The Walt Disney Company (DIS) recently posted second-quarter 2011 results that missed the Zacks expectations. The quarterly earnings of 49 cents a share was well below the Zacks Consensus Estimate of 57 cents. However, earnings inched up 2% from 48 cents earned in the prior-year quarter.
Reasons behind the Shortfall
The results of the quarter were negatively impacted by the collective effects of difficult operating environment which abridged the operating income of the company by approximately $170 million versus the prior-year period.
Getting to the causes, it was the poor performance of ‘Mars Needs Moms’ at the box office and the timing of the release of key Pixar DVD, which led to a $90 million decline in the operating results of the Studio Entertainment segment.
Going further, the calendar shift of Easter led to a $23 million loss in the operating results of the Parks and Resorts segment. Moreover, operating results of the Interactive Media segment witnessed a revenue loss of $34 million due to the inclusion of the purchase accounting from the Playdom buyout in the quarter.
It seems that Disney experienced a disastrous second quarter, as the operating results at the Parks and Consumer Products witnessed a revenue loss of $25 million resulting from the destructive effects of the Japanese earthquake.
Collectively, the consequences of the above dampened the earnings per share by 6 cents.
Top line & Operating Income
Total revenue in the quarter increased 6% to $9,077 million from the year-ago quarter, but fell short of the Zacks Consensus Revenue Estimate of $9,121 million. Total segment operating income inched up 1% to $1,773 million.
Moving to the Segments
Media Networks revenue rose 12% year over year to $4,322 million due to revenue increase across Cable Networks (up 17%) and Broadcasting (up 4%). Segment operating income rose 17% to $1,524 million. Cable Networks’ operating income jumped 15% to $1,357 million driven by growth across ESPN and the Disney Channels, partially offset by decrease in equity income. Operating income at Broadcasting soared 36% to $167 million, reflecting rise in advertising revenue at the owned television stations and at the ABC Television Network coupled with the fall in programming costs and increase in net affiliate fees.
Parks and Resorts revenue rose 7% to $2,630 million. Segment operating income declined 3% to $145 million, reflecting revenue decline at Disney Cruise Line and Tokyo Disney Resort, partially offset by growth registered at domestic and consolidated international parks and resorts.
Studio Entertainment revenue came in at $1,340 million, reflecting a sharp decline of 13% versus the year-ago quarter, while operating income plunged 65% to $77 million. The reduction reflects sluggish performance of the worldwide home entertainment and worldwide theatrical distribution coupled with higher film cost write-downs.
Consumer Products revenue rose 5% to $626 million and segment operating income rose 7% to $142 million. The growth reflected increased licensing revenue on the heels of Toy Story and Tangled merchandise and improved performance of Disney Stores in North America.
Interactive Media revenue for the quarter increased 3% to $159 million, but posted an operating loss of $115 million compared with an operating loss of $55 million in the prior-year quarter. The loss reflected increased product development costs in mobile and virtual world and the impact of acquisition accounting resulting from Playdom buyout.
Other Financial Details
During the quarter, Disney generated free cash flows of $1,317 million. The company ended the quarter with cash and cash equivalents of $3,094 million, total borrowings of $12,772 million and shareholders’ equity of $38,650 million, excluding a non-controlling interest of $1,662 million.
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).
Currently, we maintain a long-term ‘Neutral’ recommendationon the stock. Moreover, Disney’s shares hold a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
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