Disney Fiscal Q4 Reaction: Wall Street Ignored Chapek’s Warning

Disney may have warned us, but its fiscal fourth-quarter financial results revealed Wednesday were worse than what investors expected.  

The media conglomerate missed estimates on both the top and bottom lines, earning 37 cents on an adjusted basis on revenue of $18.53 billion during the quarter. 

More importantly, though a subscriber slowdown was largely anticipated (and even priced into the stock), the company’s crown jewel, Disney+, saw just 2.1 million sub additions in the quarter, bringing the streaming services total subscriber count to 118.1 million.  

CEO Bob Chapek warned in September that Disney+ would see subscriber additions in the “low single-digit millions” in fiscal Q4. But the analyst community must not have taken him very seriously. Heading into the earnings announcement, Wall Street was projecting total Disney+ subscribers of about 125 million. 

Despite the warning, the news still sent investors into a frenzy. Shares slid as much as 5% in the after-hours session following the announcement.  

And CFO Christine McCarthy’s comments that there was more pain ahead for investors didn’t help, either. Disney+ will see peak financial losses for the Disney+ in fiscal year 2022 instead of 2021, according to McCarthy. But the streaming service will have “meaningfully higher” net subscriber additions in the second half of fiscal 2022 compared to the first six months. 

On top of that, Disney+’s ARPU (average revenue per user) fell 9% from the same period last year due to the higher mix of Disney+ Hotstar subscribers. The lower price point for Disney+ and Hotstar in Indonesia and India brought down overall ARPU for the company. 

Disney’s core businesses showed more signs of life last quarter. Theme parks continued to improve, and the future is looking brighter for the studios business, but it wasn’t quite enough to boost the stock. Q4 was the first full quarter in which all of Disney’s parks remained open albeit with reduced capacity. In fiscal Q3, Disney’s theme parks swung back to profit after four consecutive quarters of operating losses and was able to maintain the momentum in Q4 and reported $640 million in operating income. 

On the film side, production is largely back, and during the quarter, Disney released hits like “Black Widow,” “Shang-Chi” and “Free Guy,” which got more people back in theaters. Though box office numbers are nowhere near pre-COVID levels, Disney has a few more notable releases scheduled for the holiday season such as “Spider-Man: No Way Home” and animated film “Encanto.” 

The past quarter was certainly a painful one for the company and investors, but there are still a couple of reasons to have hope. With the U.S. borders opening back up, theme parks will see further recovery and will continue generating free cash flow for Disney. In turn, Disney will have the money needed to produce more content for Disney+.  

Friday marks the two-year anniversary since the launch of Disney+, and in that time, it is undeniable that the service exceeded initial expectations. But now the bar is sky high, and Disney will have to be laser-focused on delivering on its long-term growth promises.