Disney (DIS) reported a strong quarter Wednesday after the bell (calendar Q2 2022 - Disney's fiscal third quarter). Revenue increased 26% year over year to $21.504 billion, beating FactSet estimates of $20.994 billion. Disney’s direct-to-consumer subscriber growth was a positive surprise. Adjusted earnings per share of $1.09 exceeded estimates of $0.97. 

The stock was rewarded with a roughly 5% jump on Thursday on top of the 4% gain on Wednesday. 

Second-quarter segment results

Disney Media and Entertainment Distribution: Revenues of $14.11 billion, up 11% year over year, beat estimates of $13.6 billion. Operating income of $1.38 billion, down 32% year over year, missed estimates of $1.94 billion.

Within the segment, Linear Networks revenue of $7.2 billion, up 3% year over year, in line with estimates; operating income of $2.47 billion, up 13% year over year, missed the $2.82 billion estimate. 

Direct-to-Consumer revenue of $5.05 billion, up 19% year over year, slightly missed estimates of $5.17 billion; operating loss of $1.061 billion was larger than the $765 million loss expected. It is a little disappointing to see the wider operating loss because this is a market that cares about profitability, but we are willing to look past it this quarter. Why? Disney blew away subscriber growth expectations. 

Disney ended the quarter with 152.1 million Disney+ subscribers, up 14.4 million from the prior quarter and well above estimates of about 147.7 million. “Core” net subscribers made up 6 million of the new additions thanks to growth in existing markets and new launches, while Hotstar (Indian streaming services) made up the other 8 million. 

Looking ahead to the fourth quarter, management expects core net additions to accelerate modestly versus the prior quarter, particular in the domestic market with the help of a steady flow of key releases like Marvel’s “She-Hulk,” a new Star Wars series called “Andor,” and Disney’s “Hocus Pocus 2.” 

Long term, management made some adjustments to its end of fiscal 2024 targets, which previously called for 230 million to 260 million total paid Disney+ subscribers. The company now sees core Disney+ subscribers in the range of 135 million to 165 million and Hotstar subscribers of up to 80 million. This update represents a cut of about 15 million to the previous target, but everyone knew the old goal was unreachable after Disney’s disciplined decision to not proceed with the expensive Indian Premier League digital rights. 

Although the subscriber target was lowered, management reiterated its confidence of reaching profitability in fiscal 2024. This is crucial, because again, this market cares about making money and everyone has been down on streaming this year due to Netflix’s subpar results. 

One way to increase profits is to increase prices, and Disney announced a brand new pricing plan. Starting Dec. 8 in the U.S., Disney+ with commercials will be $7.99 per month, which is the current price without ads. The ad-free version price will increase by $3 per month to $10.99. The price of Hulu is increasing, too. Disney announce last month a 43% increase in the price of ESPN+. The company isn’t expecting any meaningful long-term impact on churn due to these changes, but it will be something to watch.

Elsewhere in the direct-to-consumer business, Hulu subscribers increased to 46.2 million, up from 45.6 million in the prior quarter, while ESPN+ subs were up to 22.8 million from 22.3 million in the prior quarter. 

Content sales/Licensing and Other sales of $2.1 billion, up 26% year over year, in line with estimates, but reported an operating loss of $27 million compared to a profit of $16 million. Despite the strong performance of “Doctor Strange in the Multiverse of Madness,” the decrease in operating results were due to unfavorable foreign exchange.

Disney parks, experiences and products: Revenue more than doubled to about $7.4 billion, crushing estimates of $6.75 billion. Operating income of $2.186 billion blew away the estimate of $1.72 billion.

Driving the beat was Parks & Experiences, which reported total revenue of $6.21 billion compared to estimates of $5.55 billion. Operating profit of $1.59 billion beat the estimates of $1.03 billion. These results were truly impressive, speaking to the strength of the upper-income customers (people who can afford to travel to Disney's parks). This also speaks to the strength of Disney's brand and its iconic theme parks as a must-visit destination for families with children, recession or not.

Domestic Parks & Experiences reported revenue of $5.423 billion and an operating profit of $1.651 billion, meaning margins expanded quarter to quarter from about 30% from 28%. 

Per capita guest spending, which is a measure of how much an individual spends at the park, was up over 40% versus pre-Covid 2019 levels and 10% over 2021 levels, one year into the pandemic. Occupancy levels at the domestic hotels was 90%. Importantly, Disney has not seen any signs of weakening demand. The company is still seeing demand in excess of the reservations available for guests. The return of international travel has progressed but is still below pre-pandemic levels, representing another tailwind for the parks because those guests tend to stay longer at the parks and spend more when they visit. 

International Parks & Experiences reported revenue of $788 million and an operating loss of $64 million. Although revenue and operating income from Disneyland Paris exceeded 2019 levels, the results were limited due to closures at Shanghai Disney, which was closed for all but the last three days of the quarter. 

Consumers Products revenue increased 2% to $1.183 billion, in line with estimates, while operating income grew 6% to $599 million, also in line with estimates. 

Bottom line

This was an excellent quarter for Disney with better-than-expected profits driven by outperformance from the theme parks that continue to show no signs of slowdown. On the other hand, speaking to the direct-to-consumer business, Disney+ subscriber numbers were fabulous. Disney now has 221.1 million streaming subscribers across its various services, more than the 220.7 million Netflix reported last quarter.

We continue to own shares of Disney here. After the quarter, analysts have revised 2023 EPS estimate to $5.39/share. Applying a deserved 25x multiple, we arrive at a $135 price target for shares of Disney.