If you want to read The Walt Disney Company’s Q2 earnings report
The Walt Disney Company reported its earnings for quarter two. Earnings per share was $1.08, which was expected to be $1.19. Disney revenue came in at $19.25 billion compared to the $20.02 billion that was expected.
Disney+ now has 137.7 million subscribers beating out Wall Street’s estimate of 135 million subscribers. That means 7.9 million subscribers were added during quarter two. Disney’s entire streaming portfolio now sits at 205 million subscribers.
At the beginning of the call, Chapek took the time to reiterate his three strategic pillars (storytelling excellence, innovation, and audience). Chapek was proud of the performances from Disney’s domestic parks, its various content teams’ creative achievements, and all the growth at the streaming services.
“We are in a league of our own.” — Disney CEO Bob Chapek
During the call, Chapek revealed that demand for the Star Wars: Galactic Starcruiser remains strong and that they expect it to 100% to sell out in the summer. This is quite impressive as various skeptics — including myself — didn’t know if such an expensive immersive experience would equal the demand. Chapek also remarked on how Guardians of the Galaxy: Cosmic Rewind is coming to EPCOT and that Disneyland Paris Resort was receiving various upgrades including its own Avengers Campus during its 30th-anniversary celebration.
Overall, Disney added 9.2 million subscribers this quarter according to Chapek. 7.9 million of them come directly from Disney+. Disney+’s streaming growth continues to impress. Disney didn’t have a Netflix collapse because they don’t just rely on streaming. Disney also has some distinct advantages over Netflix as Disney has a proven track record of hits, room to grow in terms of subscriber base, and greater flexibility in its approach with the bundle.
Chapek also focused on how Disney has the ability to shift its resources across its creative ecosystem. Basically a fancy way of saying that Disney can now take a fan-favorite series like Dancing with the Stars from ABC and shift it to Disney+. You have to wonder what other shifting of resources might happen in the coming months at Disney. For example, Disney has been sharing more content across its three streaming services. ESPN content has been showing up a lot more on Disney+ and Love, Victor which is a Hulu Original will also stream its final season concurrently on Disney+.
Chapek and Co. are continuing to invest in international originals. Disney’s international content team is led by Rebecca Campbell (a longtime lieutenant of Chapek going back to the DPEP days). Disney has over 500 international series in the works. Chapek hyped Nautilus, which is based on the classic Disney film 20,000 Leagues Under The Sea and will showcase the origin of Captain Nemo. That will be an international production that will travel well across all regions of Disney+.
Disney+’s ad-tier is coming to the United States by the end of the year. Advertisers are over the moon that Disney+ is adding an ad-tier. This will also help Disney with ARPU (average revenue per user) as they can charge for ads. Disney is going to use the same tech it uses for Hulu and ESPN+ for its ad-tier Disney+. The ad-tier will likely arrive when the new season of Dancing with the Stars arrives. I can’t imagine a live show like that without some sort of commercials.
Chapek then hyped Disney’s impressive slate of content. Yet, notice this time he focuses more on theatrical releases. In the past, Chapek would highlight the big Disney+ series releases. This time he only highlights two. Chapek highlighted Obi-Wan Kenobi, Ms. Marvel, Lightyear, Thor: Love and Thunder, Black Panther: Wakanda Forever, and Avatar: The Way of Water as Disney’s future content.
Chapek finished his initial remarks by discussing Disney’s synergy machine or its franchise flywheel. Chapek’s example was Toy Story and how the IP was created three decades ago with a film but since then Toy Story has had immersive lands, became a cornerstone of Disney+, and is still a key consumer product franchise for Disney(generates over $1 billion in sales every year). And now due to the power of the synergy machine, Pixar’s Lightyear will expand the franchise even more.
Let’s see what the synergy machine does with Encanto. Chapek keeps teasing that one on every call and I’m curious when that synergy magic will start happening for that franchise.
Parks, Experiences, and Products
Disney Parks, Experiences, and Products revenues for the quarter increased to $6.7 billion compared to $3.2 billion in the prior-year quarter. Segment operating results increased by $2.2 billion to an income of $1.8 billion compared to a loss of $0.4 billion in the prior-year quarter.
The operating income growth at the domestic parks comes from higher guest spending but it was partially offset by higher costs. Cruise ship sailings happened during this quarter something that didn’t happen last year so that also helped. The higher guest spending comes from guests spending more on food, beverage, merchandise, and add-ons like Genie+ and Lightning Lane. International parks had better results due to growth at Disneyland Paris, which was partially offset by struggles from Hong Kong Disneyland and Shanghai Disneyland.
Growth in merchandise licensing was driven by higher sales of merchandise based on Mickey and Minnie, Spider-Man, Star Wars, and Disney Princesses.
