Before Walt Disney Co. (NYSE:DIS) reported fiscal fourth-quarter earnings after Thursday’s close, the story lay in how Disney’s pieces would fit, not the final number it would report. But that changed soon thereafter, when the Mouse laid an egg and Disney stock sputtered in response.
The numbers became important when earnings of $1.10 per share and revenues of $13.14 billion weren’t enough for Wall Street analysts covering DIS.
They certainly weren’t enough to quiet the critics.
Disney management does not offer earnings estimates, but it does do a good job of showing you where its earnings come from. The quarterly results are broken out into:
- Media networks, which includes ESPN
- Parks and resorts, which now includes Shanghai Disney
- Studio entertainment, which means the movies
- Consumer products and interactive media, which means all the toys, games, CDs and DVDs that the company uses the monetize its product ad infinitum.
Looking at Disney’s earnings report, the problem is plain. Through the first nine months of its fiscal year, media and network was up only 3%, but still represented about $18 billion out of total revenue of $42 billion. Studio entertainment was up 37%, but still represented just $7.6 billion out of that $42 billion. In short, ESPN and the other networks are dragging down the whole ship.
Disney stock is in trouble, and CEO Bob Iger needs an answer.
The Numbers
Revenues were off 1% year-over-year, and net income was down a full 10%. Disney stock immediately began dipping, losing 3% of their value within minutes.
It wasn’t just the media networks, although they were down 3% on the top line and 8% on the bottom line. The “small” consumer products category bombed, down 17% on the top line and 5% on the bottom line.
Plush dolls aren’t the problem. Video game technology is changing rapidly, and Disney software programmers are not keeping up. Given its ownership of Marvel, it should be doing much better.
Studio revenues are always going to be choppy, and last quarter was a disaster, featuring such box office losers as Tim Burton’s The BFG, Dreamworks’ The Light Between Oceans, and Queen of Katwe, which debuted in September and is still under $10 million in receipts. Good movies, but few people bought tickets to see them.
The next quarter should be better. Doctor Strange, released after the quarter ended on Nov. 4, has already grossed over $100 million — despite its being about a minor Marvel character, thanks to the acting of star Benedict Cumberbatch in the title role.
Cord-Cutting Accelerates
The numbers for the media networks are still causing the most concern.
Revenues had at least been up 2% year-over-year in the third quarter. This time they were down 3%. Worse, it was all about cable, and ESPN. Broadcasting managed to do 8% more business in this year’s fourth quarter than last year, and profits at the network were up a whopping 37%.
Cable network revenue, however, was down 7%, and represents twice as much of the unit’s gross, while profits were down a full 13%. Putting that in perspective, the great broadcasting earnings came in at $234 million, the lousy cable earnings at $1.448 billion.
Because ESPN signed so many long-term contracts — it’s in the third year of seven with the NBA, for instance — this is a problem that is not going away.
ESPN is Disney’s only network, but the company must find some way to monetize that content outside cable and satellite. Disney began rolling out an over-the-top strategy for ESPN in August, buying one-third of a streaming company launched by Major League Baseball, but that is unlikely to be enough.
What Should Disney Do?
Disney stock analysts are scratching their heads for things to suggest.
One thing it could do is make another big acquisition to get ahead of the pending deal between AT&T Inc. (NYSE:T) and rival Time Warner Inc (NYSE:TWX), which is now headed to regulators with an all-clear all but certain.
But what would such a deal look like?
Dish Network Corp (NASDAQ:DISH) has long been rumored to be seeking a merger partner, and at $26 billion in market cap would be digestible for Disney, which is worth $150 billion. DISH has cellular spectrum it needs capital to monetize, and would provide Disney with a direct channel to consumers, as well as contracts with other programming providers that might let it compete with Netflix, Inc. (NASDAQ:NFLX).
Or Disney could buy Netflix itself, although that would take about $60 billion and a promise of autonomy. Disney stock likely wouldn’t react well to that at first blush.
Still, does Bob Iger have such a deal in him?
Dana Blankenhorn is a financial and technology journalist. His latest novel is Bridget O’Flynn vs. Something Big & Ugly. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he was long DIS.
