Disney Reports Second Straight Quarterly Loss -- Update

By Erich Schwartzel 

Walt Disney Co.'s Disney+ streaming service turned one year old on Thursday. The company spent the birthday as it has the past several months in a Covid-19 world: Counting on the service for hope during an otherwise dreadful time.

Disney posted its second consecutive quarterly loss on Thursday, as the effects of the pandemic continued to ravage core businesses like theme parks and movie distribution that aren't expected to return to normal in the foreseeable future.

But the quarantine life has accelerated a pivot in the way Disney casts itself to Wall Street, and increasingly how investors see the world's largest entertainment company. With movie theaters closed and TV production stalled, Disney's streaming efforts have become the focus -- and promise -- of a company otherwise marked by layoffs and unprecedented losses. On Thursday, the streaming business delivered.

Subscriptions to Disney+ hit 73.7 million as of Oct. 3, the company said, up from more than 60 million reported in August.

"The real bright spot has been our direct-to-consumer business," said Disney Chief Executive Bob Chapek, referring to the division that includes the company's streaming operations.

Analysts and investors have accepted that Disney faces some bruising quarters before it returns to full operations, putting an even brighter spotlight on Disney+ and prompting some on Wall Street to treat the company less like an entertainment stock and more like a tech one. That has helped Disney shares weather quarterly reports that would have seemed unlikely -- if not impossible -- at the company a year ago. When the company reported a nearly $5 billion loss for the three months ended June 27, it was the first quarterly loss since 2001.

Still, the three months ended Oct. 3 deprived Disney of critical summer months of tourism and moviegoing. Operating income in the company's studio-entertainment division fell 61% as thousands of theaters remain closed.

The theme-park business was even more severely hit. Disney said it estimated the spread of Covid-19 had caused a $2.4 billion hit to its parks division.

On Thursday, Mr. Chapek reiterated to investors that the company has operations up and running to the extent possible. Dozens of scripted and unscripted shows are in production, and major divisions such as Marvel Studios and Lucasfilm have cameras rolling. Animators are drawing from home.

Disney+ subscriptions once caused Disney shares to rise; now news of a possible Covid-19 vaccine is lifting shares. When Pfizer Inc. and BioNTech SE announced promising results of a vaccine in development, Disney shares returned to levels not seen since February, before the company's studio and theme park divisions were hit by closures. Shares rose 5.8% in after-hours trading on Thursday in response to Disney's better-than-expected streaming figures and a narrower loss than analysts anticipated.

At Disney and other major Hollywood studios, the pandemic has accelerated a shift toward streaming and direct-to-consumer services that count on subscriptions, rather than box-office grosses, to boost the bottom line. Major releases such as Pixar Entertainment's forthcoming "Soul" are skipping a theatrical release and premiering on Disney+, an approach Mr. Chapek said the company will continue to take as theaters remain closed.

"We've got something here," he said. That may be welcome news for investors with an eye on Disney's streaming future, but a landscape in which more big-budget Disney releases skip a theatrical release is likely to cause considerable anxiety among exhibitors who have come to rely on the studio's box-office grosses.

Disney plans to forgo its January 2021 dividend and instead invest those funds in its direct-to-consumer division, the company said Thursday, a reallocation that activist investor Daniel Loeb recently advocated.

Disney's sports-oriented ESPN+ streaming service registered 10.3 million subscribers at the end of the quarter, and its Hulu service had 36.6 million subscribers. Of the three, Disney+ continues to yield the lowest average monthly revenue per paid subscriber, at $4.52, owing in part to a $6.99 monthly subscription fee that is lower than most competitors.

Behind the scenes, Disney has reorganized its corporate structure to make streaming an even bigger priority than it was before the pandemic closed movie theaters. Under a plan unveiled last month, Disney created programming divisions for movies, general entertainment and sports. Executives in charge of greenlighting movies and TV shows will be centralized in a distribution arm that determines where a given project premieres -- on a streaming service, a TV network or in movie theaters.

The rearrangement followed similar organizational shifts at rivals like Comcast Corp.'s NBCUniversal and AT&T Inc.'s WarnerMedia.

Disney, like much of Hollywood, is stuck in a waiting game. Movie theaters likely won't be operating at pre-pandemic levels until an effective Covid-19 vaccine is widely available. Rising case counts across the country threaten another round of shutdowns that could affect theme-park attendance.

For Disney's fourth quarter, the bad news of the pandemic was compounded as would-be financial saviors failed to deliver.

A live-action reboot of "Mulan," produced in hopes of scoring a big payday from Chinese theaters, instead alienated audiences there who critiqued its take on their country's history and grossed a paltry $40.7 million in China. Elsewhere in the world the movie went straight to Disney+; the company hasn't said how many subscribers opted to pay an extra $30 for the movie.

Hopes that Disneyland, in California, would join Disney World, in Orlando, Fla., in reopening at limited capacity were dashed when California officials said the coronavirus remains too out of control to justify letting visitors return.

Ratings for the NBA Finals fell compared with recent years, denting the company's ESPN network.

The past several months have seen Disney take drastic measures to stanch revenue declines. Earlier this month, Disney's ESPN cut about 10% of its workforce -- or about 500 jobs -- through layoffs and attrition.

That was minimal compared with the job cuts announced in late September, when the company laid off approximately 28,000 workers from its domestic theme parks. These employees had been furloughed since April, collecting health benefits but not paychecks. The job losses could mount, since Disney World continues to operate at partial capacity and Disneyland remains closed.

Disney executives have taken a publicly aggressive approach to lobbying to reopen Disneyland, a departure for a company that usually tries to steer clear of controversy. The park has been closed since March, and the company has accused California Gov. Gavin Newsom of requiring overly strict guidelines to reopen.

"We're extremely disappointed," Mr. Chapek said.

Disney expected Disneyland to remain closed through the current quarter, said Disney finance chief Christine McCarthy.

In Orlando, it is a different story, she added. Disney World hotels are nearly fully booked, even as the park operates at reduced capacity, she said.

--Allison Prang contributed to this article.

Write to Erich Schwartzel at [e-mail]

(END) Dow Jones Newswires

November 12, 2020 18:21 ET (23:21 GMT)

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