Walt Disney Co. (DIS) on Thursday night shortly after the closing bell reported a top- and bottom-line beat with its fiscal fourth-quarter earnings. Revenues of $19.1 billion (+34% YoY) exceeded estimates of $19.04 billion, and adjusted earnings per share of $1.07 (-28% YoY) greatly exceeded consensus estimates of $0.95.
The headline numbers represent a much improved outcome compared to the fiscal third-quarter results, which were characterized by integration frictions, controlled park attendance declines, and greater-than-expected investment spend. Shares are currently trading about 5% higher in the after hours in reaction to the better-than-expected results.
"Our solid results in the fourth quarter reflect the ongoing strength of our brands and businesses. We've spent the last few years completely transforming The Walt Disney Company to focus the resources and immense creativity across the entire company on delivering an extraordinary direct-to-consumer experience," said Chairman and CEO Robert Iger in the earnings release, noting the launch of Disney+ on Nov. 12.
Starting with Media Networks, sales of $6.510 billion (+22% YoY) were better than the $6.287 billion consensus as the beat in Broadcasting revenues ($2.267 billion vs. $1.828 billion consensus) more than offset the miss in Cable Networks revenues ($4.243 billion vs. $4.399 billion consensus). Total segment operating income came in at $1.783 billion (-3% YoY), a great result against expectations of $1.680 billion and compares very favorably to management's previous commentary that suggested a 10% YoY decline. Similar to the top line, the beat in Broadcasting operating income ($377 million vs. an expected $199 million) more than offset the miss in Cable Networks ($1.256 billion vs. an expected $1.336 billion). At ESPN, growth in affiliate revenues was more than offset by higher programming and production costs.
Parks, experiences and consumer products revenue of $6.655 (+7% YoY) was more than the $6.534 billion consensus. Also, segment operating income of $1.381 billion edged the consensus of $1.324 billion. Driving the operating income growth was increases in merchandising licensing as a result of strong sales of "Frozen" and "Toy Story" merchandise, and also gains at Disneyland related to higher guest spending and an increase at Disney Vacation Club.
Management said the results at Walt Disney World were comparable to the prior year, with increases in guest spending, occupied room nights, and attendance (consider this continued tailwinds from the strong U.S. consumer), offset by higher costs associated with the launch of the Star Wars: Galaxy's Edge park. Speaking more to this new park, management believes that some guests are deferring visits and holding off trips to Disneyland and Walt Disney World until the complete opening of Galaxy's Edge. Furthermore, Iger went on to say that "those 2 lands have been far more successful" than what was in the news. Recall from our earnings preview here, we said there had been some whispers of weaker than expected numbers from parks.
Overall, it looks like trends remain solid with overall per-guest spending up 5% on higher admissions, merchandise and food and beverage spending. Also, per room spending at the domestic hotels increased 2% and occupancy of 85% was comparable to the fourth quarter last year. But on the international front, headwinds at Hong Kong Disney are apparent and so was a $55-million hit on the quarter. If current trends continue, management expects to see a full-year decline of approximately $275 million vs. fiscal 2019.
Jumping to studio entertainment, revenue of $3.310 billion (+52% YoY) came in slightly below expectations of $3.391 billion.
But the miss did not translate to operating income as Studio Entertainment's $1.079 billion (+79% YoY) result greatly exceeded estimates of $889 million. Strong performance from releases like "The Lion King," "Toy Story 4" and "Aladdin" drove performance in the quarter, however, the 21CF (21st Century Fox) studio business recorded an operating loss of about $120 million. This loss in 21CF was about $100 million higher than the loss management estimates the business generated in the quarter last year. Although the Fox studio has now struggled for two quarters in a row, we fully expect the Disney management team to right this ship and execute in the future. They have the track record to do so. In the next quarter, management expects operating losses of about $60 million at the 21CF Film Studio.
While Direct-to-consumer (DTC) and international revenues of $3.48 billion (>100% YoY) came in a little below expectations of $3.54 billion, it looks like investments were more held in check as the segment reported an operating loss of $740 million compared to estimates for a $889 million loss. Although we didn't get any pre-sale subscriber numbers around the Disney+, management said that ESPN+ had more than 3.4 million paid subscribers at the end of the quarter (up from 2.4 million), and Hulu had approximately 28.5 million paid subscribers (up from 28 million).
But we did learn with the Disney+, that it can be accessed on a wide array of platforms from Apple (AAPL) , Google (GOOGL) , Microsoft (MSFT) , Sony (SNE) , Roku (ROKU) , and, announced tonight, the long-awaited deal with Amazon Fire (AMZN) plus ones with Samsung, and LG. Management also announced that it will be available in markets across Western Europe on March 21. Management said it's seeing strong demand for the Disney+ three-year subscription deal, which is a fantastic sign with regards to churn. Overall, management sounded upbeat and enthusiastic about the launch next week.
Looking ahead, management expects this segment to generate $800 million in operating losses for the next quarter, a slightly worse result relative to current consensus of $665 million in losses. Importantly though, management reiterated the longer term Disney+, Espn+, and Hulu guidance that was provided at the April Investor Day event that you can read about here (https://aap.thestreet.com/story/14925636/1/a-review-of-disney-s-investor-day.html).
Overall, while the previous earnings raised some fears about the health of the core business, we think Disney shot those concerns down with strong execution this time around. Why this is so important is because Disney is currently going through a transition period in which investments are increasing, losses in the direct to consumer segment are accumulating, and licensing revenues are rolling off. This has and will continue to have a negative affect on the bottom line, which is something investors never like.
But there is promise in the future because of what a subscription-based powerhouse of a product like Disney+ means for a company. So if Disney can continue to navigate these headwinds with better-than-expected results in the core's operating income (Media, but more importantly Parks, Experiences, and Consumer Products plus Studio Entertainment), then the hit to EPS will look manageable to investors. That's key because it will give the Disney+ and the other two prongs of the DTC strategy more time ramp and get costs under control, which will then lead to a positive inflection to earnings down the road.