The Walt Disney Company reported increased revenue and earnings for the second quarter of fiscal year 2023 ended April 1, 2023, beating Wall Street estimates. Disney posted total revenue of $21.8 billion, a 13% increase year-over-year. Net income from continuing operations was $1.3 billion, more than two-and-a-half times what it was for the second quarter of fiscal year 2022. Diluted earnings per share from continuing operations were $0.69, up from $0.26 diluted earnings per share for the same period last year. While these changes are notable, perhaps more significant is the loss of 4 million direct-to-consumer streaming subscribers, missing Wall Street estimates by more than 4 million paid subscribers.

Iger returned to The Walt Disney Company in November 2022, coming out of retirement to replace Bob Chapek who Disney fired. Iger served as CEO at Disney from 2005 to 2020. He was called out of retirement to help the company get back on track through a strategic reorganization, which included layoffs of 7,000 employees.

“I’ve been back in the company for almost six months, and in that time, we’ve embarked on a significant transformation to strategically realign Disney for sustained growth and success. I’m pleased to say that the strategy we detailed last quarter is working,” said Iger on the earnings call. “Our new organizational structure is returning authority and accountability to our creative leaders, as well as allowing for a more efficient, coordinated, and streamlined approach to our operations. The cost-cutting initiatives I announced last quarter are well underway, and we are on track to meet or exceed our target of $5.5 billion.”

Direct-to-consumer streaming subscription services

Disney ended the quarter with 157.8 million subscribers across its direct-to-consumer streaming subscription services – Disney+, Disney+ Hotstar, ESPN+ and Hulu. The most significant loss came from Disney+ Hotstar which lost 4.6 million subscribers, offset by gains at ESPN+ and Hulu. Variety reports that Wall Street analysts estimated Disney would finish the quarter with 163.17 million subscribers, missing their expectations by 5.37 million subscribers.

*Paid subscribers to Disney’s multi-product offerings, like the Disney bundle, are counted once for each service they subscribe to, so if Suzy Jones subscribed to the Disney bundle, she would be counted as a paid subscriber for Disney+, ESPN+ and Hulu.

An interesting data point to note is the increase in average revenue per user for Disney+ in the U.S. and Canada. That is due to the increase in price implemented by Disney in August 2022. That price increase may also be partly responsible for the loss of 300,000 subscribers in U.S. and Canada during the quarter.

Disney’s direct-to-consumer streaming subscription revenue for the quarter was $5.5 billion, an increase of 12% year-over-year. This decreased the operating loss by $0.2 billion for Disney’s DTC subscription services. Disney attributes the decrease in loss to improved results at Disney+ and ESPN+, partially offset by lower operating income from Hulu.

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Coming changes

On the earnings call, Iger announced some content and experience changes DTC subscribers can expect.

“As a significant step toward creating a growth business, I’m pleased to announce that we will soon begin offering a one-app experience domestically that incorporates our Hulu content via Disney+,” Iger said.

“And while we continue to offer Disney+, Hulu and ESPN+ as stand-alone options, this is a logical progression of our DTC offerings that will provide greater opportunities for advertisers while giving bundle subscribers access to more robust and streamlined content, resulting in greater audience engagement and ultimately leading to a more unified streaming experience. We will begin to roll out this one-app offering by the end of the calendar year, and we look forward to sharing more details in the future,” added Iger.

Iger announced that the ad-supported tier of Disney+ will be offered in Europe before the end of 2023. He also mentioned that they plan to “set a higher price” for the ad-supported tier to “better reflect the value” of their content.

On the earnings call, chief financial officer Christine McCarthy said Disney is reviewing content on their direct-to-consumer streaming subscription services to align with their strategic changes to their content curation. Once the review is complete, they intend to remove certain content from their streaming platforms and the company anticipates an impairment charge of $1.5 billion to $1.8 billion in the third quarter as a result.

Operational highlights

In the company’s earnings presentation, Disney shared the following operational highlights:

• Guardians of the Galaxy Vol. 3 topped the global box office on opening weekend, bringing in $289 million
• Season 3 of The Mandalorian is the most-watched series on Disney+ globally this year
• The first round of the NBA playoffs was the most-watched ever across Disney networks. The first 22 games averaged 5 million viewers.
• ABC is the #1 entertainment broadcast network for the fourth consecutive season.

In May and June, Disney has four theatrical releases planned: The Little Mermaid (May 26), The Boogeyman (June 2), Elemental (June 16) and Indiana Jones and the Dial of Destiny (June 30).

Insider Take

Disney lost direct-to-consumer streaming subscribers for the second quarter in a row, and the 4 million subscriber loss is significant. However, because of price increases and other factors, DTC revenue was still up by 12%. Disney was also able to reduce its DTC losses by 26%. Iger is doing exactly what they rehired him to do – shake things up and get the company back on the road to profitability. Part of this restructuring involves DTC streaming changes including the “one-app experience,” removal of certain content, and raising prices for their ad-support tier.

This will be a new era for Disney’s DTC streaming subscription services, paving the way toward profitability, which is not yet within reach. Iger has a proven track record of success though, and he is smart enough to test content strategies and pricing before finalizing Disney’s next DTC strategy.

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