Disney Earnings Preview: What Are We Watching?

Disney (NYSE: DIS) is scheduled to announce its first quarter fiscal 2017 results on Tuesday, February 7. The company reported weak results in the fourth quarter, as both its revenues and earnings per share fell short of market expectations. In Q4 fiscal 2016, the company’s revenue decreased 3% year-over-year (y-o-y) to $13.1 billion, primarily due to a disappointing performance by Disney’s Media Networks, where revenues fell 3% y-o-y and operating income declined 8% y-o-y. As expected, ESPN issues weighed heavily on fourth quarter earnings at Disney, driven by a y-o-y decline in advertising and affiliate revenue. We expect this decline in Disney’s Media Networks to continue in the upcoming first quarter as well.

In fiscal Q1, Disney benefited from the success of Rogue One: A Star Wars Story at the global box-office, which grossed more than $1 billion. However, we expect a relatively challenging quarter for the company with respect to its Studio Operations and Consumer Product segment, due to a difficult y-o-y comparison. Disney’s Studio Entertainment revenues jumped 46% y-o-y in fiscal Q1 2016, while its operating income was up 86% y-o-y, due to phenomenal performance of Star Wars: The Force Awakens. 

ESPN Woes Could Hurt Earnings 

ESPN has spent a significant sum for the right to broadcast NFL, MLB and NBA games, with the hope that it could boost ratings and stem the subscriber declines due to emergence of alternate viewing platforms. However, the NFL saw consistent declines in viewership this season in the first quarter, with NFL Nielsen ratings down 8% for the 2016 season. In addition, ESPN aired only three of the New Year’s Six bowl games during fiscal Q1, whereas all six games were aired during the first fiscal quarter last year. To add to that, ESPN saw a double-digit ratings drop for Saturday games, which averaged only a 10.4 rating from the 15.4 rating just two years ago. Accordingly, we expect ESPN to continue to impact Disney’s earnings in the first quarter results.

Although Disney has been successful in getting ESPN and some of its other content in various over-the-top streaming services such as DirecTV Now and Sling TV, it will take time for the company to fully address its cord cutting problems.

Theme Parks And Resorts To Boost Results In Long Run

In Q1, Disney’s Theme Parks business was likely impacted by Hurricane Mathew in early October, which resulted in the closure of many parks for about a day and a half. The company also estimates its domestic resort reservations declined around 2% y-o-y due to this impact in the first quarter. However, the launch of Disney’s Shanghai theme park has been a success, as the park saw 86% occupancy in the fourth quarter and more than 1 million guests during its first month. In fact, the company expects Shanghai theme park to break even in fiscal 2017.

We expect Disney’s theme parks to be an important driver for Disney’s long term growth due to its international expansion.

Future Outlook

In fiscal 2017, Disney expects to deliver modest EPS growth for the year due to comparability factors. In Cable Networks, the company expects its programming costs to be up about 8% versus fiscal 2016, driven primarily by the new NBA contract, which accounts for $600 million of that increase. For the Parks and Resorts segment, the company expects continued growth in 2017 due in part to the opening of Avatar Land at Walt Disney World and a full year of results from Shanghai Disney Resort. In the studio segment, the company has a strong slate of films to be released which include Beauty and the Beast, Guardians of the Galaxy Vol. 2, the fifth installment of Pirates of the Caribbean, and Cars 3 during the year. In the Consumer Products segment, while the company expects operating income growth for the full year, it also expects more than a 20% y-o-y decline in its operating income in Q1 2017 due to a difficult comparison from the strength of Star Wars and Frozen merchandise licensing in Q1 last year. Reuters’ compiled analyst estimates forecast revenues of $15.26 billion and earnings of $1.50 per share in the upcoming quarter.

Please refer to our complete analysis for Disney

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