Big-Money Movies and a YouTube TV Standoff Cut Into Disney’s Holiday Profit

The New York Times, CNBC, Bloomberg, Market Watch, and Reuters contributed to this report.

Disney parachuted past revenue expectations for the holiday quarter, but the profit line looked a bit wilted – and the culprits were expensive movies and a short-but-costly carriage fight with YouTube TV.

Here’s the short version: adjusted earnings per share slipped 7% year-over-year to $1.63, and operating profit fell 9% to $4.6 billion for the quarter ended Dec. 27. Revenue, though, grew roughly 5% to about $26 billion – helped by streaming and a blowout performance from the parks and cruise business.

But why did profit lagged?

Studios spent big. Disney released nine films in the quarter (versus four a year earlier), and the price tag was brutal. “Avatar: Fire and Ash” reportedly chewed through roughly $500 million in production and marketing – and because it hit late in the period, most box-office receipts will show up next quarter. “Tron: Ares” cost at least $320 million and only pulled in about $142 million at the box office.

A brief YouTube TV blackout stung. Roughly 10 million subscribers lost access to ESPN, ABC and other Disney channels for 15 days during a contract fight with Google’s YouTube TV. Disney says that dispute knocked about $110 million off operating income.

Linear TV also faced headwinds: political ad spending dipped year over year in the US, and Disney earlier spun off some TV assets in India – both of which reduced TV unit income.

However, some things looked bright. Streaming is finally contributing. Disney+ and Hulu’s combined operating profit jumped 72% to $450 million, helped partly by price increases. Streaming revenue rose, too.

Parks, cruises and merch carried the day. The “experiences” division topped $10 billion in quarterly revenue for the first time and accounted for 72% of the company’s operating profit. Domestic parks did especially well: domestic parks revenue reached $6.91 billion (up 7%), international parks $1.75 billion (also up 7%), and spending per guest rose 4% thanks to more food and merchandise sales. Cruises also helped the unit’s operating profit climb 8%.

Overall, Disney beat Wall Street forecasts: adjusted EPS came in at $1.63 versus the $1.57 analysts expected, and revenue was $25.98 billion versus a $25.74 billion consensus.

Net income: $2.48 billion, or $1.34 per share, down from $2.64 billion ($1.40) a year earlier.

Streaming revenue for the quarter was up about 11% to $5.35 billion (Disney stopped reporting subscriber counts this quarter).

The sports segment’s revenue was roughly $4.91 billion (up 1%), but operating income tumbled 23% to $191 million, pressured by higher programming costs and the YouTube TV blackout.

The experiences division produced about $3.31 billion in operating profit – three times the entertainment division’s profit.

For the year ahead, Disney said it’s on track to repurchase $7 billion of stock, expects double-digit adjusted EPS growth, and is forecasting $19 billion in cash from operations.

Disney guided to roughly $500 million in streaming operating income for the fiscal second quarter – about $200 million more than a year ago. The experiences unit expects only “modest” operating income growth, citing softer international visitation plus pre-launch and pre-opening costs (a new cruise line and the “World of Frozen” at Disneyland Paris).

And the leadership question looms. With Bob Iger set to retire later this year (again), Disney’s board is meeting in Los Angeles and expected to pick a successor soon. Two top internal names often mentioned are Josh D’Amaro, who runs the money-making experiences unit, and Dana Walden, co-chair of Disney Entertainment – though Disney declined to comment on the speculation.

“Overall, we certainly felt great about the quarter,” CFO Hugh Johnston said – a fair summary: parks and streaming are firing, but big movie bets and distribution spats put a dent in profitability this holiday season.