Walt Disney Co. (DIS) shares slipped Wednesday after the media company posted stronger-than-expected first quarter earnings but cautioned that its transition to broadcasting its own content on the Disney+ platform would hit its bottom line.
Disney said earnings for the three months ending in December, the company's fiscal first quarter, fell 3% from the same period last year to $1.84 per share, but still beat Street forecasts of $1.55 thanks to solid performances in the group's media and theme parks businesses. Group sales, Disney said, were essentially flat on the year at $15.303 billion, but again topped the consensus forecast of $15.1 billion.
Disney, which is buying the bulk of media assets from Twenty-First Century Fox (FOXA) in an effort to challenge online streaming services such as Amazon (AMZN) and Netflix (NFLX) , said it will unveil its own digital offering, Disney+, at the company's investor day on April 11. The move to bring Disney content onto that platform, however, will mean foregoing licensing revenues earned from other providers, and will likely clip $150 million from Disney's operating income over the course of the year, the company told investors, with most of it weighted in the final two quarters.
"What we're basically trying to do here is invest in our future," Disney CEO Bob Iger told investors on a conference call late Tuesday. And the investments that we're making in both the technology side and in creating incremental content are all designed so that long-term this business will become an important part of Disney's bottom line and long-term strategy."
"It's almost the equivalent of deploying capital to build out our theme parks when we could have deployed the capital in a variety of other directions," Iger added. "This is a bet on the future of this business. And we are deploying our capital basically so that long term, the growth of this company is stronger than it would have been without these investments."
Disney shares fell 1.1% to close at $111.41 in Wednesday's trading.
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Revenues at Disney's Parks and Experiences division, which includes Disney World in Orlando and Disneyland in California, rose 5% from the same period last year to $6.8 billion, nearly half of the group's total top line. Media networks revenues, which include ESPN and the ABC television network, rose 7% to 5.9 billion as subscriptions to the sports-only network' improved for sixth consecutive quarter, taking the total of users on its ESPN+ digital platform past the 2 million mark.
"In the second quarter, we expect the continued ramp-up of ESPN+ and ongoing development of our Disney+ service to have an adverse impact on the year-over-year change in operating income of about $200 million, with about two thirds of that attributable to ESPN+," said CFO Christine McCarthy.
Iger also raised the prospect of monetizing Disney's current 30% holding in the online streaming service Hulu, which will increase to 60% once the $72 billion purchase of media assets from Fox closes later this year.
"The goal obviously is to operate Hulu profitably and we're not going to say how long that might take. That could shift a bit because, at some point, we'll look more aggressively at some international rollouts of Hulu as well, " Iger said. "We'll own 60% when the deal closes, and we'll be prepared to talk more, perhaps, about Hulu's strategy at that point."