It has been about a month since the last earnings report for Walt Disney (DIS - Free Report) . Shares have added about 3.1% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is Disney due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important catalysts.
Disney's (DIS - Free Report) Q1 Earnings & Revenues Surpass Estimates
Disney reported first-quarter fiscal 2019 adjusted earnings of $1.84 per share that comfortably beat the Zacks Consensus Estimate of $1.57. However, the figure declined 2.6% from the year-ago quarter.
Revenues of $15.30 billion almost remained flat from the year-ago quarter. The figure surpassed the consensus mark of $15.18 billion. Strong performance of Media Networks and Parks, Experiences & Consumer Products primarily led to top-line growth.
Top Line in Detail
Disney recently reorganized its business reporting segments. The company’s new reporting segments include Media Networks, Studio Entertainment, Parks, Experiences & Consumer Products and Direct-to-Consumer & International (DTCI).
Media Networks Up on Higher Broadcasting Revenues
Media Networks’ (38.7% of revenues) revenues climbed 6.6% year over year to $5.92 billion and operating income increased 7% year over year to $1.3 billion.
Media Networks’ affiliate revenues increased 7%, driven by higher rates (7 points) and new revenue standard adoption (1 point), partially offset by a decrease in subscribers (1 point).
Cable Networks increased 4% to $3.97 billion, while operating income decreased 6% to $743 million.
Cable Networks’ operating income was hurt by ESPN and Freeform, partially offset by increases at Disney channels. The decline in ESPN was due to higher programming costs, partially offset by growth in affiliate and advertising revenues (up 3%). Programming costs were high due to increase in contractual rate for a few sports programs.
Growth in affiliate revenues reflected contractual rate increases, partially offset by a decline in subscribers. Moreover, higher advertising revenues were due to increase in rate and impressions. Notably, increase in impressions was due to “higher units delivered, partially offset by lower average viewership.”
Increase in affiliate revenues and higher income from program sales led to growth at Disney channels. Growth in affiliate revenues was due to higher contractual rate, partially offset by lower subscribers. Adoption of new revenue standard (ASC 606) also benefited program sales.
Lower advertising revenues and program sales offset by lower programming costs resulted in a decline in Freeform operating income. Advertising revenues declined due to decrease in average viewership, partially offset by higher rates.
Revenues from Broadcasting increased 12% year over year to $1.94 billion. Operating income surged 40% to $408 million. Broadcasting operating income benefited from growth in affiliate and advertising revenues and higher program sales, offset by higher programming costs.
Contractual rate increases and adoption of new revenue standards benefited affiliate revenues. Increase in advertising revenues was due to growth in political advertising and higher network rates, offset by lower average viewership. Program sales benefited from higher revenues generated from programs licensed to Hulu and sale of The Punisher to Netflix. However, programming costs were higher due to increase in primetime costs.
Equity in the income of investees was $179 million, up from $159 million in the year-ago quarter due to higher income from A+E Television Networks (A+E), which was driven by lower programming and marketing costs.
Parks & Resorts Gains From Higher Guest Spending
Parks, Experiences & Consumer Products segment (44.6% of revenues) revenues increased 4.6% year over year to $6.82 billion. Operating income increased 10% to $2.2 billion.
Growth in operating income was driven by higher guest spending due to increase in average ticket prices; food, beverage and merchandise spending; and average daily hotel room rates primarily at domestic theme parks and resorts. However, decline in income from licensing activities negatively impacted results.
Operating income at Disney’s international parks and resorts was a little low from the year-ago quarter. Growth in Hong Kong Disneyland Resort was offset by lower operating income from Disneyland Paris and Shanghai Disney Resort.
Higher occupied room nights and increased guest spending aided Hong Kong Disneyland Resort’s operating income. However, increased costs and lower attendance offset by higher guest spending hurt Shanghai Disney Resort results. Softness experienced in tourism and consumer confidence in China resulted in lower attendance at Shanghai Disney Resort.
Moreover, higher costs offset by higher average ticket prices hurt Disneyland Paris results.
Per capita spending at Disney’s domestic parks was up 7% on higher admissions, food, beverage, and merchandise spending. Per room spending at domestic hotels was up 5% and occupancy was up 3 percentage points to 94%.
Studio Entertainment Disappoints
Studio Entertainment segment (11.9% of revenues) revenues decreased 27.3% to $1.82 billion. Segment operating income declined 63% to $309 million.
