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Disney Investors Should Focus on Streaming Future, Not ESPN's Climbing Costs
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Shares of Disney (DIS - Free Report) opened lower on Wednesday despite beating top and bottom line estimates Tuesday. It seems that much of the concern once again falls directly on Disney’s Media Networks unit, which includes the struggling ESPN. With that said, let’s take a look to see how bad things really were for Disney’s cable and broadcast divisions and where the company goes from here.
The Good
Disney’s adjusted Q2 earnings climbed 23% from the year-ago period to $1.84 per share. Meanwhile, the company’s quarterly revenues popped 9% to $14.55 billion.
The company’s Media Networks unit posted overall revenue of $6.14 billion, which marked a 3% year-over-year climb. This topped our exclusive non-financial metrics consensus estimate of $6.12 billion. Disney’s Cable Networks division, which includes ESPN, Freeform, Disney Channel, and others, also saw its revenues pop 5% to $4.25 billion. The other segment, Broadcasting, rose marginally to $1.89 billion.
At first glance, this all sounds solid, especially considering that Media Networks revenue was flat in the first quarter. However, Media Networks’ overall operating income sunk 6% from the year-ago period to $2.08 billion as ESPN’s woes continued.
The Bad
ESPN’s downturn was due, for the most part, to higher programming costs. Disney noted that the rights fees it pays for college sports and NBA games both climbed. Investors should remember that Disney is still very much on the hook for its portion of a nine-year, $24 billion NBA deal it shares with Turner , which kicked off at the start of the 2016-17 NBA season. Programming costs also rose due to a College Football Playoff timing shift.
Moving on, operating income fell due to much higher costs in its new BAMTech division. Disney purchased controlling interest of the streaming TV firm in the fourth quarter of fiscal 2017 as it ramps up its streaming efforts in order to adapt to changing consumer habits and take on the likes of Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) . BAMTech’s loss is based on this push to grow, which also includes Disney’s brand new ESPN+ streaming services that launched during the second quarter.
Looking ahead, Disney expects BAMTech “to have an adverse impact on Media Networks’ fiscal 2018 operating income of $180 million,” CEO Bob Iger said on the company’s Q2 earnings call. “This is $50 million worse than our previous estimates, due primarily to increased investment in ESPN+. I'll also note that about $100 million of the full-year impact is expected during the third quarter.
The Possibilities
Investors are clearly nervous about Disney’s Media Networks unit, but things could be a lot worse during the age of cord-cutting and shifting viewing patterns. The network has continued to lose subscribers, but ESPN was once again able to charge higher cable affiliate fees as live sports remains the lifeblood of linear television. ESPN’s ad revenue was also up 3% in the quarter due to higher rates.
Iger didn’t provide any real metrics about ESPN+ on Disney’s earnings call, except to say “we're very encouraged by the reaction… the reviews have been strong and the response of sports fans has been enthusiastic.”
Disney also has the luxury to pour money into BAMTech and its new ESPN+ app because, unlike many other companies, it has multiple big business units to help prop up the company while it invests in its streaming future.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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Disney Investors Should Focus on Streaming Future, Not ESPN's Climbing Costs
Shares of Disney (DIS - Free Report) opened lower on Wednesday despite beating top and bottom line estimates Tuesday. It seems that much of the concern once again falls directly on Disney’s Media Networks unit, which includes the struggling ESPN. With that said, let’s take a look to see how bad things really were for Disney’s cable and broadcast divisions and where the company goes from here.
The Good
Disney’s adjusted Q2 earnings climbed 23% from the year-ago period to $1.84 per share. Meanwhile, the company’s quarterly revenues popped 9% to $14.55 billion.
The company’s Media Networks unit posted overall revenue of $6.14 billion, which marked a 3% year-over-year climb. This topped our exclusive non-financial metrics consensus estimate of $6.12 billion. Disney’s Cable Networks division, which includes ESPN, Freeform, Disney Channel, and others, also saw its revenues pop 5% to $4.25 billion. The other segment, Broadcasting, rose marginally to $1.89 billion.
At first glance, this all sounds solid, especially considering that Media Networks revenue was flat in the first quarter. However, Media Networks’ overall operating income sunk 6% from the year-ago period to $2.08 billion as ESPN’s woes continued.
The Bad
ESPN’s downturn was due, for the most part, to higher programming costs. Disney noted that the rights fees it pays for college sports and NBA games both climbed. Investors should remember that Disney is still very much on the hook for its portion of a nine-year, $24 billion NBA deal it shares with Turner , which kicked off at the start of the 2016-17 NBA season. Programming costs also rose due to a College Football Playoff timing shift.
Moving on, operating income fell due to much higher costs in its new BAMTech division. Disney purchased controlling interest of the streaming TV firm in the fourth quarter of fiscal 2017 as it ramps up its streaming efforts in order to adapt to changing consumer habits and take on the likes of Amazon (AMZN - Free Report) and Netflix (NFLX - Free Report) . BAMTech’s loss is based on this push to grow, which also includes Disney’s brand new ESPN+ streaming services that launched during the second quarter.
Looking ahead, Disney expects BAMTech “to have an adverse impact on Media Networks’ fiscal 2018 operating income of $180 million,” CEO Bob Iger said on the company’s Q2 earnings call. “This is $50 million worse than our previous estimates, due primarily to increased investment in ESPN+. I'll also note that about $100 million of the full-year impact is expected during the third quarter.
The Possibilities
Investors are clearly nervous about Disney’s Media Networks unit, but things could be a lot worse during the age of cord-cutting and shifting viewing patterns. The network has continued to lose subscribers, but ESPN was once again able to charge higher cable affiliate fees as live sports remains the lifeblood of linear television. ESPN’s ad revenue was also up 3% in the quarter due to higher rates.
Iger didn’t provide any real metrics about ESPN+ on Disney’s earnings call, except to say “we're very encouraged by the reaction… the reviews have been strong and the response of sports fans has been enthusiastic.”
Disney also has the luxury to pour money into BAMTech and its new ESPN+ app because, unlike many other companies, it has multiple big business units to help prop up the company while it invests in its streaming future.
The Hottest Tech Mega-Trend of All
Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce "the world's first trillionaires," but that should still leave plenty of money for regular investors who make the right trades early.
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