By Dawn Chmielewski and Lisa Richwine
(Reuters) – Walt Disney (NYSE:) Co said on Tuesday its marquee streaming service, Disney+, gained more subscribers than Wall Street had expected, but investment costs dragged quarterly earnings below analysts’ targets.
The entertainment company is spending billions to compete with Netflix Inc (NASDAQ:) and others for streaming television customers as traditional TV declines in popularity. Disney+ reported 164.2 million subscribers in the fiscal fourth quarter, surpassing Factset estimates of 161 million.
The cost to build Disney’s streaming business led to a $1.5 billion loss in the direct-to-consumer unit, which hurt quarterly earnings.
Net income from continuing operations rose 1% to $162 million. Excluding some items, Disney earned 30 cents per share, missing Wall Street’s target.
Revenue of $20.15 billion for the July-to-September quarter also fell short of the consensus estimate of $21.25 billion. Disney said it recognized $1 billion in lost revenue in the quarter from terminating a film and television contract early so it could use content on its own streaming services.
Disney has amassed a total of 235 million subscriptions across Disney+, Hulu and ESPN+ streaming services, a gain of 14.6 million from the previous quarter. Hulu reported 47.2 million subscribers, up 8% from a year ago, and ESPN+ logged 24.3 million, a gain of 42% from a year earlier, and Disney+ is up 39% from a year ago.
The company repeated comments in August that losses from its direct-to-consumer business would peak in fiscal 2022 which ended Oct. 1.
“We expect our DTC operating losses to narrow going forward and Disney+ will still achieve profitability in fiscal 2024,” said Chief Executive Robert Chapek. “Assuming we do not see a meaningful shift in the economic climate.”
The ad-supported version of the Disney+ service will launch in the United States on Dec. 8, bringing a new source of revenue to underwrite the billions the company spends creating original movies and series for the services. Macquarie Research analyst Tim Nollen estimated the ad tier could bring an additional $800 million in ad sales next year.
Disney theme parks posted robust growth despite COVID-19 related travel restrictions in China and Hurricane Ida forcing the temporary closure of Walt Disney World in Florida in September.
Disney’s parks, experiences and products group reported revenue of $7.4 billion in the quarter, beating analysts’ forecasts. Operating income reached $1.5 billion, more than double a year ago.
Nollen wrote that higher prices, and the technology Disney uses to distribute demand, have resulted in a 40% increase in spending per person since 2019.
For the fiscal year, Disney reported per-share earnings of $3.53, excluding certain items, on revenues of $82.7 billion.