Morningstar | Disney Beats 2Q Expectations; Disney+ Launch and Fox Integration Underpin Transformational 2019
Disney posted a slightly better than expected fiscal 2019 second quarter as both revenue and EBITDA beat consensus expectations. The firm continues to execute well which should help with the integration of the Fox entertainment assets and the launch of Disney+ later this calendar year. These two events are the key parts of a transformational year for the media giant as it jumps into the highly competitive direct-to-consumer market. We are maintaining both our wide moat rating and our fair value estimate of $130. With shares trading in 3-star territory, investors may want to wait for a pullback prior to investing.Revenue for the second quarter was up 3% year over year at $14.9 billion. The media networks segment posted flat revenue growth as affiliate fee revenue growth was offset by lower advertising and distribution revenue. Affiliate fee revenue was up 4% in the quarter as the 7% higher rates more than offset the 2% decline in subscribers and the 1% negative impact of the new revenue recognition standard. Advertising revenue at broadcast networks was down over 3% as higher pricing was more than offset by lower impressions due to ratings. Ad revenue at the cable networks fell 2% as ESPN aired both college football playoff semi-final games last year versus none this year.
The parks, experiences & consumer products segment posted 5% year-over-year growth, as the parks and resorts business remains a key growth driver for Disney. Compared with last year, domestic attendance was up only 1% but per capita spending grew by 4% and per room spending improved by 1%. The increased admission pricing does not appear to have deterred park goers or dampened their in-park spending. Revenue at the studio fell 15% due to a difficult comp at the box office and home distribution. Segment operating margin for the firm fell to 25.6% from 29.1% as the revenue growth was more than offset by the increased programming costs and weaker studio results.
Avengers: Endgame has already grossed over $2.3 billion worldwide at the box office in just 12 days, making the film the second-highest grossing film behind Avatar. Management just announced that the film will make its streaming debut on Dec. 11 on Disney+, one month after the service will launch in the U.S. The firm recently updated its plans for theatrical releases with release dates set for 65 films though the next eight years. The combined Disney and Fox studios will release 15 more films this year and 19 in 2020. The Avatar franchise will relaunch in December 2021 with the second movie and will be followed up in December 2023, 2025, and 2027. The new additions include three new Star Wars films which will be released in December 2022, 2024, and 2026, meaning that every holiday season from 2021 to 2027 will see the release of either a new Avatar or Star Wars film. Disney also announced seven untitled Marvel films for 2020 to 2022 which could be supplemented by further X-Men or Fantastic Four films now that those franchises are back under the control of Marvel Films.
While the total number of films on an annual basis is lower than the recent annual slates from other major studios, the franchises that underpin the films should help Disney maintain its dominance of the box office in the U.S. and worldwide. Most of these films will be available on Disney+ or Hulu within six to seven months of their theatrical release. This ongoing creation of content with established and new intellectual property will help Disney+ in its battle to obtain and retain subscribers. Unlike Netflix, the service will have the benefit of a slate of movies that people have already heard of due to the marketing efforts around the theatrical release. As the number of streaming services grow and the amount of original content expands across these services, discovery will become increasingly important and difficult for streaming platforms, particularly for content based on brand new intellectual property. Disney’s marketing efforts for its film slate and their relative theatrical performance should alleviate some of the discovery issues for Disney+ while also helping to attract new subscribers.
Walt Disney is an entertainment company. The company's segments are: Media Networks, which includes domestic cable networks, broadcast television network and domestic television stations, and television production and distribution; Parks, Experiences and Products, which includes theme parks and resorts, and consumer products operations; Studio Entertainment, which includes motion picture production and distribution, music production and distribution, and post-production services; and Direct-to-Consumer and International, which includes international television networks and channels, direct-to-consumer streaming services, and other digital content distribution platforms and services.
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