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Disney (DIS) Q1 Earnings Beat, Parks & Resorts Leads the Way

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Media behemoth The Walt Disney Company (DIS - Free Report) reported positive earnings surprise in first-quarter fiscal 2018. The company however, missed the Zacks Consensus Estimate in the preceding quarter. However, the big take away from the quarter under review was a robust top-line performance. Revenues surpassed the consensus mark for the first time in six quarters. Following the results, the company’s shares gained nearly 3% during after-hours trading on Feb 6. Moreover, the stock has increased 4.9% in the past three months compared with the industry’s 6.7% gain.

The company’s adjusted earnings in the reported quarter came in at $1.89 per share, beating the Zacks Consensus Estimate of $1.62 and increased 21.9% year over year. Moreover, revenues came in at $15,351 million, up 4% year over year and also topped the Zacks Consensus Estimate of $15,244 million. The company’s solid performances were driven by double-digit growth in Parks and Resorts segment.

The company’s total operating income came in at $3,986 million during the quarter, up 1% year over year. This upside was on a sharp increase in operating income at Parks and Resorts, which offset the decline at Media Networks, Studio Entertainment and Consumer Products & Interactive Media.


Hopes Hinge on New Streaming Services

Disney plans to launch its own streaming services, one for Disney and Pixar brands and another for ESPN followers. The company had earlier stated that it will terminate distribution agreement with Netflix, Inc. (NFLX) for subscription streaming of the new movies, effective 2019. The company said the streaming services for ESPN will be launched this spring. The ESPN-branded multi-sport streaming service will lend an option to enjoy 10,000 live international, national and regional games, annually. Tournaments like Major League Baseball, National Hockey League, Major League Soccer, Grand Slam tennis and college sports will be live streamed. The company will charge $4.99 per month for the ESPN live streaming services called ESPN Plus.

Disney will start its branded direct-to-consumer streaming service in 2019 will carry Disney movies as well as TV shows. Meanwhile, subscribers can view both Disney’s and Pixar’s latest live action and animated movies via the fresh Disney-branded service, starting with the 2019 theatrical slate.
In an effort to attract online viewers, the company has completed the acquisition of BAMTech, a video streaming, data analytics and commerce management company, in September.

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. In the reported quarter, advertising revenues declined in the low-single digit. Falling subscriber base and higher programming costs at ESPN continue to hamper the company’s results. Most media companies are failing to cope with "cord cutting" as consumers are unwilling to pay for a large bouquet of channels.

ESPN has sealed a number of deals with mostly new, over-the-top platform owners. These contracts have started to yield results and are increasing subscribers’ strength. Moreover, the company has inked a deal with Hulu and another entity and talks are also on with others. The company had earlier stated that mobile apps are going to rule the future of media and ESPN is rightly on track to put this booming trend to advantage with a wide range of apps on offer.        

Segment Details

The Media Networks segment’s revenues came in at $6,243 million, almost flat year over year. Cable Networks inched up 1% to $4,493 million whereas Broadcasting revenues declined 3% to $1,750 million.

The segment’s operating income came in at $1,193 million, down 12% year over year. Cable Networks saw a 1% dip in operating income to $858 million while the Broadcasting segment reported a 25% slump in operating income to $285 million. Drop in operating income at Cable Networks was primarily due to loss at BAMTech as well as a decline at ESPN, which overshadowed growth at Disney Channels and Freeform.

At ESPN, increase in affiliate revenues and lower programming cost were offset by dismal advertising revenues. Decrease in advertising revenues were chiefly on decline in average viewership and lower rates. Meanwhile, rise in affiliate revenues was driven by an increase in contractual rate, which mitigated the fall in subscribers. Decline in Broadcasting revenues was due to reduction in advertising revenues and program sales income plus an increase in production cost write-downs.  

Parks and Resorts segment once again turned out to be the savior for Disney. The segmental revenues came in at $5,154 million, up 13% from the year-ago period. The segment’s operating income climbed 21% to $1,347 million, backed by growth at the company’s domestic parks and resorts, cruise line and vacation club businesses. Moreover, a sturdy performance of Disneyland Paris contributed to the operating income growth. Increase in operating income at domestic parks was driven by higher guest spending and attendance, overshadowing higher costs.  Rise in guest spending was due to higher average ticket prices, merchandise spending, food and beverage expense and a surge in room rates. Meanwhile, growth at Disneyland Paris was owing to rising attendance as well as higher average ticket prices.

The Studio segment generated revenues of $2,504 million, down 1% year over year. Moreover, operating income slipped 2% to $829 million due to dismal performance of home entertainment and TV/SVOD distribution, which overshadowed strong results from theatrical distribution. Increase in theatrical distribution was on the back of blockbuster performances of Star Wars: The Last Jedi and Thor: Ragnarok.

We believe that the year ahead will be 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 an impressive line-up of big budget movies. 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. Moreover, analysts believe that the deal with Rian Johnson, director of The Last Jedi, to produce a brand new Star Wars trilogy may rekindle investors’ hopes.

Further, Disney is acquiring majority of Twenty-First Century Fox, Inc.’s (FOXA - Free Report) assets including its Film and Television studios accompanied by cable and international TV businesses in a transaction worth $52.4 billion. The accord would give the company a hold on Twenty-First Century Fox's film production business like Twentieth Century Fox, Fox Searchlight Pictures, Fox 2000 and its storied television units, Twentieth Century Fox Television, FX Productions and Fox21.

Consumer Products & Interactive Media division saw a 2% decrease in revenues to $1,450 million. Moreover, the unit’s operating income dropped 4% to $617 million due to decline at merchandise licensing business.

Walt Disney Company (The) Price, Consensus and EPS Surprise


Other Financial Details

Disney generated free cash flow of $1,256 million during the reported quarter compared with $405 million in the year-ago period. The company ended the quarter with cash and cash equivalents of $4,677 million, borrowings of $20,082 million and shareholder’s equity of $43,289 million excluding non-controlling interest of $3,794 million.

During the quarter under concern, the company bought back nearly 12.8 million shares for $1.3 billion.

Zacks Rank & Key Picks

Disney carries a Zacks Rank #3 (Hold), subject to change following the earnings announcement. Two better-ranked stocks are Time Warner Inc. and The New York Times Company (NYT - Free Report) , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Time Warner has an impressive long-term earnings growth rate of 10.2%.

The New York Times reported better-than-expected earnings in the trailing four quarters. 

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