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Disney Misses As ESPN’s Subscriber Losses Take A Toll

Thursday, November 10, 2016 18:26
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A couple of weeks ago we wrote about an epic collapse in ESPN pay TV customers (see “ESPN Loses A Record 621,000 Subscribers In One Month“) noting that the sports media giant lost 621,000 subscribers in the month of October alone.  We figured the impact of just October’s monthly losses would cost Disney about $50mm per year.  As it turns out, those subscriber losses are starting to take a toll on Disney’s P&L in a big way.

In 4Q earnings released after the bell today, Disney missed on both the top and bottom line with 4Q adjusted EPS coming in at $1.10 versus consensus of $1.16 while revenue came in at $13.1 billion versus consensus of $13.5 billion.  The largest top-line misses came from the company’s Consumer Products and Parks and Resorts segments while the Studio Entertainment business missed on operating income driven by higher costs.


While the Media Networks segment, which houses Disney’s ESPN business along with other media assets, registered a slight “beat” versus consensus, revenue and operating income at the unit were down 3% and 8%, respectively, YoY.


And, as we pointed out earlier, a big portion of the YoY decline in the Media Networks segment was directly attributable to sub losses at ESPN.  Per Disney’s 4Q press release, ESPN’s affiliate revenue is declining just as “programming and production costs” are increasing.  Meanwhile the Disney CFO just confirmed on the company’s earnings call that ESPN’s ad sales are continuing to trend down in the current quarter.  We guess it’s not a great combo to sign massive content deals with various sports leagues at the same time that you’re losing a ton of subscribers…oops. 

Operating income at Cable Networks decreased $207 million to $1.4 billion for the quarter due to decreases at ESPN and the Disney Channels, partially offset by an increase at Freeform.

The decrease at ESPN reflected lower advertising and affiliate revenue and higher programming and production costs. Lower advertising revenue was primarily due to fewer impressions and lower rates. The decrease in impressions was driven by the Fiscal Period Impact, lower ratings and fewer units sold. Lower affiliate revenue was due to the Fiscal Period Impact and a decline in subscribers, partially offset by contractual rate increases. The increase in programming and production costs was driven by costs for Olympics programming internationally, the World Cup of Hockey rights and higher contractual rates for college sports, partially offset by the absence of costs for the British Open and a favorable Fiscal Period Impact.


Meanwhile, the Consumer Products & Interactive Media segment also declined substantially YoY primarily on a business discontinuation but also on lower merchandise sales associated with the Frozen franchise.

Consumer Products & Interactive Media revenues for the quarter decreased 17% to $1.3 billion, and segment operating income decreased 5% to $424 million. The decrease in revenue was primarily due to the discontinuation of our Infinity console game business. Lower operating income was driven by decreases at our merchandise licensing and games businesses, partially offset by an increase at our publishing business due to cost saving initiatives. 

The decrease in operating income from merchandise licensing was due to the Fiscal Period Impact and a decrease in revenues from merchandise based on Frozen, partially offset by higher revenues from merchandise based on Finding Dory/Nemo and various Disney properties.

But, of course, the revelation on Disney’s earnings call that ESPN is still losing a ton of subscribers in November, but just not quiet as many as the 621,000 lost in October, was all the reason investors needed to send the stock soaring in after-hours trading. 



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