Disney (DIS) Beats On Q3 Earnings, Buys Stake In BAMTech

Media behemoth – The Walt Disney Company DIS – reported better-than-expected earnings and revenues in third-quarter fiscal 2016 after missing in the previous quarter. Disney’s robust results were driven by solid performance of the company’s Studio entertainment segment.

The company reported third-quarter fiscal 2016 earnings per share of $1.62 that surpassed the Zacks Consensus Estimate by a penny. Moreover, its earnings increased 11.7% year over year. On the other hand, revenues improved 9% year over year to $14,277 million and also beat the Zacks Consensus Estimate of $14,167 million.

Despite reporting sturdy quarterly numbers, the company’s shares declined 1.8% in after-hour trading session, primarily due to concerns over ESPN’s future. Disney’s primary cash cow – ESPN – has come under a lot of pressure as the Pay TV landscape continues to alter owing to migration of subscribers to online TV. Falling subscriber base and higher programming costs of these businesses have been worrying investors for quite some time now. Subscriber at ESPN declined in the reported quarter also.

Most of the media companies are failing to cope with "cord cutting" as consumers do not want to pay for large bundles of channels. Disney is making its full effort to bring back ESPN’s golden days. In an effort to attract online viewers, the company has inked a deal with video streaming, data analytics as well as commerce management companies BAMTech.

As per sources, value of the deal stands at $1 billion. The company also has the option to acquire majority of the stake in BAMTech, in future.  The company intends to come up with a fresh “direct-to-consumer ESPN-branded, multi-sports subscription streaming service.”

Disney is also putting a lot of effort to make its content accessible to more customers. It said that AT&T’s DirecTV will feature channels like ESPN, ESPN2, ABC, Freeform, Disney Channel, Disney XD as well as Disney Junior in their subscription packages in the upcoming DirecTV Now OTT service.

Coming back to the results, the company’s total operating income came in at $4,456 million during the quarter, up 8% year over year. The upside was primarily driven by 62% and 8% increase in operating income from Studio Entertainment and Parks and Resorts, respectively.

DISNEY WALT Price, Consensus and EPS Surprise

DISNEY WALT Price, Consensus and EPS Surprise | DISNEY WALT Quote

Segment Details

The Media Networks segment’s revenues increased 2% to $5,906 million, primarily due to a 1% rise in Cable Networks revenues to $4,200 million and 5% gain in Broadcasting revenues to $1,706 million.

The segment’s operating income came in at $2,372 million, flat year over year. Cable Networks saw a 1% rise in operating profits to $2,090 million, whereas the Broadcasting segment reported a 6% decline in operating profit to $282 million. Growth in Cable Networks operating income was driven by surge in ESPN which benefited from rise in affiliate revenues and advertising revenues growth. Affiliate revenue growth was primarily due to increase in contractual rate, which was partially overshadowed by fall in subscribers and negative effect of foreign currency exchange rate.

Parks and Resorts continued to outperform with a 6% increment in revenues to $4,379 million. The segment’s operating income jumped 8% to $994 million. While domestic operations were robust, international operations were hampered by lower footfall and higher operating costs at Disneyland Paris and also due to higher pre-opening expenses of the Shanghai Disney Resort. Increase in operating income at the company’s domestic operations was due to rise in guest spending and decline in costs, marginally overshadowed by lower volumes.

The Studio segment generated revenues of $2,847 million, up 40% year over year. On the other hand, operating income surged 62% to $766 million. Increase in operating income was propelled by rise in home entertainment and theatrical results. Robust theatrical distribution results were primarily due to the sturdy performance of titles like Captain America: Civil War, The Jungle Book, Finding Dory and Alice Through the Looking Glass.

Consumer Products & Interactive Media division saw a 1% decrease in revenues to $1,145 million. The units’ operating income went down 7% to $324 million. The fall in operating income was mainly stemmed by decline at the company’s merchandise licensing, retail as well as Japan mobile businesses. Dip in retail business was mainly due to negative impact of foreign currency as well as due to fall in operating margins.

Other Financial Details

During the quarter, Disney generated free cash flow of $2,489 million, up 51% year over year. The company ended the quarter with cash and cash equivalents of $5,227 million, borrowings of $15,129 million and shareholder’s equity of $48,146 million, excluding non-controlling interest of $3,953 million.

During the quarter, the company bought back 15.2 million shares for $1.5 billion.

Currently, Disney carries a Zacks Rank #3 (Hold). Some better-ranked stocks from the same space include MSG Networks Inc. MSGN, Liberty LiLAC Group LILA and World Wrestling Entertainment Inc. WWE. All these stocks hold a Zacks Rank #2 (Buy).

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