Strong Start to Important Transitional Year for Disney

Disney DIS began fiscal 2019 with a strong first quarter that provided insight into the direct-to-consumer business, which we found encouraging. The disclosed projected impact from not licensing its movies reinforces our belief that Disney is much better served by reserving its content for its DTC effort than by arming its competitors. The Fox media assets and the DTC efforts will continue to be the focus as Disney works through an important transitional year. We are maintaining both our wide moat rating and our fair value estimate of $130.

Revenue for the first quarter were flat year over year at $15.3 billion. The reorganized media networks segment grew revenue 7% due to growth at both cable networks and the broadcasting segment. Affiliate fee revenue was up 7% in the quarter as higher rates offset the 1% decline in subscribers. The rate of subscriber losses has decreased for six consecutive quarters, driven by the continued consumer uptake of the OTT TV services. Ad revenue at broadcast networks was up 6% as higher pricing and local political ad spending offset lower impressions due to ratings. ABC continued to see strong ad pricing growth in the current quarter, with scatter pricing running 40% above the upfront levels.

The new parks, experiences & consumer products segment posted 5% growth, as the park and resort business continues to report strong results. Domestic attendance was flat but per capita spending grew by 7% and per room spending improved by 5%. The increased admission pricing does not appear to have negatively impacted attendance or dampened in-park spending. Revenue at the studio fell 27% due to a weak theatrical slate and a difficult comp. Given the record-breaking 2018 box office performance, the studio business will face difficult comps throughout 2019. Segment operating margin for the firm fell by about 210 basis points to 23.9% as the revenue growth was more than offset by the increased programming costs and weaker studio results.

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