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When the DTC business was bleeding red ink as Walt Disney (DIS) poured billions into Disney+ and its streaming platforms in 2021-2023, it was the more traditional theme park business that came to the rescue, generating robust operating profits as pent-up demand for travel fueled attendance. In 3Q24, though, the tables turned a bit as a moderation in demand at DIS' domestic theme parks weighed on the Experiences segment, while profits for the Entertainment segment soared, partly due to the DTC streaming business generating positive operating income for the first time.

• Buoyed by a few rounds of price hikes for Disney+ and Hulu, as well as a more disciplined approach to spending on content, DTC Streaming finally turned the corner, posting an operating profit of $47 mln compared to a ($512) mln loss in the year-earlier quarter. Entertainment DTC, which includes Disney+ and Hulu but excludes ESPN+, also nearly broke even with an operating loss of ($19) mln as Disney+ subscriber growth came in a little better than expected. Last quarter, DIS stated that it's not expecting to achieve core subscriber Disney+ growth in Q3, but subscribers edged higher by 1% to 118.3 mln.
• For some perspective, two years ago, the DTC business posted an operating loss of ($1.06) bln. To erase those losses and swing the business into profitability is a crowning achievement for DIS and CEO Bob Iger, but DTC wasn't the star of the show in Q3.
• That accolade belongs to the theatrical film business, which struck gold with the June 14 release of "Inside Out 2." The movie became the highest grossing animated film of all time, selling nearly $1.6 bln in tickets. Its huge success also helped to offset another rough quarter for the Linear Networks business as cord-cutting continues to pressure advertising revenue for traditional cable. Although Linear Networks saw operating income decline by 6% to $966 mln, operating income for the overall Entertainment segment (Linear Networks, DTC, Content Sales/Licensing) soared by 194% yr/yr to $1.2 bln.
• DIS has another blockbuster hit on its hands, too, with Marvel's "Deadpool & Wolverine" breaking the box office record for the largest R-rated global opening ever. Since that movie wasn't released until July 26, though, its contributions won't been seen until DIS issues its Q4 results in early November. However, with momentum building in the theatrical film business -- Moana 2 and Mufasa: The Lion King are also set to launch this year -- DIS had the confidence to raise its FY24 EPS growth target to 30% from 25%.
• Unfortunately, these bullish developments in the Entertainment segment are being clouded over by the disappointing results and outlook for Experiences. Given the outsized attention that's given to the streaming business, it may seem surprising that Experiences still produces the bulk of DIS' earnings. While operating income dipped by 3% in Q3 to $2.2 bln, that still represented 52% of the company's total operating income. Therefore, any negative change in the profit outlook for Experiences will have an impact on the stock. On that note, DIS is expecting Q4 operating income for Experiences to decline by mid-single digits yr/yr driven by a moderation in demand for the domestic theme park business, and reduced attendance at Disneyland Paris due to the Olympics.

The main takeaway is that there were plenty of positives in DIS' Q3 report, most notably including the swing to profitability for the DTC Streaming business, but demand is continuing to weaken for domestic theme parks. If that trend continues, then DIS will have an increasingly difficult time making up for the operating income declines in Experiences.