Decline in operating income was due to lower theatrical revenues, offset by growth in TV/SVOD distribution. Robust performance of Incredibles 2 and Avengers: Infinity War drove TV/SVOD distribution results.
Lack of strong performing titles in first-quarter fiscal 2019 compared to solid performance of Star Wars: The Last Jedi and Thor: Ragnarok in first-quarter 2018 resulted in lower theatrical revenues.
DTCI Down on Heavy Investments
Direct-to-Consumer & International (DTCI) segment (6% of revenues) revenues decreased 1.4% to $918 million. Segment operating loss increased from $42 million in the year-ago period to $136 million.
Increase in operating loss was due to higher investments in ESPN+, higher costs associated with the upcoming launch of Disney+ and loss from streaming technology services, partially offset by an increase at International Channels and lower equity loss from Hulu investment.
International Channels benefited from growth in affiliate revenues, lower costs and higher program sales, which were offset by foreign currency fluctuations. Additionally, Hulu benefited from increase in subscription and advertising revenues, offset by increase in programming costs.
Notably, Disney’s deal to air UFC fights on the ESPN platform, both linear and over-the-top (OTT) helped it gain 600K users. Disney expects growth in ESPN+ subscribers to continue owing to its content strength. ESPN+ currently has 2 million paid subscribers.
Free Cash Flow Declines
Disney generated free cash flow of $904 million in the reported quarter compared with $2.65 billion in the previous quarter.
Moreover, capital expenditures increased 21.8% year over year to $1.2 billion due to increased spending at Disney’s domestic theme parks and resorts.
Disney’s acquisition of Twenty-First Century Fox is expected to close in the first half of calendar year 2019.
Disney, which currently holds 30% stake in Hulu, is entitled to another 30% stake after acquiring Fox. Comcast owns 30% stake in Hulu and AT & T the remaining 10%. To attract customers Disney is planning to give discount to users when they choose to buy all the three streaming services – ESPN+, Disney+ and Hulu at one go.
In the current quarter, Disney’s studio received 17 nominations including the Best Picture nomination at this year's Golden Globes. Marvel's Black Panther alone received seven nominations. Notably, Disney and Fox combined received a total of 37 nominations.
On Apr 11, 2019 Disney will provide a detail insight about Disney+ including its strategy, demonstration of the platform and original content lineup. Notably, Disney+ is expected to be launched by the end of the calendar year.
Apart from original content investments in Disney+, Disney is buying content from other providers such as CBS TV Studios to ramp up its content portfolio. Moreover, the company will continue to buy content from third-party providers to cater to consumer demand.
However, Disney’s entry into streaming space comes at a time when increasing number of companies from media, telecom and technology have entered/are entering the market. Launch of free streaming services from both Sinclair Broadcast and Amazon and the upcoming services from Viacom and Comcast will increase competition in the streaming space. This does not bode well for Disney.
Second-quarter fiscal 2019 operating income will have a negative impact of $200 million due to continued investments in ESPN+ and Disney+.
Second-quarter fiscal 2019 theatrical and home entertainment business operating income is expected to be in the range of $450-$500 million, lower than the year-ago quarter’s figure due to unfavorable comparison. Black Panther had contributed significantly to second-quarter fiscal 2018 results. In fact, Star Wars: The Last Jedi, Thor: Ragnarok and Coco performed well in first-quarter fiscal 2018 and the effect continued into the second quarter.
Movies expected to release in second-quarter fiscal 2019 include Captain Marvel and Dumbo. However, as Dumbo will be released at the end of second-quarter fiscal 2019, its contribution to box-office results will be lower. The film’s pre-release marketing expense will be accounted for in second-quarter fiscal 2019. This can hurt Studio Entertainment segment’s profitability.
Second-quarter fiscal 2019 Parks, Experiences & Consumer Products operating income will have a negative impact of $80 million due to the adoption of a new revenue standard. Notably, about $45 million of second-quarter fiscal 2019 operating income is expected to shift to third-quarter fiscal 2019 due to the timing of the Easter holiday period.
Moreover, ongoing investments in Disney’s direct-to-consumer businesses will continue to have negative impact on DTCI's segment results.
Broadcasting operating income is expected to witness a negative impact of approximately $85 million in second-quarter fiscal 2019 due to difficult program sales comparison on a year-over-year basis.
How Have Estimates Been Moving Since Then?
It turns out, fresh estimates have trended downward during the past month. The consensus estimate has shifted -12.73% due to these changes.
Currently, Disney has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Disney has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.