Broadcasting and media company Walt Disney (DIS 105.07, +2.39 +2.3%) fills the gap higher today despite the backdrop that its Q4 earnings left something to be desired; rather, today the stock recoups its post-Q3 losses, not on the aforementioned quarterly print, but instead on commentary by DIS management that the company would price its incoming Disney Direct to Consumer offering “substantially below” streaming service Netflix (NFLX 190.68, -3.22 -1.7%).
On the conference call after the print, management was quick to quell raised eyebrows about recent M&A speculation as the company was straightforward about not commenting on such matters. However, more importantly, on the call the company commented that its Disney-branded DTC service -- launching in the latter part of 2019 -- would price below where Netflix currently sits. Further, the company also gave comments about its upcoming ESPN Plus DTC product – dubbed ESPN+ -- stating that pricing details and a demonstration are incoming in early 2018.
In short, DIS missed Street expectations for both Q4 earnings and revenues; the company saw Q4 EPS of $1.07 on revenue declines of 2.8% year-over-year to $12.78 billion. Results were light across the board at DIS’ operating segments, save for its Parks business.
- Parks and Resorts:
- Revenues for Q4 were up 6% to $4.7 billion, and segment operating income increased 7% to $746 million. Operating income growth for the quarter was due to an increase at our international operations, partially offset by a decrease at the company’s domestic operations, which were unfavorably impacted by Hurricane Irma. As a result of the hurricane, Walt Disney World Resort was closed for two days, and DIS canceled three cruise itineraries and shortened two others. Further, results at DIS’ international operations were due to growth at Disneyland Paris and Shanghai Disney Resort. Guest spending growth was primarily due to higher average ticket prices and food and beverage spending. The increase at Shanghai Disney Resort was due to attendance growth and lower marketing costs, partially offset by lower average ticket prices. And lastly, growth at DIS’ cruise line resulted from higher average ticket prices.
- Cable Networks:
- Operating income dipped by $15 million to $1.2 billion for Q4 due to declines at Freeform, and partially offset by growth at the Disney Channels due to higher program sales. The decrease at Freeform was driven by lower advertising revenue primarily due to a decrease in average viewership.
- Management noted results at ESPN were comparable to the prior-year quarter as higher programming costs and lower advertising revenue were offset by higher affiliate revenue. The programming cost increase was driven by contractual rate increases for NFL, college sports and MLB, but partially offset by the absence of costs for Olympics programming internationally and the World Cup of Hockey. Also, lower advertising revenue was a result of a decrease in average viewership and lower units delivered, and partially offset by higher rates. Affiliate revenue growth resulted from contractual rate increases, partially offset by a decline in subscribers.
- Operating income was down by $42 million to $229 million for Q4 as lower advertising revenue and a decrease in program sales was partially offset by an increase in affiliate revenue, due to rate increases, and lower programming costs.
- The decrease in advertising revenue reflected lower network impressions, lower political advertising at DIS’ owned television stations and the absence of the Emmy Awards show, and partially offset by higher network rates. Further, lower network impressions were driven by a decrease in average viewership, and partially offset by an increase in units delivered. The decrease in program sales was mainly due to fewer significant titles in the current quarter compared to the prior-year quarter. The current quarter included sales of The Punisher and Designated Survivor, whereas the prior-year quarter included sales of Luke Cage, Castle, Golden Girls and Quantico.
- Studio Entertainment:
- Revenues for Q4 decreased 21% to $1.4 billion and segment operating income decreased $163 million to $218 million. The decrease in operating income was due to higher film cost impairments, lower TV/ SVOD distribution results and a lower revenue share from the Consumer Products & Interactive Media segment. Additionally, home entertainment and theatrical distribution results were comparable to the prior-year quarter. However, theatrical distribution revenues declined primarily due to the performance of Cars 3 in the current quarter compared to Finding Dory in the prior-year quarter.
- Consumer Products & Interactive Media
- Revenues for Q4 decreased 6% to $1.2 billion, and segment operating income decreased 12% to $373 million due to a decrease at our merchandise licensing business. Lower results at the company’s merchandise licensing business were primarily due to a decrease in earned licensing revenues, higher third-party royalty expense and an unfavorable impact from foreign currency translation. Lower earned licensing revenues were due to decreased sales of merchandise based on Star Wars, Frozen and Finding Dory, partially offset by increases from merchandise based on Cars and Spider-Man.
While this can all be a lot to digest, it’s important to note that DIS has its thumbs in quite a few pies at the moment. What’s important to remember, though, is that the stock is reacting favorably mainly due to the commentary from management about the upcoming DTC offerings – in competition with Netflix’s streaming service -- which management was adamant about pricing below said NFLX levels.