Company overview - The Walt Disney Company is an entertainment company. The Company operates in four business segments: Media Networks, Parks and Resorts, Studio Entertainment, and Consumer Products & Interactive Media. The media networks segment includes cable and broadcast television networks, television production and distribution operations, domestic television stations, and radio networks and stations. Under the Parks and Resorts segment, the Company's Walt Disney Imagineering unit designs and develops new theme park concepts and attractions, as well as resort properties. The studio entertainment segment produces and acquires live-action and animated motion pictures, direct-to-video content, musical recordings and live stage plays. It also develops and publishes games, primarily for mobile platforms, books, magazines and comic books. The Company distributes merchandise directly through retail, online and wholesale businesses. Its cable networks consist of ESPN, the Disney Channels and Freeform.

DIS Details
 
Q2FY17 impacted by Consumer Products & Interactive Media segment: Walt Disney Company (NYSE: DIS) reported 3% yoy growth in revenue at $13.3bn, while posting 11% and 15% yoy growth in net income and earnings per share respectively.  However, for the six months ended 01 April 2017, revenues declined 0.3% to $28.12bn and net income decreased 3% to $4.8bn. Revenue decline in Studio Entertainment, Consumer Products & Interactive Media was offset by Theme Parks & Resorts segment as it grew by 8% yoy to $8.8bn during H1FY17. For Q2FY17, earnings per share (EPS) increased by 15% to $1.50 from $1.30 in the prior-year quarter, while for the six months it was flat. However, excluding certain items affecting comparability, EPS for the six months increased by 2% from $3.0 to $3.05. Further, the company has declared a semi-annual cash dividend of $0.78 per share, payable July 27, 2017 to shareholders of record at the close of business on July 10, 2017.
 

Financial summary in Millions, except per share data; (Source: Company reports)
 
Higher programming costs at ESPN dragged the Media Networks operating income: During Q2FY17, overall revenue from Media Networks segment grew 3% yoy to $5.9b, while segment operating income decreased 3% yoy to $2.2bn. Revenue from Cable Networks increased 3% to $4.1bn and operating income decreased 3% to $1.8bn, due to a decrease at ESPN. Further, the decrease at ESPN was due to higher programming costs due to the shift in timing of College Football Playoff (CFP) bowl games relative to fiscal quarter end and contractual rate increases for NBA programming. On the other side, higher results at the Disney Channels and Freeform were driven by lower programming costs and higher affiliate fees, partially offset by lower Freeform advertising revenue due to a decrease in impressions. Broadcasting revenues for the quarter increased 3% to $1.9b and operating income increased 14% to $344m, and the increase in operating income was driven by higher program sales income, affiliate revenue growth and a decrease in primetime marketing costs coupled with a lower cost mix of programs sold in Q2FY17.


Media Networks revenue split in Millions; (Source: Company reports)
 
Parks and Resorts operating income driven by Shanghai Disney Resort: Revenues for the quarter increased 9% yoy to $4.3b and segment operating income increased 20% yoy to $750 million. Importantly, growth in operating income was led by the opening of Shanghai Disney Resort in the third quarter of the prior year and an increase at domestic parks and resorts. However, the segment results were adversely impacted by the timing of the Easter holiday, which occurred in the second quarter of the prior year compared to the third quarter of the current year, and impact was partially offset by the shift of the New Year’s holiday relative to fiscal periods. Notably, growth in operating income at domestic parks and resorts was led by higher volumes, increased attendance and guest spending on food and beverage, as well as higher operating participant income from Disney Springs.
 

Segment results in Millions; (Source: Company reports)
 
Studio Entertainment:Revenues for the quarter decreased 1% to $2.0b and segment operating income increased 21% to $656m driven by growth in TV/SVOD distribution, lower film cost impairments and an increase in home entertainment results. Further, higher TV/SVOD distribution results were driven by international growth and higher domestic rates, partially offset by the timing of domestic title availabilities. Moreover, the increase in home entertainment results was due to higher average net effective pricing reflecting a higher sales mix of new release and Blu-ray titles. Importantly, Q2FY17 was benefited from lower pre-release marketing costs and the robust performance of Beauty and the Beast.


Walt Disney Company; (Source: Google)

Declining revenue from Star Wars and Frozen: Revenues from Consumer Products & Interactive Media decreased 11% to $1.1b led by due to lower revenue from products based on Star Wars and Frozen and an unfavorable impact from foreign currency translation. However, segment operating income increased 3% to $367m due to an improvement at games business driven by a favorable impact from the discontinuation of Infinity console game business in the prior-year quarter. Moreover, the company witnessed lower operating income at retail business was due to lower comparable store sales, reflecting higher sales of Frozen and Star Wars merchandise in the prior-year quarter.

Decrease in the effective income tax rate due to new accounting norms: The increase in interest expense for the quarter was due to lower capitalized interest and higher average interest rates as capitalized interest was lower due to the completion of most of construction at Shanghai Disney Resort in the prior-year third quarter. Further, the decrease in the effective income tax rate for the quarter was primarily due to the favorable impact from the adoption of a new accounting pronouncement ($53 million) as the company adopted new accounting guidance in Q1FY17, which requires that excess tax benefits or tax deficiencies on employee share-based awards be included in “Income taxes” in the Condensed Consolidated Statement of Income.


Consolidated income statement in Millions; (Source: Company reports)
 
Decline in cash flows due to higher pension plan contributions: Cash flow from operations decreased by $1.3bn from $6.0bn in in Q1FY17 to $4.7bn in Q2FY17 due to higher pension plan contributions and film and television production spending in fiscal 2017. During H1FY17, capital expenditures decreased by $633mn to $1.9bn due to lower spending at Shanghai Disney Resort.
 

Cash flows in Millions; (Source: Company reports)
 
Services segment was the only catalyst in FY16: During FY16, total revenue grew by 6% yoy to $48.8bn driven by revenue from services as it grew 7% yoy to $47.1bn, due to higher theatrical distribution revenues, higher merchandise and game licensing revenue, average guest spending and attendance growth at domestic parks and resorts, higher affiliate fees, growth in TV/ subscription video on demand (SVOD), revenues from the opening of Shanghai Disney Resort, growth in digital distribution of film content and higher advertising revenue. Product revenues for fiscal 2016 decreased 1%, or $69mn to $8.5bn due to the discontinuation of the Infinity business and lower retail store volumes, partially offset by higher average guest spending at domestic parks and resorts, higher net effective pricing at home entertainment and revenues from the opening of Shanghai Disney Resort.
 
For FY16, cost of services increased 6% yoy to $24.7bn, due to higher film cost amortization and distribution expense, increased media programming and production costs, the impact of the opening of Shanghai Disney Resort and cost inflation and higher infrastructure and labor costs at domestic parks and resorts. Further, cost of products increased 3% to $5.3bn due to the Infinity Charge, higher guest spending and cost inflation at domestic parks and resorts and higher film cost amortization due to home entertainment revenue growth. Depreciation and amortization costs increased 7% yoy to $2.5bn due to the opening of Shanghai Disney Resort and depreciation of new attractions at domestic parks and resorts.
  
Stock Performance: The stock has declined 5.4% over the past three months, while it was moved up 11.6% in the last one year. Despite the subdued performance in H1FY17, we believe that the on-going investments into new ventures, increasing visitation at recently commenced Shanghai Disney Resort and expansion into other geographies will provide some momentum for future growth and earnings going forward. Hence, we give a “Buy” recommendation on the stock at the current market price of $106.86


DIS Daily chart; (Source: Thomson Reuters)
 

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