Disney reported its third quarter fiscal year 2022 earnings for this April through June on an investor call held by CEO Bob Chapek on August 10, 2022. This covers the good & bad of these results, including the “success” of Genie+, more guest spending growth at Walt Disney World & Disneyland, huge revenue increases from theme parks, streaming subscriber numbers, and more.
Let’s start with the numbers. The third quarter of the Walt Disney Company’s fiscal year (or the second quarter of the calendar year) is another quarter of positive results, especially as the previous year offers an weak comparison due to ongoing closures and soft attendance last year.
Last quarter, the Walt Disney Company missed on Wall Street estimates with earnings per share (EPS) off by 9% and revenue about 4% lower than expected. For the third quarter, forecasts called for revenue of $20.96 billion, but the actual total was $21.5 billion. Disney’s EPS was $1.09 per share in the latest quarter, whereas analysts were expecting earnings of $0.96 per share. With that said, the true bright spot of Disney’s quarterly earnings report was once again its flagship streaming service…
Disney announced added 14.4 million subscribers, as compared to 7.9 million in the previous quarter. The number far exceeded Wall Street expectations, with average forecasts anticipating around 10 new subscribers. Analysts on average expected the Disney+ streaming service to reach 147.76 million subscribers for the quarter.
In actuality, Disney+ blew past that with 152.1 million paid subscribers worldwide. The company also reiterated its guidance of of reaching 230 million to 260 million Disney+ subscribers by 2024. Currently, total subscriptions across all direct to consumer offerings exceed 221 million, thanks to additional growth at ESPN+ and Hulu.
Even prior to this, it’s been a good week for the company’s stock, with the share price up 20% month-to-date and falling to $90 per share in mid-July. Even after the August recovery, Disney stock is still down 28% year-to-date, compared with a 12% drop for the S&P 500 index. It’s given up gains during the pandemic as Wall Street has focused on profits, rather than growth in subscribers.
This has been a trend across the board with a reevaluation of streaming services, driven by two consecutive disappointing quarters for Netflix. That streamer has posted its first net losses of subscribers from quarter to quarter, resulting in Netflix’s stock price and that of its competitors (Warner Bros, Paramount, Comcast, Disney) to be hit hard.
Consequently, investors are reevaluating metrics for measuring success–and streaming services themselves are rethinking their approaches. Most notably, Warner Bros. Discovery last week announced a seismic shift in content strategy that caught Hollywood and fans by surprise.
Streaming services have faced numerous headwinds, including heightened churn, delayed content, and pulled-forward demand in the past two years. There have been questions as to whether Disney can outperform the competition–is it a cause of some of Netflix’s woes or will Disney+ eventually reach the same plateau?
While streaming continues to be the emphasis for Disney, it continues to lose money–and likely won’t turn a profit for the company until 2024. Between now and then, Disney is chasing market share and subscriber growth. Disney reported revenues for the quarter increased 19% to $5.1 billion and its operating loss increased $0.8 billion to $1.1 billion. (You read that correctly–Disney+ and co. lost over one billion dollars in the quarter. That’s even more eyepopping once you see the Parks & Resorts results below.)
The increase in operating loss was due to a higher loss at Disney+ (due to higher spending on content), lower operating income at Hulu and, to a lesser extent, a higher loss at ESPN+.
Rather than fundamentally rethinking its approach to streaming, Disney is making measured changes. The company revealed details about its highly anticipated ad-supported streaming plans, announcing new tiers and pricing. The new base option will be Disney+ with advertising, a subscription offer that will be available in the U.S. starting December 8, 2022 for $7.99 a month—the same price as the current ad-free base plan.
The Disney+ premium no-ads plan will increase to $10.99 per month or $109.99 annually on that same date. Disney also announced a variety of lower-priced, basic plans with ads for the Disney Bundle, which includes various ad-supported and free configurations with ESPN+ and Hulu.
Of particular interest to us is Parks, Experiences and Products (or Parks & Resorts). Revenues for the quarter increased by 72% to $7.4 billion during the quarter, up from $4.3 billion during the same period last year. The company attributed this to increases in theme park attendance, occupied resort room nights, and cruise ship sailings–partially offset by higher costs.
In particular, cruise ships were operating during the entire current quarter while sailings were suspended in the prior-year quarter. Guest spending growth was due to an increase in average per capita ticket revenue and higher average daily hotel room rates. The increase in average per capita ticket revenue was due to Genie+ and Lightning Lane, which did not exist in the prior-year quarter.
Walt Disney World also had fewer promotions in the third quarter. While we’ve discussed the return of discounting in recent months, that’s as compared to last fall–the prior-year quarter that is the relevant comparison here did have better room-only discounts.
