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Films, theme parks push Disney Q3 net to $2.2 bn; ESPN disappoints

MUMBAI: Film, theme parks and consumer products divisions have all contributed to push US media conglomerate Disney’s third-quarter net profit by 22 per cent to $2.2 billion.

Revenues rose by eight per cent to $12.5 billion. Diluted earnings per share (EPS) for the third quarter increased by 27 per cent to $1.28 from $1.01 in the prior-year quarter. Excluding certain items affecting comparability, EPS for the quarter increased by 24 per cent to $1.28 from $1.03 in the prior-year quarter.

Diluted EPS for the nine months ended 28 June 2014 increased by 30 per cent to $3.40 compared to $2.61 in the prior-year period. Excluding certain items affecting comparability, EPS for the nine months increased 31 per cent to $3.43.

Theme parks revenue touched $4 billion in the quarter. However, the cable networks division disappointed.

Disney chairman and CEO Robert A. Iger said, “Our strategy of building strong brands and franchises continues to create great value across our company. This quarter we delivered the highest EPS in the company’s history, and we’ve now generated greater EPS in the first three quarters of FY 2014 than we have in any previous full fiscal year. We’re extremely pleased with these results and we are also thrilled with the spectacular performance of ‘Guardians of the Galaxy’, which holds great promise as a new franchise for our company and once again reinforces the tremendous value of Marvel.”

Cable networks

Operating income at cable networks decreased by seven per cent to $1.9 billion for the quarter due to a decrease at ESPN, partially offset by an increase at ABC Family. The decrease at ESPN was due to higher programming and production costs, decreased recognition of previously deferred revenue and the absence of ESPN UK, which was sold in the fourth quarter of the prior year.

These decreases were partially offset by affiliate fee contractual rate increases and higher advertising revenue. Programming and production costs increases were driven by a contractual rate increase for Major League Baseball and the addition of the Fifa World Cup, partly compensated by the absence of X Games events in the current quarter.

ESPN recognised $98 million less of previously deferred revenue during the quarter as a result of changes in contractual provisions related to annual programming commitments. ESPN advertising revenue increased due to higher rates and more units sold. Higher rates reflected the benefit of the Fifa World Cup in the current quarter, partially offset by two less NBA finals games this year.

The increase at ABC Family was driven by lower programming costs, reflecting fewer hours of original scripted programming due to the timing of premieres, and higher affiliate fees due to rate increases.

Broadcasting operations

Income at broadcasting increased 66 per cent to $354 million for the quarter due to an increase in affiliate fees and higher income from programme sales. The increase in affiliate revenues was due to contractual rate increases and new contractual provisions. Increased operating income from programme sales was driven by a lower average expense amortisation rate and higher revenues led by Marvel’s ‘Agents of S.H.I.E.L.D’.

Iger in a conference call noted that for ESPN, the 2014 soccer World Cup once again demonstrated the value of having the number one sports brand covering the world’s biggest sporting events. “With its unprecedented reach across all platforms, ESPN delivered the most watched World Cup ever on English language TV here in the US and with almost 44 million hours of live viewing on WatchESPN, this year’s World Cup was the most streamed sporting event in history.

“In the month of June alone, an astounding 80 million people connected to ESPN via computers and mobile devices to keep up with the World Cup and other sporting events such as the NBA Finals, the NBA Drafts, the US Open, Wimbledon and major league baseball games.”

He added that ESPN’s new SEC network will debut in almost 60 million homes across US on 14 August making it one of the most successful launches in cable TV history.

Parks and resorts

Parks and resorts revenues for the quarter increased by eight per cent to $4 billion and segment operating income increased by 23 per cent to $848 million. Operating income growth for the quarter was driven by an increase at our domestic operations, partially offset by a decrease at Disneyland Paris.

Parks and resorts results include a favourable impact due to a shift in the timing of the Easter holiday relative to the company’s fiscal periods. Higher operating income at the domestic operations was due to increased guest spending and higher attendance, partially offset by higher costs. Higher costs were driven by MyMagic+ and labour and other cost inflation, partially offset by lower pension and postretirement medical costs.

