Disney's Parks and Resorts helped lead the company to record results. But investors were watching another division. Image source: The Walt Disney Company.

The Walt Disney Company (DIS 1.54%) and Wall Street seem to be on Jakuu and Takodana wheen it comes to the company's recently reported first-quarter performance. The company was ebullient when it reported record results by posting $15.2 billion in revenue and diluted earnings per share of $1.73, year-on-year increases of 14% and 36% respectively. Disney's results exceeded analyst expectations of $14.75 billion and $1.45 by a strong amount as well. Futhermore, CEO Bob Iger and his C-suite reaffirmed earlier guidance statements.

So Disney hit the trifecta -- beat revenue, earnings, and reaffirmed earlier guidance -- and investors should have been rewarded by higher stock prices, right? No – Disney sold off to the tune to 4.7% in the after-hours markets. The reason why Wall Street is nervous about Disney's path forward has to do more with the composition of Disney's earnings than the actual numbers.

Disney's earnings continue to support the most-bearish narrative
For Disney, this was a quarter driven by the huge commercial success of the company's Star Wars: The Force Awakens film. As of this writing, the movie has grossed over $2 billion in box-office receipts and is the No. 3 highest grossing movie. As a result of the movie, Disney's Studio Entertainment experienced 86% year-on-year operating income growth. 

Operating income

SegmentQ1 '16% of TotalQ1 '15% of TotalYoY Growth
Media Networks $1,412 33.1% $1,495 42.2% (6%)
Parks and Resorts $981 23% $805 22.7% 22%
Studio Entertainment $1,014 23.8% $544 15.3% 86%
Consumer Products & Interactive Media $860 20.2% $701 19.8% 23%
Total $4,267 100% $3,545 100% 20%

Source: Disney's Q1' 16 earnings filing. Revenue figures in millions.

Disney's growth cannot be disputed. Overall, the company grew segment operating income 20% over last year's corresponding period. In every defined segment Disney grew operating income...except for one. Disney's media networks division contracted 6% during this period and contributed nearly $83 million less to Disney's operating profit.

For investors, Disney's media networks division has been a cause for concern as the dual risks of a slowing or declining top-line through cord-cutters and increased programming costs (read: ESPN's deals with NCAA, NFL, and NBA) have led many to expect slowing/declining segment operating income. That appears to have happened here, and investors know they can't depend upon a Star Wars' level success from the studio entertainment division every quarter if Disney's largest division underperforms.

Margin compression for ESPN
Iger discussed ESPN in the company's conference call by noting an uptick in subscribers and pointing out the network's partnership with DISH Network's SlingTV. And this quarter appeared to support Iger's thesis as total revenue grew 8% for the division.

Media Networks

MetricQ1 '16% of Total RevenueQ1 '15% of Total RevenueYoY Growth
Affiliate fees $2,960 46.7% $2,854 48.7% 4%
Advertisement $2,619 41.4% $2,335 39.8% 12%
TV/SVOD distribution $753 11.9% $671 11.5% 12%
Total revenue $6,332 100% $5,860 100% 8%
Operating income $1,412 22.3% $1,495 25.5% (6%)

Source: Disney's first-quarter earnings filing. Figures in millions.

Unfortunately, the 8% year-on-year revenue growth isn't as clear cut as it seems. The 4% growth Disney produced in affiliate fees was fully based on higher contractual rates (7% growth) with offsets of 2% each from lower subscribers and forex headwinds. The key here is Disney's host of channels are losing subscribers and it's hurting top-line growth. At this point, the company is able to raise rates on existing subscribers, but that potentially can encourage new cord-cutters.

Normally, investors can take solace in the fact Disney grew advertisement revenue 12%, but even that has an asterisk. Disney reports that the growth this quarter is mostly due to a favorable seasonal adjustment because of the College Football Playoffs. This quarter, Disney reported ad-based revenue for six CFP games that were aired in the second quarter of 2015. In effect, these favorable results were just "pulled forward" rather than organic growth making the year-on-year comparison misleading.

There was a cost for this content, however. Disney reported $400 million in increased programming costs because of higher contractual rates for college and professional football. As a result, Disney's total media network expenses grew 12% -- above the revenue-growth rate for the division—and resulted in margin contraction of 3.2 percentage points, from 25.5% in 2015 to 22.3% today.

In addressing the margin compression, Iger stated segment operating income would have been similar to the revenue-growth rate if not for the college-football timing issue, which hints to the fact sports deals are not as value accretive as the rest of Disney's media division. Even with record revenue, questions of Disney's media networks division persisted. And that's why investors are taking a wait-and-see approach in regard to Disney's path forward.