Disney Reports Weak Q4 Results As ESPN’s Struggles Continue

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Disney (NYSE:DIS) reported relatively weak fiscal fourth quarter earnings on Thursday, November 9, as both its earnings per share and revenues missed market expectations. The company’s revenue declined 3% year-over-year (y-o-y) to $12.8 billion, primarily due to a seasonal fall in the company’s Studio revenues and a continued decline in the Media Network segment. The company posted earnings of $1.07 per share, compared to $1.10 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, which more than offset growth in its affiliate revenues. Also, ESPN’s advertising revenue was down low single-digits in the fourth quarter, as higher rates were more than offset by a decrease in impressions. To add to that, ESPN’s cash ad sales paced down, and prime-time viewership remained flat while the network saw a decline of 3% in total-day viewership in the September quarter. ((ESPN Fares Better Than Many Cable Competitors In Q3, Sports Business Daily, Sep 29 2017))

In the Q4 earnings call, Disney also announced that ESPN’s upcoming streaming service will be called ESPN+, which will be launched in early 2018 with a fully redesigned app. This app will offer scores and highlights along with streaming of channels for cable subscribers, and the ability to subscribe to live events. However, its service fee was not disclosed. In addition, Disney’s direct-to-consumer streaming offering will be launched in 2019, and will include content from Disney, Pixar, Lucasfilm, and Marvel. It will also have 4-5 exclusive feature films per year, in addition to some original series.

Media Networks Continue To Decline In Q4 

Disney’s Media Networks revenue for the quarter declined 3% y-o-y to $5.5 billion, while its segment operating income decreased 12% y-o-y to $1.5 billion. This was driven by a decline in both Broadcasting and Cable Networks. The segment’s flat cable results were driven by the decline at ESPN, where higher programming expenses and lower advertising revenues were offset by growth in affiliate revenues. In the Broadcasting segment, lower advertising revenue and a decrease in operating income from program sales more than offset double-digit growth in affiliate revenue and lower programming expenses. In addition, the segment’s equity income was lower in the quarter, due to higher losses from the investments in BAMTech and Hulu and lower income at A&E Television Networks.

Parks And Resorts – Strong Growth Driver

Disney’s Theme Parks revenue grew 6% y-o-y and operating income increased 7% y-o-y, driven by growth in its international businesses, where the company benefited from the operations of Shanghai Disney Resort and improved results at Disneyland Paris. In fact, Shanghai Disney Resort generated positive operating income during its first full fiscal year of operations, which comfortably surpassed the expectations of breakeven from its first year. The segment’s domestic operations were negatively impacted by Hurricane Irma. Moreover, higher costs and fewer occupied room nights, partially offset by growth in guest spending and attendance, hurt the company’s domestic operations. 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 21% y-o-y to $1.4 billion and the segment’s operating income further fell 43% y-o-y to $218 million, due to lower theatrical, home entertainment, and consumer products revenues. The segment witnessed difficult y-o-y comparisons to key titles in Q4 last year.

Our $114 price estimate for Disney’ stock is more than 10% ahead of the current market price.

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