Disney+'s Push to Profitability: What to Expect from Disney's Earnings Report

Walt Disney Co. is a leading entertainment company. It produces and distributes films and television programs, and operates theme parks around the world. The company has a strong commitment to creativity, innovation, and quality.

Investors will be looking to see if streaming business is making progress toward profitability when reports its fourth-quarter earnings Tuesday afternoon. In addition, they will be interested in how well the entertainment giant’s theme parks did this summer.

Disney reported strong third-quarter results in August, with a 26% surge in revenue. This was driven by record results from the theme parks division, which has implemented new technology to reduce crowd sizes and encourage guests to return following the worst of the coronavirus pandemic.

Since its launch three years ago, Disney+ has been in a phase of subscriber growth, rather than profitability. This changed when Disney Chief Executive Bob Chapek indicated that the company's focus was shifting. Since then, Disney's streaming segment has lost more than $7 billion. The company has said it foresees Disney+ turning a profit by September 2024.

Wall Street observers predict that Tuesday's results will reflect that the company is still transitioning to a focus on profit.

Analysts estimate that Disney+ added 8.8 million net new subscribers in the most recent quarter, bringing its total to 161 million. However, average monthly revenue per user of the service fell by a dime to $4.30.

Disney's revenue for the quarter is expected to be $21.3 billion, slightly lower than the previous quarter but up from $18.5 billion in the year-earlier quarter, according to estimates from FactSet.

Analysts expect Disney's overall operating income to fall 36% from the prior quarter to $2.3 billion. Most of this decline is expected to come from the division that includes the direct-to-consumer streaming business, which analysts believe will lose more than $1 billion.

Disney's parks division is expected to generate $22.9 billion in sales for the full 2022 fiscal year, more than double the amount from the previous year. However, analysts expect a 7% decline in sales compared to the previous quarter.

As the streaming industry continues to grow, many companies are raising prices, including Disney. In December, Disney will introduce price increases on certain subscription packages. The company is also launching an ad-supported tier of Disney+, which will compete with a similar product offered by Netflix this month.

"Streaming is a critical mass business," Mr. Chapek said last month at The Wall Street Journal Tech Live conference in Laguna Beach, Calif. "Scale is really, really important in order to be able to thrive." In the future, consolidation will lead to fewer streaming services and force companies like Disney to offer more services through their streaming platforms, he added.

This month, Disney+ launched a test program that placed links inside the app allowing users to buy exclusive merchandise related to Star Wars, Marvel Studios and other popular franchises the company owns. This program is designed to give users a more convenient way to purchase merchandise related to their favorite Disney+ content.

Some people who follow Disney closely say that the company faces a difficult balancing act. They need to spend enough money on popular shows and movies to attract new subscribers. But they also need to find the right pricing point for dozens of different markets. And they need to keep costs under control so that streaming can break even.

Since the spring, shares of media companies that rely on streaming have tumbled across the board, as investors have grown more pessimistic about the prospects of near-term profitability for streaming. Disney’s shares are down 35% since the start of the year. This trend is likely to continue as streaming services face increasing competition and pressure to turn a profit.

"The days of unchecked growth and subscriber growth are over," said Chris Legg, senior managing director at investment bank Progress Partners. "Companies in the media and advertising technology space need to be more strategic in their approach."

"Disney is still focused on acquiring more subscribers, whether it's locally or internationally. They probably have a few quarters to keep pursuing this strategy, but Wall Street is getting less patient with the spend-for-subs model," said Mr. Legg.