Disney expects subscription decline in Disney+Hotstar in Q1 due to absence of the IPL

Disney expects subscription decline in Disney+Hotstar in Q1 due to absence of the IPL

Disney's share price had fallen by 10% in after hours trading after it missed earnings targets.


Mumbai: Speaking to analysts during a conference call to announce its fourth quarter and annual results, Disney senior executive vice president & chief financial officer Christine McCarthy said that the expectation is that Disney+Hotstar subscribers will decline in Q1 of the current fiscal year due to the absence of the Twenty20 league, the IPL. The company's expectation is that the overall DTC business will be profitable in 2024 as long as there is no meaningful shift in the economic climate. In Q4, the DTC business reached peak operating losses, which Disney expects to decline going forward.

Disney's share price had fallen by 10 per cent in after-hours trading after it missed earnings targets. It reported $20.15 billion in revenue growth in the fourth quarter, a nine per cent increase over the same period in the previous fiscal year. But $21.26 billion had been expected, according to Wall Street analysts. Disney’s income from operations for the quarter was $1.6 billion. This was a 55 per cent decrease from the previous quarter, but comparable to the same period the previous fiscal year.

The company’s theme park division is rocking. It reported Q4 revenue of $7.42 billion, up 36 per cent from the same quarter in the previous fiscal year. On Disney+ subscriber net additions, it overachieved with 12.1 million versus the expected 9.35 million.

"At Disney+ Hotstar, we are currently expecting that subscribers will decline in Q1 due to the absence of the IPL, but we do expect to see some stabilisation in Q2," McCarthy stated. In Q4 of the recently concluded fiscal year, lower pay-per-view revenue at ESPN+ and slightly lower ad revenue at Hulu and Disney+ Hotstar also impacted direct-to-consumer revenue in the fourth quarter relative to the third quarter.

She said that in Q4 of the recently concluded fiscal year, Hulu and ESPN+ added approximately one million and 1.5 million subscribers, respectively, during the quarter, while Disney+ added over 12 million global subscribers, of which a little less than three million were at Disney+ Hotstar. "Core Disney+ added over nine million subs in Q4, accelerating as expected versus the six million net ads we saw in the third quarter, reflecting the success of Disney+ Day and our tentpole content releases, in addition to continued growth from third quarter market launches. Nearly two million of these net ads were from the US and Canada, and a little over seven million were international Core editions," she pointed out.

Disney CEO Bob Chapek said that the company is exactly one month from the US launch of Disney+'s ad-supported subscription offering, which he says is a win for audiences, advertisers, and shareholders. "The launch will bring fans a new slate of subscription plans across Disney+, Hulu, ESPN+, and the Disney Bundle, giving viewers flexibility in choosing an option that suits their needs. The offering also adds a key component to our total company advertising portfolio, and advertiser interest has been strong. We have been a leader in streaming advertising for some time and are bringing our years of experience leading ad tech and relationships to this important opportunity," he said.

He added, "Disney+ has secured more than 100 advertisers for our domestic launch window, spanning a wide range of categories. And our company has over 8,000 existing relationships with advertisers who will have the opportunity to advertise on Disney+. Strong base pricing reflects the value advertisers place on our audience, our brand-safe environment for their messages, and our sales experience. We also have proven technology to deliver a great advertising experience on day one."

"And importantly, we have the ability to scale and innovate for audiences and advertisers alike. We are incredibly excited about the launch of our new ad-supported subscription offering for Disney+, which rolls out on December 8th. 2022 was an important year of recovery coming out of the pandemic, as we made foundational investments in our long-term success. As we celebrate the three-year anniversary of Disney+ this week, I can't help but reflect upon how our commitment to and substantial investment in our DTC business has helped create the world's most powerful suite of streaming services with the ability to reach hundreds of millions of viewers around the world with must-see content, services that aren't just content delivery systems but platforms that bring us closer to audiences than ever before and enable consumers to access more of The Walt Disney Company's total offering," he brought out.

