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'Frozen' Helps Disney to Post Record Q2 Earnings

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As expected, The Walt Disney Company (DIS) posted outstanding second-quarter fiscal 2014 results after the closing bell yesterday. The company’s adjusted earnings came in at $1.11 per share, outpacing the Zacks Consensus Estimate of 97 cents while surging 41% year over year.

The Walt Disney Company - Quarterly Earnings Per Share | FindTheBest

Continued double-digit revenue growth across Studio Entertainment, Consumer Products as well as Interactive businesses led to the impressive quarterly performance. A special mention for the incredible success of the animated movie “Frozen” that has surpassed $1 billion in revenues to become the highest grossing animated film of all time and has been instrumental in driving stellar results.

Including one-time items, earnings were $1.08 per share, up nearly 30% from the prior-year quarter.

Revenues came in at $11,649 million, up 10% year over year. Moreover, it surpassed the Zacks Consensus Estimate of $11,216 million. Total segment operating income increased nearly 34% to $3,353 million, based on strong performance across all divisions, particularly Studio Entertainment and Interactive segments.

Segment Details

Media Networks revenues increased 4% year over year to $5,134 million attributable to 5% rise in Cable Networks revenues to $3,633 million. Broadcasting revenues were almost flat at $1,501 million during the quarter.

The segment’s operating income increased 15% to $2,133 million owing to an increase of 15% in Cable Networks operating income to $1,974 million, which reflected growth at the domestic Disney Channels and ESPN along with increased equity income from A&E Television Networks (:AETN).

Moreover, Broadcasting operating income grew 15% to $159 million owing to increased affiliate revenues and lower general and administrative expenses. These were partly offset by reduced Network primetime advertising revenue.

Parks and Resorts revenues rose 8% to $3,562 million, while the segment’s operating income increased 19% to $457 million. Growth was due to record footfall at Walt Disney World and Hong Kong Disneyland partly offset by increased costs related to roll out of MyMagic+.

In the quarter, per capita spending in the Parks grew 4% on increased ticket prices and food and beverage spending. Management stated that so far in the third quarter of fiscal 2014, domestic resort reservations have risen 3% year over year, while booked rates are up 6%.

Recently, the company has announced an additional investment in Shanghai Disney resort. An anticipated boom in China’s travel and tourism market has prompted Disney to increase investment in the country.

Studio Entertainment revenues rose 35% to $1,800 million, while operating income registered a substantial year-over-year gain to $475 million. The stupendous success of the “Frozen” followed by Thor: The Dark World led to higher domestic home entertainment revenues and international theatrical results leading to higher segment revenues.  Moreover, increased number of titles available for TV/SVOD distribution contributed to higher revenues.

Disney expects the success of Captain America: The Winter Soldier to boost third quarter revenues and anticipates momentum in the segment to continue in the quarters ahead as its boasts a strong number of movies in the pipeline including Maleficent, Tommorowland, Guardians of Galaxy, Avengers: Age of Ultron. Star Wars Episode VII, Disney’s most ambitious project in recent times, is slated to release on Dec 18, 2015.

Consumer Products revenues increased 16% to $885 million, while segment operating income rose 37% to $274 million, owing to gains from Merchandise Licensing and the retail business.

Interactive revenues for the quarter rose 38% to $268 million, while operating profit was $14 million, up from a loss of 54 million in the prior-year quarter. The increment was on the back of rise in console game sales (especially Disney Infinity) and the continuously growing Japan mobile business. Notably, management had expected to post a loss for the quarter during the first quarter 2014 earnings release.

Other Financial Details

During the first half of 2014, Disney generated free cash flow of $2,380 million, up 9% year over year. The company ended the quarter with cash and cash equivalents of $4,098 million, borrowings of $10,909 million and shareholder equity of $44,889 million, excluding non-controlling interest of $2,751 million.

Strong cash flow generation positions the company favorably to enhance shareholders value through share repurchases. In the reported quarter, Disney bought back 19.9 million shares for approximately $1.5 billion. Year to date, it repurchased 58.2 million shares worth approximately $4.3 billion.

Capital expenditure during the quarter increased 21.4% to $1,359 million mainly due to higher construction costs for Shanghai Disney Resort.

Needless to say, Disney is firing on all cylinders and is expected to continue with its fabulous run in the upcoming quarters.

Currently, Disney carries a Zacks Rank #2 (Buy). Another media stock worth investment includes Lions Gate Entertainment Corp. (LGF), which carries a Zacks Rank #1 (Strong Buy).

This week will also see two other media giants reporting quarterly results, namely Twenty-First Century Fox, Inc. (FOXA) on May 7 and CBS Corporation (CBS) on May 8.


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