Disney shares are falling as the company tries to make its streaming business profitable

Disney (DIS) said Tuesday that a significant portion of its streaming business turned a profit for the first time, but it expects weaker results in that segment during the current quarter, sending its shares down as much as 8% ahead of its market launch.

The forecast highlights the challenges Disney faces in achieving sustainable profitability in streaming, a key priority as its linear TV business declines. Overall, CEO Bob Iger’s recent turnaround plan has made investors more optimistic about the stock in recent months. The company also scored another win in a high-profile proxy fight against activist investor Nelson Peltz.

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

The company said it expects DTC results in the entertainment segment to be in the red in the third quarter, driven by losses from its Indian brand Disney+ Hotstar.

Additionally, not all of Disney’s streaming services were profitable in the second quarter. Including ESPN+, direct-to-consumer losses totaled $18 million versus a loss of $659 million reported in the same period a year earlier. Disney expects full streaming profitability by the fourth quarter of this year.

The company reported second-quarter adjusted earnings of $1.21 per share — a win compared to the $1.10 expected by analysts surveyed by Bloomberg and higher than the $0.93 that Disney reported in the second quarter of 2023.

Revenues were $22.1 billion, meeting consensus expectations and ahead of the $21.82 billion the company reported in the same period last year.

Disney also raised its full-year adjusted earnings growth guidance to 25%, up from the previous 20%. However, Disney took a hit after merging its Star India business with Reliance Industries, reporting impairment charges of more than $2 billion.

“Soft entertainment streaming guidance next quarter may dampen enthusiasm. However, today’s news reinforces Iger’s argument that Disney is in the middle of a long-awaited turnaround,” KeyBanc analyst Brandon Nispel said in a note following the second-quarter results.

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

On the earnings call, Disney CFO Hugh Johnston said the company saw “some evidence of global moderation from the post-coronavirus travel peak” at its theme parks. He also noted that rising costs and inflation are likely to impact profits.

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In the second quarter, the media giant reported an increase in Disney+ subscriber additions as Charter Cable subscribers began receiving free subscriptions as part of their packages.

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

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

“I think you’ll see a steady rise in prices over time on the streaming service because the content that we have is worth paying for,” Johnston told Yahoo Finance executive editor Brian Suozzi on Tuesday.

Meanwhile, the theme parks business delivered another strong quarter of results with domestic operating income rising to $1.61 billion compared to $1.52 billion in the same period a year earlier.

The company attributed this increase to higher profits at Walt Disney World Resort and Disney Cruise Line, which was partially offset by lower results at Disneyland Resort.

Meanwhile, ESPN’s domestic operating income fell 9% year-over-year to $780 million, hurt by lower affiliate revenue and fewer subscribers as more consumers cut off service. The company also 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 division, which declined 11% year-over-year in the quarter. Operating income within the sector decreased by 18%. This has also been blamed on lower affiliate revenues, along with lower advertising revenues.

In February, Disney doubled down on its sports streaming efforts by unveiling an upcoming joint venture partnership with Fox and Warner Bros. Discovery. The company is also working on a separate sports streaming platform for ESPN, scheduled to debut in the fall of 2025.

Regarding sports, Disney has reportedly agreed to increase its media rights deal with the NBA to $2.6 billion, compared to $1.5 billion previously. The current NBA rights deal expires at the end of next season.

Alexandra Canal He is a senior reporter at Yahoo Finance. Follow her on X @allie_canal, linkedin, And email it to [email protected].

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