Walt Disney Co.'s (DIS) fiscal third quarter results were nothing to marvel at, leading the market to mark the House of Mouse notably lower on Wednesday morning.
Shares sold off by over 4% in the pre-market hours, tempering the momentum that had moved an over 20% gain since the company's analyst day in April.
Disney said adjusted earnings for the three months ending in June came in at $1.35 per share, well shy of the Street consensus forecast of $1.72, thanks in part to group's $71.3 billion acquisition of Fox, which trimmed earnings by 60 cents per share. Meanwhile, group revenues rose 33% from last year to $20.245 billion, but again fell shy of bullish estimates set at $21.4 billion.
The dilution from the acquired Fox assets was substantially larger than had been anticipated, nearly doubling the impact that had been forecast by management for the quarter.
"I've been doing earnings calls for a long time, and this is one of our more complicated ones," CEO Bob Iger admitted in remarks to analysts on Tuesday evening. "This is our first full quarter since we closed our acquisition of 21st Century Fox in March...our results reflect our efforts to integrate the assets, businesses and talent we acquired in order to enhance and advance our strategic transformation."
"The initial guidance of $0.35 reflected our assumptions about the business at the time," CFO Christine McCarthy went on to explain. "However, there were a couple of 21CF businesses whose results came in significantly lower than our expectations, in particular, the 21CF film studio and Star."
She added that the film studio realized an operating loss in the third quarter of about $170 million, which was surprisingly blamed on theatrical underperformance despite the success of blockbuster titles like Avengers Endgame and Captain Marvel.
The transition to direct to consumer services was also noted for its remaining growing pains ahead of full release in just a few months.
Alternative Disney $DIS Narrative
Disney+ $6.99/month ($5.83 if paid annually)
Hulu with Ads $5.99
$13 ($11.82 with D+ annual)
New bundle of Disney+, Hulu w/ads & ESPN+ is: $12.99
Basically giving ESPN+ away for free, a service virtually nobody wants in the first place #yawn— Rich Greenfield (@RichatTBD) August 7, 2019
"Results at DTCI reflect ongoing investment in our direct-to-consumer businesses, and this quarter also included an operating loss at Star of about $60 million," McCarthy explained. "There was an additional negative impact to EPS of about $0.06 as a result of the Hulu agreement we entered into with NBCU in May. The agreement provides us with full operational control of Hulu, and most of the $0.06 impact results from NBCU no longer being allocated its share of Hulu operating losses in our financial reporting."
The company's 10-Q filing reveals that the cost of services for the quarter increased 61% due to the consolidation of 21CF and Hulu's operations. Selling, general, administrative and other costs increased 52%, largely as a result of the same factors.
Lastly, the company's Parks, Experiences and Products was hit by slowing attendance ahead of new park upgrades into the year end.
"Attendance at our domestic parks was down 3% in the third quarter but per capita spending was up a healthy 10% on higher admissions, food and beverage and merchandise spending," McCarthy told analysts."The decline in attendance at Disneyland Resort was primarily driven by lower annual passholder visitation as we managed demand for the first few weeks after opening Star Wars: Galaxy's Edge in order to maintain a high level of guest satisfaction. And at Walt Disney World, our survey data suggest that guests are deferring visitation until after Star Wars: Galaxy's Edge opens, which we believe contributed to the decline in attendance we saw during the third quarter."
McCarthy did not buoy confidence with guidance either, as persistent integration issues for new services remain in the quarter ahead.
"We expect our direct to consumer and International segment to generate about $900 million and operating losses for the quarter which represents an increase of about $560 million over the fourth quarter last year," she said. "We expect the continued investment in our DTC services including ESPN+ and Disney+ and the consolidation of Hulu to drive an adverse impact on the year-over-year change in segment operating income of our direct to consumer businesses of approximately $550 million which is almost the entirety of the total segment change versus prior year."
On to the Endgame
Despite the messy quarter, many analysts and shareholders remained, advising shareholders shift their focus to the November release of Disney+ in November.
"Overall, this was not a good quarter relative to expectations," said Jim Cramer's Action Alerts PLUS team, which has held a significant position in Disney for some time. "But it was almost as if Disney was up against the perfect storm of events as it dealt with integration/transition hiccups from the Fox deal that should prove to be temporary in nature, a "controlled" attendance decline in parks that again should be temporary in nature, and ramped up investment for its DTC initiative which represents a key to the company's future and an important offset to cord-cutting."
Disney made waves when it said it will offer a subscription bundle that includes Disney+, ESPN+ and ad-supported Hulu for $12.99 per month when the service is launched this autumn. Iger said the bundle will be available on the Nov. 12 launch date of Disney+, which will cost $6.99 per month as a standalone service.
At $12.99 per month, the planned bundle will be the same price as the most popular standard tier of Netflix (NFLX) in the U.S. If paid for separately, Disney+, ESPN+ ($4.99/month) and ad-supported Hulu ($5.99/month) would cost roughly $18 per month.
The backlog already in existence and the attractive price point for the service was key to keeping stock watchers waiting rather than fleeing the name.
"With so many moving pieces between the newly acquired Fox and Disney+ launch, there are bound to be some hits and misses each quarter," J.P. Morgan analyst Alexia Quadrani advised clients. "We believe the focus and upcoming catalyst for shares remains the launch of Disney+ (and its announced bundle with ESPN+ and ad-supported Hulu at an attractively priced $12.99/month) and these results don't change our favorable outlook on the DTC products and expectations for rapid growth in subscribers."
Based on the the potential bull run yet to come should success in the service shine through, she retained an "Outperform" rating on the stock and a $150 price target, which would mark an all-time high for shares.
"We see long-term value in Disney's distinct brands and assets with high barriers to entry in multiple aspects of the business," Quadrani concluded. "While there is uncertainty in the broader media landscape and Disney's multiple direct to consumer initiatives, we believe. Disney is in the best position to succeed given its unmatched arsenal of content, well-recognized global brand, and impressive marketing arm...we still find shares attractively valued given the multiple growth drivers of the business and the likelihood of unprecedented subscriber growth with Disney+ over time."
'Show Me' Status
Yet, it is just that overwhelming bullishness that has kept some investors skeptical.
"I have rarely seen such bullish unanimity as on Disney. On cue, the company misses on both top and bottom line," Real Money contributor Doug Kass commented. "The nature of the misses were exactly the reason I was short."
He added that from this point forward into its release of streaming services in the calendar fourth quarter, Disney is a "show me" stock.
"Even as shares have seemingly stabilized overnight down less than 4%, the volatility will extend throughout the session. Maybe even the week," Real Money contributor Stephen "Sarge" Guilfoyle commented. "Shareholders in this name, a group among whom I am a member should brace themselves for now."