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ESPN Helps Lift Disney, But Big Problems Remain

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Most of the conversation on Disney’s (DIS - Free Report) quarterly earnings call centered on its streaming TV plans to take on Netflix (NFLX - Free Report) and Amazon (AMZN - Free Report) . But Disney’s streaming services isn’t due out for over a year, so let’s take a look at how the much-talked about and struggling ESPN performed during Disney’s fiscal third quarter.

Quick Q3 Overview

Disney saw its overall quarterly revenues climb by 7% to hit $15.23 billion, which did fall short of our $15.49 billion Zacks Consensus Estimate. Meanwhile, the entertainment power’s adjusted Q3 earnings also fell short of our estimate, but at $1.87 per share it did climb over 18% from the year-ago quarter.

The company’s Studio Entertainment division soared 20% to $2.88 billion, boosted by strong box office results from Avengers: Infinity War and Incredibles 2. Parks and Resorts revenues popped 6% to $5.19 billion.

Those two divisions are very important, but Disney’s Media Networks unit, which includes ESPN, remained its biggest revenue driver. The key unit saw its quarterly revenues climb by 5% to reach $6.16 billion. For the first nine months of the year, Media Networks was up 3% to $18.54 billion. However, the segment’s operating income slipped roughly 1% to $1.82 billion.

ESPN

More specifically, Cable Networks revenues for the quarter increased 2% to $4.19 billion and 3% for the first nine months, while the segment that includes ESPN's operating income decreased 5% to $1.38 billion. Disney noted that this lower operating income was due to a loss at BAMTech—the division that it is using to launch its streaming TV service—and a decrease at Freeform. Investors might be pleased to note that these declines were partially offset by an increase at ESPN.

ESPN’s increase was driven by affiliate revenue growth. This expansion is key and helps prove that although ESPN has been negatively impacted by the cord-cutting revolution, those that still have cable consider ESPN a must have since cable companies are paying more for the sports network.

It was not all good for ESPN though, with the network’s programming costs up and advertising revenue down. A contractual rate increase for NBA programming was cited as the primary reason for the rising cost. Meanwhile, a decline in advertising impressions led to lower ad revenue even though rates climbed—plus one less NBA Finals game. Ad revenue at ESPN was down 3% in the quarter.

The problem for ESPN is that these trends don’t seem like they will reverse anytime soon during the new age of entertainment. Luckily for investors, the sports network started to experiment with a stand-alone streaming version of ESPN.

ESPN+

Disney launched ESPN+ in April at a $4.99 per month price point. The service allows users to watch an array of sports content, almost none of which appears on ESPN’s cable networks. Monday Night Football, NBA basketball, as well as premier college football and basketball is not offered on the streaming service.

Yet, the company has spent pretty heavily to land UFC fights and other live rights in an effort to attract customers. “It's still early days, but conversion rates from free trials to paid subscriptions are strong and subscription growth is exceeding our expectations,” CEO Bob Iger said on Disney’s earnings call. “ESPN+ will become even more compelling to fans across the sports spectrum as we continue to expand the content and enhance the user experience.”

ESPN+ features UFC, boxing, over 200 college football games this year, thousands of other college sports events, as well as live MLB, NHL, and MLS games. The company also noted that it just landed the rights to Italy's Serie A soccer league that will see it stream 340 matches per season on ESPN+ starting this year. It is worth noting that Serie A is one of Europe’s five largest leagues and it just landed the most famous athlete on the planet, Cristiano Ronaldo, who boasts 138.5 million followers on Facebook’s (FB - Free Report) Instagram.

“So we feel really good about how we are positioned and we'll continue to look opportunistically in terms of what rights will be available,” Iger continued. “A lot of the rights in sports are already spoken for, but we still have some opportunities including some opportunities to take some of the rights that we already own for the ESPN primary channels and move them along.”

It seems clear that TV is headed in a streaming direction, and the platform will certainly be much more attractive down the road when ESPN is able to put its most popular sports on a streaming service.

Lastly, it is worth noting that Disney’s proposed $71.3 billion purchase of key Twenty-First Century Fox (FOXA - Free Report) assets, which has already been approved by shareholders and U.S. Justice Department authorities, will see Disney divest Fox’s 22 regional sports networks based on antitrust concerns.

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