Chapek went on to say that while DTC losses reached a peak in Q4, those losses will decline. "It has taken just three short years for Disney+ to transform from a nascent business into an industry leader. That transformation is the direct result of the strategic decision we made at launch to heavily invest in our direct-to-consumer offering, a decision made knowing that achieving rapid growth would result in short-term losses. Building a streaming powerhouse has required significant investment. And now, with scale, an incredible content pipeline, and global reach, Disney+ is well-positioned to leverage our position for long-term profitability and success."

He said that the company's financial results this quarter represent a turning point as it reached peak DTC operating losses, which it expects to decline going forward. "That expectation is based on three factors: first, the benefit of both price increases and the launch of the Disney+ ad tier next month; second, a realignment of our costs, including meaningful rationalisation of our marketing spend; and third, leveraging our learnings and experience in direct-to-consumer to optimise our content slate and distribution approach to deliver a steady state of high-impact releases that efficiently drive engagement and subscriber acquisition. With these factors, we believe we are on a path to a profitable streaming business that generates shareholder value long into the future. And assuming we do not see a meaningful shift in the economic climate, we still expect Disney+ to achieve profitability in fiscal 2024, as losses begin to shrink in the first quarter of fiscal 2023."

International Channels

International Channels revenues for the quarter decreased 18 per cent to $1.1 billion, and operating income decreased 18 per cent to $0.1 billion, reflecting lower operating income from channels that operated for the entire current and prior-year quarters (ongoing channels), partially offset by a benefit from channel closures.

Lower results from ongoing channels were primarily due to a decrease in ad revenue and, to a lesser extent, higher marketing spend and an unfavourable foreign exchange impact, partially offset by lower sports programming costs. The decrease in advertising revenue was due to lower average viewership, partially offset by higher rates. The decreases in sports programming costs and average viewership were due to the non-comparability of cricket events, reflecting the impact of covid-related timing shifts. The most significant impact was on the timing of Indian Premier League cricket matches, as there were no matches in the current quarter compared to 18 matches in the prior-year quarter.

Overall for the company Chapek noted, "2022 was a strong year for Disney, with some of its best storytelling yet, record results at the parks, experiences, and products segment, and outstanding subscriber growth at the direct-to-consumer services, which added nearly 57 million subscriptions this year for a total of more than 235 million. Our fourth quarter saw strong subscription growth with the addition of 14.6 million total subscriptions, including 12.1 million Disney+ subscribers. The rapid growth of Disney+ in just three years since launch is a direct result of our strategic decision to invest heavily in creating incredible content and rolling out the service internationally, and we expect our DTC operating losses to narrow going forward and that Disney+ will still achieve profitability in fiscal 2024, assuming we do not see a meaningful shift in the economic climate."

He goes on, "By realigning our costs and realising the benefits of price increases and our Disney+ ad-supported tier coming on 8 December, we believe we will be on the path to achieve a profitable streaming business that will drive continued growth and generate shareholder value long into the future. And as we embark on Disney’s second century in 2023, I am filled with optimism that this iconic company’s best days still lie ahead."

He added that Q4 was also the first time in Disney history that the company released tentpole original content from Disney, Marvel, Star Wars, Pixar, and National Geographic. "This is an indication that we are now at a full cadence of new releases as we hit our steady state. As evidenced, Hocus Pocus 2 was a smash hit, becoming not only the most watched premiere on Disney+, but also a Nielsen record-setting streaming movie with 2.7 billion minutes viewed in its first weekend. And Marvel Studios' Ms. Marvel completed its run in July, and She-Hulk: Attorney at Law debuted in August, contributing to subscriber growth and driving substantial engagement."

He spoke about Lucasfilm's Andor, a spy thriller that explores the backstory of Cassian Andor, a popular character from Rogue One. This, he said, earned rave reviews and showcases the company's ability to extend stories from the big screen to streaming services. "Turning to general entertainment, the critically acclaimed Prey from 20th Century Studios was Hulu's biggest premiere ever across all films and series and was the most watched film premiere on Star+ in Latin America and Disney+ under the Star banner in all other territories. Looking ahead, we are thrilled that audiences are returning to the box office for blockbuster films, and we have big plans for the big screen in fiscal year 2023. Black Panther: Wakanda Forever opens this Friday, and Ryan Coogler has delivered yet another culture-defining powerful film."