The decrease in operating income at Disneyland Paris was due to higher operating costs, decreased attendance, and occupied room nights and lower special event revenue, partially offset by higher average ticket prices.

Theme park revenue for the first nine months of the fiscal year was $11.1 billion, up by seven per cent compared to $10.3 billion for the same period last year.

Iger noted that progress continues on Shanghai Disney Resort. “This our most ambitious project ever and we’re thrilled with the way this spectacular destination is coming along. We hope to set an official date for our grand opening sometime within the next six months or so.”

Film

Studio entertainment revenues for the quarter increased by 14 per cent to $1.8 billion and segment operating income increased to $411 million from $201 million. Higher operating income was due to increases in worldwide home entertainment and international theatrical distribution, partially offset by a decrease in domestic theatrical distribution.

The increase in worldwide home entertainment was driven by lower per unit costs, higher net effective pricing and unit sales growth reflecting the success of ‘Frozen’. Higher international theatrical distribution results reflected the performance of ‘Frozen’, ‘Captain America 2: The Winter Soldier’ and ‘Maleficent’ in the current quarter compared to ‘Iron Man 3’, ‘Wreck-It- Ralph’, ‘Oz The Great and Powerful’ and ‘Monsters University’ in the prior-year quarter.

Lower results in US theatrical distribution were due to the success of ‘Iron Man 3’ and ‘Monsters University’ in the prior-year quarter compared to ‘Captain America 2: The Winter Soldier’, ‘Maleficent’ and ‘Million Dollar Arm’ in the current quarter.

Iger also noted that the company is especially excited about the fantastic debut of Marvel’s ‘Guardians of the Galaxy’ with $181 million in global box office so far. “Domestically Guardians delivered the biggest August opening weekend ever and with Monday added in, it did over $106 million. This result reinforces what we’ve known for a while and that is that we have incredibly talented people making films for and with Marvel. Combined with a very strong brand and a rich array of characters and stories, the future for Marvel is incredibly exciting.

“We’re looking forward to ‘Avengers 2’ next May. The footage we shared at Comic-Con was a huge hit with fans. We’ll follow ‘Avengers’ with ‘Ant-Man’ in July, then ‘Captain America 3’ in May of ’16, and last week we announced we are going to make a sequel to ‘Guardians’. We see great promise in ‘Guardians’ as another fantastic Marvel franchise.

Consumer products

Consumer products revenues for the quarter increased by 16 per cent to $902 million and segment operating income increased by 25 per cent to $273 million. Higher operating income was due to increases at Disney’s retail and merchandise licensing businesses.

At the retail business, higher operating income for the quarter was driven by comparable store sales growth in all key markets. The increase in operating income at merchandise licensing was due to the performance of merchandise based on ‘Frozen’, Disney Channel properties, ‘Spider-Man’ and ‘Planes’, partially offset by lower ‘Monsters University’ revenue.

Additionally, merchandise licensing results benefited from lower acquisition accounting impacts, which reduced revenue recognition in the prior-year quarter. These increases were partially offset by higher third-party royalties.

Interactive

Interactive revenues for the quarter increased 45 per cent to $266 million and segment operating results improved from a loss of $58 million to income of $29 million. Improved results were due to strong game sales growth, lower product development costs and higher licensing fees from the company’s mobile phone business in Japan.

The increase in game sales was driven by Disney Infinity, which was released in the fourth quarter of the prior year, and the success of the ‘Tsum Tsum’ and ‘Frozen Free Fall’ mobile games. The decrease in product development costs was due to fewer titles in development and the benefit of restructuring activities.

Iger observed that this quarter also marked Disney Interactive’s fourth straight quarter of profitability. “Disney Infinity continues to be a key driver and will add Marvel characters including Guardians of the Galaxy to the Infinity Universe when Disney Infinity 2 launches next month.”