By Dow Jones Business News,
August 05, 2014, 08:53:00 PM EDT
By Ben Fritz
Skyrocketing sports-rights costs caught up to ESPN last quarter, providing a setback in an otherwise stellar
quarter for Walt Disney Co.
Hit by a combination of higher costs for Major League Baseball and World Cup soccer, as well as a shrinking
subscriber base for ESPN and certain timing issues, operating income at Disney's cable networks group fell 7% to $1.9
billion during the quarter ended June 28. It was the only one of the company's business units not to report double-
digit, or higher, growth in operating income.
Driven by everything from "Frozen" DVD sales to price increases at domestic theme parks to higher sales at Disney
Stores and a turnaround at the interactive media unit, Disney generated higher earnings per share in the first three
quarters of its fiscal 2014, which ends in September, than in any previous full fiscal year, Chief Executive Robert Iger
said on a conference call.
Net income in the quarter grew 22% to $2.2 billion, and revenue was up 8% to $12.5 billion.
Cable networks revenue was up just 1% to $3.9 billion, also the lowest of any segment of the company. Along with
higher costs, Chief Financial Officer Jay Rasulo said ESPN's subscriber losses were "modest" and "mostly economically
driven," presumably from people switching to cheaper cable packages or abandoning pay television altogether.
Affiliate revenue--the money paid to Disney by cable and satellite companies to carry ESPN--grew in the mid-single-
digit percentages last quarter, affected by contractual provisions. Such fees are a key driver of ESPN's business. Mr.
Rasulo said that figure should return to its normal high-single-digit growth rate in the current quarter and continue at
that pace through 2016.
Comparisons to the same quarter last year were hurt by nearly $100 million less in deferred revenue recognition as
well as the sale last summer of ESPN's United Kingdom business.
Disney's film studio enjoyed another blockbuster quarter, with operating income more than doubling from the year-
earlier period to $411 million and revenue up 14% to $1.8 billion. Home-entertainment sales of "Frozen" were the biggest
reason, as well as the animated musical's ongoing success at the overseas box office, particularly in Japan, and the
healthy theatrical runs of "Captain America: The Winter Soldier" and "Maleficent" in the spring.
This past weekend's strong opening of the Marvel movie "Guardians of the Galaxy" continued a yearlong streak
without a major flop for Disney's studio.
In what could be a strong driver of growth for the unit in the future, Mr. Iger said Disney is working on designs
that will result in a "far greater Star Wars presence in our parks."
Increased attendance and higher spending per guest drove growth at Disney's domestic parks that more than offset
weakness at Disneyland Paris, the company said. Wireless wristbands called My Magic Plus that launched at Disney World
last year and help visitors to plan rides and pay for items will contribute to the theme-parks unit's profitability for
the first time in the current quarter, said Mr. Iger.
Shares in Disney, which have risen 14% this year, were down 1%, to $86.75, in 4 p.m. trading Tuesday, before
financial results were released.
Write to Tess Stynes at email@example.com
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