The Walt Disney Company DIS reported third-quarter fiscal 2015 earnings per share of $1.45 that rose 13% year over year and beat the Zacks Consensus Estimate of $1.39 by a wide margin, marking the eighth consecutive quarter of earnings beat.
In spite of growing 5% year over year, revenues of $13,101 million came in a tad below the Zacks Consensus Estimate of $13,169 million, leading to a 7% drop in share price in after-market trading.
In addition, management stated that lack of hedges at favorable rates against forex volatility will hit fiscal 2016 operating income by $500 million. Also, loss of subscribers at ESPN will reduce Cable Network’s affiliate revenues. Lower affiliate revenues in addition to currency volatility will bring down the unit’s operating income growth during the fiscal 2013 to fiscal 2016 period to mid single-digits as against high single-digit range projected earlier.
However, the highlight of the earnings conference was Disney’s powerful defense for its premier cash cow ESPN stating that decline in the number of subscribers was moderate and that ESPN was still a widely watched sports network. Though the company acknowledged that the TV landscape is changing due to increasing number of cord cutters, it has no plans to go OTT with ESPN in the near future. The network remains in a good position given that live sports programming is more valuable now than it was ever. ESPN will continue to benefit from its long-term deals with NFL, the NBA and Major League Baseball.
Also, the company stated that the Shanghai Disneyland is on track for opening in the spring of 2016. The park is estimated to draw a record of 25 million visitors in its first year as per market analysts.
Back to results, the company’s total operating income came in at $4,120 million, up 7% year over year.
Segment Details
The Media Networks segment’s revenues grew 5% to $5,768 million, attributable to a 5% rise in Cable Networks revenues to $4,140 million and 4% rise in Broadcasting revenues to $1,628 million.
The segment’s operating income grew 4% to $2,378 million. Though Cable Networks saw a 7% increase in operating profits to $2,078 million, the Broadcasting segment reported a 15% decline in profits to $300 million.
Broadcasting segment’s performance was marred by higher programming costs and falling advertising revenue that ran down growth in affiliate fees and higher revenue from SVOD distribution.
Parks and Resorts continued their good show lifting the segment’s revenues by 4% to $4,131 million while operating income grew 9% to $922 million. Domestic operations were robust but international operations were marred by lower footfall at Hong Kong Disneyland, higher operating costs of Disneyland Paris and pre-opening expenses of the Shanghai Disney Resort.
Studio segment, once again stole the spotlight. The tremendous success of Avengers: Age of Ultron, Cinderella and Inside Out led to a 13% increase in revenues to $2,040 million. The phenomenal successes of the three movies easily covered up the disappointment of Tomorrowland. Segment’s operating income grew 15% to $472 million. Recently released Ant-Man also has nabbed nearly $300 million at the box office so far. With projects like The Good Dinosaur, Bridge of Spies and finally the epic showdown, Star Wars: The Force Awakens, the segment is poised to deliver record revenues in coming days.
Consumer Products division saw 6% growth in revenues to $954 million. The units’ operating income rose 27% to $348 million, owing to gains from the Merchandise Licensing business and reduced third-party royalty expense.
Interactive segment’s performance in the quarter disappointed as revenues tanked 22%, while operating income broke even with the prior-year quarter. Lower sales of Disney Infinity and console game catalogue titles ran down growth in sale of Tsum Tsum.
Other Financial Details
During the quarter, Disney generated free cash flow of $1,652 million, down 19% year over year. The company ended the quarter with cash and cash equivalents of $4,475 million, borrowings of $12,154 million and shareholder’s equity of $46,519 million, excluding non-controlling interest of $3,688 million.
During the quarter, the company bought back shares worth $ 9.4 million for $1 billion, taking the total count to 32.4 million shares for $3.2 billion as of Aug 4, 2015. Management expects to repurchases shares worth $6 billion to $8 billion in fiscal 2016.
Currently, Disney carries a Zacks Rank #3 (Hold). Better-ranked media stocks include AMC Networks Inc. AMCX, Gray Television, Inc. GTN and Salem Media Group, Inc. SALM. All sport a Zacks Rank #1 (Strong Buy).
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