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Executive summary:

  • One the best companies in the entertainment space.
  • MyMagic+ is all set to become a major margin booster for the company in the times to come.
  • Content/Character monetization is gaining momentum and all the segments are becoming more and more interrelated.

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Powered by a decent revenue growth and an exceptional margin improvement Walt Disney (DIS) announced the excellent results for the first quarter of FY 2014. Ever since the company came out with the results, its stock price has been surging ahead and is currently hovering around its 52 week high.

Commenting on the results Robert A. Iger, Chairman and CEO, The Walt Disney Company said, "We had an incredibly strong first quarter, delivering a 32% increase in adjusted earnings per share and double-digit increases in operating income in all business segments," "These results reflect the strength of our unprecedented portfolio of brands, a constant focus on creativity and innovation, and the continued success of our long-term strategy."

I will dig deeper into the results to find out whether the rally is the stock price is justifiable.

First, the results:

For the latest quarter, Disney reported revenues of $12.3 billion, up 9% from $11.3 billion a year earlier, and net profit of $1.8 billion, up 33% from $1.4 billion a year earlier. On per share basis, the earning per share stood at $1.04, up 32% from $0.79 during the same period last year.

Segment-wise (along with analysis):

  • Media Networks:

Media Networks segment generated 43% of the company's revenue for the last quarter. The segment's revenue grew 4% to $5.3 billion from $5.1 billion a year earlier. Its operating profit grew 20% to $1.5 billion from $1.2 billion a year earlier. The growth in the revenue was fueled by 6% increase in Cable Networks revenue, partly offset by 2% decline in Broadcasting revenue.

Outcome:

Media Networks is the largest segment for the company. Considering the scale of the segment, the revenue growth is good. There are multiple reasons behind the revenue growth, such as increase in affiliate and advertising revenues, and the absence of equity losses.

After the exit from ESPN STAR Sports joint venture and ESPN UK, the segment is emerging as a much stronger unit. The unit shall continue perform well in the near future. The key positive about the performance is operating margins that improved by 371 bps (year over year).

  • Parks and Resorts:

Parks and resort segment delivered a solid performance during the quarter and generated 29% of the company's revenue for the quarter. The segment's revenue grew 6% to $3.6 billion from $3.4 billion a year earlier. Its operating profit grew 16% to $671 million from $577 million a year earlier.

The growth was led by the domestic operations while Disneyland Paris lagged behind. The domestic operations were boosted by the increased guest spending at Walt Disney World and Disneyland Resort, as the per-capita spending was up an impressive 8% on the higher ticket prices and food and beverage spending. The average per room spending at its domestic hotels was up 5% compared to the prior year.

Outcome:

Parks and resort is the second largest segment of the company. The company has been investing heavily in the segment for the last many years, which is showing its positive effect on the revenue and margins of the segment. In FY 2014, the effect of these investments shall continue to show its positive effect. However, a lot will depend on economic conditions that till now look good.

  • Studio Entertainment:

For the latest quarter, Studio Entertainment segment generated the revenue of $1.9 billion, up 23% from $1.6 billion a year earlier, and the operating profit of $409 million, up 75% from $234 million a year earlier. The results were primarily boosted by the strong performance of Frozen and Marvel's Thor: The Dark World.

Outcome:

The success of the company's movies is the key factor behind the good performance of the segment. Many popular titles are scheduled to be released in the near future. The quantum of the success of the titles will determine the future outcome of the segment.

  • Consumer Products:

Consumer Products segment generated the revenue of $1.1 billion, up 11% from $1 billion a year earlier. The segment's operating profit grew 24% to $430 million. The growth in the operating income was primarily due to the gains in Merchandise Licensing. The licensing growth was driven by the inclusion of Lucasfilm's results, as well as higher revenue from Planes, Disney Junior properties and Monsters.

