Media behemoth – The Walt Disney Company (DIS - Free Report) – posted better-than-expected earnings for the third straight quarter, as it reported third-quarter fiscal 2017 results. Despite reporting earnings beat, the company’s shares declined nearly 4% in after-hour trading session yesterday as the company’s top-line performance hurt investor sentiment, which missed the Zacks Consensus estimate for the fourth consecutive quarter. In fact, the stock has declined 2.5% in the past three months, wider than the industry’s dip of 1.1%.
The company’s earnings in the reported quarter came in at $1.58 per share, beating the Zacks Consensus Estimate of $1.53 but decreased 2.5% year over year. Meanwhile, revenues came in at $14,238 million, almost flat year over year but missed the Zacks Consensus Estimate of $14,442 million. The year-over-year decline in both top and bottom line were primarily impacted by higher programming costs at ESPN as this is the first year of fresh NBA contract and sharp decline in Studios Entertainment revenues.
The company’s total operating income came in at $4,011 million during the quarter, down 10% year over year. The downside was due to 22% and 17% decline in operating income from Media Network, and Studio Entertainment, respectively.
Disney to Terminate Netflix Partnership
Concurrently, Disney stated that it will terminate distribution agreement with Netflix, Inc. (NFLX - Free Report) for subscription streaming of the new movies starting in 2019. Instead, the company will have its own streaming services – one for Disney and Pixar brands and another for ESPN followers.
Disney will start online streaming services for ESPN sports in early 2018 and its branded direct-to-consumer streaming service in 2019 will carry Disney movies as well as TV shows. The ESPN-branded multi-sport streaming service will give an option to enjoy 10,000 live international, national and regional games every year. Tournaments like Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis, and college sports will be live streamed.
Meanwhile, through the fresh Disney-branded service subscribers can view both Disney’s and Pixar’s latest live action and animated movies, starting with the 2019 theatrical slate. Movies like Toy Story 4, the sequel to Frozen and The Lion King will also be streamed.
Disney to Acquire Majority Stake in BAMTech
In an effort to attract online viewers, the company which had earlier acquired 33% stake in video streaming, data analytics as well as commerce management company BAMTech announced its intention to acquire another 42% stake in the firm. Per the agreement, the company will have shell out $1.58 billion to buy another 42% stake in BAMTech.
In the past few quarters Disney’s ESPN has been a hot topic in the media industry and investors are closely monitoring the performance of ESPN. Identical to performances in the past few quarters, ESPN has disappointed investors in the third quarter again. Falling subscriber base and higher programming costs at ESPN continues to hamper the company’s results. Most of the media companies are failing to cope with "cord cutting" as consumers are unwilling to pay for large bundles of channels.
ESPN has sealed a number of deals with new platform owners, mostly over-the-top. These deals have started to give positive results and are also increasing the number of subscribers. Moreover, the company has inked a deal with Hulu and another entity, and also is in discussion with others. The company had earlier stated that mobile apps are going to play an important role in the future of media and ESPN is rightly on the way of taking the advantage of the trend with wide range of apps.
Walt Disney Company (The) Price, Consensus and EPS Surprise
The Media Networks segment’s revenues were down 1% to $5,866 million, primarily due 3% decrease in Cable Networks revenues to $4,086 million. However, broadcasting revenues rose 4% year over year to $1,780 million.
The segment’s operating income came in at $1,842 million, down 22% year over year. Cable Networks saw 23% drop in operating income to $1,462 million, while the Broadcasting segment reported a 22% slump in operating income to $253 million. Operating income from equity in the income of investees plunged 18% to $127 million. Sharp decline in Cable Networks operating income was due to dismal performance of ESPN. Weaker results at ESPN were mostly due to increase in programming cost in comparison with the preceding year, fall in advertising revenues. Further, it was affected by severance and contract termination expenses which overshadowed the affiliate revenues growth. Decrease in advertising revenues were chiefly due to decline in average viewership. Meanwhile, growth in affiliate revenues was driven by rise in contractual rate, which mitigated the fall in subscribers.
Parks and Resorts revenues came in at $4,894 million, up 12% from the year-ago period. The segment’s operating income climbed 18% to $1,168 million, backed by growth at the company’s international operations which was due to robust performance of Shanghai Disney Resort and Disneyland Paris. Rise in guest spending and attendance were the main reasons behind growth in operating income at Disneyland Paris. Meanwhile, operating income at the company’s domestic operations was flat year over year as rise in expenses were offset by higher guest spending and volumes. Both attendance and per capita spending at the company’s domestic park increased 8% and 2%, respectively during the quarter.
Further, the segment results were also driven by timing of the Easter holiday, which fell in the third quarter compared with second quarter in the previous year. The company is also satisfied with the Shanghai Disney, which completed its first full year of operations in June. It is also anticipated to be modestly profitable in this fiscal year.
The Studio segment generated revenues of $2,393 million, down 16% year over year. Moreover, operating income dropped 17% to $639 million. Sharp decline in operating income was due to dismal performance in theatrical as well as home entertainment distribution, which offset growth at TV/SVOD distribution, home entertainment and decline in film cost impairments. Decrease in theatrical distribution results were due to better performance of the company’s releases in the prior year-quarter compared with this quarter. During the third quarter, the company’s major releases included Guardians of the Galaxy Vol. 2, Pirates of the Caribbean: Dead Men Tell No Tales and Cars 3, while in the year-ago quarter it released Captain America: Civil War, The Jungle Book, Finding Dory and Alice Through the Looking Glass.
However, analysts believe that the coming two years will be the most fruitful for Disney. The studio is all set to continue with its success story beyond Star Wars, Zootopia and Beauty and the Beast as it boasts of an impressive lineup of big budget movies up to 2018.
Movies which are lined up for 2017 include Thor: Ragnarok, Coco and last but not the least, one of the most awaited releases of the year Star Wars: Episode VIII – The Last Jedi. Moreover, the success of its movies will mean great business for its Consumer Products division as demand for the merchandise associated with successful movies usually skyrocket. In 2018, the company is expected to release Black Panther, A Wrinkle in Time, Avengers: Infinity War, The Incredibles 2 and Ant-Man and the Wasp.
Consumer Products & Interactive Media division saw 5% decrease in revenues to $1,085 million. However, the units’ operating income rose 12% to $362 million. The rise in operating income was mainly due to improvement at the games and merchandise licensing business.
Other Financial Details
Disney, which shares space with Twenty-First Century Fox, Inc. (FOXA - Free Report) generated free cash flow of $3,328 million during the reported quarter, up 33% year over year. The company ended the quarter with cash and cash equivalents of $4,336 million, borrowings of $18,849 million and shareholder’s equity of $42,531 million, excluding non-controlling interest of $3,520 million.
During the quarter, the company bought back nearly 22.3 million shares for $2.4 billion.
Zacks Rank & Key Picks
Currently, Disney carries a Zacks Rank #4 (Sell), which is subject to change following the earnings announcement. A better-ranked stock include Gray Television, Inc. (GTN - Free Report) , which carries a Zacks Rank #2 (Buy). Shares of Gray Television have gained nearly 11% in the past three months. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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