Cable Nets hit headwinds as Disney disappoints in Q3

Cable Nets hit headwinds as Disney disappoints in Q3
Joseph O'Halloran
| 08 August 2018

Just as it is prepping to finalise its $71 billion takeover of key 21st Century Fox assets to take on the digital giants, Disney has reported somewhat less than spectacular third quarter 2018 results.
disney 8Aug2018
Overall for the quarter ended 30 June 2018, the House of Mouse reported revenues of $15.228 billion, an annual rise of 7% and leading to nine-month revenue of $45.127, a similar increase compared with the same period in 2018. These were the drivers of Q3 net income of $2.916 billion, up 23% annually, and nine-month profit of $10.276 billion, a year-on-year rise of 42%.

Yet drilling down, the Disney TV divisions showed that the quarter was actually rather challenging. Media Networks revenues for the quarter increased 5% to $6.2 billion and segment operating income was comparable to the prior-year quarter at $1.8 billion. Yet as part of this, revenues for the quarter in the Cable Networks line inched up 2% to $4.2 billion and operating income actually fell 5% annually to $1.4 billion. The company attributed lower operating income was due to a loss at BAMTech — what will be one of the mainstays of the forthcoming direct-to-consumer plays — and a decrease at Freeform, partially offset by an increase at ESPN.

Disney noted that in Q3 BAMTech’s operating loss was a result of its acquisition of a controlling interest in the fourth quarter of fiscal 2017. It added that the loss at BAMTech reflected higher content and marketing costs and ongoing investments in their technology platform including costs associated with ESPN+, which was launched in April 2018. The decline at Freeform was said to be primarily due to lower advertising revenue and higher marketing costs, partially offset by lower programming costs. The decrease in advertising revenue was due to lower impressions from a decline in average viewership.

The increase at ESPN was due to affiliate revenue growth and the comparison to severance and contract termination costs incurred in the prior-year quarter, partially offset by higher programming costs and a decrease in advertising revenue. Affiliate revenue growth reflected contractual rate increases, partially offset by a decline in subscribers while the programming cost increase was primarily due to a contractual rate increase for NBA programming. Lower advertising revenue was due to a decrease in impressions from lower average viewership, partially offset by higher rates. Advertising revenue was adversely impacted by one fewer game than was possible for the NBA Finals.

Broadcasting revenues for the quarter increased 11% to $2.0 billion and operating income increased 43% to $361 million. The increase in operating income was due to higher programme sales, affiliate revenue growth and increased network advertising revenue, partially offset by higher programming costs.

The increase in programme sales was driven by higher sales of Designated Survivor, How to Get Away with Murder and Grey’s Anatomy, but partially offset by lower sales of Quantico. Affiliate revenue growth was due to contractual rate increases. The increase in network advertising revenue was due to higher rates, partially offset by lower average viewership. The programming costs increase was driven by higher cost primetime programming, including the impact of American Idol and Roseanne in the current quarter.

Despite the issues in the TV divisions, Disney CEO and Chairman Bob Iger expressed satisfaction with the third quarter results and how they had positioned the company for the big moves ahead. “We’re pleased with our results in the quarter, including a double-digit increase in earnings per share, and excited about the opportunities ahead for continued growth,” he remarked. “Having earned the overwhelming support of shareholders, we are more enthusiastic about the 21st Century Fox acquisition than ever, and confident in our ability to fully leverage these assets along with our own incredible brands, franchises and businesses to drive significant value across the entire company.”
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