Media behemoth – The Walt Disney Company DIS – posted better-than-expected earnings for the second straight quarter, as the company reported second-quarter fiscal 2017 results. However, the company’s revenues missed the Zacks Consensus Estimate for the third straight quarter.

The company’s earnings in the reported quarter came in at $1.50 per share, beating the Zacks Consensus Estimate of $1.45 and also increased 10% driven by robust performance of Studios as well as Parks and Resorts businesses.

Meanwhile, revenues also increased 3% year over year to $13,336 million but missed the Zacks Consensus Estimate of $13,478 million. Increase in revenues can primarily be attributed to strong performance of Media Networks and Parks and Resorts.

The company’s total operating income came in at $3,996 million during the quarter, up 5% year over year. The upside was chiefly due to 20% and 21% rise in operating income from Parks and Resorts, and Studio Entertainment, respectively.

Following, the results the company’s shares declined nearly 2% in after-hour trading session primarily due to investors ongoing concerns over ESPN’s future. However, in the past six months the company’s shares have gained 14.7%, outperforming the Zacks categorized Media Conglomerates industry’s advance of 9.1%.


Segment Details

The Media Networks segment’s revenues gained 3% to $5,946 million, primarily on the back of 3% increase in Cable Networks revenues to $4,062 million. Broadcasting revenues also rose 3% year over year to $1,884 million.

The segment’s operating income came in at $2,223 million, down 3% year over year. Cable Networks saw 3% drop in operating income to $1,791 million, while the Broadcasting segment reported a 14% jump in operating income to $344 million. Sharp decline in Cable Networks operating income was due to dismal performance of ESPN. Weaker results at ESPN were mostly owed to increase in programming cost in comparison with the preceding year, which overshadowed the affiliate and advertising revenue growth. Total affiliate revenue increase by 4% in the reported quarter driven by rise in contractual rate, while advertising revenue was up 5%.

Parks and Resorts revenues came in at $4,299 million, up 9% from the year-ago period. The segment’s operating income climbed 20% to $750 million, backed by opening of Shanghai Disney Resort in third-quarter fiscal 2016 and also due to robust performance of domestic parks and resorts. Growth at domestic operations was driven by increase in guest spending, higher volumes and attendance. However, these gains were partially overshadowed by increase in expenses.

The Studio segment generated revenues of $2,034 million, down 1% year over year. Nevertheless, operating income jumped 21% to $656 million. Increase in operating income was mainly due growth at TV/SVOD distribution, home entertainment and decline in film cost impairments. Theatrical distribution results were boosted by lower pre-release marketing costs and remarkable performance of Beauty and the Beast.

The company’s recently released live-action remake Beauty and the Beast had a great start at the box office. So far, the movie has collected more than $1 billion at the global box office.

Analysts believe that the coming two years will be the most fruitful for Disney. The studio is all set to continue with its success story beyond Star Wars, Zootopia and Beauty and the Beast as it boasts of an impressive lineup of big budget movies up to 2018.

Further, Disney has outlined the release dates for most of its upcoming movies. Cars 3 will be released on Jun 16, 2017. Other movies which are lined up for 2017 include Pirates of the Caribbean: Dead Men Tell No Tales, Thor: Ragnarok, Coco and last but not the least, one of the most awaited release of the year Star Wars: Episode VIII – The Last Jedi.  Moreover, the success of its movies will mean great business for its Consumer Products division as demand for the merchandise associated with successful movies usually skyrocket.

In 2018, the company is expected to release Black Panther, A Wrinkle in Time, Avengers: Infinity War, The Incredibles 2 and Ant-Man and the Wasp.

Consumer Products & Interactive Media division saw 11% decrease in revenues to $1,057 million. However, the units’ operating income rose 3% to $367 million. The rise in operating income was mainly due to improvement at the games business.

Walt Disney Company (The) Price, Consensus and EPS Surprise


Walt Disney Company (The) Price, Consensus and EPS Surprise | Walt Disney Company (The) Quote

Is ESPN Woes Over?

Over the past few quarters Disney’s ESPN has been a hot topic in the media industry and investors are closely monitoring the performance of ESPN. Identical to performances in the past few quarters, ESPN has disappointed investors in the second quarter again. Falling subscriber base and higher programming costs at ESPN continues to hamper the company’s results. Most of the media companies are failing to cope with "cord cutting" as consumers are unwilling to pay for large bundles of channels.

Dismal performance of ESPN this quarter, once again has raised the question of its recovery. Chief Executive Robert Iger’s optimism to be bullish about the ESPN’s future has come under a lot of pressure as the Pay TV landscape continues to alter owing to migration of subscribers to online TV. In an effort to attract online viewers, the company had earlier inked a deal with video streaming, data analytics as well as commerce management company BAMTech. Additionally, it has the option to acquire majority of the stake in BAMTech, in future.  Disney intends to come up with a fresh “direct-to-consumer ESPN-branded, multi-sports subscription streaming service” in 2017. Further, the company is focused on launching ESPN on all new multi-channel services, which includes Sling TV, DIRECTV NOW, Hulu and PlayStation Vue.

ESPN has sealed a number of deals with new platform owners, mostly over-the-top. These deals have started to give positive results and are also increasing the number of subscribers. Moreover, the company has inked a deal with Hulu and another entity, and also is in discussion with others.

The company said that it is focused on making innovative digital products. ESPN's mobile apps’ reached monthly viewers of nearly 23 million and spent above 5.2 billion minutes engaging with ESPN. The company further said that mobile apps are going to play an important role in the future of media and ESPN is rightly on the way of taking the advantage of the trend with wide range of apps.

Other Financial Details

Disney, which shares space with Twenty-First Century Fox, Inc. FOXA generated free cash flow of $2,555 million during the first six months of fiscal 2017. The company ended the quarter with cash and cash equivalents of $3,800 million, borrowings of $16,788 million and shareholder’s equity of $43,784 million, excluding non-controlling interest of $3,483 million.

During the quarter, the company bought back nearly 18.6 million shares for $2 billion.

Zacks Rank & Key Picks

Currently, Disney carries a Zacks Rank #3 (Hold). Better-ranked stocks include Nexstar Media Group, Inc. NXST and Central European Media Enterprises Ltd. CETV. Both the stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past six months, Nexstar Media Group shares have increased 15%.

Shares of Central European Media Enterprises have soared 72% in the past six months.

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