Disney (NYSE:DIS) recently reported its Q3 2013 earnings. The company saw overall revenue growth of 4.4%. Despite weak ratings, ESPN continued to lead the way with robust growth in affiliate fee. The broadcasting networks saw continued weakness due to pressure on ratings. Disney’s theme parks business benefited from higher attendance and guest spending growing its operating income by 9%. Studio entertainment division suffered from tougher comparisons and pre-release marketing costs associated with The Lone Ranger weighed on the earnings.
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Disney’s Theme Parks Stays Firm
Disney’s theme park revenues grew 7% to $3.7 billion despite an unfavorable impact due to a shift in the timing of the Easter holiday.  The revenue growth was driven by higher average guest spending and attendance. Theme parks business provides stable cash flows to Disney and according to our estimates it contributes close to 19% to the company’s value. The business is driven by attendance in the parks and per capita guest spending. While the attendance increased by 3% in the quarter, per capita guest spending jumped 7% primarily due to the increased ticket prices (See – Disney Hikes Theme Park Ticket Prices But It Means Little For Shareholders). Since theme parks are destination for leisure activities, the attendance is somewhat linked to the state of the economy. The U.S. economy grew at a seasonally adjusted annual rate of 1.7% in the second quarter of 2013, as businesses spent more and the federal government cut less.  We believe the theme parks business of Disney will continue to do well as the economy recovers.
Ratings Trend Impact Cable Networks
The revenues for media networks increased by 5% to $5.35 billion due to higher affiliate fees, which rose by 9% driven by contractual rate increases at ESPN.  ESPN ratings have declined sharply this year. (See – ESPN Ratings Decline Amid Increased Competition) The company’s management stated that the decline in ratings during the quarter was primarily related to NBA comparability issues as the network aired fewer NBA regular season games compared to last year when the lockout created a more back-end loaded schedule. 
While cable networks revenues increased by 8%, Disney’s broadcasting revenues remained flat. The advertising revenues at broadcasting networks declined due to lower network ratings and lower rates and political advertising at the owned television stations.  ESPN has been benefiting from multi-year programming contracts that specify annual fee increase and sustained high demand for sports programming. However, we believe that going forward, the growth in the subscription fee is likely to slow due to pressure from pay-TV service providers and expected competition from Fox Sports 1, which will be launched on Aug 17 this year.
The Lone Ranger Weighs On Earnings
The revenues at Disney’s studio entertainment division declined by 2% to $1.59 billion reflecting lower performance from Iron Man 3 in the current quarter compared to The Avengers in the prior-year quarter. Iron Man 3 also saw a good collection, grossing over $1.2 billion at the box-office so far. The operating income at Disney studios tumbled 36% due to increased pre-release theatrical marketing expenses primarily due to The Lone Ranger. While The Lone Ranger didn’t perform well at the box-office, we still believe the studio business will grow this year due to strong lineup that includes Planes, Thor: The Dark World and Frozen. Disney has been taking risks with big-budget films and fewer releases. The studio ranks third in market share after Comcast’s Universal Studios and Time Warner’s Warner Bros. Currently all three studios have a market share of close to 16%.  The success of a movie depends on the response it gets from the audience and it would be interesting to see if Disney manages to end the year with the highest market share.
We are currently in the process of updating our model for Disney in view of the recent earnings.Notes: