Walt Disney (NYSE:DIS) has a lot to prove in its upcoming earnings announcement. After all, the entertainment giant just wrapped up a fiscal year that included its first drop in sales and profits since 2010.
Sure, that rare decline had a lot to do with the timing of its major film releases. However, Disney also endured weak results in media and broadcast networks last year, thanks to a shrinking pool of pay-TV cable subscribers.
With that bigger picture in mind, let's look at the key trends investors will be watching in Disney's results due out after the market closes on Tuesday, Feb. 6.
A declining media segment
The House of Mouse gets about half of its annual revenue from its network of broadcast and cable TV channels, including sports powerhouse ESPN. As a result, the move by consumers toward internet-delivered home entertainment poses a direct threat to its bottom line. As subscribers exit the pay-TV market, they reduce a network's ratings and put pressure on both the advertising rates and the carriage fees that Disney can charge.
In response, the company has aggressive plans in the works to shift its business model toward on-demand streaming. There's an ESPN-branded app set to launch in the next few months, followed by a broader content service in late 2019. In the meantime, its media results will depend on the pace of decline that the TV industry suffers. Last quarter, executives said they were encouraged to see subscriber rate losses improve slightly to a 3% pace from 3.5% in the prior quarter. On Tuesday, we'll find out whether that uptick was the start of a stabilization trend or just a temporary pause.
Healthy parks business
Disney's parks segment was one of the rare bright spots in its recent results. Revenue improved by 8% over the past 12 months, and profit jumped 14% thanks to rising attendance, higher prices, and a stellar inaugural year for the new Disney Shanghai resort.
Investors are looking for this division to post healthy results that offset any weakness in the media business this year. After all, Disney has been pouring resources into upgrades at both Disneyland and Walt Disney World resorts. And the massive Shanghai park should begin contributing significant earnings after it generated a surprising profit during its first full year of operations in 2017.
The movie release calendar
Disney's treasure trove of intellectual property is its most important asset, and that's why it's critical that the company succeed at launching new global brands while adding value to its existing ones. Theatrical movie releases are by far its most effective platform for this brand-building strategy. Once a film like Beauty and the Beast resonates with enough consumers, Disney, through its entertainment empire that spans TV, consumer products, and parks and resorts, can extract more value from the property than any other company could.
The good news for investors is that the entertainment giant just wrapped up its second straight year of dominion over the box office. With just a dozen movies in theaters in 2017, Disney collected $2.4 billion in ticket sales, or 20% more than the second-place studio, which had 33 movies in theaters, according to Box Office Mojo.
These theatrical wins, particularly Star Wars: The Last Jedi, will lift the company's fiscal 2018 results. And the pending acquisition of 21st Century Fox will do even more to cement its place as the highest-grossing movie studio each year.
The real returns from these movie launches don't accrue until future years, though, when Disney uses the brands as the basis for profitable theme-park additions, or for massive sequels, like Frozen 2, scheduled for release in 2019.