The Walt Disney Co. had a solid fiscal Q1 2018 that beat the forecasts of several Wall Street analysts. But, all is not well in the Mouse House, and Pivotal Research Group Senior Research Analyst of Advertising Brian Wieser took a closer look at what went right for the company.
What’s Wieser’s prognosis on the owner of the ABC network, broadcast TV O&Os and cable networks including Freeform and ESPN? Disney’s Theme parks are hot, while its broadcast and cable TV holdings are not.
Zacks Equity Research was among the investment advisement houses that gushed over Disney’s most recent fiscal quarter.
Thanks to “a robust top-line performance,” revenues surpassed the consensus mark for the first time in six quarters.
However, as Zacks notes, “The company’s solid performances were driven by double-digit growth in Parks and Resorts segment.”
A review of fiscal Q1 revenues by division tells a chilling story for media executives. Disney’s Media Network division saw its revenue move to $6.24 billion, from $6.23 billion.
That’s statistically flat. All-important Segment Operating Income shrunk by 12%, to $1.19 billion.
Breaking that down even further shows that Disney’s much-discussed cable network malaise isn’t as troublesome as its broadcasting division. In fiscal Q1 ’18, the Disney cable nets saw revenue gains of 1%, to $4.49 billion. In contrast, broadcast revenue dipped 3%, to $1.75 billion.
Segment broadcast revenue for the cable networks dipped, however, moving down 1% to $858 million.
For broadcasting, SOI slumped by 25%, to $285 million.
The cable networks dips are primarily due to declines at ESPN, with lower ad revenue triggered by a decrease in impressions and lower rates.
What about ABC’s broadcasting operation? “The decrease in operating income was due to lower advertising revenue, higher production cost write-downs and a decline in program sales income. These decreases were partially offset by affiliate revenue growth due to rate increases.”
Meanwhile, “Studio Entertainment” revenue was off by 1%, to $2.5 billion, and Consumer Products & Interactive Media revenue declined by 2%, to $1.45 billion.
It was Parks and Resorts revenue that saved the day for Disney. In this division, revenue surged 13%, to $5.15 billion.
‘NEGATIVE TWEAKS ON NEAR-TERM OUTLOOK’
In the eyes of Wieser, Disney’s quarterly results “were generally solid,” but he continues to value DIS shares at $94 on a year-end 2018 basis — rating the stock “Sell.”
Why? The core media segment has much to do with it.
“Revenues were down 3% at Broadcasting, with advertising falling by 8% and affiliate fees up by 17%,” he notes.
Like other TV broadcasters, ad revenue shortfall is being largely made up for by sharply rising fees.
With the release of Disney’s fiscal Q1 results came word of a $4.99 “ESPN Plus” direct-to-consumer app that reportedly will offer live sports programming not found across its many networks and on its already expansive ESPN3 digital platform.
What’s Wieser’s take on ESPN Plus?
“While we can imagine that there will a significant number of hard core sports fans who will embrace a well-designed product with a sufficient volume of incremental content, we think it remains too early alter forecasts by much to account for the product,” he notes.
In conclusion, Disney’s quarter was positive. But, Wieser is wary of “double-digit programming cost increases in the current quarter in part because of the aforementioned timing shift of college football playoff games.”
And, he’ll keep his eye on the all-important ad revenue—now a concern at ABC’s network operations, too.