Disney reported a 30% year-over-year growth in adjusted earnings per share, raising its full-year adjusted EPS growth target to 25% in its recent Q2 2024 earnings call. This performance was largely driven by the Entertainment and Experiences segments, with Disney’s streaming business reaching profitability in the Entertainment division. Here’s a closer look at how each business segment performed and the challenges Disney faces moving forward.
Entertainment segment
Disney’s Entertainment segment saw its operating income surge by over 70% year-over-year, primarily due to strong growth in its direct-to-consumer (DTC) business. Revenue in this segment grew sequentially by 2% and annually by 13%, reaching US$47 million in operating income. This success was attributed to significant expense savings and a 6.3 million increase in Disney+ core subscribers. Disney+ core ARPU (average revenue per user) also grew by 6% sequentially, thanks to price increases and improved international ARPU.
Despite these positive trends, Disney is bracing for a loss in the Entertainment DTC business in the third quarter due to the cost of ICC cricket rights for Disney+ Hotstar. Additionally, the company expects no growth in Disney+ core subscribers in the third quarter but anticipates a rebound in the fourth quarter. Nevertheless, Disney remains confident that its streaming businesses will achieve profitability again in Q4 and continue improving into fiscal 2025.
The Linear Networks division faced some headwinds, with operating income declining due to lower domestic affiliate and advertising revenue and reduced international affiliate revenue. However, linear networks continue to play a crucial role in Disney’s DTC strategy by providing high-quality content not captured on streaming alone, that broadens the audience base.
Meanwhile, the Content Sales/Licensing division reported lower results compared to last year due to the absence of significant theatrical releases. Nevertheless, modestly positive operating income is expected in the third quarter.
Sports segment
ESPN’s second-quarter operating income slightly decreased, this was primarily due to higher programming and production costs, which were only partially offset by increased advertising revenue. ESPN saw record-breaking ratings across multiple sports, including the NCAA Women’s Final Four and the NFL postseason. Monday Night Football also enjoyed its best season since 2000.
Managing inflationary pressures in sports rights and securing an NBA deal that balances costs and value will be critical challenges for ESPN.
Experiences segment
The Experiences business remained a financial powerhouse for Disney, with revenue growing by 10% and operating income by 12%. Segment margins expanded by 60 basis points. Hong Kong Disneyland Resort, Walt Disney World, and the cruise business contributed significantly to this growth. However, Disneyland’s results were affected by cost inflation despite growing attendance and per capita spending. In the cruise business, new cruise ships and the new private island Lookout Cay are set to bolster growth. The Consumer Products division also performed well, with a 7% increase in operating income.
While the third quarter’s operating income is expected to be roughly comparable to the previous year due to non-comparable and timing-related factors, Disney remains optimistic about the long-term prospects of the Experiences segment.
Strategic initiatives and future outlook
Disney is pushing forward with several strategic initiatives to drive future growth:
- Streaming milestones:
- The successful launch of Hulu on Disney+ and the addition of an ESPN tile to the platform later this year will offer subscribers a richer viewing experience.
- The company is also planning to roll out an enhanced standalone ESPN streaming service in the fall of 2025.
- Disney and Warner Bros Discovery just unveiled a new streaming bundle featuring Disney+, Hulu, and Max.
- Film and series slate:
- The film slate remains robust, with highly anticipated releases such as Kingdom of the Planet of the Apes, Inside Out 2, Deadpool & Wolverine, and Moana 2.
- FX’s Shogun has become a global hit across linear and streaming platforms, exemplifying the value of Disney’s combined ecosystem.
- Disney is reducing the Marvel output to focus on quality over quantity, ensuring its content remains compelling and profitable.
- Cost efficiency and shareholder returns:
- Disney is on track to exceed its US$7.5 billion annualized cost-efficiency target.
- The company expects to generate over US$8 billion in free cash flow this fiscal year and remains committed to returning capital to shareholders through stock repurchases.
Key challenges
Despite the positive momentum, Disney faces several challenges:
- Inflation and economic uncertainty:
- Inflationary pressures on labor and sports rights and slowing global economic growth could impact consumer spending.
- Market dynamics:
- Intense competition in the streaming space and potential market saturation domestically require Disney to stay ahead of shifting consumer preferences.
- Strategic execution risks:
- The profitability turnaround in streaming will be crucial, especially as Disney pivots from linear to digital without losing existing revenue streams.
Overall, Disney’s second-quarter results reflect its strategic clarity and execution, with a 30% year-over-year increase in adjusted earnings per share and a raised full-year growth target of 25%. However, the upcoming quarters will be pivotal in addressing several market challenges and achieving long-term profitability in DTC. Linear networks face declining affiliate and advertising revenues, and cost inflation in the Experiences segment continues to pressure margins.
