Disney’s Q4 FY15 Earnings Preview: Watchout For Cable Networks Growth Amid Continued Ratings Woes And Currency Issues

Disney (NYSE:DIS) will report its Q4 and full year earnings for fiscal 2015 on November 5th. (The fiscal year ends with September.) ^[1] We expect the company to post steady growth at its theme parks, but ESPN could face some headwinds amid lower television ratings in Q3. Disney’s theme parks will likely see steady growth in attendance and average guest spending, given the stable macro-economic environment, along with the impact of Disney’s increased ticket prices this year. Looking at cable networks, Disney in its previous earnings call stated that ESPN is seeing modest subscriber losses while its overall cable business may grow at only a mid-single-digit rate. This can primarily be attributed to a shift in viewing habits. Viewers are embracing digital video platforms, which have resulted in lower viewership on television and also encouraged cord cutting amid rising pay-TV bundle prices. ESPN’s ratings declined 10% for primetime and 6% in total day for the September quarter. ^[2] Now lower ratings will likely weigh on the network’s advertising revenues. Furthermore, ESPN has spent billions of dollars in acquiring the programming rights and the increased costs have weighed on its bottom line in the past few quarters. This could well be the case in September quarter as well. At broadcast, ABC was the most stable of the Big 4 networks, but was still down 3% in demo C3 ratings. ^[3] This should again be a drag on domestic advertising revenues.

Looking at the studio operations, Disney will surely benefit from the wide success of Inside Out, which has grossed close to $850 million at the global box-office while it was made with a production budget of $175 million. ^[4] Similarly, Disney’s Ant Man was successful at the box-office during the September quarter. Having said that, the strength in the U.S. Dollar will surely weigh over the foreign box-office performance. Looking forward, Disney has a solid lineup in the coming months, including much hyped Star Wars: The Force Awakens, The Jungle Book and a sequel to Captain America. These movies should drive growth for the studio in fiscal 2016, and we estimate the segment revenues to be over $8 billion. An estimated EBITDA margin of 28% will translate into EBITDA of over $2.25 billion by end of 2016, representing more than 10% of the company wide EBITDA.

Disney recently launched its own over-the-top streaming service – DisneyLife – in U.K. The service will include Disney’s’ movies, TV series, books and music offerings in a bundle priced at £9.99 per month. Disney plans to expand this service into other European markets, including France, Spain, Italy and Germany. We’ll be looking for any updates on this new service in the earnings conference call.

Overall, we expect mixed results from Disney with steady growth at its theme parks driven by higher attendance and guest spending, while cable networks may face some headwinds amid ratings woes and subscriber losses.

• Trefis has a $119 price estimate for Disney’s shares, translating into a $200 billion market cap. This is slightly above the market price of around $115 seen over the week.
• We currently estimate the company’s 2015 revenues to be around $52.6 billion and earnings per share to be $5.00, in line with the consensus, according to Reuters.

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1. Disney’s Investor Relations [↩]
2. ESPN’s Ratings Down 9 Percent in Prime Time in Third Quarter, News Busters, Oct 7, 2015 [↩]
3. TV’s Third-Quarter C3 Ratings Plunge 8%, Advertising Age, Oct 12, 2015 [↩]
4. Inside Out, Box Office Mojo [↩]