Walt Disney (NYSE: DIS) reported its first-quarter results for fiscal 2018 after the market closed on Tuesday. The entertainment giant's revenue increased 4% year over year, while earnings per share adjusted for one-time factors rose 22%. EPS on the basis of generally accepted accounting principles (GAAP) jumped 88%.
Driven by strength in its parks and resorts business, Disney got its mojo back in the quarter. Last year marked the first time in seven years that the company's annual revenue and profits tumbled from the previous year.
Shares were up 2.9% in after-hours trading on Tuesday, which bodes well for the stock's performance on Wednesday. We can attribute the market's initial reaction to earnings comfortably beating Wall Street's expectation.
Image source: Disney.
Disney's key quarterly numbers
Metric | Fiscal Q1 2018 | Fiscal Q1 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $15.35 billion | $14.78 billion | 4% |
Segment operating income | $3.99 billion | $3.96 billion | 1% |
Net income | $4.42 billion | $2.48 billion | 78% |
GAAP EPS | $2.91 | $1.55 | 88% |
Adjusted EPS | $1.89 | $1.55 | 22% |
Data source: Disney.
Adjusted EPS excludes a $1.6 billion one-time net tax benefit associated with the new U.S. federal income tax legislation, as well as certain other items affecting comparability. Cash flow from operations soared 55% to $2.24 billion, and free cash flow tripled to $1.26 billion.
Disney doesn't provide guidance. For some context -- though long-term investors shouldn't place too much emphasis on Wall Street's near-term estimates -- analysts were looking for adjusted EPS of $1.61 on revenue of $15.46 billion. So the company fell slightly short of the top-line expectation, but breezed by the bottom-line consensus.
Here's how the three largest segments performed.
Media networks: Profit continues to slide, but broadcasting is the main culprit
Metric | Fiscal Q1 2018 | Fiscal Q1 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $6.24 billion | $6.23 billion | -- |
Operating income | $1.19 billion | $1.36 billion | (12%) |
Data source: Disney.
Here's how the two businesses within this segment did:
Business/Metric | Fiscal Q1 2018 | Year-Over-Year Change |
|---|---|---|
Cable networks revenue | $4.49 billion | 1% |
Cable networks operating income | $858 million | (1%) |
Broadcast networks revenue | $1.75 billion | (3%) |
Broadcast networks operating income | $285 million | (25%) |
Equity in the income of investees (an operating income line item) | $50 million | (58%) |
Data source: Disney.
Investors have come to expect drops in media networks' operating income stemming from fewer subscribers to cable channels, particularly ESPN, as consumers increasingly cut the cord and flock to video steaming options. While operating income did edge down in Disney's cable business, broadcasting had the largest negative impact on segment results -- caused by lower advertising revenue, higher production cost writedowns, and less program sales income.
A loss at BAMTech and a decrease at ESPN were to blame for cable's operating miss. The decline at ESPN was attributed to lower advertising revenue, partially offset by affiliate revenue growth and lower programming costs. Affiliate revenue growth was due to rate increases, partially offset by a decrease in subscribers. CFO Christine McCarthy said on the earnings call that the reduction in subs negatively impacted affiliate revenue by about 3 percentage points.
BAMTech's operating loss was reported in cable networks because Disney acquired a controlling stake in the video streaming leader in the fourth quarter of fiscal 2017. In the year-ago quarter, its results were included in equity in the income of investees. Disney is investing significantly in the streaming company's technology platform, which is the cornerstone of the entertainment titan's goal to become a leader in the subscription video streaming space. It plans to launch an ESPN over-the-top service this spring called ESPN Plus -- CEO Bob Iger announced its price of $4.99 per month on the earnings call -- followed by a more broad Netflix-like offering in 2019.
Parks and resorts: Firing on all cylinders
Metric | Fiscal Q1 2018 | Fiscal Q1 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $5.15 billion | $4.56 billion | 13% |
Operating income | $1.35 billion | $1.11 billion | 21% |
Data source: Disney
The parks business continues to be Disney's growth engine. Operating income growth was bolstered by increases at the company's domestic parks and resorts, cruise line and vacation club businesses, and Disneyland Paris. At domestic parks, all key metrics -- park attendance, ticket prices, and across-the-board guest spending -- moved in the right direction. Disneyland Paris got a boost from higher attendance and average ticket prices, both of which benefited from the park's 25th anniversary celebration.
Management said on the earnings call that Shanghai Disney's performance is humming along.
Image source: Getty Images.
Studio entertainment: Growth in theatrical distribution more than offset by other losses
Metric | Fiscal Q1 2018 | Fiscal Q1 2017 | Year-Over-Year Change |
|---|---|---|---|
Revenue | $2.50 billion | $2.52 billion | (1%) |
Operating income | $829 million | $842 million | (2%) |
Data source: Disney.
Disney's legendary moviemaking business performed better than the above numbers suggest. Theatrical distribution results showed year-over-year growth, with the quarter's trio of releases -- Thor: Ragnarok, Coco, and Star Wars: The Last Jedi -- trumping the performance of the year-ago quarter's lineup of Rogue One: A Star Wars Story, Moana, and Dr. Strange, as I opined in my earnings preview should be the case.
The increase in theatrical distribution results, however, wasn't enough to fully offset the declines in home entertainment and TV/SVOD (subscription video on demand) distribution results, as well as lower income from the revenue share with the consumer products segment. In home entertainment, Cars 3 couldn't match the superb performance of Finding Dory in the year-ago period.
Looking ahead
Iger looked forward in the earnings press release, saying, "We're excited about what lies ahead, with a robust film slate, the launch of our ESPN direct-to-consumer business, new investments in our theme parks, and our pending acquisition of [the entertainment assets of] Twenty-First Century Fox."
As to the "robust film slate," for the first time, Disney will release three Marvel movies in a single year this year. Moreover, the company said on Tuesday that David Benioff and D.B. Weiss, executive producers of HBO's hit series Game of Thrones, will write and produce a series of new Star Wars films.
On the earnings call, Iger said that there's no update on the acquisition front. The deal is presently being examined by antitrust officials.
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Beth McKenna has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Netflix and Walt Disney. The Motley Fool has a disclosure policy.