The following financial analysis of The Walt Disney Company’s recent quarterly earnings report will become a regular feature of NavFile’s coverage of the company. David Aughinbaugh II will be analyzing the firm’s performance each quarter and providing insights and commentary on the company's direction. In addition to this report, David will also be providing video or audio commentary on each quarter.
The Walt Disney Company First Quarter Financial Analysis Materials
In addition to this article, the following are some additional materials to support this article.
Slideshow supporting this article (PDF file)
The Walt Disney Company had a relatively stable start to fiscal 2019 year. The company beat analyst expectations on earnings and the firm also slightly beat expectations for revenues. Disney reported earnings per share (EPS) of $1.84 and revenues of $15.303 billion dollars. Expectations were for EPS of $1.55 and revenues of $15.142 billion dollars according to Reuters. The company beat earnings per share expectations by 18.71 percent and revenue expectations by 1.06 percent.
Performance of Walt Disney Company’s Media Networks and Parks, Experiences, and Consumer Products divisions led the way and helped the organizations rise above expectations. Studio Entertainment and Direct-to-Consumer and International were the two worst performing divisions for the quarter.
Above: The Walt Disney Company Logo featuring Mickey Mouse.
Overall Performance Takeaway
The results for the first quarter show that The Walt Disney Company is performing reasonably well. As with previous quarters, Parks and Resorts is leading the way with solid results that are significantly helping the company. Growth within the Media Networks division is also another positive for the company. Studio Entertainment has seen its revenues and profitability decline sharply from last year; however, the firm notes that several strong movie releases during last year's quarter are the basis for the negative comparable financials for the 1st quarter of 2019. Direct-to-Consumer and International saw declines in revenue and more considerable losses when compared to the first quarter of 2018. Disney reports that declines for the segment were due to investments in ramping up ESPN+ and the upcoming Disney+ streaming services.
Disney’s financial performance for the quarter was solid. The main areas to watch going forward will be the Direct-to-Consumer division. If the Disney+ launch later this year is successful it can help the company grow. If the firm can get Direct-to-Consumer to produce profits for the company, Disney’s financial performance will be significantly enhanced.
Studio Entertainment’s weakness is a downside for the company at this moment; however, if the firm can get quality results from upcoming movies, then the organization will be in good shape. The performance of this division is a red flag for the firm, however.
If Direct-to-Consumer and Studio Entertainment results improve and Media Networks and Parks, Experiences, and Consumer Products continue their positive results, the company will be in great shape. On the other hand, the company did see segment operating income decline by 8 percent and comparable EPS decline by 3 percent when compared to Q1 2018.
Key Segment Financial Results Review
This segment saw revenues and operating income increase by 7 percent from last year. Broadcasting was the primary driver of growth as revenues for the mini-segment increased by 12 percent and profit increased by 40 percent. Equity in the income of the investees (The company’s A+E holdings) saw its earnings increase by 13 percent.
Cable Networks was the weak point in the segment as it saw its profits decline by 6 percent from last year despite seeing revenues increase by 4 percent. Disney blames ESPN’s and Freeform’s performance for the weakness. ESPN had increased costs, while Freeform saw lower advertising revenue and program sales.
Parks, Experiences, and Consumer Products
The strongest division for the company saw its revenues increase by 5 percent while operating income increased by 10 percent. The operating margin for the segment increased to 31.5 percent from 30 percent in the prior year. Domestic theme parks were the main drivers of the solid results as increased ticket prices and increased merchandise and food spending were responsible for the rise in income. International theme parks and resorts did not perform well, and income was down. Hong Kong Disneyland Resort was the exception as the resort saw income rise due to increased purchases and room stays.
Licensing income for Disney declined due to reduced revenues from Cars and Star Wars branded products.
Above: A photo of the Walt Disney World Entrance by David Aughinbaugh II.
Disney reported that Revenues for the quarter were at $1.8 billion and operating income at $309 million. Revenues for this division declined by 27 percent, and operating income dropped 63 percent from last year’s quarter. The company was unable to match last year’s strong film releases that included Star Wars: The Last Jedi and Thor: Ragnarok. TV and streaming video on demand was able to help results slightly as Incredibles 2 and Avengers: Infinity Wars did better than last year’s releases.
Direct-to-Consumer and International
This division saw its revenues decline by 1 percent to $918 million dollars and its operating loss increased by 224 percent from Q1 2018. The increase in operating losses was due to greater technology services costs for its streaming services platform. In addition, The company is preparing to launch Disney+ later this year.
Cash Flow Review
Cash Flows for the quarter declined by 6 percent when compared to Q1 2018. The company reported Cash Flows of $2.099 billion dollars and free cash flow of $904 billion dollars. Free cash flow declined by $352 million dollars or 28 percent. Investments in parks and resorts were the main items that contributed to the decline in cash flow. The company is preparing to launch Star Wars themed lands and other attractions at Disneyland California and Walt Disney World Resort later this year. Those attractions and other future improvements are likely behind the decrease in free cash flow.
What to Watch For
The main areas that will affect the future performance of the company include Disney’s streaming services growth, Parks and Resorts expansion projects, and Studio Entertainment’s operations.
Walt Disney Company’s streaming services can be a key area of growth for the company going forward. If the firm is successful with its upcoming Disney+ service and its current ESPN+ service, the company will have added a new division. It has yet to be seen if Direct-to-Consumer can yield a profit so this will be the central area of focus going forward.
Parks and Resort’s operations are expanding as the company is introducing new Star Wars themed lands in Disneyland California and Walt Disney World Resort. The company is also adding new attractions to Walt Disney World Resort. How these new attractions impact Disney’s performance will have to be seen. Will the new attractions increase guest traffic, spending, or relieve the crowding of the parks that have been seen in recent years? Those factors will affect the future performance of the firm.
Studio Entertainment’s recent decline for this quarter was slightly out of the ordinary for the company as the firm’s Q1 2018 and 2017 results were the same. Will the segment be able to climb back to have the same performance as 2018 and 2017?
The Walt Disney Company had a solid quarter that was better than analyst estimates. Media Networks and Parks, Experiences, and Consumer Products were the two divisions that helped the firm perform well during the quarter. Studio Entertainment saw sharp declines in revenue and operating income when compared to Q1 2018, which was an area of concern. In addition, Direct-to-Consumer & International saw increases in losses; however, the firm’s ESPN+ subscriber count has increased to 2 million subscribers. Going forward, the performance of Disney’s parks and resorts, streaming services, and Studio Entertainment will be critical areas to watch due to the importance they play in the financial results for the company.