Disney stock falls after a disappointing earnings report. Here’s what happened

Walt Disney Co.’s purchase of 21st Century Fox was meant to help the entertainment giant transform itself for the streaming future. But the newly acquired Fox businesses have caused some early challenges for the Mouse House.

Disney earnings fell well short of Wall Street estimates in the third quarter, dropping 28% from a year ago, partly because of the worse-than-expected performance of Fox assets, including the movie studio that produced the recent box office flop “Dark Phoenix.”

Burbank-based Disney also continued to spend big on streaming services such as Disney+, which the company believes is key to its ability to compete for years to come. The firm also took full operational control of money-losing streaming platform Hulu, which further eroded profit.

Disney is spending heavily on streaming services ESPN+ and Disney+, the latter of which is expected to launch in November. On a call with analysts, Disney Chief Executive Bob Iger said the company will offer consumers a bundle of Disney+, ESPN+ and a version of Hulu for $12.99 a month.

Disney earned $1.35 a share on revenue of $20.25 billion during the quarter that ended June 29, the company said Tuesday. That compared with $1.87 a share on revenue of $15.23 billion during the same period last year.

Analysts had predicted earnings of $1.72 a share and sales of $21.45 billion in the quarter.

Disney’s shares dropped $7.44, or about 5%, to $134.43 in midday trading on Wednesday.

The results reflected the first full quarter of earnings since Disney completed its $71.3-billion purchase of Rupert Murdoch’s 21st Century Fox in March, giving the company control of properties such as “The Simpsons,” “Avatar” and “X-Men.” But the underperformance of Fox units hampered Disney earnings, despite the success of Disney’s overall film slate, which included blockbusters such as “Avengers: Endgame.”

Storied film studio 20th Century Fox posted a $170-million loss in the quarter, Disney said, due partly to the failure of Fox’s “X-Men” movie “Dark Phoenix,” which suffered from poor reviews. The company said it recorded an undisclosed impairment charge for “Dark Phoenix.” Another Fox asset, the international networks business Star India, also had a difficult quarter because of an increase in the costs of sports rights to events such as the Cricket World Cup.

The newly acquired Fox assets results “were disappointing, to say the least,” wrote media analyst Michael Nathanson in a research report sent to clients Wednesday.

Nonetheless, Iger expressed continued confidence in Disney’s strategy of using Fox properties to boost its growth in the streaming business, where it will compete with aggressive tech players such as Netflix.

“Nothing is more important to us than getting this right,” Iger said. “We’re clearly bullish on our future, and for good reason.”

Iger also noted the extraordinary success of Disney’s own movies in recent months.

Disney’s films have already grossed $8 billion at the worldwide box office this year, breaking its own record for the industry.

“Avengers: Endgame,” released in April, grossed $2.795 billion in worldwide ticket sales, making it the highest-grossing movie ever, not adjusting for inflation. The superhero film unseated James Cameron’s “Avatar,” which generated $2.79 billion in receipts and held the record for nearly 10 years.

Disney’s live-action remake of “Aladdin” collected $1.03 billion, while Pixar’s “Toy Story 4” grossed $959 million.

Operating income at Disney’s movie studio grew 13% to $792 million during the quarter. The quarter did not include results from “The Lion King,” which hit theaters in July and has collected $1.2 billion in ticket sales.

As for Fox, Iger touted film franchises including “Planet of the Apes” and “Deadpool” now under the leadership of studio bosses Alan Horn and Alan Bergman, as well as “X-Men,” which will be stewarded by Marvel Studios President Kevin Feige.

Still, he said it would take “a good solid year, maybe two years, before we can have an impact” on Fox’s film business.

“We’re all confident that we’re going to be able to turn around the fortunes of Fox live action,” Iger said.

Disney’s media networks business, which now includes Fox channels such as FX and National Geographic, saw operating income grow 7% to $2.1 billion in the quarter.

The parks and consumer products segment posted a 4% increase in operating income to $1.72 billion, even as attendance at Disneyland Resort in Anaheim and Walt Disney World in Orlando, Fla., declined 3%.

Chief Financial Officer Christine McCarthy said the drop in visits was because of efforts to control crowding during the weeks after the opening of Star Wars: Galaxy’s Edge in Anaheim. Walt Disney World customers, she said, were waiting to visit the Florida park until the new Star Wars attraction opens. Executives also said Disneyland customers may have stayed away from the California park out of concern over the big crowds for Galaxy’s Edge, which opened in May.

The company’s direct-to-consumer segment continued to lose money. The company posted a loss of $553 million on revenue of $3.86 billion in the quarter, reflecting the major investment the firm is making in streaming products. The unit lost $168 million during the same period a year ago.