Disney Delights, Netflix Disappoints

I have covered the online movies section earlier in my Web 3.0 analysis. Two relevant companies in the discussion recently announced their results.

Walt Disney Company (DIS), the second largest American entertainment company reported its Q2 financials for the year raising doubts on the recessionary pressures.

Revenue for the quarter grew 10% annually to $8.71 billion, beating market expectations of $8.5 billion. EPS grew by a substantial 32% for the year to $0.58 compared to market’s views of $0.50. The growth happened despite the 100-day Hollywood writers strike in the quarter, and the growing economic pressures.

Its studio revenue grew by 18% to $1.82 billion. Parks and resorts revenues grew by 11% to $2.73 billion, products grew by 10% to $0.55 and media revenue grew by 5% to $3.6 billion.

The company has believed in a strategy of creating high-quality branded content with enduring franchise to be its key driver for the growth. The results this quarter were demonstrative of these efforts. Its ability to leverage this content in all of its business lines showed results. For instance, this quarter, the company launched High School Musical in it parks in the U.S., France and Hong Kong, and enhanced revenues in its product and studio entertainment through merchandising, music sales, concerts, and theatrical releases.

It continued to invest in locally producing content for its international markets. Additionally, the lineup for the rest of the year is quite impressive, and even includes 3D launches.

The company entered into the VOD marketplace through an experiment with Comcast Corp. (CMCSA) and recorded these sales as incremental to its current sales and not detrimental. It views VOD as an opportunity for movies to become widely more pervasive, and accessible in the next five years.

I have mentioned the need for Disney to acquire with the intent of deepening the children’s and family entertainment and sports verticals. The company should look at acquisitions in the in the teen-focused social networking space such as Xanga, hi5 and Tagged. The other teen/tween community micro-blogging site that it could also look at is Twitter. However, as of now Disney doesn’t seem to be looking there. Instead, it is looking at buying more development teams for its games titles, and branded program focused channels or businesses.

On Thursday, in after hours trading, its stock was up 2% to $34.50.

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While Disney beat the economic pressures, Netlfix (NFLX) succumbed to them. Despite being a devoted customer of Netflix, I have maintained a safe distance from investing in the industry. Its Q1 results added reason to my point.

Q1 revenues of $326.2 million recorded a 7% increase over the previous year Q1 revenues, narrowly missing the $327 million expectations that the market had for it. The company's EPS of $0.23 grew 44% over the year, but missed the street’s expectations by $0.01.

Results for Q1 were record performances for it in its six years as a public company. The subscriber net additions were at $764,000, Subscriber Acquisition Costs [SAC] reached $29.50 from $47.46 a year ago, and churn reduced to 3.9% from 4.4% a year ago. Its total subscriber base at the end of the quarter stood at 8.24 million.

However, this record performance was primarily attributed to the price increase by its prime competitor Blockbuster (BBI), instead of some defined strategy.

During the quarter, the company completed a $100 million buy-back program, repurchasing 3.8 million shares at an average cost of $25.99.

For the year, it is expecting its subscriber base to increase by 26% to 9.1-9.7 million and an EPS increase of 27% to $1.16-$1.29. Earlier, the company had projected an EPS of $1.18-$1.30. For Q2, it is projecting a subscriber base of 8.3-8.5 million, and EPS of $0.33-$0.42. Its outlook was short of market expectations of annual EPS of $1.32 and Q2 EPS of $0.41.

I talked about the embedding of Netflix in LG set-top boxes as a good experimental opportunity. The company feels it ability to offer online streaming and DVD rental at low cost and better service will aid in differentiation and future growth. This year it is planning to announce three more such partnerships where it will be able to deliver content on the Internet to its subscribers at no additional cost. That might be a good viewer engagement model, but it is definitely not a good long-term profitable model.

It really needs to be taking advantage of the community and content features. At the risk of sounding repetitive, Netflix has a great brand, huge traffic, yet its position as an online advertising venue has not been exploited very much.

The stock tumbled 14% on its outlook after having reached a new 52-week high of $40.90 just days before the announcement. It is currently trading at $30.15.

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