He is excited about Avatar: The Way of Water, which opens on 16 December and is the sequel to the highest grossing film of all time. "James Cameron and his team have once again created something truly magical using groundbreaking technology. The audience is as excited as we are to return to Pandora. And given the strong performance of September's rerelease of the original Avatar, we can't wait for the film to hit screens. Our Searchlight studio continues to deliver critically acclaimed films, and three fantastic titles will be in theatres this quarter: The Banshees of Inisherin, which has earned critical acclaim since its Venice premiere; The Menu, starring Ray Fiennes and Anya Taylor-Joy; and The Empire of Light, from Academy Award winner Sam Mendes.

"Looking even further into 2023, we'll see the theatrical releases of three highly anticipated Marvel films, Ant-Man and the Wasp: Quantumania, Guardians of the Galaxy Vol. 3, and The Marvels. And we could not be more excited about Disney's live-action. The Little Mermaid, a reimagining of one of the most popular animated films of all time, stars Halle Bailey, whose rendition of Part of Your World has already lit up the internet. We're also bringing 999 happy haunts to life with the hilarious new live-action Haunted Mansion featuring an all-star cast. Pixar will debut an all-new original feature, Elemental. And Harrison Ford is back in the eagerly awaited fifth Indiana Jones film, which is going to be spectacular."

In terms of the theme park business, he said that Disneyland Paris is enjoying a great resurgence. "Our fantastic new Marvel Avengers Campus opened on 20 July, and guests love the highly immersive and dynamic environment of the first ever Marvel-themed land in Europe. Prior to the recent closure of Shanghai Disney Resort, we were seeing positive momentum there and at Hong Kong Disneyland. We are hopeful that the situation will improve and are thinking of all of our employees there as we manage through the challenging covid environment. Our Disney Cruise Line is showing strong signs of recovery."

He explains that one of the things that guests loved most was the opportunity to celebrate at Disney's parks, as evidenced by the post-pandemic return and sell-out of special ticketed events like Oogie Boogie Bash and Mickey's Not-So-Scary Halloween Party. "I visited Disneyland with my family just before Halloween, and the celebration was phenomenal. Tickets for Mickey's Very Merry Christmas Party at Walt Disney World have now officially gone on sale, and over half of all dates have already sold out. As you know, we are about to embark on the company's 100th anniversary celebration."

McCarthy noted that the parks, experiences, and products segment had another stellar quarter, with DPEP operating income in the fourth quarter more than doubling versus the prior year at $1.5 billion. One thing she noted is that Disney's parks in the US are now getting more visitors from outside the US, and the level is around the same as pre covid. "Our domestic parks delivered significant year-over-year revenue and operating income growth despite an adverse impact of approximately $65 million to segment operating income from Hurricane Ian. And per-capita spending remained strong, increasing 6% versus Q4 of fiscal 2021 and nearly 40% versus fiscal 2019, reflecting the continued popularity of premium offerings, including Genie+ and Lightning Lane.

"We are also making meaningful progress on the return of international visitors to our domestic parks, particularly at Walt Disney World, where the mix of international attendance in the fourth quarter was roughly in line with pre-pandemic levels. Looking toward fiscal 2023, while we continue to monitor our booking trends for any macroeconomic impacts, we are still seeing robust demand at our domestic parks and are anticipating a strong holiday season in Q1. Disney Cruise Line was also a meaningful contributor to the year-over-year increase in domestic parks and experiences' operating income in Q4, reflecting the successful launch of the Disney Wish in July and the continued recovery of the existing fleet coming out of the pandemic. To date, occupancy for the Wish continues to exceed 90 per cent, while we have also seen a meaningful pickup in the rest of our fleet, with booked revenue up versus pre-pandemic levels.

"At international parks, fourth quarter results also improved significantly year over year, driven by continued strength at Disneyland Paris, partially offset by a decrease at Shanghai Disney Resort. As Bob mentioned, the situation in Shanghai has recently been challenging. The park is currently closed, and we do not yet have visibility to a reopening date. Q4 results at consumer products also increased versus the prior year, driven by higher merchandise licencing results across several of our key franchises, including Mickey and Friends, Encanto, and Toy Story."