Disney (DIS) reported weaker-than-expected fiscal fourth-quarter results after the closing bell Tuesday. We were shocked and stunned by the poor performance, and we’re certainly not alone. The stock fell roughly 7% in after-hours trading. 

• Revenue for the quarter increased 9% year over year to $20.15 billion, but fell short of estimates of $21.24 billion, according to Refinitiv.

• Adjusted Q4 earnings declined 19% to 30 cents per share, missing estimates of 55 cents, as both of the company’s parks and media divisions struggled.

Q4 segment results

Disney Media and Entertainment Distribution: Revenue in Q4 of $12.73 billion, down 3% year over year, missed estimates of $13.8 billion. Operating income fell 91% to $83 million mostly due to higher than expected losses from the Direct-to-Consumer business.

Direct-to-Consumer revenue of $4.91 billion, up 8% year over year, missed estimates of $5.4 billion, and DTC’s operating loss more than doubled from last year to $1.47 billion, and that’s worse than estimates of a roughly $1.1 billion loss.

It’s a big disappointment to see losses swell to this size but the silver lining here is that management believes this quarter reflects the peak in DTC operating losses, which are now expected to narrow towards Disney+’s target to be profitable during one of quarters of fiscal 2024. This news represents no change from prior guidance. This path to profitability is expected to be driven by price increases and the launch of the Disney+ advertising tier next month, a realignment of costs with a “meaningful” rationalization of marketing spend, and an optimized content release schedule.

• In better news, Disney ended Q4 with 164.2 million Disney+ subscribers, up 12.1 million from the prior quarter and well above estimates of about 160.45 million. Core net subscribers made up over 9 million of the new additions, thanks to growth in existing markets and new launches, while the rest were from Disney+ Hotstar, a popular streaming service in India.

• Hulu subscribers in Q4 increased to 47.2 million, up from 46.2 million in the prior quarter, while ESPN+ subs were up to 24.3 million from 22.8 million in the prior quarter.

It was nice to see subscribers come in ahead of estimates, but streaming’s average revenue per user, or APRU, was another disappointment.

• Global Disney+ ARPU+ fell 5% year over year to $4.84, badly missing estimates of about $4.27. Bundling has a negative effect on ARPUs, and Disney said Tuesday evening that bundled and multiproduct offerings now make up over 40% of domestic Disney+ subscribers. Of course, the trade-off from these lower prices is high engagement and retention, leading to smaller customer churn.

• Fourth quarter ARPU at ESPN+ increased 2% to $4.84, and Hulu SVOD Only slipped 4% to $12.23 while Hulu Live TV + SVOD increased 2% to $86.77.

Looking ahead to the fiscal first quarter of 2023, management expects DTC operating losses to improve by at least $200 million versus the fourth quarter’s $1.47 billion loss. That’s encouraging to see but is still far away from the roughly $500 million loss analysts expected for Q1 before Tuesday evening’s release.

• A larger improvement is expected to happen in the fiscal second quarter, but there appears to be a major disconnect between what DTC will lose in fiscal 2023 versus what analysts had anticipated. This will put pressure on the stock and cast doubt on the path to profitability outlook.

• In terms of subscribers, Disney sees core Disney+ subscribers slightly increasing in its first quarter, though Disney+ Hotstar is expected to lose subs due to the absence of the Indian Premier League Cricket rights. This is another disappointment given analysts were expecting total subscribers to increase by about 6 million from the levels it ended this quarter with.

Linear Networks revenue of $6.34 billion, down 5%, missed estimates of $6.6 billion but operating income of $1.73 billion, up 6%, was higher than the $1.58 billion estimate.

Content sales/Licensing and Other sales of $1.74 billion, down 15% year over year, missed estimates of $2.03 billion and the operating loss of $178 million was slightly worse than the $130 million loss expected.

Disney parks, experiences and products: Revenue in Q4 increased 36% to $7.43 billion, slightly missing estimates of $7.49 billion. Operating Income more than doubled year over year, but Disney’s run of crushing estimates came to an end this quarter with $1.51 billion missing estimates of $1.87 billion.

Revenues at Parks & Experiences look solid, increasing 46% year over year to $6.8 billion which was higher than estimates of $5.93 billion. But operating income of $815 million missed estimates of $1.12 billion. 

At the domestic parks and experiences, revenue increased 44% year over year to $5.01 billion and operating income increased to $741 million. Hurricane Ian was a $65 million headwind to operating income.

• 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 6% over 2021 levels, suggesting people are still spending a lot in the parks.

• The return of international travelers is progressing as well, with international attendance at Walt Disney World in Florida roughly back at pre-pandemic levels. Management continues to monitor booking trends for macroeconomic impacts but still sees robust demand at its domestic parks and anticipates a strong holiday season.

International Parks & Experiences reported revenue of $1.07 billion and an operating profit of $74 million. 

Consumers Products revenue increased 4% to $1.34 billion, in line with estimates, while operating income grew 13% to $699 million, beating estimates of $647 million.

Fiscal 2023 outlook

Management provided some early commentary about how they see fiscal year 2023. Assuming no meaningful shift in the macroeconomic climate, the company expects revenue and segment operating income to grow at a high single-digit percentage rate versus 2022.

However, upong checking consensus estimates, this is a terrible miss compared to expectations of sales growing by 11% and operating income increasing by 17%. We can live with a few percentages point miss on revenue, but the profit guide looks very weak, and the difference must be due to those losses at DTC.

Bottom line

Our main issue is with the losses at streaming. The losses at Direct-to-Consumer are piling up far worse than what we were led to believe. Earnings were down almost 20% during a quarter in which revenue was up 9%. That’s not how you properly manage a business, especially in a market that stresses profitability over growth. CEO said this should be the inflection point for DTC losses (meaning the losses should start to decrease next quarter), so let's hope that is true.

For now we're holding on to our shares and doing nothing.