Disney stock fell as the company tries to turn the streaming business into a profitable one

Disney ( DIS ) said on Tuesday that a key part of its streaming business turned a profit for the first time but expected weaker results in that segment for the current quarter, sending its shares down nearly 10% in early trading.

The forecast highlights Disney’s challenges in achieving sustained profitability in streaming, a key priority as its linear TV business declines. Overall, CEO Bob Iger’s latest turnaround plan has made investors more excited about the stock in recent months. The company has won a new victory in a high-profile proxy fight against activist investor Nelson Beltz.

In Disney’s fiscal second quarter, the direct-to-consumer (DTC) portion of its entertainment division, which includes Disney+ and Hulu, posted an operating income of $47 million, compared with a loss of $587 million in the year-ago period.

The company expects DTC results in the entertainment segment to be in the red in the third quarter due to losses from its Indian brand Disney+ Hotstar.

Additionally, not all of Disney’s streaming services were profitable in Q2. Including ESPN+, total direct-to-consumer losses were $18 million, compared to a loss of $659 million reported in the prior year. Disney expects full streaming profits in the fourth quarter of this year.

Q2 2023 was higher than Disney’s Q2 2023 estimate of $0.93, compared to $1.10 analysts polled by Bloomberg.

Revenue came in at $22.1 billion, meeting consensus expectations and ahead of the $21.82 billion the company reported a year earlier.

Disney raised its guidance for full-year adjusted earnings growth to 25% from 20% previously. However, Disney took a hit after merging its Star India business with Reliance Industries, which reported an impairment charge of more than $2 billion.

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KeyBanc analyst Brandon Nispel said in a note following the Q2 results, “Softer guidance for entertainment streaming next quarter could dampen enthusiasm. However, today’s news reinforces Iger’s contention that Disney is in the midst of a long-awaited turnaround.”

Nispel also noted that investors may view Disney’s bullish outlook for its experience business as a “negative” for the stock, which includes theme parks. The company said third-quarter operating income for the segment should come in “roughly comparable to the prior year.”

On the earnings call, Disney CFO Hugh Johnston said the company saw “some evidence of global moderation from post-Covid travel globally” at its theme parks. He also noted that rising costs and inflation will impact profitability.

In the second quarter, Disney+ subscriber enrollment increased as Charter Cable subscribers began receiving premium subscriptions as part of their packages, the news agency reported.

Disney added more than 6 million core Disney+ subscribers in the second quarter, ahead of its own guidance and easily beating the Bloomberg consensus estimate of 4.7 million.

The company saw continued positive momentum in average revenue per user, or ARPU, amid recent price hikes and a crackdown on password sharing. ARPU increased sequentially by $0.44 to $7.28.

“I think you’re going to see prices steadily rise over time on the streaming service because the content we have is worth paying for,” Johnston told Brian Sozzi, managing editor of Yahoo Finance, on Tuesday.

Meanwhile, the parks business delivered another strong quarterly result with domestic operating income rising to $1.61 billion compared to $1.52 billion in the year-ago period.

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Higher profits at Walt Disney World Resort and Disney Cruise Line were partially offset by lower results at Disneyland Resort, the company said.

Disney CEO Bob Iger recently led the company through a proxy battle with activist investor Nelson Peltz.  (Photo by VCG/VCG via Getty Images)

Disney CEO Bob Iger recently led the company through a proxy battle with activist investor Nelson Peltz. (VCG/VCG via Getty Images) (VCG via Getty Images)

Meanwhile, ESPN’s domestic operating income fell 9% year over year to $780 million, dragged down by lower ancillary revenue and fewer subscribers. The company blamed the results on increased production costs due to College Football Playoff (CFP) programming.

It was a similar story for domestic linear network revenue in the entertainment segment, which fell 11% year over year in the quarter. Operating income in this segment fell by 18%. It was also blamed on lower ancillary revenue, along with a decline in advertising revenue.

In February, Disney doubled down on sports streaming with the reveal of an upcoming joint venture with Fox and Warner Bros. Discovery. The company is also working on a separate sports streaming platform for ESPN, which will debut in fall 2025.

Sports-related, Disney has reportedly agreed to increase its media rights deal with the NBA to $2.6 billion from the previous $1.5 billion. The NBA’s current franchise agreement expires at the end of next season.

Alexandra Canal Senior reporter at Yahoo Finance. Follow her on X @alli_kanal, LinkedIn, and email [email protected].

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