Disney Dragged Down by TV Properties in Rare Q2 Expectations Shortfall

ESPN subscribers and ad sales drop, with television unit’s overall sales staying flat

Last Updated: May 10, 2016 @ 4:28 PM

Disney posted a rare earnings miss in its fiscal second quarter results Tuesday, as home sales for “Star Wars: The Force Awakens” couldn’t offset weakness in its key television division, including a decline in ESPN subscribers.

The company also said it would fold its video games business, taking a $147 million charge for it.

Overall, profit rose 2 percent to $2.1 billion on a 4.1 percent revenue climb to about $13 billion. But its adjusted earnings per share, at $1.36, fell short of the $1.40 average estimate of Wall Street analysts. Disney has either met or beaten earnings expectations every quarter in the last five years.

Shares plunged 6 percent at $100.65 in after-hours trading at 4:30 p.m. ET.

Despite one of the biggest blockbusters in years with “Star Wars: The Force Awakens,” Disney investors have been on tenterhooks about the health of sports network ESPN. CEO Bob Iger said in August that the network had modest subscriber losses, comments that spurred a wide sell-off in television companies’ stocks, feeding into fears about cord cutting.

In February, Iger reassured Wall Street that ESPN subscribers were increasing again, and Disney shares have climbed about 19 percent since then. 

But Tuesday, Disney’s television division saw revenue slip 0.3 percent amid a drop in ESPN subscribers. Disney compensated for the weak revenue with cost savings, to post a 9 percent increase in the unit’s operating profit.

ESPN lowered its programming costs and enjoyed higher affiliate revenues, but both subscribers and ad revenue at those networks dropped. The TV unit, called media networks, is the company’s biggest by both revenue and profit, and ESPN is the powerhouse of that unit. Timing of college football games made year-earlier comparisons messy in the latest period.

Disney’s movie division, called studio entertainment, saw a 22 percent leap in sales. December blockbuster “Star Wars: The Force Awakens” continued to reap rewards for Disney in the latest period thanks to home-entertainment sales, and its movie arm enjoyed a surprise hit with animated film “Zootopia.” The company’s latest theatrical blockbusters, “The Jungle Book” and “Captain America: Civil War,” were released after the end of the first quarter.

The report is also the first since the surprise resignation of chief operating officer Thomas Staggs threw the company’s presumed succession plan into disarray. Iger is set to retire in two years.

In the latest period ended April 2, Disney reported a profit of $2.143 billion, or $1.30 a share, from $2.108 billion, or $1.23 a share, a year earlier. Revenue rose 4.1 percent to $12.969 billion.

Excluding the charge related to its video games, earnings were $1.36 cents a share.

Analysts on average were expecting $1.40 in per-share profit on $13.19 billion in revenue.

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