Disney Beats Netflix At A Big Cost— Blame 'Dr. Strange' And 'Black Panther'

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Smartphone with displayed "Disney" logo is seen on the keyboard in front of displayed "Streaming service" words in this illustration
A smartphone with displayed "Disney" logo is seen on the keyboard in front of displayed "Streaming service" words in this illustration taken March 24, 2020.

Disney is winning the streaming wars but at a high cost, due to new films like "Dr. Strange" and "Black Panther."

The content king is beginning its second century by beating Netflix on subscriber gains. “Walt Disney Co.'s fiscal second-quarter earnings reported massive growth in subscribers as their streaming services continue to draw new viewership," Kunal Sawhney, CEO, Kalkine Group, told International Business Times.

"The results on Wednesday rather surprised analysts who were not expecting this, especially after Netflix's fall from grace. Disney's arch-rival, Netflix, reported losing around 200k subscribers last month, which saw its share price tumbling."

But Disney's victory against Netflix's victory against the streaming giant came at a high cost, which undermined the company's second-quarter earnings. Diluted earnings per share (EPS) from continuing operations decreased to $0.26 from $0.50 in the prior-year quarter, missing analysts’ estimates.

Wall Street didn't like what it saw, sending the company's shares lower in pre-market trading.

Still, management was pleased with the results, emphasizing the subscriber gains in its Disney+ services and providing an optimistic outlook for the company's second century.

"Our strong results in the second quarter, including a fantastic performance at our domestic parks and continued growth of our streaming services—with 7.9 million Disney+ subscribers added in the quarter and total subscriptions across all our DTC offerings exceeding 205 million—once again proved that we are in a league of our own," said Bob Chapek, CEO, The Walt Disney Company, in its shareholder report.

"As we look ahead to Disney's second century, I am confident we will continue to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger, more connected, and magical Disney universe for families and fans around the world."

The problem behind Disney's lackluster financial performance in the second quarter is rising production costs, combined with losses in licensing fees. "Disney revenue and earnings missed the expectations of Wall Street analysts largely based on higher TV and film content costs as well as the loss of $1 billion in licensing fees as it focused on its own streaming services of Disney+, Hulu, and ESPN," Michael Ashley Schulman, CFA, Partner & Chief Investment Officer Running Point Capital Advisors, told IBT.

"Although overall, Mickey Mouse performed relatively well across resorts, theme parks, and streaming service subscriber growth and has a promising pipeline of films, investors will question the sustainability of subscriber growth, the ability of Disney to reign in TV and film costs which are projected to be $32 billion, and their ability turn a profit within their streaming services where losses doubled to a Dumbo sized $900MM."

Meanwhile, Schulman points to a couple of more factors that have negatively affected the company's bottom line, like revenue hits from the closure of theme parks in Hong Kong and China. Then there's the state of Florida's decision to disband the Reedy Creek Improvement District, the location of the company’s Disney World Resort.

Looking beyond these challenges, Schulman is optimistic about the future of Disney, both in its streaming services and the traditional theater business.

"Additionally, Disney+ streaming service grew by nearly 8 million subscribers (versus the recent slump at Netflix) and will expand to 50 additional countries in 2022," he says. "Also, Disney's pipeline of theatrical releases including 'Lightyear' based on Buzz Lightyear, an 'Avatar' sequel, and new MARVELous films 'Dr. Strange in the Multiverse of Madness,' 'Black Panther,' and 'Thor: Love and Thunder' seem promising, although, without the promise of Chinese theatrical release, they have lost some sparkle."

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