Outcome:

The segment yields the highest margins for the company. The success of the segment depends on the popularity of the characters and movies that belongs to the company. The rising popularity of Disney Junior shall make it sure that the company gets steady revenues from the segment.

  • Interactive:

Due to the success of Disney Infinity, the segment reported a growth of 38% in the revenue, which touched $403 million as compared to $291 million during the same period last year. The operating results improved to $55 million from $9 million a year earlier.

Outcome:

Infinity is the game changer for the segment. The long-term success of the segment will depend on how well Infinity will carry-on with its initial success.

Conclusion:

The company reported another record quarter due to record attendance at Walt Disney World, Hong Kong Disneyland and Tokyo Disney Resort; the popularity of Disney Infinity; the strong demand for Frozen, Star Wars and Disney Junior merchandise; the success of Disney Animation's Frozen, Marvel's Thor: The Dark World, and Walt Disney Studio's Saving Mr. Banks. All these things led to the revenue as well as margin expansion.

  • Margin expansion:

For the quarter, the most positive outcome for the company is the operating margins that showed an exceptional improvement (year on year). All reportable segments showed the marked improvement (see the table below).

Q1 FY 2014

Q1 FY 2013

Change %

Media Networks

27.50%

23.80%

3.71%

Parks and Resorts

18.65%

17.02%

1.64%

Studio Entertainment

21.61%

15.15%

6.46%

Consumer Products

38.19%

34.16%

4.03%

Interactive

13.65%

3.09%

10.55%

During the quarter, the company continues to move ahead with an excellent strategy and its ongoing capital investments like MyMagic plus.

  • MyMagic+:

The company is moving forward with a vision to grow revenues along with the margins. One of the key growth initiatives, which the company expects to come into play in the coming months is MyMagic+.

MyMagic+ is the unique initiative by the company, which is entirely focused on the customer experience as it enhances the quality of the time that the customers spend at its parks. In simple words the company hopes that with this initiative it will give the customers much more time for entertainment and thereby offers the company more business opportunities. The initiative is in the early stages of rollout. During the quarter, the company for the first time experienced the success of MyMagic+. As per the company:

"To give you, for instance, our Parks people in Walt Disney World believe during the peak holiday season that we were able to accommodate about 3,000 more additional guests in the Magic Kingdom per day. Thanks to Magic+."

The initial success of the MyMagic+ is great news for the company, as its billion dollar investment will not only enhance the customer experience but also will allow it to generate more revenues through better asset utilization, in the future. The key thing to be noted here is that major part of the incremental revenues that the company will generate due to MyMagic+ initiative should add to the profits, which means MyMagic+ will be a significant margin booster for the company.

  • Strategy:

The results once again reaffirms the success of the company's strategy that is focused on to tap the success of its characters and franchises across the multiple platforms such as TV shows, theme parks, merchandising, etc. The strategy allows the company to use the success of its movies and popularity of its characters to earn additional revenues. For example, success of Frozen allow the company to earn better revenues from its Consumer Products segment by selling merchandise related to Frozen.

All in all, results one again reaffirm that the company is one of the best companies in the entertainment space, and holds the future that points towards decent growth due the company's brand portfolio and excellent strategy that allow the company to tap the success of its content and characters to the fullest extent.

With the on-going rollout of MyMagic+ and the busy schedule of upcoming movies the future of the company looks exciting. The expected opening of Shanghai Disneyland in 2015 will further enhance the company's growth possibilities in emerging markets. However, a lot will depend on the economic conditions and the success of the company's content (primarily movies), but overall the company is moving ahead with a great strategy and there is every reason for the company to feel confident about its future growth.

Disclaimer: Investments in stock markets carry significant risk, stock prices can rise or fall without any understandable or fundamental reasons. Enter only if one has the appetite to take risk and heart to withstand the volatile nature of the stock markets.

This article reflects the personal views of the author about the company and one must consult its financial adviser before making any decision.

Source: Walt Disney: MyMagic Plus Should Show The Magic In The Times To Come