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5 Key Takeaways From Walt Disney Co.'s Q2 Earnings Call

By Beth McKenna - May 18, 2016 at 1:58PM

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Don't miss these ESPN takeaways and management quotes about the entertainment giant's lucrative licensing business, powerful leveraging chops, and more.

Image source: Disney.

Walt Disney Co. (DIS -0.71%) reported second-quarter fiscal 2016 results last week. The entertainment giant's year-over-year revenue increased 4.1%, and adjusted earnings per share rose 10.6%. While these are solid results for a company of Disney's size, the market sent shares tumbling about 5% after earnings were released because both numbers fell short of analysts' expectations.

Long-term investors should remember that Wall Street is focused on the short term. (You can read my full earnings take here.) To provide color on the results, here are five key takeaways from Disney's analyst conference call. (Transcript via Seeking Alpha.)

1. Pursuing opportunities to thrive in a changing TV-viewing market

As with the last three quarterly calls, there was once again much talk about sports cable network ESPN's modestly declining subscriber count, cord-cutting and cord-slimming, and Disney's plans to adapt to a somewhat changing TV-viewing market. Consumers are increasingly opting out of cable or trimming their traditional expanded cable packages. Streaming services are a huge factor in this phenomenon.

You can read my article on what Disney CEO Bob Iger said about this topic here. Takeaways:

  • Look at Disney as a whole. It's been performing great, despite the slowly declining number of cable subscribers.
  • Disney is aggressively pursuing opportunities that will enable it to thrive in a changing market. These include getting ESPN included in skinny bundles offered by Dish Network and Sony, negotiating to have it included in other light bundles, and exploring additional direct-to-consumer subscription streaming services beyond DisneyLife in the U.K.
  • Disney has time to fine-tune its strategies. The expanded cable bundle will remain the dominant consumer media product for at least the next five years, opined Disney CEO Bob Iger. 

2. Iger "currently" has no plans to extend CEO contract

From Iger's remarks:

I have just over two years left on my contract as CEO ... And the board is very actively engaged in a succession process as it has been actually for some time. ... I have nothing really to add in terms of the extension of my contract except that I don't currently have any plans to extend beyond ... June of 2018.

Iger's contract expiration has taken on greater importance because Tom Scaggs, former COO, recently left Disney. Scaggs was widely viewed as Iger's successor. Iger's answer wasn't a definitive "no," so there could be a chance that he stays on past June 2018.

3. Licensing business remains strong

Disney's consumer products and interactive segment's operating income declined 8% from the year-ago period. This segment includes the company's lucrative licensing segment. From CFO Christine McCarthy's remarks:

[O]ur underlying Merchandise Licensing business remains very strong. On a comparable basis, earned licensing revenue was up 18% in the second quarter. This was driven by strong ongoing demand for Star Wars merchandise, partially offset by the expected difficult year-over-year Frozen comparison. Merchandise Licensing was also affected by lower minimum guarantee shortfall recognition in the quarter, which relates to the shift in our fiscal calendar.

Disney has largely built its empire upon its licensing prowess, which is second to none. McCarthy drove home the point that this business remains robust, despite the decrease in the segment's operating income. The decline was due to the adverse impact from foreign exchange as well as lower results from the Disney Store business and the Disney Infinity console gaming business. The company took a $147 million charge in connection with the shutdown of Infinity. 

4. Committed to driving shareholder value

From McCarthy's remarks:

We continue to actively repurchase our shares, and in the second quarter, we bought back 20.8 million shares for $2 billion. Fiscal year-to-date, we've repurchased about 47.3 million shares for approximately $4.9 billion.

Stock buybacks result in a company's EPS increasing faster than its net income. EPS results typically drive stock prices, so buybacks are very beneficial for shareholders. They're a more flexible way than dividends for a company to drive shareholder value. 

Some investors grumble about Disney's modest dividend -- its yield is currently 1.4%, vs. the S&P 500's average of 2.1%. Granted, this makes the stock less attractive to income investors. However, maintaining a dividend less than what it could typically comfortably afford is a wise move. Disney needs to maintain much cash on hand, so it can scoop up attractive big acquisitions that may come its way, like Pixar, Marvel, and Lucasfilms (which brought it Star Wars). It also needs a fat wallet to fund its ambitious park expansion efforts. 

5. Studio entertainment is a golden leveraging magic wand

A terrific quote from McCarthy:

The success of our Studio is no accident. It is the result of our strategy of making high-quality branded films and leveraging that success across a number of our integrated businesses. No company does a better job than Disney in creating, cultivating and extending the value of a franchise. As a result, when we have a successful film franchise, we're able to drive industry-leading returns on investment.

As an example of McCarthy's point, the phenomenal box office success of Star Wars: The Force Awakens has also been driving results in the consumer products and interactive segment, as the demand for merchandise based on the film has been incredibly robust. The movie's success will also continue to increase the value of visits to its theme parks, as Disney's opening various film-based exhibits. In turn, the merchandise and park exhibits based on the movie will keep interest in the franchise high, so consumers will be primed to run to theaters when the next Star Wars film opens this December. 

Studio entertainment has been rocking. Its year-over-year revenue increased 22%, and operating income jumped 27% in the quarter. Growth was powered by the worldwide theatrical success of The Force Awakens and Zootopia. The latter is currently the year's highest-grossing film worldwide, with a box office take of $969.8 million, as of May 15. The hit-movie party is continuing in the third quarter, with Captain America: Civil War and The Jungle Book currently the year's Nos. 2 and 4 top-grossing movies worldwide, respectively. Soon to open in the quarter: Alice Through the Looking Glass in May and Finding Dory in June.

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