Portfolio name Disney (DIS) reported a good quarter after the closing bell Wednesday, despite missing estimates on headline revenue and earnings.

Fiscal second-quarter revenue increased 23% year over year to $19.25 billion. Adjusted earnings came in at $1.08 per share.

• It’s worth noting that revenue would have been $1 billion higher, if not for the early termination of some licensing agreements to make content available on the company’s direct-to-consumer (DTC) services.

Q2 segment results

Disney Media and Entertainment Distribution: Revenues of $13.62 billion, up 9% year over year, missed estimates of $13.72 billion. Operating income of $1.94 billion, down 32% year over year, beat estimates of $1.8 billion.

Within the segment, Linear Networks revenue of $7.71 billion, up 5% year over year, beat estimates of $6.83 billion, and operating income of $2.82 billion, down 1% year over year, exceeded the $2.39 billion estimate. Notably, advertising revenue at ESPN increased 30% year over year.

Direct-to-Consumer revenue of $4.9 billion, up 23% year over year, missed estimates of $5.05 billion, and the operating loss of $877 million was larger than the $590 million loss that was expected.

• We did not like to see a wider than expected operating loss. Still, we are pleased to see Disney+ add more subscribers than expected as many feared a much weaker result after the Netflix quarter.

• Disney ended the quarter with 137.7 million Disney+ subscribers, up 8 million from the prior quarter and above estimates of about 135 million. A little over half of those adds were driven by Disney+ Hotstar, a popular streaming service in India, which benefitted from the start of the new Indian Premier League cricket season. Domestic net adds were approximately 1.5 million.

• Management reiterated their view that they expect Disney+ subscriber growth in the back half of the fiscal year to exceed growth in the first half, but they moderated expectations on the call due to the better than expected first half of the year. This latter comment was one reason why Disney shares gave up initial after-hours gains of ~6%. If we look at the math, Disney added 19.6 million subscribers over the past two quarters. 

• Long term, management reiterated confidence in their target of 230 million to 260 million total paid Disney+ subs by the end of fiscal 2024. Also, management still expects that Disney+ will achieve profitability in fiscal 2024. During the conference call, management said they plan to introduce an ad-supported Disney+ subscription offering in the U.S. by the end of the year and internationally in 2023.

• Average revenue per user (ARPU), for Domestic Disney+ was $6.32, up from $6.01 last year. Global Disney+ ARPU was $4.35, up 9% year over year, versus estimates of $4.30. ESPN+ ended the quarter with 22.3 million subscribers versus estimates of 22.67 million. ARPU of $4.73 at ESPN+ was below estimates of $5.10. Total Hulu subscribers hit 45.6 million, slightly below estimates of 46.26 million. Hulu subscription video on demand (SVOD) only subscribers reached 41.4 million versus the 42.19 million expected, with APRU of $12.77 versus $11.10 estimates.

Disney parks, experiences and products: Revenue more than doubled to $6.65 billion, blowing away estimates of $6.29 billion. Operating income of $1.76 billion topped estimates of $1.68 billion.

Driving the beat was Parks & Experiences, which reported total revenue of $5.47 billion, up more than 100% year over year, compared to estimates of $5.2 billion. Operating profit of $1.12 billion, also up more than 100% year over year beat estimates of $984 million.

• Domestic Parks & Experiences reported revenue of $4.9 billion and an operating profit of $1.39 billion. While operating margin slid to about 28% from 32% in the year-ago period, these are still very impressive results. 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 20% over 2021 levels, one year into the pandemic. Increases were seen in admissions, food and beverage, and merchandise. Management is still limiting attendance using its reservation system to optimize the guest experience. If people are happy they will spend more. Management believes the return of international visitors to the U.S. is still in the early days of the recovery.

• International Parks & Experiences reported revenue of $574 million and an operating loss of $268 million. These results were limited by the closures at Hong Kong Disneyland and Shanghai Disney due to virus-mitigation restrictions stemming from China’s zero-Covid policy. Closures at these two parks could negatively impact operating income by $350 million versus the prior year.

Consumers Products delivered flat year over year revenue of $1.18 billion, basically matching estimates of $1.19 billion. Operating income of $638 million, up 14% year over year, exceeded the $559 million expected.  

Bottom line

It wasn’t a perfect quarter, but we were pleased to see our two key watch items— theme park operating income and Disney+ subscriber additions — beat expectations.

We had thought a relief rally might be in the cards if Disney+ added more subscribers than expected, considering the stock has dropped 20% since Netflix last month reported a decline in paid subscribers for the first time in more than 10 years, raising questions about peak streaming. Well, Disney+ outperformed, breathing a great sigh of relief. This suggests that Disney’s streaming strategy is different and superior to Netflix’s game plan. However, Disney shares are surprisingly trading down today.

It is a tough market for all companies, all stocks. Albeit delivering net growth in subscriber, Disney+ yielded wider-than-expected DTC operating loss, raising some questions about the path to profitability, even as management reaffirmed its view of when the business will be profitable.

However, we continue to invest in Disney because this iconic company now trade at 21x earnings and have retreated to prices before the DTC strategy was introduced. We're essentially getting all of the first part of what we reported to you "Disney Media and Entertainment Distribution) for free (again, because share price has gone back lower than when this segment came out).