Media and Entertainment Distribution
Total (so far): 205 million subscribers
Disney+’s overall ARPU (average revenue per user) is now at $4.35 which is a 9% increase from the prior year. Disney+ Domestic’s ARPU went up 5% to $6.32. ESPN+’s ARPU saw a 4% jump from the prior year and now sits at $4.73. Hulu SVOD Only ARPU increased 6% from $12.08 to $12.77, whereas Hulu Live TV + SVOD ARPU increased 8% from $81.83 to $88.77.
Final Thoughts
Chapek and Disney are still confident in its long-term sub guidance of Disney+ reaching 230 million to 260 million subscribers by fiscal 2024. The same year that Disney+ will be profitable. The sub-goal is doable but I think it’s going to take the bundle and the continued content push to get there. The mix of general entertainment and localized content could help Disney+ gain new subscribers who aren’t enchanted by the Marvel and Star Wars series.
Disney is confident in its content pipeline for Disney+ but they didn’t hype other series or films coming to the service today. I found it odd that Disney+ is the crown jewel of Disney but Chapek only hyped Dancing with the Stars, Obi-Wan Kenobi, Ms. Marvel, and Nautilus. That’s a missed opportunity. Everytime you do these things — even if it’s just for the investors and not the fans — you have to hype and sell your service. Hype your returning series, hype Percy Jackson, hype things that aren’t coming until later this year, and don’t be afraid to tease things. I still remember when Bob Iger on one of these calls revealed Andor was happening. Chapek should start announcing some of these things himself as it would help him get more comfortable in the “Uncle Walt” part of the CEO job.
The demand for domestic parks is positive. Yet, Disney needs to continue to invest in this division. You only have so many “new” things left in your pipeline at the parks, and when that’s done you’re going to need some new attraction, land, or experience for the fans to look forward to and things to get people to come back every year. If they lull themselves to sleep and stop investing they may witness some uglier quarters for the parks down the line.
Especially if prices continue to rise and Disney continues its approach of creating add-ons like Genie+ and Lightning Lane (things that used to be free). It also doesn’t help that park hoppers have been rendered useless as you can’t do it until 2 PM and anytime you want to visit a park you have to make a reservation. Yes, I know the reservation system is used to forecast staffing needs and other things. But I pose the question doesn’t Disney have enough data already to know all these things? Do we really need this? How does this benefit the guest? There has to be a better way here.
Back to Disney+, the inevitable Disney+ price increases will happen. Let’s just hope Disney learns its lessons from Netflix. You can’t raise the price too much without providing value. Netflix kept increasing its price and the content quality was decreasing. It was a recipe for a disaster. Netflix still can navigate its way out of this situation. But if I’m Disney I don’t allow that situation to happen. No matter how tempting having a higher ARPU is.
Whenever Chapek talks about the data from Disney+ and the other streaming offerings. I’m curious if his team is developing or has thought about a Disney Prime subscription. A service that would be one step beyond what Disney+ offers and expands the Disney as a service strategy into the Disney Parks and Consumer Products. A monthly membership and you get all access to Disney and discounts. It could be a compelling idea and strategy if executed right. Especially if they find a way to merge Disney+ subscription with the power and demand for the Disney Parks.
Disney also knows and understands that inflationary pressures are coming. I think the question is will the guests know that they are coming? If you read our business columns on Boardwalk Times. You know we have been covering the supply chain and inflation issues. We recently got into the issue on the mailbag for Q2. Disney’s hope is to just mitigate inflationary pressures with different strategies but hopefully, it doesn’t affect the parks too much.
Something that may be overlooked coming out of this call is ESPN going full direct-to-consumer would be gigantic for Disney when the time comes. When that happens Disney will be easily the winner of the streaming wars as long as they keep all the sports rights at ESPN. Sports is some of the most-watched programming out there, as Chapek said. Disney having the streaming rights to beloved IP and sporting events would put it a notch above the competition.
Another takeaway, Disney wants to mine its intellectual property. The prime example is Lightyear, a unique way to expand the Toy Story property without just doing another Toy Story film. They also want to create new franchises like Encanto. Geez, another Encanto mention from Chapek. I’m expecting a “Future of Encanto” presentation at D23 Expo or I give up.
Chapek was asked a question if Disney is worried about not having its films in China, and Chapek didn’t seem worried at all. He pointed out how successful Doctor Strange in the Multiverse of Madness has been so far even without China. Doctor Strange in the Multiverse of Madness has already crossed $500 million worldwide and it just came out. That’s also a better box office gross already than other Marvel pandemic-era films like Shang-Chi, Eternals, and Black Widow.
Despite missing its earnings, Disney had a good performance for Disney+ and the Disney Parks. The stock market is a mess right now, and Disney has never been valued correctly on the market. If things can continue to stay normal for Disney when it comes to the parks, Disney+, and theatrical releases. It should be blue skies ahead. If everything starts to click we may see a stronger Disney emerge ahead of its 100th-anniversary celebration.
Let’s finish off with the lightning round.
Lightning Round
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Zach Perilstein is the Editor-in-Chief of the Boardwalk Times
