EUR 850.00 For Business Accounts Only

Morningstar | Disney Ends FY2018 with Strong 4Q; Direct-To-Consumer and Fox Continue to Hold Center Stage

Disney ended its fiscal 2018 with a strong fourth quarter as revenue and EBITDA beat both the Street and our expectations. The studio segment outperformed again as the firm continues to benefit from a strong 2018 slate including Incredibles 2, the highest grossing Pixar film ever. The Fox media assets and the firm’s direct-to-consumer efforts continue to be the focus of CEO Bob Iger as the firm enters an important transitional fiscal year. We continue to believe the launch of Disney+ (the newly announced name for the firm’s SVOD) and the closing of the Fox acquisition will help boost the firm’s positive trajectory for the near future. We are maintaining both our wide moat rating and our fair value estimate of $130.

Revenue for the fourth quarter increased 12% year over year to $14.3 billion. Media networks revenue improved 9% due to growth at both cable networks and the broadcasting segment. Affiliate fee revenue was up 5% in the quarter as higher rates continue to offset the 1% decline in subscribers. The slide in subscriber losses slowed down from 2% in the last quarter and has decreased for five consecutive quarters. We note the slowdown is largely due to the continued uptake of the OTT pay TV services and proves the strength of Disney’s channel bundle which will be enhanced with the Fox channels including FX. Ad revenue at broadcast networks was flat as higher pricing and local political ad spending was offset by lower network impressions due to ratings.

Parks and resorts remain an area of strength with 9% growth as last year was impacted by Hurricane Irma. Domestic attendance was up 4% and per capita spending growth of 9% was impressive as was the per room spending growth of 8%. Revenue at studio improved 50% due to another strong theatrical quarter along with growth in television distribution. Segment operating margin for the firm expanded by 100 basis points to 23.0% as the revenue growth more than offset the increased marketing and programming costs.

While the Disney+ name does align branding wise with ESPN+ (which now has over one million subscribers), we believe that the firm could have been more inventive with naming such an important platform for the firm. Even recycling the Disney Life name from the U.K. SVOD service would have still used the Disney brand but in a more evocative manner. Despite the name, we remain positive on the potential impact of the service as management continues to dole details prior to the launch of the SVOD in late 2019. Iger disclosed that the firm will be bringing Disney+ to Europe and will be producing content locally in order to fulfill any government quota requirements. He also noted that the interface for the service will be brand-centric and tailored toward specific content. As we discussed in our recent Ad-hoc, “Netflix Needs to Chill: The Director’s Cut,” we expect that the elegant and brand-specific interface of Disney Life will serve as a template for the Disney+ experience. The firm plans to hold an investor day in April to further flesh out its DTC efforts which will include a preview of Disney+.

Beyond Disney+, the firm will also control 60% of Hulu after the Fox acquisition closes in the first half of 2019. Iger reiterated his plan to keep general entertainment on Hulu and family entertainment on Disney+. The company intends to sit down its minority partners (Comcast and WarnerMedia) and Hulu management to outline Disney’s strategy for third-largest SVOD service in the U.S. One strategy will include the international expansion for the service. While Hulu failed in its initial incursion outside of the U.S. into Japan, we believe that the platform could find success in Europe, particularly given its mix of content. However, we note that WarnerMedia plans to launch its own comprehensive SVOD and that Comcast may be less willing to sell its content to a service controlled by a direct rival. Even with these caveats, we think that Hulu can help to accelerate Disney’s DTC efforts. One potential method for leveraging Hulu would be a bundle of Hulu with Live TV, Disney+, and ESPN+ for under $50. This offer would provide subscribers with a skinny bundle of the most popular linear networks, access to two SVOD services with the libraries of both Disney and Fox, and even more live sports including UFC and other exclusive rights.