Disney streaming miss shouldn't affect profitability, revenue: Analyst

Disney (DIS) missed its third-quarter revenue estimates by $180 million — reporting revenue of $22.33 billion — and beating earnings expectations with gains of $1.03 per share. Ultimately, the entertainment company missed Disney+ subscriber growth projections while managing to narrow its losses tied to the streaming segment.

Bloomberg Intelligence Senior Media Analyst Geetha Ranganathan states aspects of Disney's streaming underperformances can be attributed to its segment in India, Disney+ Hotstar and its telecasting of the Indian Premier League cricket. "It's not a big contributor to revenue," Geetha says, adding: "The optics [of the subscriber miss] looks bad, but it doesn't necessarily really affect the profitability or the revenue line all that much."

Ranganathan goes on to define the metrics streaming companies are chasing rather than raw subscriber growth, the outlook for ESPN's sports betting deal with Penn Entertainment (PENN), and the continuing impact of the Hollywood writers and actors' strikes on production studios.

Video Transcript

- Disney out with a beat on earnings in a narrower than expected streaming loss. But revenue missed expectations, and streaming subscriber numbers fell short. That's pressuring the stock in after hours trading. We're looking at a loss of just about 1%. For a deeper dive, we want to bring in Geetha Ranganathan, Bloomberg Intelligence senior media analyst. Geetha, it's good to see you here.

So some good news and bad news in this report, at least from the looks of it right now. Some concerns about subscriber numbers missing expectations. Revenue coming up a bit short. That's dominating the trading action here in after hours. But what's your first take at these results?

GEETHA RANGANATHAN: Yeah, so my very first take was, of course, at that streaming loss number, which actually came in much better than expected-- we were expecting about $750 to $770 million in streaming losses. They came in substantially lower at about $500, $550 million. That's one thing. Of course, as you pointed out, you know, the streaming subscriber miss of-- you know, at first glance, yes, it does seem like a huge miss.

But then if you just dig a little bit deeper, most of those subscriber misses, actually 12.5 million subscriber losses, were at the Indian division of Hotstar. And remember, this is because, you know, Disney actually has foregone a key piece of content, which is the Indian Premier League Cricketing Rights. Those rights, are-- you know, Disney kind of gave up on just in a focus on being, you know, kind of more cost conscious and cost disciplined.

So we kind of expected this. And it's not really a big-- you know, it's not a big contributor to revenue. Because if you look at a Hotstar subscriber, they bring in roughly about $0.50 to $0.60 per month versus a Disney Plus subscriber here in the US who brings in over $7. So it's not-- you know, the subscriber missed-- the optics of it looks bad, but it doesn't necessarily really affect the profitability or the revenue line all that much.

- Geetha, this is a company that is clearly very much in transition when you think about what it's trying to do with some of its more legacy parts of the business versus investing in streaming and other parts of the business where they see the future. Looking at where the company came in, they reported a $2.6 billion one-time charge in impairments. That was part of the number that dragged things down. Where do you think the company is in this transition, in this restructuring? What do these numbers tell you?

GEETHA RANGANATHAN: That's a great question. So I think that is really about trading some short term pain for longer term gains. So the narrative, at least in the streaming world right, now has shifted away from subscriber growth or just chasing subscribers for the sake of chasing them to more on profitability and being able to get to good end unit economics, making sure that the streaming business is a consistent long-term earnings growth driver.

And I think Disney is doing exactly that. So that one time charge, yes, you know, it did depress earnings in this quarter. But what it does is it sets up the company for a much leaner and a cleaner kind of content cost profile. So remember, Disney is one of the largest spenders of content in the media landscape. They spend about $30, $31 billion. A lot of that, of course, is sports rights, which is paid out by ESPN.

But then you have a lot of entertainment content as well, whether it's films, whether it's, you know, a new Marvel series or Pixar Animation films. So all of this. And Disney is really kind of trying to rightsize the cost base to make sure that they can ensure hitting those profitability targets sooner than expected. So they had actually guided to getting to profitability in the streaming business by the end of fiscal 2024. We'll have to wait and watch and see if management says that they can accelerate that timeline, get there a little bit sooner. That should be something that investors can cheer about.

- Geetha, what do you think about Iger's vision, his broader vision for ESPN? We had the news yesterday about Disney teaming up with Penn Entertainment, going into sports betting. Something that many analysts had expected now for quite some time. But does this signal anything broader just about what the future could look like for ESPN?

GEETHA RANGANATHAN: I think the one thing that it definitely does tell us is that there is still a lot of value in the ESPN brand name. I think that is, you know, a question that some of the investors were kind of asking. You know, is there really value in ESPN? Does it have, you know, the name recognition, the brand recognition. And absolutely, yes, it does. The fact that they're now able to get, you know, $2 billion over 10 years without necessarily getting directly involved in the sports betting business obviously I think is, you know, low risk, high reward for, you know, Bob Iger. So kudos to him for getting that deal done.

And it really helps them now kind of monetize younger audiences. Right, it's not just about reach. It's about kind of being able to monetize that. And they're going to be able to do that now. Does it say anything about whether they're going to spin out or sell the company? I'm not sure as yet. ESPN is still a very critical brand. It's still a very, very critical property to Disney. Of course, all options are on the table, as Bob Iger has said repeatedly.

But having said that, you have to remember, ESPN is also important to the company from a bottom line perspective. Yes, it is under pressure because of cord cutting. But it does still bring in about $3.5 to $4 billion in EBITDA every year. And now you have this additional revenue, of course, from the Pen deal as well.

- Finally, we've been talking a lot about what that content pipeline looks like for so many studios, given just how long the WGA strike has been going on. And now you've got SAG-AFTRA on top of that as well. Bob Iger has said at least publicly he doesn't think these demands are realistic. How-- how big of an impact is this having on the company? I mean, how do we kind of bottom line it?

Because we keep hearing the pipeline is still there. It's a matter of how long this goes on. What do you think?

GEETHA RANGANATHAN: Yeah, that is-- that's a perfect point. And you know, what-- ironically, what we're seeing is the strikes are actually helping the bottom lines of these companies. I mean, we've seen this across the board from, you know, a Paramount to a Warner Brothers Discovery. And today, we saw lower streaming losses for Disney as well. So it's fewer content costs. So you know, obviously, better profit profile. Something that the Street is extremely focused on.

So in the short term, it's actually helping them, ironically. But in the long term, that's when it's going to become a real problem. Because content is the lifeblood of all of these media companies. Most notably, Disney. They have all of their key franchises, which are critical to driving new subscriber gains, which are critical to driving revenue and ultimately profits. So the sooner these strikes get resolved, obviously it is better for the industry as a whole.

- Geetha Ranganathan, Bloomberg Intelligence senior media analyst. Good to talk to you today. Appreciate you stopping by.