Higher costs were primarily due to volume growth, cost inflation, and new guest offerings. Domestic parks and resorts were open for the entire current quarter, whereas Disneyland Resort was open for 65 days of the prior-year quarter, and Walt Disney World Resort operated at reduced capacity in the prior-year quarter.
Another interesting note from the company is that performance was “partially offset by an unfavorable attendance mix at Disneyland Resort.” Disney has been touting the favorable attendance mix for the last several quarters, so this is an interesting twist. In plain English, this means more Annual Passholders or Magic Keymasters. Locals and/or regulars spend less per visit on average, making them less desirable in a high demand environment.
While we wouldn’t expect Disney to directly address it, we have noticed more park reservations have been allocated to Magic Keys in recent months, which is likely due to the Magic Key lawsuit (discussed towards the end of this post). There have been some dates when reservations haven’t been available for regular ticket holders, but have been open for APs. It’s also possible that the company has unrealistic expectations based on the strength of the more favorable attendance mix in Florida. But Disneyland is not Walt Disney World.
You might also say that the positive Parks & Resorts results were partially offset by an “unfavorable location mix.” International parks dragged down the results, losing $64 million for the quarter. This was largely due to the closure of Shanghai Disney Resort, which was due to the park being open for all of the prior-year quarter but only for 3 days in the current quarter.
Improved results at international parks and resorts were primarily due to growth at Disneyland Paris, which saw increases in attendance and occupied room nights, partially offset by higher operating costs due to volume growth. Additionally, Disneyland Paris was open for the entire current quarter compared to 19 days in the prior-year quarter. Although the favorable comparison drops off next quarter, the Disneyland Paris 30th Anniversary celebration should help deliver strong results.
The earnings document also revealed that capital expenditures increased from $2.5 billion to $3.8 billion primarily due to higher spending at Parks & Resorts, driven primarily by cruise ship fleet expansion. The increase also reflected higher spending on corporate facilities.
Work had largely resumed by this time on the major projects at Walt Disney World and Disneyland, so there’s likely not much change there. Work coninutes TRON Lightcycle Run at Magic Kingdom and they appear to be doing more digging in the Giant EPCOT Dirt Pit. For the international parks, the Zootopia expansion at Shanghai Disneyland, Arendelle: World of Frozen at Hong Kong Disneyland, and the expansion of Walt Disney Studios Park at Disneyland Paris are all ongoing.
When directly discussing theme parks during his scripted remarks, Chapek gushed about the performance of Disney’s domestic parks. He indicated that they continue to see strong revenue growth and that demand remains strong.
It’s hard to pull substantive quotes from Chapek’s prepared statements that don’t sound like they were written by AI. For what it’s worth, they sound equally robotic when read aloud. Perhaps you fans of “activations” and the “synergy machine” might beg to differ with my assessment and love Chapek’s speaking style. To each their own.
One thing mentioned repeatedly by both Chapek and CFO Christine McCarthy was the park reservation system. McCarthy confirmed that Walt Disney World “has not seen demand abate at all” and is still seeing “demand in excess of the reservations [Disney] is making available.”
This is technically true, but not the full story. For example, the reservations that Walt Disney World is making available are filling up for Magic Kingdom and Hollywood Studios with regularity…but not EPCOT or Animal Kingdom. We’ve speculated for a while that Disney is doing this deliberately to redistribute and normalize attendance across all 4 parks. This is corroborated by wait time data, which has decreased and reflects crowd levels of 4/10 for May, 8/10 for June, 7/10 in July, and 5/10 thus far in August (a number that’ll drop once school goes back into session).
Chapek sort of spoke to this (maybe? it’s hard to tell) by saying that the reservation system does a good job spreading demand. If Disney sees “spikiness,” then management can “smooth” that in a way that couldn’t be done before, and the company is “really pleased” with that.
In other words, demand is in excess of the park reservations that Disney is making available, but the company has purposefully held back reservations. Consequently, the parks are not at or even close to normal utilization or crowd levels. (Also, this is the latest sign that the Park Pass system isn’t going anywhere anytime soon–it’s unlikely ever going away for Annual Passholders. Disney clearly loves park reservations.)
McCarthy more or less confirmed this, stating that average daily attendance is still down as compared to 2019, but that the parks saw higher revenue despite fewer guests in the parks. This is a definite positive for the company, and is something that has been touted on past calls, as well.
While this increase is “only” up 10% as compared to the prior-year quarter, don’t feel too bad for the Walt Disney Company. It’s hardly down its luck. To the contrary, last year’s third quarter was the start of that record-setting run in per capita spending, so it’s just a tougher comp. Looking back to the same quarter in 2019 and we see that per capita spending at the domestic parks was still up well over 40%.
Again, same story there. It’s due to price increases across the board on admissions, food and beverage, and merchandise coupled with fewer discounts. McCarthy expects more of the same going forward, thanks to high occupancy levels for the resorts (above 90%) and intent to visit metrics in line with the same time in 2019.
