Disney earnings beat estimates but stocks drop on subscriber miss

Disney (DIS) reported fiscal third quarter earnings after the bell on Wednesday that beat expectations after the company revealed its flagship sports network ESPN has 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 slide as much as 2% in after-hours trading.

The company reported 146.1 million total Disney+ subscribers, a 7.4% decline from the previous quarter. Analyst polled by Bloomberg had expected a narrower loss of 154.8 million paying users.

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.

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 year 2024, aided by new revenue streams like Disney’s recently launched ad-supported tier, in addition to various price increases to help pare losses and lift metrics like average revenue per user, or ARPU.

Here are Disney’s third-quarter results compared to Wall Street’s consensus estimates, as compiled by Bloomberg:

  • Revenue: $22.33 billion versus $22.51 billion expected

  • Adj. earnings per share (EPS): $1.03 versus $0.99 expected

  • Total Disney+ subscribers: 146.1 million versus 154.8 million expected 

  • Disney Parks, Experiences and Products revenue: $8.33 billion versus $8.25 billion expected

  • Disney Media and Entertainment Distribution revenue: $14 billion versus $14.36 billion expected

On the parks side of the business, 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 on 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 of estimates of a 6% drop.

Meanwhile, the company’s media and entertainment division missed revenue estimates, dragged by disappointing studio results following the disappointing theatrical releases of films like “The Little Mermaid” and Pixar’s “Elemental.”

Questions still loom about the ongoing double strike in Hollywood, ESPN’s direct-to-consumer push and the future of Disney’s TV assets.

Last month, Iger said 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 said the company is open to strategic partners, either through a joint venture or part ownership, for ESPN to enable it to make the transition to streaming.

The future of ESPN

Disney CEO Robert Iger arrives at the Save the Children

Disney CEO Robert Iger arrives at the Save the Children “Centennial Celebration: Once in a Lifetime” event on Oct. 2, 2019, in Beverly Hills, Calif. (Photo by Jordan Strauss/Invision/AP)

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.

“Sports stands very tall in the media landscape for its ability to convene millions of people all at once,” Iger said last month, reiterating his bullish stance on ESPN and confirming plans to take the network fully over-the-top as a direct-to-consumer platform.

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 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 have cautioned 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.

Alexandra Canal is a Senior Reporter at Yahoo Finance. Follow her on Twitter @allie_canal, LinkedIn, and email her at alexandra.canal@yahoofinance.com.

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