Disney: Fiscal 2017 In Review

by Trefis Team
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Disney (NYSE: DIS) had a fairly soft fiscal 2017 (fiscal year ends September 2017). The company’s total revenue declined 1% year-over-year (y-o-y) to $55.1 billion, primarily due to a fall in the company’s Studio revenues, weakness in the Consumer Products segment, and a continued decline in the Media Networks segment. As expected, ESPN has remained a concern for Disney in fiscal 2017 as well. However, the company was able to rely on the Parks & Resorts business to offset that top line pressure, led by its international operations. The company also posted earnings of $5.73 per share, down 1% y-o-y.

In fiscal 2017, 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 help create an ESPN-branded, over-the-top video streaming service ESPN+, which will be launched in early 2018 with a fully redesigned app. This app will offer scores and highlights along with streaming channels for subscribers, and the ability to subscribe to live events. In addition, Disney also announced the launch of its direct-to-consumer streaming offering in 2019, which 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.

Declines In Media Networks Continue

In fiscal 2017, Disney’s Media Networks revenue declined 1% y-o-y to $23.5 billion, while its segment operating income decreased 11% y-o-y to $7 billion. This was driven by a decline in both Broadcasting and Cable Networks, due to lower impressions and advertising, partially offset by higher rates. In addition, the increase in segment affiliate fees was offset by a decrease in subscribers. Disney has been witnessing a slowdown in its Media Networks segment lately, of which ESPN forms an integral part. The company’s financials were substantially impacted by the higher programming expenses at ESPN – primarily due to the first year of the new NBA contract – which more than offset growth in its affiliate fee revenues.

Parks & Resorts: Strong Growth Driver

Disney’s Parks & Resorts business experienced strong growth during fiscal 2017. The segment’s revenue grew 8% y-o-y and operating income increased 14% y-o-y, driven by growth in its domestic and international businesses. The segment’s growth in domestic operations was primarily driven by higher average guest spending and a 2% y-o-y increase in attendance, partially offset by higher expenses to support higher volume and new attractions. On the international front, the company benefited from the full year operations of Shanghai Disney Resort and improved results at Disneyland Paris (now 100% owned). We expect Parks & Resorts to be a key growth driver for Disney in fiscal 2018.

Weak Studio Performance

Disney’s studio business had a somewhat soft year on a year-on-year basis, but that was largely due to difficult comps to key titles in the prior year, including Star Wars: The Force Awakens, Captain America: Civil War and The Jungle Book. As a result, the company’s studio entertainment revenues decreased 11% y-o-y and its operating income fell 13% y-o-y.

Future Outlook

In fiscal 2018, Disney expects its earnings to be negatively impacted by the consolidation of BAMTech and its ongoing investment in the business. In addition, Disney expects a $1 billion increase in its capital expenditures due to the continued investment in Parks and Resorts.

Despite the weak trends witnessed by the company, we expect 2018 to be better than 2017 across most segments. In Media Networks, the company expects ESPN to absorb most of the NBA rights costs in fiscal 2018, which could help the segment grow, albeit at a slower pace. In Park & Resorts, the company is expected to benefit from another operational year of Shanghai Resort. In Studio Operations, the company has two Star Wars films (The Last Jedi, Han Solo) and three Marvel films (Black Panther, Avengers: Infinity War, Ant-Man and the Wasp) lined-up for fiscal 2018. Thor: Ragnarok has already grossed more than $800 million at the global box-office, which is significantly higher than the entire run of the first Thor movie in 2011. The upcoming lineup should help the company lift its Studio and Consumer Products revenues going forward.

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