Disney earnings miss forecasts as streaming costs rise

Walt Disney Co. reported a steeper earnings decline than Wall Street expected on Tuesday as the company poured money into the streaming media business it is building to challenge Netflix.

Shares of Disney, which had risen 27 per cent this year and hit an all-time high last week, dropped 5 per cent in after-hours trading to $135 US.

Excluding certain items, Disney earned $1.35 per share, below average analyst estimates of $1.75 per share, according to IBES data from Refinitiv.

Disney, the owner of ESPN, a movie studio and theme parks around the world, is investing in digital media platforms to compete with Netflix Inc. Costs to build online services will weigh on profits for several years, the company has said.

Disney's biggest digital bet, a family-friendly subscription service called Disney Plus, is scheduled to debut in November. Adult-oriented programming will be concentrated on Hulu, which Disney now controls.

Competition expected next year

Competitors from AT&T Inc.'s WarnerMedia and Comcast Corp.'s NBCUniversal are expected next year.

The direct-to-consumer and international unit reported an operating loss of $553 million, up from $168 million a year earlier, from consolidation of Hulu and spending on Disney Plus and the ESPN streaming service.

Disney executives said that investments in digital would lead to a roughly $900 million operating loss in the direct-to-consumer unit in the fourth quarter, compared with expectations of a $593 million loss.

Executives told analysts on a conference call that Fox's film studio performed worse than expected while sports rights costs at Fox's Star India were higher than anticipated.

"Some of the other misses seem to be related to the integration of Fox," said Jim Nail at Forrester. "I would speculate that they have decided to take all their lumps this quarter and put all this 'bad' news together, clearing the board for better results next quarter."

Bundle streaming services

Netflix's shares slipped in April when Disney priced Disney Plus, at $6.99 per month, below the video streaming pioneer's basic plan of $8.99.

Disney also said on Tuesday it would bundle its streaming services, charging $12.99 a month for Disney Plus, ESPN Plus and ad-supported Hulu.

At the theme parks unit, overall operating income rose 4 per cent to $1.7 billion but declined at Disney's U.S. parks. The company attributed the drop to expenses for an ambitious Star Wars-themed expansion in late May at California's Disneyland and lower attendance.

Media networks, which includes ESPN, the Disney Channels and FX, reported a 7 per cent increase in operating income to $2.1 billion.

A blockbuster movie slate led by Avengers: Endgame, the highest-grossing movie of all time, and the addition of cable networks purchased from Twenty-First Century Fox Inc. helped boost revenue to $20.2 billion.

Endgame boosted movie studio profit to $792 million, along with hits Toy Story 4 and Aladdin.