Disney (NYSE:DIS) will report its Q4 earnings for fiscal 2013 on November 7, and the focus will be on the ESPN and the theme parks business. The sports giant ESPN dropped 32% in primetime viewership in the second quarter but has recovered and gained 10% in the third quarter as compared to the same period the previous year.  The viewership gains were driven by the telecast of NFL (National Football League). Disney’s theme parks will continue to drive growth for the company on increased attendance and higher per capita guest spending. Additionally, we expect the company to benefit from the success of its new game Infinity, which was launched in August.
ESPN Will Benefit From Improved Ratings
According to our estimates, ESPN networks constitutes roughly 40% of the company’s value. The sports giant derives its value from the high fee that it charges for its sports programming from close to 100 million subscribers in the U.S. The network charged an estimated subscription fee of $5.05 in 2012, which we estimate to be around $5.25 for 2013. Earlier, in the second quarter, 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.  The network is seeing a 21% increase for its Saturday night college football games to date, and also saw gains in Q3 for Little League World Series and MLB coverage.  Given the benefit of improved ratings and NFL telecast, ESPN will see healthy growth in Q4.
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TV Advertising Shows Steady Growth
Advertising is an important source of revenue for the content owners such as Disney. For Q3 2013, Disney’s media networks ad revenues grew by 1% to $2 billion, primarily driven by growth in its cable networks.  The advertising market has been trending well this year despite the absence of the Olympics or high political spending. Television continues to dominate its position as the front-running media format for advertising. For the first half of 2013, global TV ad expenditures grew 4% percent on a y-o-y basis, accounting for 58% of total ad spend. Excluding television, traditional media budgets took some hits in the first half of 2013, as spending in newspapers, magazines and radio all declined in the first half (-2.0%, -1.9% and -0.9%, respectively).  Content owners such as Disney will be benefit from the increased ad spending in television.
Theme Parks Business Is Growing
Theme parks business contributes close to 20% to Disney’s value, according to our estimates. In the previous quarter, Disney saw a 7% rise in theme parks revenues to $3.7 billion despite an unfavorable impact due to a shift in timing of the Easter holiday.  The theme parks business provides stable cash flows to Disney, and the business is driven by attendance in the parks and per capita guest spending, which rose by 7% in the third quarter. The growth in spend can be primarily attributed to higher ticket prices. The company hasn’t resorted to any special pricing for the slower months and has been increasing the ticket prices consistently every year. A day-pass to Disney World now costs $95 for adults, up from $89, and $89 for children (0-9), up from $83. Similarly, a day-pass to Disneyland or California Adventure now costs $92 for adults and $86 for children (0-9).  On the other hand, the annual attendance at Disney’s theme parks in the U.S. has grown at a slow pace for the last few years amounting to an estimated 72 million in 2012. The attendance growth was driven by the improving U.S. economy and Disney’s investment in new attractions within its resorts. We believe Disney’s theme parks will continue to do well due to the economic recovery and increasing consumer spending that will drive per capita guest spend at the parks.
Consumer And Interactive Media To Gain Momentum
In the consumer segment, Disney operates its retail stores under the name of Disney Store. This is an international chain of specialty stores selling only Disney-related items, many of them exclusive. The company earns revenues from merchandise sales based on popular Disney characters, including products such as toys, games, apparel, footwear, books, magazines, etc. The company is expanding internationally to capture a wider footprint and cater to the middle class of various economies including China, where Disney is coming up with its largest store (Read More – The Shanghai Store To Aid Disney’s Revenue Growth).
Disney’s interactive media division, which is involved in developing and distributing video games and content for branded online services, has been struggling the past few years due to poor performance from its releases. However, its latest game, Infinity, has shown encouraging numbers for August and September topping the sales of one million starter pack units globally in a very short span of time.  If this positive trend continues, it might help Disney to turnaround the loss-making unit. Infinity sales will aid to Disney’s overall revenue growth in Q4 (Also See – Disney’s Interactive Media Unit Gets A Boost With Encouraging August Infinity Sales).Notes:
- ESPN Primetime Viewership Rebounds In Q3, While FS1 Up Over Speed Last September, Sports Business Daily, Oct 10, 2013 [↩] [↩]
- Disney’s SEC Filings [↩] [↩] [↩]
- GLOBAL AD SPEND: WITH DOUBLE DIGIT GAINS, DISPLAY ADS DRIVE IN-YOUR-FACE RESULTS, Nielsen, Oct 22, 2013 [↩]
- Disney Hikes Theme Park Ticket Prices But It Means Little For Shareholders, Trefis, June 4, 2013 [↩]
- Disney Infinity’ Reaches One Million Mark in Global Starter Pack Sales, Disney Newsroom, Oct 23, 2013 [↩]