Disney Delivers Strong 1Q - Analyst Blog


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The Walt Disney Company ( DIS ) delivered strong first quarter earnings that surpassed the Zacks Consensus Estimate. Better-than-expected results were driven by robust performance of Parks and Resorts and the Cable Networks segments.

First-quarter earnings of 80 cents a share were well ahead of the Zacks Consensus Estimate of 71 cents and jumped 18% from 68 cents in the prior-year quarter.

Total revenue for the quarter inched up 1% year over year to $10,779 million. However, revenue lagged behind the Zacks Consensus Estimate of $11,211 million. Total segment operating income increased 11% year over year to $2,444 million.

Aided by these strong results, Disney intends to boost the reach of the Disney brand in order to generate attractive returns. The company is planning to launch a new broadcast satellite channel in March, primarily targeting women and families. Moreover, Disney will launch the Disney Fantasy at the end of the second quarter.

Segment Details

Media Networks revenue increased 3% year over year to $4,779 million, reflecting an 8% increase in Cable Networks revenue, partly offset by a 7% decrease in Broadcasting revenue. Segment's operating income jumped 12% to $1,193 million compared with $1,066 million in the prior-year period. Cable Networks' operating income spiked 25% to $967 million driven by growth across ESPN and the worldwide Disney Channels. However, operating income at Broadcasting division contracted 23% to $226 million, reflecting less political advertising revenues and increased marketing costs.

The company stated that so far in the second quarter, ESPN's ad sales are pacing up in single digits after adjusting for the benefit of the Rose and Fiesta Bowls.

Parks and Resorts revenue rose 10% to $3,155 million. Segment's operating income increased 18% to $553 million, reflecting higher guest spending at domestic parks and higher passenger cruise days. However, the increases were partly offset by increased costs.

Management added that the domestic resort reservations are pacing up mid-single digits, while book rates are up in mid-single digits so far in the second quarter.

Studio Entertainment revenue marked a sharp decline of 16% year over year to $1,618 million, reflecting few Disney branded titles in theatrical release coupled with lower DVD volumes. However, operating income increased 10% to $413 million, reflecting increased worldwide theatrical revenues and lower film cost write-downs, partly offset by decreases in television distribution and worldwide home entertainment results.

Consumer Products revenue increased 3% to $948 million, while segment's operating income remained flat at $313 million. Disney noted that the increased revenues from the Cars and Tangled merchandise were largely offset by higher operating costs.

Interactive Media revenue for the quarter decreased 20% to $279 million, while operating loss widened as the segment reported an operating loss of $28 million compared with an operating loss of $13 million in the prior-year quarter. The sluggish results reflect decreases in the console game business.

Quarter Highlights

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 growth in the coming years through its strategic initiatives.

Despite difficult operating environment, the company did not change its strategies and remained focused in deploying its capital toward expanding its Parks and resorts business, and in turn, enhancing its markets and creating long-term growth opportunities.

During the quarter, the company made a notable progress in expanding its global footprints and augmented its operations in the developing markets such as Russia, China and India. In Russia, Disney launched an over-the-air Disney Channel.

Further, to drive growth in China, the company has started building its Shanghai Disney Resort, which includes Shanghai Disneyland, two themed hotels, and retail dining and entertainment venue.

Moreover, Disney completed the acquisition of the remaining 50% stake in UTV, India. The company's strategic move will not only enhance its presence in India, but will also position it well with respect to movie offerings. The company aims to increase the number of cable and satellite channels to 9 from 3.

During the quarter, Disney entered into a multi year agreement with the National Collegiate Athletic Association (NCAA) for international broadcasting rights of Men's Basketball. The deal effective immediately runs through 2023-24.

According to the pact, Disney will shell out $500 million over the tenure of the deal for the extension of its international broadcast rights to 24 NCAA championships and exclusive broadcasting rights beyond the U.S. borders for the NCAA Division I Men's Basketball Championship. Moreover, it also includes 600-plus hours and 300 telecasts of live coverage yearly across multiple platforms.

As per the company, the success of ESPN continued as the later witnessed a record number of viewers for the sixth consecutive year, while remaining the favorite destination of sports lovers. In the last few years, ESPN with its right mix of exclusive sporting licenses with top sporting leagues emerged as an industry leader in the pay-TV industry. It is to be noted that ESPN remains the key driver of revenues at the Media Networks division in recent times

Moreover, in strategic move, Disney entered into a 10-year long-term comprehensive programming distribution deal with Comcast Corp. ( CMCSA ), thus enabling an authenticated pay-TV subscriber of Comcast to watch a vast library of Disney contents any where, any time, and on any devices.

Though the financial terms of the deal were not yet disclosed, we believe that Disney will get multi-billion dollars from Comcast. Further, Comcast has a huge video and high-speed broadband subscriber base, which will be highly beneficial for Disney in raising its viewership ratings.

Other Financial Details

During the quarter, Disney generated free cash flow of $1,100 million. The company ended the quarter with cash and cash equivalents of $3,766 million, net borrowings of $10,620 million and shareholders' equity of $37,257 million, excluding a non-controlling interest of $2,166 million.

Strong results enable the company to enhance shareholders value through share repurchases. The company bought back 23.3 million shares for approximately $800 million. Fiscal year-to-date, Disney repurchased 33 million shares for approximately $1.2 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 ) and Time Warner Inc . ( TWX ).

We maintain a long-term 'Neutral' recommendationon the stock. Moreover, the shares of Disney currently retain a Zacks #3 Rank, which translates into a short-term 'Hold' rating.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: CMCSA , DIS , NWSA , TWX

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