Disney’s Fiscal Q3 Earnings: ESPN Issues Remain, Studio Performance Weak

by Trefis Team
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Disney‘s (NYSE:DIS) stock slid slightly after a mixed fiscal third quarter earnings report on August 8, as earnings came in ahead of market expectations but revenues missed. The company’s revenue was flat at $14.3 billion, primarily due to the full-year operations of Shanghai Disney Resort, increased attendance and guest spending at domestic parks and resorts, and growth in affiliate revenues, partially offset by a decline in advertising revenues and lower theatrical revenue in the quarter. The company also posted earnings of $1.58 per share, compared to $1.62 per share in the prior year.

As expected, ESPN remained a concern for the company. Disney was largely impacted by the higher programming expenses at ESPN due to the first year of the new NBA contract, as about $400 million of the $600 million year one cost step-up was incurred in this quarter. To add to that, ESPN had two fewer NBA finals games and three fewer conference finals playoff games compared to last year. Accordingly, ESPN’s advertising revenue was down 8% y-o-y in the third quarter, as higher rates were more than offset by a decrease in impressions. Also, ESPN’s prime-time viewership declined 1% y-o-y in the June quarter, and this 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).

In the Q3 earnings call, Disney also announced that it will be increasing its stake in BAMTech, a video streaming company originally created by Major League Baseball, from 33% to 75%, to create an ESPN-branded, over-the-top video streaming service that will cover a variety of sports. It is planning to launch this standalone ESPN streaming app in 2018. In addition, Disney will be removing its content from Netflix‘s (NASDAQ:NFLX) platform following the expiry of the two companies’ deal at the end of 2018, and will launch its own streaming service in 2019, once the deal has expired.

ESPN Issues Weigh On Media Networks 

Disney’s Media Networks revenue for the quarter declined 1% y-o-y to $5.9 billion, while its segment operating income decreased 22% y-o-y to $1.8 billion, as growth in Broadcasting was more than offset by lower equity income from Hulu and a decline at Cable Networks. The segment’s lower cable results were driven by the decline at ESPN, where higher programming expenses and lower advertising revenues were partially offset by growth in affiliate revenues. In addition, advertising revenue at the ABC network was also down 5% y-o-y for the third quarter, as higher pricing was more than offset by a decrease in impressions.

Parks And Resorts – Strong Growth Driver

Disney’s Theme Parks revenue grew 12% y-o-y and operating income increased 18% y-o-y, driven by growth in its domestic and international businesses. The segment’s revenue benefited from the timing of the Easter holiday. The segment’s growth in domestic operations was primarily driven by higher average guest spending and an 8% y-o-y increase in attendance, partially offset by higher expenses to support higher volume and new attractions. At domestic hotels, per-room spending was up 8% y-o-y, while occupancy was down 2 percentage points to 88%. On the international front, the company benefited from the full year operations of Shanghai Disney Resort and improved results at Disneyland Paris. We expect Disney’s theme parks to be an important driver for its long-term growth due to its international expansion.

Weak Performance Of Studio Division

Disney’s Studio Entertainment revenues decreased 16% y-o-y to $2.4 billion and the segment’s operating income fell 17% y-o-y to $639 million, due to lower theatrical and home entertainment results, partially offset by growth in television distributions. 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, the segment witnessed difficult y-o-y comparisons to key titles in Q3 last year, including Captain America: Civil War and The Jungle Book.

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