It seems we’re regularly seeing Disney earnings come in below expectations, ESPN blamed for the miss, and Disney stock dropping as a result. That’s what happened in May (where Disney missed targets for the first time since March 2011), and that’s what happened Thursday when Disney posted fourth-quarter earnings of $1.10 per share (down eight per cent from the previous year) on revenue of $13.14 billion (down 3 per cent from the previous year), below the consensus estimates of $1.16 a share on $13.52 billion in revenue. That caused Disney stock to drop three per cent in after-hours trading, and as Jacob Primuk writes at CNBC, an ESPN downturn appears to have been a key reason why:
Media networks are Disney’s biggest source of sales, followed by parks and resorts, studio entertainment, and consumer products. Media networks revenue fell 3 percent from the prior year to $5.66 billion, while operating income dropped 8 percent to $1.7 billion. The segment’s sales were in line with Wall Street expectations, according to StreetAccount consensus estimates.
The company said it saw operating income fall for its cable networks partly due to ESPN, which “reflected lower advertising and affiliate revenue and higher programming and production costs.”
It’s interesting that this comes shortly after Nielsen coverage estimates suggested ESPN, ESPN2 and ESPNU lost a combined 1.9 million subscribers in a month. ESPN pushed back against those numbers and Nielsen briefly pulled them, but then said they stand by them. Significant subscriber loss would certainly hurt ESPN’s bottom line given how much of their income comes from a per-subscriber fee, and that might be part of what’s going on here. However, lower advertising revenue and higher production costs also could be a major factor. (It’s interesting that 21st Century Fox’s earnings report earlier this month also reflected rising sports programming costs, particularly at their regional sports networks and international networks, but that cable network revenues increased by more than enough to offset that; their cable sports channels are lumped in with Fox News and other non-sports channels, so we can’t directly compare, but their overall cable network division seems to be performing well.)
It’s also worth noting that ESPN is far from the only Disney unit hurting; media networks (which includes ESPN and much more) particularly dropped, but while parks and resorts and studio entertainment sales both rose year-over-year, they both missed analyst expectations as well. The Street analyst Ron Grover wrote that it’s highly unprecedented to see all Disney units struggling this way:
Disney’s strength has always been its diversity, its many units that usually offset one another in times of a downdraft.. this quarter, they are showing negative operating earnings at all of them !!! media networks (cable and broadcast), parks, studio entertainment and consumer products… I have covered this company for more than two decades and I have never seen that, never!!!
We’ll see where Disney and ESPN go from here, but it’s clear that investors and analysts aren’t all that pleased with how ESPN is doing right now. That could change, especially as ESPN’s planned over-the-top service gets closer and if new ratings metrics start counting the people who watch in bars or through streaming TV services, but there’s a lot of criticism of ESPN’s current impact on Disney’s bottom line. That could boost the chances of the recently-floated idea of Disney spinning off ESPN. It will be worth keeping an eye on how analysts and investors react to these earnings over the next few days, and if it leads to any particular changes from ESPN.