What To Expect From Disney’s Fiscal Third Quarter Results

by Trefis Team
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Disney (NYSE: DIS) is scheduled to announce its fiscal third quarter results on Tuesday, August 8. The company had a relatively mixed first half of fiscal 2017 (fiscal year ends September 2017), beating earnings per share estimates but missing revenue estimates in both quarters. In the first six months of fiscal 2017, the company’s total revenue remained flat at $28.1 billion, due to increased attendance and guest spending at domestic parks and resorts, offset by lower theatrical revenues and weakness in the consumer products segment.

As expected, ESPN’s issues weighed heavily on the first half of 2017, due to a y-o-y decline in advertising and affiliate revenues. ESPN remains a concern for the company in the upcoming quarter as well. Given that ESPN contributes 26% of Disney’s value, per our estimates, the decline in the sports network’s subscriber base, along with lower advertising impressions, could pose a major threat to the company, as ESPN derives more than 60% of its revenues through subscription fees.

NBA Adds to ESPN Woes 

ESPN’s prime-time viewership declined 1% y-o-y in the June quarter. Moreover, it was the network’s lowest third quarter mark in the last four years. ESPN also reportedly saw a decline of 9% in prime time viewing from 2016 (1.38 million vs. 1.52 million).

ESPN suffered a blow due to the generally uncompetitive NBA Playoffs in Q3, resulting in significant declines for its major broadcast partner. The sports network’s deal to broadcast NBA games was extended through 2025 in February 2016, at a reported value of $2.66 billion per year. Going forward, any further declines in NBA viewership could have a long-term impact on ESPN given its continued association with the league.

We also expect the continued headwinds in television broadcasts ratings to impact the Media Networks segment’s revenue in this quarter. According to MediaPost, overall Nielsen C3 ratings for broadcast TV declined 12% in the June quarter, and Disney’s ABC network declined 15% in the C3 prime time ratings within the 18-49 age group. This decline in viewership could further hurt the company’s advertising revenues, which will likely add pressure to its top line for the quarter.

Relatively Weak Studio Performance

In the third quarter, Disney benefited from the success of  Guardians of the Galaxy Vol. 2 at the global box office, which has grossed more than $850 million worldwide. However, we expect a relatively weak quarter for the company with respect to its Studio Operations and Consumer Products segment, as the studio’s performance was relatively soft in the third quarter compared to the prior year quarter.

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. Reuters’ compiled analyst estimates forecast revenues of $14.4 billion and earnings of $1.56 per share in the upcoming quarter.

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

Please refer to our complete analysis for Disney

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