Dis­ney earn­ings hurt by its me­dia di­vi­sion

Net in­come falls 1%, rev­enue drops 3% amid TV woes

Los Angeles Times - - BUSINESS - By Daniel Miller and Stephen Battaglio

ESPN again weighed down the earn­ings of par­ent com­pany Walt Dis­ney Co. as the sports jug­ger­naut con­tin­ued to grap­ple with sweep­ing changes in the me­dia busi­ness.

Over­all, it was a weak fis­cal fourth quar­ter for Bur­bank-based Dis­ney, which re­ported net in­come of $1.75 bil­lion, down 1% from a year ear­lier. Rev­enue de­clined 3% and the com­pany failed to meet an­a­lysts’ ex­pec­ta­tions.

The com­pany’s me­dia net­works unit — whose crown jewel is ESPN — had a tough quar­ter, re­port­ing seg­ment op­er­at­ing in­come of $1.48 bil­lion, a drop of 12% from a year ear­lier. Its op­er­at­ing in­come de­clined on a yearover-year ba­sis for the sixth quar­ter in a row.

Within the unit’s ca­ble net­works group, which houses ESPN, seg­ment op­er­at­ing in­come de­clined 1% to $1.24 bil­lion. Dis­ney at­trib­uted the drop, in part, to lower ad­ver­tis­ing rev­enue at ESPN and higher pro­gram­ming costs for the net­work, which pays a pre­mium to carry Na­tional Foot­ball League and Ma­jor League Base­ball games.

On the same day Dis­ney an­nounced re­sults for the quar­ter that ended Sept. 30, The Times and other out­lets re­ported that ESPN would lay off about 100 em­ploy­ees this year across the di­vi­sion, which has 8,000 em­ploy­ees world­wide, ac­cord­ing to peo­ple fa­mil­iar with the plans who were not au­tho­rized to com­ment pub­licly.

ESPN went through a staff re­duc­tion of about 100 peo­ple in April, in-

clud­ing a num­ber of on-air per­son­al­i­ties.

A rep­re­sen­ta­tive for the net­work would not com­ment on the planned cuts, which were first re­ported by SI.com and CNBC.

ESPN has long been the profit en­gine for Dis­ney. But it has been squeezed by ris­ing sports rights costs at a time when pay-TV rev­enue has been un­der threat partly from cord-cut­ting. In 2010, ESPN was avail­able in nearly 100 mil­lion homes in the U.S. Now, how­ever, it is in about 87 mil­lion homes, ac­cord­ing to Nielsen data.

ESPN could once rely on cov­er­ing the costs of ex­pen­sive rights fees for events such as “Mon­day Night Foot­ball” and NBA bas­ket­ball by pass­ing them on to pay-TV providers who push the costs along to their cus­tomers. But con­sumers have grown re­sis­tant to pay­ing high pay-TV bills for con­tent they do not watch, which has helped to spur the cord-cut­ting phenomenon.

The down­ward trend — and a string of con­tro­ver­sies over ESPN per­son­al­i­ties and pro­gram­ming — has put mount­ing pres­sure on John Skip­per, who has served as pres­i­dent of ESPN since 2012.

Still, in a con­fer­ence call with an­a­lysts, Dis­ney Chief Ex­ec­u­tive Robert Iger ex­pressed op­ti­mism for the sports net­work.

“We’ve never lost our bullish­ness about ESPN,” Iger said. “The brand is strong. The qual­ity of their pro­gram­ming is strong. There are al­ways op­por­tu­ni­ties to im­prove .... But we like where ESPN is these days.”

Partly in re­sponse to the chang­ing me­dia busi­ness, Dis­ney re­cently out­lined bold plans to launch two Net­flix-like stream­ing ser­vices — one for sports and an­other for films and tele­vi­sion shows. The stand-alone sub­scrip­tion of­fer­ings are meant to ap­peal to younger au­di­ences who are turn­ing away from tra­di­tional me­dia. The sports ser­vice is sched­uled to de­but next year, while the one for films and TV shows is slated to come on­line in 2019.

On the con­fer­ence call, Iger said the sports ser­vice would be called ESPN Plus. ESPN, based in Bris­tol, Conn., will hire em­ploy­ees as it con­tin­ues to build up the dig­i­tal plat­form, which is be­ing de­vel­oped by BamTech, a stream­ing tech­nol­ogy firm that Dis­ney ac­quired a ma­jor­ity stake in this year. Iger said that pric­ing for ESPN Plus would be de­tailed next year.

Be­sides the me­dia net­works unit — whose ABCled broad­cast di­vi­sion saw a 15% drop in op­er­at­ing in­come — there were other weak spots in Dis­ney’s earn­ings re­port.

Dis­ney’s film stu­dio had a weak quar­ter, post­ing op­er­at­ing in­come of $218 mil­lion, off 43% from a year ear­lier. And its con­sumer prod­ucts and in­ter­ac­tive unit de­liv­ered op­er­at­ing in­come of $373 mil­lion, a de­crease of 12%. The com­pany’s parks and re­sorts busi­ness was a bright spot: It saw op­er­at­ing in­come in­crease 7% to $746 mil­lion.

An­a­lysts had pre­dicted earn­ings per share of $1.12 on rev­enue of $13.23 bil­lion in the fourth quar­ter, ac­cord­ing to Thom­son Reuters, but Dis­ney de­liv­ered ad­justed per-share earn­ings of $1.07 on rev­enue of $12.78 bil­lion.

Also on Tues­day, the com­pany re­ported full fis­cal year re­sults, which in­cluded net in­come of $8.98 bil­lion, a 4% drop from a year ear­lier. Rev­enue for the year was $55.1 bil­lion, down 1%.

As with most Dis­ney earn­ings calls, Iger took the op­por­tu­nity to break some news, an­nounc­ing that the com­pany has tapped film­maker Rian John­son, the direc­tor of the forth­com­ing “Star Wars: The Last Jedi,” to de­velop a new “Star Wars” film tril­ogy.

But one topic in the news was not broached — Dis­ney’s in­ter­est in ac­quir­ing 21st Cen­tury Fox’s movie and tele­vi­sion pro­duc­tion stu­dios, as well as a hand­ful of TV chan­nels, in­clud­ing FX and Na­tional Ge­o­graphic. Dis­ney ap­proached Fox about a po­ten­tial deal, but talks have stalled, ac­cord­ing to a per­son with knowl­edge of the mat­ter.

When an an­a­lyst asked Iger to com­ment about re­cent news re­ports on the talks, a Dis­ney ex­ec­u­tive said the com­pany would not “take any ques­tions on press spec­u­la­tion.”

Shares of Dis­ney rose 1.5% in reg­u­lar trad­ing to $102.68. In the af­ter-hours ses­sion, the stock dipped be­fore ris­ing nearly 1%.

Mark Zaleski As­so­ci­ated Press

ESPN HAS long been the profit en­gine for Dis­ney. But it has been squeezed by ris­ing sports rights costs at a time when pay-TV rev­enue has been un­der threat partly from cord-cut­ting. Above, an ESPN broad­cast.

Bar­bara David­son Los Angeles Times

AMONG THE weak spots seen in Dis­ney’s fourth-quar­ter earn­ings was its film stu­dio, which posted op­er­at­ing in­come of $218 mil­lion, off 43% from a year ear­lier. Above, the com­pany’s Bur­bank head­quar­ters.

Kelly Sul­li­van Getty Im­ages

ROBERT IGER, Dis­ney’s CEO, ex­pressed op­ti­mism for ESPN.

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