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Disney Reports Robust 2Q

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The Walt Disney Company (DIS - Free Report) delivered robust second-quarter results, driven by solid performance of Parks and Resorts and the Media Networks segments. The quarterly earnings of 58 cents a share exceeded the Zacks Consensus Estimate of 56 cents and increased 18% from 49 cents earned in the prior-year quarter. However, including one-time items, earnings jumped 29% to 63 cents.

Total revenue for the quarter increased 6% year over year to $9.63 billion, beating the Zacks Consensus Estimate of $9.60 million. Total segment operating income increased 10% year over year to $1.9 billion.

Through its strong operating results, Disney continued to invest in its core businesses while expanding its operating margins. Moreover, the company remains well positioned to drive revenue in the coming years through its strategic initiatives.

Despite difficult operating environment, the company did not change its strategies, but remained focused on deploying its capital toward expanding its Parks and resorts business, and in turn, enhancing its markets and creating long-term growth opportunities. In China, the company remains on course to build its Shanghai Disney Resort, including Shanghai Disneyland, two themed hotels, and retail dining and entertainment venue.

As per the company, the success of ESPN continued as the channel had a record number of viewers in the quarter, and remained the favorite destination for sports lovers. In the last few years, ESPN, with its right mix of exclusive sporting licenses and top sporting leagues emerged as an industry leader in the pay-TV industry. This success has made ESPN the key driver of revenues at the Media Networks division in recent times.

Moreover, in a strategic move, Disney entered into a 10-year long-term comprehensive programming distribution deal with Comcast Corp. (CMCSA - Free Report) , thus enabling an authenticated pay-TV subscriber of Comcast to watch a vast library of Disney content any where, any time, and on any device. Comcast has a huge video and high-speed broadband subscriber base, which will be highly beneficial for Disney in raising its viewership ratings.

Segment Details

Media Networks revenue climbed 9% year over year to $4.7 billion, reflecting a 12% increase in Cable Networks revenue coupled with a 2% rise in Broadcasting revenue. The segment’s operating income rose 13% to $1.7 billion compared with $1.5 billion in the prior-year period. Cable Networks’ operating income increased 11% to $1.5 billion driven by growth across ESPN and domestic Disney Channels. Moreover, operating income at the Broadcasting division spiked 37% to $229 million, reflecting increased advertising revenues and lower programming and production costs.

Parks and Resorts revenue rose 10% to $2.9 billion, reflecting higher revenues from domestic parks and resorts, Hong Kong Disneyland Resort and Tokyo Disney Resort. The segment’s operating income increased 53% to $222 million, reflecting higher guest spending at domestic parks, partly offset by increased costs.

Studio Entertainment revenue saw a decline of 12% year over year to $1.2 billion, while operating loss was 84 million during the quarter, as the company’s science-fiction ‘John Carter’ proved to be a disaster, resulting in lower theatrical revenues and film cost write-downs.  

Consumer Products revenue increased 8% to $679 million, while segment operating income increased 4% to $148 million. Disney stated that the increased revenues from Merchandise Licensing were offset in part by lower revenues from the retail business.

Interactive Media revenue for the quarter increased 13% to $179 million, while operating loss improved as the segment reported an operating loss of $70 million compared with $115 million in the prior-year quarter, due to a stronger gaming business.

Other Financial Details

During the quarter, Disney generated free cash flow of $335 million. The company ended the quarter with cash and cash equivalents of $3.7 billion, net borrowings of $12.3 billion and shareholders’ equity of $38 billion, excluding non-controlling interest of $1.9 billion.

Strong results enable the company to enhance shareholders value through share repurchases. The company bought back 21.4 million shares for approximately $870 million. Fiscal year-to-date, Disney repurchased 51 million shares for approximately $1.9 billion.

Walt Disney is one of the world's leading diversified entertainment companies. Moreover, the company commands a formidable portfolio of globally recognized brands, primarily its namesake brand Walt Disney, followed by ABC, ESPN and Marvel Entertainment. These renowned brands offer a strong competitive edge to the company and bolster its well-established position in the market against major players like News Corporation (NWSA - Free Report) and Time Warner Inc. (TWX - Free Report) .

We maintain a long-term ‘Neutral’ recommendation on the stock. The shares of Disney currently retain a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.

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