Yesterday, The Walt Disney Company reported total revenue of $19.3 billion, a 23% increase, for the second quarter of fiscal year 2022, compared to total revenue of $15.6 billion for the same period last year. This is particularly remarkable since the company also reported a $1.0 billion charge paid to a customer to terminate a film and television content contract early, so Disney could use the content primarily on their direct-to-consumer streaming services.

Though revenue was up, Disney’s earnings reflect the charge. For the quarter, the company had net income of $470 million, or $0.26 diluted earnings per share, compared to $912 million, or $0.50 diluted earnings per share for the prior-year period, representing a 48% decrease.

CEO comments

“Our strong results in the second quarter, including fantastic performance at our domestic parks and continued growth of our streaming services—with 7.9 million Disney+ subscribers added in the quarter and total subscriptions across all our DTC offerings exceeding 205 million—once again proved that we are in a league of our own,” said Bob Chapek, CEO.

“As we look ahead to Disney’s second century, I am confident we will continue to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger, more connected, and magical Disney universe for families and fans around the world,” Chapek said.

Quarterly highlights

In addition to revenue and net income figures, Disney reported the following highlights for the second quarter of fiscal year 2022:

• For the most part, domestic parks and resorts have resumed normal operations without significant impacts from COVID-19. Internationally, some restrictions continue to impact Disney parks, resorts and cruise ship operations.
• In the company’s Media and Entertainment division, film and television production has resumed, though some disruptions continue depending on the locale.
• Theatrical releases of films have not been significantly impacted in the first half of fiscal year 2022.
• The company continues to incur additional expenses to follow government regulations to keep their employees, guests and talent safe.
• Disney’s Media and Entertainment Distribution segment accounted for $13.6 billion of revenue, a 9% increase, while Disney, Parks, Experiences and Products accounted for $6.7 billion of revenue, more than double revenue for the prior year period.
• In the Media and Entertainment Distribution segment, Linear Networks accounted for $7.1 billion in revenue, a 5% increase year-over-year; Direct-to-Consumer revenue was $4.9 billion, a 23% increase; Content Sales/Licensing and Other revenue was $1.9 billion, and the Elimination of Intrasegment revenue was $(265) million, comprising $13.6 billion total.

Though Direct-to-Consumer revenue increased 23% year-over-year, operating loss for this category was $0.9 billion, due to higher losses at Disney+ and ESPN+ and lower operating income at Hulu. The losses at Disney+ were partially offset by an increase in subscriber revenue from both subscriber growth and increased pricing.

The losses from ESPN+ were due to higher sports programming costs and less income from Ultimate Fighting Championship pay-per-view events. These losses were also offset by an increase in subscription revenue due to an increase in subscribers. As shown below, ESPN+ showed the biggest increase in the number of subscribers, growing from 13.8 million as of April 3, 2021 to 22.3 million as of April 2, 2022.

Lower operating income from Hulu was attributed to higher programming and production, and marketing and technology costs, which were partially offset by growth in subscription revenue and advertising revenue. The increase in programming and production costs were due to higher subscriber-based fees for the Live TV service because Hulu is carrying more networks, the increase in total subscribers and rate increases. Advertising revenue increased due to higher rates and impressions.

Subscriber count and goals

The company reported the following paid subscribers as of April 2, 2022:

Disney’s total direct-to-consumer streaming paid subscribers is now 205.6 million. By comparison, Netflix had 222 million paying subscribers at the end of its second quarter. Though Netflix had more subscribers total than Disney, Netflix lost 200,000 subscribers during the first quarter and is projecting a loss of 2 million more in the second quarter of the year.

On the earnings call, Christine McCarthy, senior executive vice president and CFO, noted the company’s confidence that they will hit their long-term subscriber goal of 230 million to 260 million subscribers to Disney+ by fiscal year 2024 while also achieving profitability that same year.

Also on the earnings call, Chapek addressed a question by Brett Feldman, an analyst for Goldman Sachs, about whether or not Disney had factored in their upcoming ad-supported tier, additional content, increased competition and inflation when making the decision to increase their prices last year. Disney+, as a standalone service, is now $7.99 a month or $79.99 a year. The Disney+ bundle, which includes Disney+, ESPN+ and Hulu’s ad-supported plan, is $13.99 a month or $19.99 for subscribers who prefer Hulu’s ad-free plan.

“We launch with an extremely attractive opening price point on Disney+, and we’ve been very comfortable with the price-value relationship that we’ve offered. And as you know, as we increase our content investment, we believe that that’s going to give us the ability to adjust our price by — and still, at the same time, maintain that strong value proposition,” Chapek said.

Chapek also noted that he believes the ad-supported tier of Disney+ will allow the company to reach a broader audience at multiple price points.

“We believe that we can sort of move up and cascade up our net price over time given the tremendous value that we started with and the increased price-value relationship of all the new content, but we’re pretty bullish about that,” added Chapek.

Insider Take

Despite the $1 billion charge for early contract termination, Disney still enjoyed a solid second quarter, seeing strong subscriber growth. With their diversified direct-to-consumer streaming portfolio and strong slate of content, it seems likely that Disney will continue to grow that segment of their business and reach their fiscal year 2024 goals.

As Disney’s market penetration in the direct-to-consumer streaming market continues, they will eventually level off similar to Netflix, but it will be a while before that happens. Disney is smart to consider an ad-supported tier as another revenue stream and to hang onto as much exclusive content as they can, even if it means a $1 billion hit now. Ultimately, it is the content which attracts and keeps subscribers, presuming that pricing and user experience are roughly the same across streaming services.