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Disney (NYSE:DIS) reported strong Q3 fiscal 2012 earnings, driven by growth across several businesses including its media networks, filmed entertainment, parks & resorts as well as consumer products. This is more or less in-line with our previous expectations (see Disney’s Earnings Should See Broadbased Growth Across Businesses). Below we give a quick snapshot of Disney’s results and what really matters.


ESPN’s Operating Income Down, Full-Year Expectation Unaffected

Approximately 45% of Disney’s value can be attributed to ESPN and related channels. ESPN charges a subscription fee (per subscriber per month) which is highest in the industry. This fee has increased from about $3.26 in 2007 to about $4.69 in 2011. This year has seen a further increase in this fee and it appears that ESPN is now charging somewhere around $5.15 per subscriber per month [NBC Sports Network’s Olympic Ambitions, Businessweek, July 5 2012]. Despite this fee increase, the company’s operating income declined this quarter compared with the same quarter the previous year. However, this is a temporary issue due to timing of revenue recognition and full-year expectations remain unchanged.

ESPN is still dominating when it comes to sports and along with subscription fee increase, the ad pricing for the channel is also experiencing healthy growth. In Q3 fiscal 2012, ESPN’s ad revenue grew by roughly 15% (mid-teens) driven by high ratings as well as improved pricing [Disney’s Q3 Fiscal 2012 Earnings Trancript]. The ad inventory was efficiently utilized as well, driving up the unit sales.

Disney Channel Gave A Boost

Disney Channel is another flagship channel for Disney, besides ESPN. It recently surpassed Viacom’s (NASDAQ:VIA) Nickelodeon to become the top-rated channel on cable. As expected, the performance is paying off and Disney stated that the channel was the prime driver of cable networks revenue growth due to contractual increase in subscription fee [Disney’s Q3 Fiscal 2012 Earnings Trancript]. Nevertheless when seen in context of the whole company and compared with ESPN, Disney Channel is still a small value contributor.

Significant Improvement In Film Business

As expected, Disney’s filmed entertainment business did very well compared with the previous quarter. Compared with Q3 of fiscal 2011, it was more or less flat despite success of the blockbuster "Avengers." Nevertheless the profits were significantly higher. The essence is that even though revenue was roughly flat year-over-year, profits increased because costs were limited to fewer movies. "Avengers" single-handedly drove a significant proportion of the profits. We estimate that the movie business constitutes close to 10% of Disney’s value.

"Avengers" has developed into an important franchise for Disney and the company’s several other businesses such as cable networks, broadcasting, consumer products etc. are working to leverage this franchise to boost their own sales. Therefore, the true value of such franchises is not limited to box office or DVD sales.

Disney is planning to leverage marvel’s characters and the animation unit’s efforts to bring more potentially successful movies over the course of the next few years. The company is launching classics Finding Nemo and Monsters Incorporated in 3D toward end of this year. Furthermore, the sequel of "Avengers" and some other movies based on characters such as "Iron Man," "Thor" and "Captain America" are lined up for next couple of years. This suggests that Disney could continue to perform well in the movie business.

Parks & Resorts Did Well

Disney’s parks & resorts business, which constitutes a little over 10% of Disney’s value, demonstrated continued demand despite slow economic recovery. The attendance and average guest spending increased and the launch of Disney’s new cruise was a success [Disney’s Q3 Fiscal 2012 Earnings Trancript]. The company is making several investments in this area and 2012 is likely to see high capital expenditures, thus suppressing cash flows from this business. Over time, these investments will pay off and capital spending will come down (as % of revenue).

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Source: Disney's Engines For Growth Are Still Purring