Disney’s Q4 Fiscal 2015 Earnings Likely Driven By Studio Entertainment

Disney (NYSE:DIS) will report its Q4 earnings for fiscal 2014 on November 6th. (Fiscal years end with September.) We expect Disney to report higher earnings driven by strong growth across its segments. We will likely see that the studio business benefited from the success of Guardians of Galaxy, along with the continued success of previous quarter release, Maleficent. The studio business will have a favorable comparison to the prior year period, which was let down by the poor performance of The Lone Ranger.

While the sports giant ESPN witnessed slightly higher viewership for NFL games this year, the ratings were down 2% from last year. ^[1] Despite lower ratings, better pricing may have helped the network post higher advertising revenues. However, the important aspect to watch out for would be the network’s affiliate fees, which grew by a lower-than-expected low single-digit rate in the previous quarter. Disney in its last earnings call stated that it will return to a normal high single digit growth rate in the September quarter. ^[2]

Looking at ABC broadcasting, the network saw 5% year-over-year drop in ratings and 2% drop in viewership for the 2013-14 season, which ended in September. For summer, the ratings were even worse, down 7%. ^[3] However, The Disney Channel did well in the third quarter and was ranked No. 1 in total viewers in the demographics  Kids 2-11, Kids 6-11 and Tweens 9-14. ^[4]

Starting this quarter, Disney’s theme parks are likely to benefit from the MyMagic+ technology. MyMagic+ is a new ticketing system for Disney’s resorts and it can function as a room key, entry ticket to the parks and for payments to be made in the park for food, beverage and other services. Disney expects to boost the average guest spend inside the theme parks by its MyMagic+ setup.

Last month, the company announced that it will inject $1.25 billion into Euro Disney to improve the theme park’s financial position. ^[5] Disney currently owns around 40% of Euro Disney. The Parisian theme park has been struggling over the past few years amid a decline in attendance. We will be looking for any update on this development from the company’s management in the quarterly earnings call.

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Watchout For Subscription Trends In ESPN

We estimate that ESPN networks contribute roughly 35% to Disney’s value. The sports giant derives its value primarily from two sources, subscription and advertising. The network charges high fees to pay-TV operators for its sports programming. ESPN’s penetration is high with more than 95% of TV households subscribing to the network. The monthly fee per subscriber has been on an uptrend over the past few years. It has increased from $3.26 in 2007 to an estimated $5.54 in 2013. The reason for high fees is the increasing programming costs for sports. ESPN pays hefty fees to secure the television rights of various sporting events and that cost is passed on to the pay-TV operators and eventually to subscribers. We believe that this trend will continue in the coming years as ESPN has renewed majority of its big sports deals and this will ensure its dominance in sports media. Accordingly, we estimate that the monthly fees per subscriber to grow to a little under $6 in 2014 and over $8 towards the end of our forecast period.

Studio Business Will Drive The Earnings

Disney’s Studio Entertainment saw a fantastic 2014 driven by the wide success of Frozen. Looking at the September quarter, the company surely reaped the benefits from the success of Guardians of Galaxy, which has grossed over $750 million at the box-office globally. ^[6] Disney currently ranks No. 2 and commands 15.60% market share in the U.S. box-office for 2014. If we account for international market, the company has so far grossed close to $3 billion at the box-office this year. ^[7] We estimate the studio revenues to be over $6.5 billion for the calendar year 2014. An estimated EBITDA margin of 19% will translate into EBITDA of over $1.2 billion by end of the year.

We estimate revenues of around $48.4 billion for Disney in 2014 and EPS of $4.00. We maintain a $94 price estimate for Disney’s shares, which is close to the current market price of $90.

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1. NFL Week 7 TV Ratings: Steelers/Texans Has Slight Decline on ESPN, Sports Media Watch, Oct 22, 2014 [↩]
2. The Walt Disney Company (DIS) CEO Bob Iger on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 5, 2014 [↩]
3. NBC Finishes #1 for the Full 52-Week 2013-14 Primetime Television Season, The Futon Critic, Sep 16, 2014 [↩]
4. Disney Channel Sweeps Total Day Among Viewers, Kids & Tweens in Third Quarter 2014, Zap2it, Sep 30, 2014 [↩]
5. Walt Disney Co. Backs $1.25 Billion Lifeline for Euro Disney, The New York Times, Oct 6, 2014 [↩]
6. Guardians of Galaxy, Box Office Mojo, As of Nov 2, 2014 [↩]
7. 2014 Worldwide Grosses, Box Office Mojo, As of Nov 5, 2014 [↩]