Although The Walt Disney Company (NYSE: DIS) showed how strong its brand is as the emotions of its storytelling enchanted our hearts for a lifetime, it couldn’t escape the detrimental effect of COVID-19. Moreover, despite its pricing power that is a source of envy for most other firms, inflation continues to hurt its short-term figures, causing increases in capital spending and pressuring margins. Its fourth quarter results showed show attendance in its parks grew, but earnings missed across the board along with streaming growth slowing down.
Fourth quarter earnings
For the quarter ended on October 2
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, Disney made 37 cents in adjusted earnings, coming short of the expected 51 cents expected, according to Refinitiv. Revenue amounted to $18.53 billion, also below the $18.79 billion that Refinitiv expected.
During the quarter, all the company’s theme parks were open across the globe. All of its cruise ships also left the ports, with the business unit that also includes hotels and merchandise, experiencing a 26% growth as it generated $5.45 billion in revenue.
Direct-to-consumer segments generated $4.6 billion in revenues, increasing 38%. Average monthly revenue per paid subscriber rose slightly for ESPN+ and Hulu. Revenue from content and licensing amounted to $2 billion, representing a 9% increase. However, higher operating and marketing costs resulted in an operating loss of $65 million for the segment. While theaters have reopened, the recovery is going at a gradual pace. While much of film and television production has resumed, Disney’s studio is still experiencing pandemic-related disruptions.
Meeting government regulations and increasing safety measures for its workers and guests, costed Disney $1 billion throughout fiscal 2021.
Subscribers
Disney+ gained 2.1 million subscribers that allowed it reach a total of 118.1 million, which is in line with the company’s guidance. Average monthly revenue per subscriber for Disney+ came in at $4.12, down 9% YoY. The company attributed the dip to a higher mix of Disney+ Hotstar subscribers compared with the prior-year quarter, but the revenue per subscriber has been shrinking over the past few quarter due to lower price points for its Disney+ and Hotstar bundle in Indonesia and Indi that pulled down the overall average.
Disney+, ESPN+ and Hulu combined gathered 179 million subscriptions across at the end of the fourth quarter.
Story telling without boundaries
CEO Bob Chapek confirmed that Disney will be putting a spell on the metaverse. It is a popular destination these days, ever since Facebook, now known as Meta Platforms Inc (NASDAQ: FB) CEO Mark Zuckerberg redefined the company around a new three-dimensional environment where users’ digital avatars will be able to work, socialize and even pursue their hobbies. Even game-makers Roblox Corp (NASDAQ: RBLX) and Epic Games, as well as the software giant Microsoft Corp (NASDAQ: MSFT) are also working on their own version of the metaverse.
Disney’s Metaverse
Beyond dropping a buzzword that has everyone excited these days, the legendary entertainment company didn’t provide any specifics. However, expanding its horizons is consistent with Disney’s long history of technological innovation, dating back nearly a century to creating the first cartoon to feature synchronized sound.
Chapek envisions the metaverse as an extension of streaming video service Disney+ — through the “three-dimensional canvass” that will be home to new dimensions of storytelling.
Last year, Disney’s former executive head of Digital and Technology for Disney Parks, Experiences and Products, Tilak Mandadi, spoke of a metaverse version of a theme park, where wearable devices and smartphones enable the physical and virtual world to converge.
Not all of Disney’s digital expeditions ended with ‘happily ever after’
After 11 years, Disney’s online children’s social network, Club Penguin, was shut in 2007. In 2010, Disney also entered social gaming through a $563.2 million acquisition of Playdom but this game ended with a write-down. In 2014, it tried to capitalize on the galloping popularity of short-form Alphabet-owned (NASDAQ: GOOG) YouTube videos through a $500 million acquisition of Maker Studios in 2014, but the operation ended up being absorbed into other parts of the company.
Takeaway
The bottom line is that Disney’s magical pricing power isn’t enough to outpace inflation right now. The company’s latest earnings did not help, with streaming subscriber adds slowing while costs for content and its Parks rise due to pressures created by the pandemic that slaughtered its business.
On a brighter note, the company’s parks, experiences and products segment produced positive operating income for the first time since the pandemic began last quarter and improved on those results during the most recent period.
Outlook
Although per capita spend is expected to remain well above pre-pandemic levels in fiscal 2022, it will be offset by the elevated costs from inflation and other factors.
However, Disney will be ramping up content for Disney+ in the fourth quarter of 2022 which will be the first time Disney+ to release all of its original content in a single quarter. Chapek restated the 2024 goal of reaching 230 to 260 million Disney+ subscribers, showing Disney is focused on the big picture as opposed to a quarter-to-quarter perspective.
Domestic parks are looking forward to the return of international visitors, but management doesn’t expect this traffic will substantially impact the company until the second half of fiscal 2022. Q4 will be the first time in Disney+ history for the company to. The limitless potential of the metaverse has management as excited as ever about The Walt Disney Company’s next century. At the end of the day, the entertainment conglomerate made history due to its capacity to generate dreams over the past century – and this magical capacity helped it weathered through the COVID storm so there’s no reason to doubt its version of the metaverse will also be the happiest digital place on Earth.
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