Walt Disney Co. Silences Critics With Its Earnings Report

For Disney, cord-cutting fears were overblown in its recently reported fourth quarter.

Jamal Carnette, CFA
Jamal Carnette, CFA
Nov 9, 2015 at 3:00PM
Technology and Telecom

Source: Disney

The Walt Disney Company (NYSE:DIS) is quickly becoming a battleground stock. Although the company is an entertainment conglomerate, with pedestrian observers mostly familiar with its films and theme parks, the economic engine of the company is its Media Networks business. And this particular engine is powered by the company's television-network properties: ABC, The Disney Channel, and, most importantly, ESPN's host of sports-related programming.

For example, for the recently reported full fiscal year, Disney's Media Networks division was responsible for 44% of the company's total revenue and even a larger 53% of segment operating income. As such, investors should pay attention to this particular division when evaluating the company.

More recently, there's been a host of headwinds in the overall subscription pay-TV industry. Cord-cutters and cord-slimmers have abandoned large cable bundles with ESPN's programming to save money. A recent Wall Street Journal report found that the company has lost over 7% of its subscribers in four years. Meanwhile, content costs, especially for ESPN, have increased significantly.

So, naturally, you'd expect Disney's Media Network's division to underperform in its recently reported earnings -- and you'd be wrong.

Actually, Media Networks was a source a strength
In Disney's fourth fiscal quarter, its Media Networks division actually overperformed on a comparative basis. While Disney overall increased its revenue 9% on a year-on-year basis, pulling in $13.5 billion, Media Networks increased 12%. The division even became more profitable, turning 31.2% of each dollar into segment operating income versus 27.5% in last year's quarter.

The company specifically mentioned ESPN as a reason for the operating-income improvement. In addition, Disney pointed toward full-quarter inclusion of the SEC Network for revenue increases. Long story short, in this quarter it seems as if sports programming provided tailwinds to revenue and earnings growth -- not headwinds.

And it wasn't just Disney, 21st Century Fox (NASDAQ:FOXA) reported higher affiliate fees and advertising revenue in its Cable Network Programming because of its Fox Sports 1 network. Not only this, but a host of cable-delivery companies have also reported better-than-expected subscriber figures, leading many to think cord-cutting will slow going forward.

A mea culpa or sorts ... for one quarter, at least
In full disclosure, I've been bearish about Disney's short-term prospects. Simply put, if the company's Media Networks division starts to falter, I'm unsure how other divisions can make up for the underperformance. More recently, bulls have talked up its Studio Networks division, and the upcoming Star Wars trilogy, as a catalyst. However, it will be hard for movies to consistently replace lost Media Networks revenues and profits.

However, this line of thinking is contingent upon having the company's Media Networks division really falter. Although ESPN has recently taken a few steps to control costs, announcing it will lay off as many as 350 employees, it seems as if the division's profitability is not as much at risk as many thought -- yet. I'll continue to watch the greater subscription TV industry for signs of continued cord-cutting, and I'm not totally sold this risk is overblown, but Disney's fourth-quarter report went a long way toward silencing critics.