Once again, both Media Networks and the Parks and Resorts segments’ robust performance facilitated The Walt Disney Company (DIS) to deliver strong fourth-quarter 2011 results that outshined the Zacks Consensus Estimate.
The quarterly earnings of 59 cents a share came ahead of the Zacks Consensus Estimate of 55 cents and jumped 31% from 45 cents earned in the prior-year quarter.
However, on a reported basis, including one-time items, quarterly earnings came in at 58 cents per share compared with 43 cents earned in the prior-year quarter.
Total revenue in the quarter increased 7% to $10,425 million from the year-ago quarter, surpassing the Zacks Consensus Revenue Estimate of $10,382 million. Total segment operating income spiked 23% to $2,113 million.
Management stated that it expects to add incremental $500 million in both revenue and expense in fiscal 2012 owing to its growth strategies. Further, Disney expects expansion of margins in its Parks and Resorts business in 2012. In fiscal 2012, capital expenditures are expected to rise by $500 million compared with fiscal year 2011.
What Segments Say
Media Networks revenue rose 9% year over year to $4,798 million due to revenue increase across Cable Networks (up 11%) and Broadcasting (up 4%). Segment operating income jumped 20% to $1,462 million. Cable Networks’ operating income rose 18% to $1,261 million driven by growth across ESPN and the worldwide Disney Channels. Operating income at Broadcasting division soared 37% to $201 million, reflecting rise in network advertising revenue coupled with the fall in programming and production costs.
Parks and Resorts revenue rose 11% to $3,129 million. Segment operating income increased 33% to $421 million, reflecting higher guest spending at domestic parks and higher passenger cruise days. However, the increases were partly offset by increased costs.
Studio Entertainment revenue declined 8% to $1,459 million compared with the year-ago quarter, while operating income increased 13% to $117 million. The rise in operating income reflects increased domestic theatrical revenues and lower film cost write-downs, partly offset by lower revenues at international theatrical and worldwide home video segments.
Consumer Products revenue rose 12% to $816 million and segment operating income increased 13% to $207 million. The growth reflected increased licensing revenue from Carsmerchandise and higher revenue from Marvel properties.
Interactive Media revenue for the quarter increased 19% to $223 million, but posted an operating loss of $94 million, marking a decrease of $10 million from the prior-year quarter. The improvement reflects abridged marketing and product development costs in console game division.
Unfolding the Growth Story
Disney has made a positive comeback in the reported year, beating the performance of the previous year. Through its strong operating results, Disney continued to invest in its core businesses while expanding its operating margins. Moreover, the company remains well positioned to drive revenue growth in the coming years through its strategic initiatives.
Disney reported earnings of $2.54 in fiscal 2011, up 23% from $2.07 earned in the previous year. Total revenue increased 7% to $40,983 million in fiscal 2011 compared $38,063 million in the previous year.
Despite difficult operating environment, the company did not change its strategies and remained focused in deploying its capital toward expanding its Parks and resorts business, and in turn, enhancing its markets and creating long-term growth opportunities.
During the year, the company made a notable progress in expanding its global footprints and augmented its operations in the developing markets such as Russia, China and India. In Russia, Disney announced the acquisition of 49% stake in Seven TV network from UTH Russia. Disney will start broadcasting a free-to-air channel in Russia early next year.
Moreover, to drive growth in China, the company started building its Shanghai Disney Resort, which includes Shanghai Disneyland, two themed hotels, and retail dining and entertainment venue.
Disney remains on course to acquire the remaining 50% stake in UTV, India. The company aims to increase the number of cable and satellite channels to 9 from 3.
The company has stretched its broadcast rights deal with the National Football League for eight more years during the reported quarter. According to the pact, the company will pay $15.2 billion over the tenure of the deal.
The deal will extend ESPN’s existing deal to 2021. The current deal was scheduled to end in 2014. Moreover, it includes digital rights of NFL-branded programs, 3D distribution and the right to air games on web enabled mobile devices. Further, it also includes bigger international broadcasting rights.
The contract, commencing in 2014, marks a substantial increase in the cost of broadcasting rights when compared with the current deal. Disney will shell out approximately $1.9 billion per season over the tenure of the deal, up approximately 73% from the current $1.1 billion per season.
We believe that Disney might hike fees for pay-TV distributors with affiliate fees and advertising providing an opportunity to hedge against the rising cost.
The company stated that the success of ESPN continued as the latter witnessed a record number of viewers for the fourth consecutive year, while remaining the favorite destination of sports lovers. Moreover, ESPN was the key driver of revenues at the Media Networks division in recent times. Thus, Disney gained a 12-year deal for multi-platform rights for a wide range of Pac-12 conference sports. Further, it also entered into a 12-year deal for becoming the exclusive U.S.broadcaster of Wimbledon.
Moreover, Disney notified that its owned stations have entered into agreements with quite a few multi-channel distributors and has completed license agreements with non-owned affiliates.
Other Financial Details
During the quarter, Disney generated free cash flow of $1,106 million. The company ended the quarter with cash and cash equivalents of $3,185 million, net borrowings of $10,792 million and shareholders’ equity of $37,358 million, excluding a non-controlling interest of $2,068 million.
Strong results enable the company to enhance shareholders value through share repurchases and dividend payout. The company augmented its rate of share repurchases during the quarter and bought back 58 million shares for approximately $2 billion. Collectively, Disney repurchased 134.7 million shares for approximately $5 billion in fiscal 2011.
The company stated that it has repurchased 12.7 million shares for about $420 million in the first quarter of 2012.
Walt Disney is one of the world’s leading diversified entertainment companies. Moreover, the company commands a formidable portfolio of globally recognized brands, primarily its namesake brand Walt Disney, followed by ABC, ESPN and Marvel Entertainment. These renowned brands offer a strong competitive edge to the company and bolster its well-established position in the market against major players like News Corporation (NWSA) and Time Warner Inc. (TWX).
Currently, we maintain a long-term ‘Neutral’ recommendation on the stock. Moreover, Disney’s shares hold a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating
