Walt Disney Co.'s Q4 Earnings Rise on Strong Performance in Cable Networks

Image source: Disney.

Walt Disney Co. (DIS 0.18%) reported its fiscal-fourth-quarter and full-year 2015 results after the market closed on Thursday. The world's most powerful and well-known entertainment giant posted solid year-over-year revenue growth and forceful earnings growth.

Shares of Disney were up 2.2% at 11:30 a.m. Friday. The stock has returned nearly 27% over the last year, compared to the overall market's return of 6.6%. 

The quarterly numbers

Data source: Disney.

Investors shouldn't get too hung up on quarterly Wall Street growth expectations. That said, it's worth noting that Disney's revenue came in essentially in line with what analysts were expecting while adjusted earnings comfortably beat the consensus. That beat was thanks largely to the powerful profit performance of the company's largest segment, media and networks.

This quarter marked a solid finish to a strong year for Mickey and Co. For fiscal year 2015, the company's revenue increased 7% year over year to a record $52.5 billion, earnings per share on a generally accepted accounting principles (GAAP) basis rose 15% to a record $4.90, and adjusted EPS jumped 19% to a record $5.15.

Here's how the four main segments performed in the quarter. (The interactive segment is tiny, accounting for 2.6% of quarterly revenue, so it makes little difference in overall results.)

Media networks: ESPN leads the segment to margin expansion 

Data source: Disney.

Results in Disney's largest segment were robust, with the operating margin solidly expanding. Disney attributed the segment's strong performance primarily to its sports cable network, ESPN, and, to a lesser extent, A&E Television Networks and the Disney Channels. ESPN's performance was driven by higher affiliate and advertising revenue, partially offset by an increase in programming costs. Affiliate revenue growth was driven by rate increases and an increase in subscribers.

Investors were no doubt relieved by ESPN's results in light of the events of the last couple of quarters. The phenomenally successful sports cable network remains a cash cow, though challenges have recently arisen. The number of subscribers has slightly declined over the past few years because of "cord cutting" -- people dropping or trimming their large cable packages -- while costs for obtaining the rights to broadcast live sporting events have been increasing.

Cord-cutting is a legitimate issue, though concerns seem a bit overblown at this point. ESPN's subscribers decreased by 7.2% for the four-year period through July, according to Nielsen data reported by The Wall Street Journal, though CEO Bob Iger said during last quarter's call that this number is overstated. The bottom line is that Disney is aware of the issue and taking steps to mitigate it, such as trimming costs in the segment, and exploring options such as offering a stand-alone ESPN product.

Parks and resorts: Solid growth continues in domestic parks

Data source: Disney.

Disney's second-largest segment has been a solid and steady performer all year. The company's domestic theme parks continued to draw in larger crowds last quarter, while park visitors, on average, continued to spend more money.

The slight downtick in this segment's operating margin is due in part to some temporary factors in the international operation, including higher pre-opening expenses at Shanghai Disney Resort. This massive new Chinese park is slated to open in 2016 -- most likely in the spring, according to comments made by Iger on the conference call. So it will soon start bringing in revenue, rather than simply adding to expenses.

Studio entertainment: Operating income soars

Data source: Disney.

According to Disney, operating income growth was largely due to increased TV/SVOD (subscription video on demand) distribution, improved theatrical results, and a higher revenue share with the consumer products segment. These increases were partially offset by lower home entertainment results.

Inside Out and Ant-Man drove the strong theatrical results. Pixar's Inside Out, released in mid-June, is currently the No. 5 top-grossing movie of 2015, with worldwide moviegoers turning their pockets inside out to the tune of $842.5 million. Global ticket sales for Marvel's Ant-Man, the ninth top-grossing film of the year, to date, are currently $513.8 million. There was no Pixar film in the previous year's quarter, making for an easier year-over-year comparison. 

Consumer products: Solid growth for the margin champ

Data source: Disney.

Licensing revenue, and operating income growth were driven by the performance of Star Wars Classic, Avengers and Frozen merchandise.

Importantly, these numbers don't include licensing revenue generated from sales of merchandise based on Star Wars: The Force Awakens even though this merchandise began hitting retailers' shelves during the quarter. Hasbro, for instance, rolled out its initial line of The Force Awakens-based toys to retailers on Sept. 4. As CFO Christine McCarthy explained on the conference call, Disney can't recognize the licensing revenue of merchandise based on a film until the film is released due to an accounting rule. The Force Awakens is slated to hit the silver screen on Dec. 18, so licensing revenue from merchandise based on this film that was sold in the fourth quarter will be recognized in the company's fiscal-first-quarter 2016 results.

Looking ahead
There are many exciting catalysts for growth on the horizon for the world's most-beloved entertainment brand. Most notable on the near-term horizon are The Force Awakens and Shanghai Disneyland. Revenue and profit from the new Star Wars film will begin pouring into Disney's coffers in the first quarter of fiscal 2016. The massive new Chinese park is on target to open sometime in the spring of 2016, according to Iger, with some expecting it to draw up to 25 million visitors during its first full year -- a number that would dwarf the Magic Kingdom's.