Hollywood’s Mirage Earnings Season: Fear That the Worst Isn’t Here Yet

It’s the economy, stupid. The phrase made famous in the 1992 presidential campaign could well be on Wall Street’s mind as entertainment giants report their second-quarter earnings in late July and August. After all, the upcoming quarterly results might not look so bad, as streaming hits like Stranger Things and Obi-Wan Kenobi respectively boost viewership at Netflix and Disney+ and box office smashes like Paramount’s Top Gun: Maverick and Universal’s Jurassic World Dominion roll through theaters.

But these titles may be a mirage obscuring headwinds this fall, meaning investors will listen at least as closely to executive forecasts, expectations and commentary for hints of what’s happening in the current third quarter. Meanwhile, inflation and economic pressures could come to a head during the back half of 2022 amid talk of a possible recession that could hit ad revenue for big streamers.

Morgan Stanley analyst Benjamin Swinburne has underlined Wall Street’s economic fears about Hollywood. “The pivot to streaming has not reduced the risk to media estimates from a slowing economy,” he argued in a July 18 report. “Advertisers and consumers likely pull back in a recession.” Looking at the back half of 2022, he warned of “three reasons we are incrementally cautious on the TV/streaming group within our coverage.”

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In that environment, Netflix co-chiefs Reed Hastings and Ted Sarandos kicked off earnings season July 19, ahead of upcoming reports from the likes of Comcast/NBCUniversal, Disney, Paramount Global and the first combined results for the newly merged Warner Bros. Discovery. Just as management had predicted, Netflix lost more subscribers in the second quarter after its shock 200,000-user drop in the first. The latest loss of 970,000 subscribers worldwide in the three months ending in June was less than the firm’s forecast for a 2 million decline. Netflix appears more confident about the path ahead, forecasting 1 million subs in the current third quarter, but the reality remains to be seen.

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The streamer’s results are expected to have a ripple effect across the industry. In a July 18 note, Guggenheim analyst Michael Morris predicted that the streamer’s update would have “wide-ranging implications for the stock and the media ecosystem,” given the streaming giant’s plan to roll out a cheaper ad-supported subscription tier.

On the same day, analyst Michael Nathanson noted that U.S. streaming penetration of households “ticked up” in the second quarter, paving the way for other streamers to capture users from Netflix. “We are seeing growth — albeit more slowly than prior quarters — in new subscriptions at newer services like HBO Max and Paramount+ versus the more established services of Netflix, Disney+ and Amazon,” Nathanson wrote.

Notably, in its letter to investors July 19, while Netflix did not directly mention competitors, the company said it plans to combat its slowed growth by launching an ad-supported tier, which should eventually pull in more members, and by monetizing in 2023 the accounts of individuals who are watching but not currently paying for the service, estimated by Netflix at more than 100 million.

There also are individual concerns specific to various stocks. Disney, which added 11.8 million subscribers in the first quarter to reach 137.7 million, has warned that subscriber growth could slow in the next few quarters. The company cites a stronger-than-expected first half of the year — thank Thor and Doctor Strange sequels — alongside supply chain impact from the war in Ukraine. The company has said it plans to have a strong content slate in the second half of the year that could offset some of this, but analysts are concerned about Disney’s ability to hit its target of 230 million to 260 million Disney+ subscribers by 2024.

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The fact that Disney sealed a deal for TV rights for Indian Premier League cricket from 2023-27 but bowed out of the auction for streaming rights because of a hefty price tag caused some analysts to wonder if the company could reduce its 2024 streaming user outlook, given that it’s expected to lose customers in India.

The Bob Bakish-run Paramount similarly is going into its earnings report with streaming subscriber growth momentum and a likely boost from Top Gun: Maverick, which has made close to $1.24 billion in theaters worldwide. Wells Fargo’s Steven Cahall recently boosted his forecast for operating income before depreciation and amortization for the company’s filmed entertainment unit from $134 million to $173 million, citing Top Gun. But Paramount, like many other streamers, is living in the shadow of Netflix’s subscriber loss, as Wall Street grows concerned about whether streaming has peaked. Cahall lowered his quarterly ad revenue projection for the total company by 4.2 percent to $2.54 billion “due to a weaker ad market.” That would mark a 2 percent drop from the $2.59 billion recorded in the year-ago period.

While Cahall cut his direct-to-consumer ad revenue estimate, he still expects that to grow 33.5 percent over the year-ago period, while TV media ad revenue will fall 6.6 percent. Time will tell if those numbers will come under further pressure this year.

Comcast’s NBCUniversal likewise has the theatrical success of Jurassic World Dominion — with global box office passing the $900 million mark — to tout. But the Street has grown increasingly concerned about cable giants’ broadband subscriber momentum and media powerhouses’ ad outlook. Morgan Stanley’s Swinburne kept his broadband subscriber estimate for Comcast at a gain of around 65,000 but highlighted continued industry-wide growth concerns. “At NBCU, we layer in a lower near- and medium-term advertising outlook at media,” he wrote July 11. He also lowered his second-quarter Peacock monthly active accounts net adds estimate — it has 28 million active accounts and 13 million paid users — “to flattish, given a light programming quarter.”

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Meanwhile, the second quarter may still look a little “messy” for Warner Bros. Discovery, according to Wells Fargo’s Cahall, as the new conglomerate emerges from the merger that created it April 8. There are still deal expenses and restructuring costs that will likely make the latest earnings report complex and difficult to assess. The second quarter also is traditionally a weak quarter at the company for net subscriber additions, causing Cahall to lower his forecasts to 2 million net adds for HBO Max, down from their previous 3 million estimate.

But Wall Street remains focused on company guidance for 2023 and the streaming strategy of the merged giant. Cahall added, “We think a future investor day will be more pivotal than this quarter’s results.”

Source: Morgan Stanley research on consensus Wall Street forecasts based on company data; Paramount includes Paramount+ and Showtime.

This story appeared in the July 20 issue of The Hollywood Reporter magazine. Click here to subscribe.

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