ESPN Continues To Hit Disney Finances

Disney have recently released its fourth quarter and fiscal year ended October 1st 2016 and part of the results included details on their broadcast and studio divisions.

Here are the details:

Media Networks revenues for the quarter decreased 3% to $5.7 billion, and segment operating income decreased 8% to $1.7 billion.

Cable Networks

Operating income at Cable Networks decreased $207 million to $1.4 billion for the quarter due to decreases at ESPN and the Disney Channels, partially offset by an increase at Freeform.

The decrease at ESPN reflected lower advertising and affiliate revenue and higher programming and production costs. Lower advertising revenue was primarily due to fewer impressions and lower rates. The decrease in impressions was driven by the Fiscal Period Impact, lower ratings and fewer units sold. Lower affiliate revenue was due to the Fiscal Period Impact and a decline in subscribers, partially offset by contractual rate increases. The increase in programming and production costs was driven by costs for Olympics programming internationally, the World Cup of Hockey rights and higher contractual rates for college sports, partially offset by the absence of costs for the British Open and a favorable Fiscal Period Impact.

Lower results at the Disney Channels were primarily due to decreased affiliate revenue and program sales, partially offset by lower programming and production costs driven by a decrease in program write-downs. The decrease in affiliate revenue was primarily due to the Fiscal Period Impact, partially offset by contractual rate increases.

Growth at Freeform was driven by lower programming and production costs, as well as a decrease in marketing expense, partially offset by a decrease in affiliate revenue due to an unfavorable Fiscal Period Impact. Lower programming and production costs were driven by fewer hours of original scripted programming in the current quarter, while the decrease in marketing expense was due to launching fewer new series.

Broadcasting

Operating income at Broadcasting increased $60 million to $224 million for the quarter due to higher operating income from program sales, an increase in affiliate revenue and a decrease in compensation-related costs, partially offset by higher programming costs, lower advertising revenue and an increase in equity losses from Hulu.

Affiliate revenue growth reflected higher contractual rates. The increase in program sales income was driven by sales of Luke Cage, Quantico and Golden Girls, partially offset by lower sales of Scandal and Nashville. The increase in programming costs was due to a higher average amortization rate for network programming, the addition of the Emmy Awards show and higher costs for political news coverage in the current quarter, partially offset by a favorable Fiscal Period Impact. The decrease in advertising revenue was due to a decrease in impressions, partially offset by higher rates and the addition of the Emmy Awards show. Lower impressions were driven by the Fiscal Period Impact, decreased ratings and fewer units sold, which was a result of higher political coverage in the current year. Higher equity losses from Hulu reflected increased programming, marketing and labor costs, partially offset by higher subscription and advertising revenues.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 2% to $1.8 billion, and segment operating income decreased $149 million to $381 million. The decrease in operating income was driven by lower theatrical distribution results, partially offset by growth in TV/SVOD distribution.

The decrease in theatrical distribution results reflected the lower than expected performance of Pete’s Dragon and Queen of Katwe in the current quarter. Results also reflected the continuing performance of Finding Dory and Captain America: Civil War in the current quarter compared to Inside Out, Ant-Man and Avengers: Age of Ultron in the prior-year quarter. Additionally, the current quarter included higher pre-release marketing costs.

The increase in TV/SVOD distribution was primarily due to a sale of Star Wars Classic titles in the current quarter.

Our Take:

Disney’s movies have been doing incredibly well in 2016, sadly Pete’s Dragon and Queen of Katwe have underperformed, especially compared to previous quarter, which included Finding Dory, Civil War and The Jungle Book.  However in the long run, the movie division should do well in the next quarter with Doctor Strange, Moana and Rogue One.  Disney also did well in selling shows on the many different platforms like Luke Cage.

However, ESPN continues to cause problems for her company with more customers cutting the cord and leaving the network.  It was reported that ESPN had lost 621,000 subscribers in a single month.  Plus with higher production costs for big events like the Summer Olympics continues to leave investors wondering what Disney can do to reduce losses in this division.  With ESPN accounting for half of the media divisions operating income, his is why investors are worried.

What do you think of this news?