Key Takeaways From Disney’s Fiscal Q2 Earnings

Disney‘s (NYSE:DIS) stock slid slightly after a mixed fiscal second quarter earnings report, as earnings came in ahead of market expectations but revenues missed. The company’s revenue increased 3% year-over-year (y-o-y) to $13.3 billion, primarily due to the benefit of the opening of Shanghai Disney Resort in 2016, increased attendance and guest spending at domestic parks and resorts and growth in Media Network’s affiliate revenues, partially offset by lower theatrical revenue in the quarter. The company also posted diluted earnings of $1.50 per share, compared to $1.30 per share in the prior year.

ESPN remained a concern for the company in this quarter. According to the press release, ESPN saw further subscriber losses in this quarter, although the exact numbers were not revealed. Given that ESPN contributes 26% of Disney’s value, per our estimates, the decline in the sports network’s subscribers could be a major threat to the company, as ESPN derives more than 60% of its revenues through subscription fees. Moreover, lower advertising impressions and increases in contractual rates are only adding to the company’s existing problems.

Media Networks See Growth In Q1, Despite ESPN

Disney’s Media Networks revenue for the quarter increased 3% y-o-y to $5.9 billion. However, its segment operating income decreased 3% y-o-y to $2.2 billion, as growth in Broadcasting was more than offset by lower equity income from Hulu and A&E and a decline at Cable networks. The segment’s lower Cable results were driven by a decline at ESPN, where higher programming and production expenses were partially offset by higher affiliate and advertising revenue. Moreover, the growth in ESPN’s programming costs was due to its new NBA agreement, contractual rate increases for NFL programming, and the shift of three College Football Playoff games into Q2 compared to last year. The segment’s Broadcasting operating income grew 14% y-o-y in the quarter due to an increase in program sales and higher affiliate revenue, partially offset by higher programming costs and lower advertising revenue.

Parks And Resorts – Strong Growth Driver

Disney’s Theme Parks revenue grew 9% y-o-y and operating income increased 20% y-o-y, driven by growth in its domestic and international businesses. The segment’s growth in domestic operations was primarily driven by a 3% increase from higher volumes and a 1% increase from higher average guest spending on food and beverages. However, the segment’s domestic resort reservations were down to 4% y-o-y in the second quarter. ^[1] On the international front, the company benefited from the opening of Shanghai Disney Resort and improved results at both Disneyland Paris and Hong Kong Disneyland. We expect Disney’s theme parks to be an important driver for Disney’s long-term growth due to its international expansion.

Relatively Weak Performance Of Studio Division

Despite benefiting from the success of Beauty and the Beast at the global box office, which grossed more than $1 billion in the quarter, Disney witnessed a difficult y-o-y comparison in the second quarter. The company’s Studio Entertainment revenues decreased 1% y-o-y to $2 billion, but the segment’s operating income grew 21% y-o-y to $666 million, due to increases in television distribution and home entertainment, partially offset by lower film share revenue as sales of Star Wars and Frozen merchandise were higher in the prior year.

Q3 Guidance

In Cable Networks, the company expects its programming costs to be up about 8% compared to fiscal 2016, driven primarily by the new NBA contract. For the Parks and Resorts segment, the company expects continued growth in the third quarter as well, due in part to the opening of Pandora – The World of Avatar at Animal Kingdom, Guardians of the Galaxy – Mission: Breakout! at Disney California Adventure and Explorers Lodge Hotel at Hong Kong Disneyland.

Disney expects its capital expenditures for fiscal 2017 to be $200 million lower than prior year.

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1. The Walt Disney (DIS) Q1 2017 Results – Earnings Call Transcript, SeekingAlpha, May 9 2017 [↩]