN is licensing its brand to Penn versus launching its own sportsbook.
As part of the deal, Penn will pay ESPN $1.5 billion over the next 10 years, with ESPN holding warrants to purchase roughly 32 million shares of PENN worth $500 million, which will vest over the same period.
Penn sold Barstool Sports back to founder Dave Portnoy after fully purchasing Barstool earlier this year.
"We've been in discussions with a number of entities over a fairly long period of time," Iger said on the call. "It's something that we've wanted to accomplish, obviously, because we believe there's an opportunity here to significantly grow engagement with ESPN consumers, particularly young consumers."
Iger also said it's "not a matter of if but when" ESPN makes the full move to direct-to-consumer.
"The team is hard at work looking at all components of this decision, including pricing and timing," he explained.
Disney has held exploratory talks with major sports leagues including the NFL, NBA, NHL, and MLB regarding strategic partnerships, according to a source with knowledge of Disney's plans. Variety reported last week that former Disney executives Tom Staggs and Kevin Mayer have been tapped as advisers to help Iger with ESPN's streaming transition.
Still, analysts and media watchers cautioned that the full transition to streaming will be a difficult journey, particularly when it comes to consumers footing the bill for an additional streaming service versus watching sports as part of the cable bundle.
Disney will begin to report results with ESPN as its own standalone unit later this year.