Once again, these increases were driven by higher food & beverage and merchandise spending, as well as contributions from Genie+ and Lightning Lanes. Putting these factors together, domestic parks and resorts delivered Q3 revenue and operating income exceeding pre-pandemic levels, and that’s even as Disney continued managing attendance.
Both McCarthy and Chapek once again praised the standout “success” of Genie. According to Chapek, “about 50% of the people who come through the gate buy up the Genie product…which you can see in results of our yields.”
Previously, Chapek has stated that Disney is “very, very encouraged” by the trends of guests who purchase the Genie+ service. He also stated that the success of the service initially caught even Disney by surprise, which seems accurate. The load balancing adjustments made to Genie+ and Individual Lightning Lanes on a temporary basis last holiday season and this spring were made permanent last week, and support that.
Of course, Genie+ has been far more controversial among Walt Disney World fans. Look no further than the comments section to any post about paid FastPass. Those are is filled with complaints about the user interface, missing features, and general resentment over having to pay for something that was previously free.
Aside from a couple interesting lines, this quarterly earnings call mirrored the last several. At least, from a Parks & Resorts perspective. Most of the statements and questions & answers were covered on prior calls, with the answers just restated in slightly different ways. Nothing particularly illuminating about the future, major announcements or hints at what’s to come–not even any “good gaffes” as have become par for the course during the Chapek era. I did like the “spikiness” line and will consider adopting that as a technical term to describe crowds, but it was hardly a good goof up. (Not that I’m actively rooting for those flubs, but they generate amusing discourse.)
It was definitely much more eventful for fans of Disney+ and the other streaming services. Even as someone who is more or less ambivalent about Disney+ (I’m more worried that Warners is going to ruin HBO Max–far and away our favorite), I’m happy to see the direction there being positive, and Disney not having the same problems as Netflix. That could’ve been an albatross for the entire company that (indirectly) negatively affected the parks, just like ESPN was not too long ago.
Nevertheless, it does bear underscoring that Disney lost over one billion dollars on streaming in this quarter. Those losses are to be expected in the near-term as Disney+ gets itself established, but that’s still a lot. Especially as contrasted against the performance of Parks & Resorts.
Turning back to Walt Disney World and Disneyland, the biggest takeaway is how much they’re leaning on the park reservations system to explain away problems or underscore demand. McCarthy and Chapek highlighted the reservations system on multiple occasions, presenting it as an asset to address “spikiness” in demand or improve the “consumer experience” (among other things) while not really speaking to its continued necessity due to staffing shortages and other operational woes. Both Chapek and McCarthy have really emphasized points about “managing attendance” and other purported benefits in the last couple of calls.
There were also some interesting points about occupancy, guest spending, and how the company views the Genie+ service. While consistent with past calls and not illuminating on their own, the totality of these comments does suggest that the company is optimistic about Walt Disney World and Disneyland in the near-term.
As always, it’ll be interesting to see how Disney’s forward-looking forecast actually plays out. It makes sense that Chapek and McCarthy are optimistic in their projections, as the mixture of pent-up demand and diminished capacity have produced strong results.
In the past, our commentary has emphasized the likelihood of pent-up demand fizzling out and growth slowing. Inflation on necessities might result in reductions to discretionary spending, and the same could also happen due to depleted household savings and higher debt loads. When all or some of that happens, consumers will return to being more cost-conscious and price sensitive, and things will normalize to at least some degree.
That’s prefaced with “in the past” because we have a hard time seeing that happen in fiscal or calendar year 2022. Even with the fall off-season having arrived at Walt Disney World, this time of year is normally slow–and last year presents a particularly favorable comparison due to the Delta spike and reinstated mask rules at the parks. This year will almost certainly not be as weak as last year, making for another favorable comp.
Looking forward, the Halloween and Christmas seasons at both Walt Disney World and Disneyland Resort are already shaping up to be strong. Halloween hard ticket events on both coasts are selling faster than last year (or 2019, for that matter) and resort bookings for October through December appear strong. While none of that is conclusive of crowds, attendance, or per-guest spending…it is pretty much the opposite of a “red flag” at this point.
In other words, get used to high prices, heavy crowds, and nickel & diming at Walt Disney World and Disneyland as this record run of revenue and income continues for the foreseeable future. Things could always change in a hurry–exactly that has happened before–but that probably won’t happen until at least early 2023.
What do you think of Walt Disney Company’s Q3 FY2022 earnings and future forecast? What about the spike in per guest spending? Are you worried about the future of Walt Disney World, Disneyland, or the company in general? Think things will improve or get worse throughout this year? Do you agree or disagree with our assessment? Any questions we can help you answer? Hearing your feedback–even when you disagree with us–is both interesting to us and helpful to other readers, so please share your thoughts below in the comments!