Disney Tops Forecasts

February 6, 2019

The Walt Disney Company reported quarterly earnings for its first fiscal quarter ended December 29, 2018. Diluted earnings per share (EPS) for the quarter decreased 36% to $1.86 from $2.91 in the prior-year quarter. Excluding certain items affecting comparability, EPS for the quarter decreased 3% to $1.84 from $1.89 in the prior-year quarter.

The firm's earnings of $1.84 per share was more than the $1.55 per share which was forecast. Disney noted revenue of $15.30 billion with only $15.14 billion expected.

“After a solid first quarter, with diluted EPS of $1.86, we look forward to the transformative year ahead, including the successful completion of our 21st Century Fox acquisition and the launch of our Disney+ streaming service,” said Robert A. Iger, Chairman and Chief Executive Officer, The Walt Disney Company. “Building a robust direct-to-consumer business is our top priority, and we continue to invest in exceptional content and innovative technology to drive our success in this space.”

Cable Networks

Cable Networks revenues for the quarter increased 4% to $4.0 billion and operating income decreased 6% to $743 million. Lower operating income was due to a decrease at ESPN and Freeform, partially offset by an increase at the Disney Channels.

The decrease at ESPN was due to higher programming costs, partially offset by affiliate revenue growth and an increase in advertising revenue. The increase in programming costs was due to contractual rate increases for key sports programming and a shift in the mix of College Football Playoff (CFP) games. Two semi-final games and one “host” game were aired in the current quarter, whereas three host games aired in the prior-year quarter. Semi-final games generally have a higher cost than host games. Affiliate revenue growth reflected contractual rate increases, partially offset by a decline in subscribers. Higher advertising revenue was due to an increase in rates and impressions. The increase in impressions was due to higher units delivered, partially offset by lower average viewership. Advertising revenue benefited from the shift in mix of CFP games.

Lower operating income at Freeform was due to decreases in advertising revenue and program sales, partially offset by lower programming costs. The decrease in advertising revenue was due to lower average viewership, partially offset by higher rates.

Growth at the Disney Channels was due to higher income from program sales and an increase in affiliate revenue. Affiliate revenue growth was due to contractual rate increases, partially offset by a decline in subscribers. Program sales included a benefit from the adoption of a new revenue accounting standard (ASC 606).

Broadcasting

Broadcasting revenues for the quarter increased 12% to $1.9 billion and operating income increased 40% to $408 million. The increase in operating income was due to affiliate revenue growth, increased advertising revenue and higher program sales, partially offset by higher programming costs.

Growth in affiliate revenue was due to contractual rate increases and an impact from the adoption of ASC 606. The increase in advertising revenue was due to higher network rates and an increase in political advertising at the owned television stations, partially offset by lower network average viewership. The increase in program sales was due to higher revenues from programs licensed to Hulu and the sale of The Punisher in the current quarter. The programming cost increase was driven by higher primetime costs, including the impact of The Conners and Dancing with the Stars in the current quarter.

Equity in the Income of Investees

Equity in the income of investees increased from $159 million in the prior-year quarter to $179 million in the current quarter due to higher income from A+E Television Networks driven by lower marketing and programming costs.

Parks, Experiences & Consumer Products

Parks, Experiences, & Consumer Products revenues for the quarter increased 5% to $6.8 billion and segment operating income increased 10% to $2.2 billion. Operating income growth for the quarter was due to an increase at our domestic theme parks and resorts, partially offset by a decrease from licensing activities.

Operating income growth at our domestic theme parks and resorts was due to increased guest spending and higher occupied room nights. Guest spending growth was due to higher average ticket prices, an increase in food, beverage and merchandise spending and higher average hotel room rates.

Operating income at our international parks and resorts was down modestly compared to the prior-year quarter as lower results at Shanghai Disney Resort and Disneyland Paris were largely offset by an increase at Hong Kong Disneyland Resort. Lower operating income at Shanghai Disney Resort was primarily due to lower attendance and higher costs, partially offset by increased guest spending. Lower operating income at Disneyland Paris was due to increased costs, partially offset by higher average ticket prices. At Hong Kong Disneyland Resort, the increase in operating income was driven by increased guest spending and higher occupied room nights.

Lower income from licensing activities was driven by a decrease in revenue from products based on Star Wars and Cars and higher third-party royalty expense, partially offset by an increase from minimum guarantee shortfall recognition, higher revenues from products based on Spider-Man and an increase in licensee settlements. Higher minimum guarantee shortfall recognition was due to an impact from the adoption of ASC 606 (see below).

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 27% to $1.8 billion and segment operating income decreased 63% to $309 million. Lower operating income was due to a decrease in theatrical distribution results, partially offset by growth in TV/SVOD distribution.

The decrease in theatrical distribution results was due to the strong performance of Star Wars: The Last Jedi and Thor: Ragnarok in the prior-year quarter compared to Mary Poppins Returns and The Nutcracker and the Four Realms in the current year. Other significant releases included Ralph Breaks the Internet in the current quarter, while the prior-year quarter included Coco.

Growth in TV/SVOD distribution results was due to the performance of Incredibles 2 and Avengers: Infinity War in the current quarter compared to Cars 3 and Guardians of the Galaxy Vol. 2 in the prior-year quarter, more title availabilities, and to a lesser extent, an impact from the adoption of ASC 606 (see below).

Direct-to-Consumer & International

Direct-to-Consumer & International revenues for the quarter decreased 1% to $918 million and segment operating loss increased from $42 million to $136 million. Revenues reflected a 4% decrease from an unfavorable foreign currency impact. The increase in operating loss was due to the investment ramp-up in ESPN+, which was launched in April 2018, a loss from streaming technology services and costs associated with the upcoming launch of Disney+, partially offset by an increase at our International Channels and a lower equity loss from our investment in Hulu.

The increase at our International Channels was due to lower costs, affiliate revenue growth and higher program sales (all on a constant currency basis), partially offset by an unfavorable foreign currency impact.

Hulu results reflected increases in subscription and advertising revenue, partially offset by higher programming costs.

ADOPTION OF NEW REVENUE RECOGNITION ACCOUNTING STANDARD

At the beginning of fiscal 2019, the Company adopted a new revenue recognition accounting standard (ASC 606). Results for fiscal 2019 are presented under ASC 606, while prior period amounts continue to be reported in accordance with our historic accounting.

The current quarter includes a $115 million favorable impact on segment operating income from the ASC 606 adoption. The most significant benefits were $56 million at Media Networks and $34 million at Parks, Experiences & Consumer Products, both of which reflected a change in the timing of revenue recognition on contracts with minimum guarantees.