What To Expect From Disney’s Fiscal Second Quarter Results

by Trefis Team
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Disney (NYSE: DIS) is scheduled to announce its fiscal second quarter results on Tuesday, May 9. The company started fiscal 2017 on a weak note, as both its revenues and earnings per share fell short of market expectations in the first quarter. In Q1, the company’s revenue decreased 3% year-over-year (y-o-y) to $14.8 billion, primarily due to a weak performance by Disney’s media networks, where revenues fell 2% y-o-y and operating income declined 4% y-o-y, due to higher programming costs and fewer subscribers of the media networks. The company also posted diluted earnings of $1.55 per share, compared to $1.73 in the prior year. This 10% y-o-y decline in the first quarter earnings were due to a difficult y-o-y comparison, particularly in the company’s Studio and Consumer Products segments, due to the strength of Star Wars: The Force Awakens.

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 second quarter as well, driven by continued headwinds amid lower television ratings in the second quarter. Disney benefited from the success of Beauty and the Beast at the global box-office, which has grossed more than $1 billion. However, we expect a relatively weak quarter for the company with respect to its Studio Operations and Consumer Product segment, as the studio’s performance was relatively weak in the second quarter as compared to the prior year quarter.

ESPN Woes Could Hurt Earnings 

The company’s sports viewing has been slightly down so far this year. In fact, sports commentary shows like ESPN’s SportsCenter were down 7% in viewership. Also, ESPN’s ratings were down 7%, and ESPN2 was down 34% in the second quarter. However, basketball kept dominating the sports scene, given that the football season was over, representing 36% of the sports hours viewed in the week ended March 5. These good ratings helped the sports network partially offset the threat from alternative viewing platforms. However, we expect ESPN to continue to negatively impact Disney’s earnings in the second quarter results. The segment’s recent layoffs will be unlikely to impact margins until later this year.

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, but it will take time for the company to fully address its cord cutting problems.

Q2 Guidance

In Q2, Disney expects an increase in ESPN’s programming costs compared to Q2 last year based on the shift of three College Football Playoff games into Q2. The company also expects its cable programming and production costs to increase 16% y-o-y in the second quarter. At Parks and Resorts, the company is expected to benefit from one week of the winter holiday shifting into the second quarter. However, there will likely be a net adverse impact of $50 million due to the shift of Easter holidays in Q3 entirely, which were reported in Q2 last year. Meanwhile, the Studio business is expected to face a tough comparison to a very strong second quarter last year, which benefited from the strength of Star Wars and the release of Zootopia.

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Please refer to our complete analysis for Disney

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