Cable Networks Power Higher Earnings at Disney

UPDATED: 8:20 p.m. ET

The Walt Disney Co. reported higher first-quarter earnings thanks to increases at its cable TV networks and theme parks.

Net income rose 12% to $1.5 billion, or 80 cents a share, from $1.3 billion, or 69 cents, a year ago. Revenues rose 1% to $10.8 billion.

"We're off to a good start in this fiscal year executing on our ongoing strategy, deriving greater value from our brands -- Disney, Pixar, Marvel, ESPN and ABC -- in the U.S. and around the globe," Disney President and CEO Bob Iger said in a statement. "We are confident that our commitment to creating and providing exceptional family entertainment on multiple platforms continues to position us to deliver long-term shareholder value."

During Disney's conference call with analysts, Iger pointed to a major long-term affiliation agreement with Comcast as a key for the future of its television businesses.

"This new deal not only provides for distribution into the next decade, but the rates that we will be paid reflect the increased value we're no providing," he said.

Iger said it was important to maintain the current multichannel business model and that the Comcast deal accomplished three key goals.

One was to "allow more customers access to our programs and channels on new devices, including mobile, desktops and laptops. Goal two was to protect and enhance the value of the multichannel subscription to the distributor by allowing it to sell access to our programs and channels on devices as part of their service and by not allowing access to channels to non-subscribers. Finally, Disney wanted to "get paid by the distributor for creating this opportunity."

Iger said all three goals were accomplished.

With Disney knowing long-term how much it will get from Comcast for ESPN, and also knowing how much it will be paying for its most expensive programming thanks to last year's agreement with the NFL, Iger said he's confident ESPN will be able to expand its profit margins over time.

Iger also highlighted the strength of Disney's children's business. That's a contrast Viacom, whose earnings were hurt by a sudden drop in ratings at its Nickelodeon channel.

He noted that Disney Channel has the top five rated series for kids 5 to 11, Disney XD ratings were up 11%, he said, and XD will provide a strong platform for Disney's Marvel business when it launches a Marvel Universe programming block April 1. Finally, Disney Junior ratings were up 24%. A full-time Disney Junior channel for pre-schoolers will launch next month with 30 million subscribers, he added.

As for advertising, "scatter pricing has been very strong both at ABC and ESPN," Iger said. "The trends that we're seeing in advertising are good."

So far this quarter, ESPN ad sales are packing up single digits, adjusting for some schedule changes, CFO Jay Rasulo said.

At ABC Family, ad revenue was up 10% in the first quarter and so far during the second quarter, sales are pacing up double digits. ABC Family will be airing 20 additional hours of original programming during the second quarter. While that will strengthen the network's schedule, it will also result in $35 million in incremental programming and marketing spending in the quarter, Rasulo said.

So far this quarter scatter pricing at ABC is running mid-teen percentage points above upfront levels, according to Rasulo. And while GM's decision to drop some of its advertising caused some jitters, Iger said that option pickups "have been great." ABC has also sold out the Oscar telecast at the end of the month.

Second quarter ad sales at Disney's local stations is pacing down at a single digit rate.

Disney's Media Networks unit, which includes ABC and ESPN, registered $1.2 billion in operating income, a 12% increase from a year ago during the first quarter, which ended Dec. 31. Operating income at Disney's cable networks was up 25%, while operating income at the company's broadcast operations was down 23%.

Revenue at Disney's Media Networks unit rose 3% to $4.8 billion, with a 25% increase on cable and a 23% decline for broadcast.

Disney said cable network growth was driven by higher affiliate fees at ESPN. Some of that came because of a change in the new Comcast affiliation agreement that required the network to defer $76 million less in revenue than last year. ESPN will defer $70 million less in revenue from Comcast in the second quarter as well, but the change in deferring income won't affect revenues over the full year, Rasulo said

Cable distribution revenue was up 11% in the first quarter and adjusting for the lower deferral of income, affiliate fees were up in the high single digit range, Rasulo said. Disney will continue to post increases in that range for the rest of the year, he added.

Iger noted that those figures didn't include rate hikes written into the new Comcast deal that haven't started to kick in yet.

Ad revenues at ESPN were flat. Rates were higher but a year ago, Disney's quarter ended Jan 1, which meant the Rose Bowl and Fiesta Bowl were in the first quarter. Plus the NBA lockout cost ESPN 29 NBA games. The changes meant reduced revenue during this year's quarter. Had those changes not taken place, ESPN ad sales would have been up 8%, Rasulo said.

ESPN had lower programming costs because of the shifts, but some of that was offset by higher payments for NFL games.

The ABC Television Network had higher marketing costs as it launched a number of new series. Ad revenue at the ABC was flat, with higher rates offset by decreased ratings and units sold

Asked about reports that ABC News was in talks with Univision to create a new English language cable news network, Iger said only that "ABC is a platform we continue to invest in. ABC News is a very important part of that platform. And we have an interest in seeing that ABC News continues to flourish by giving it opportunities to look for and create some growth opportunities of its own."

Broadcasting income was hurt by lower political ad revenues at Disney's TV stations and higher marketing costs. Those were offset by lower programming and production costs because of the absence of The Oprah Winfrey Show. Ad revenues at the stations was down 20% in the quarter, but excluding political advertising and the sale of stations in Flint, Mich., and Toledo, Ohio, ad revenue was up 3%.

For the quarter, Disney has repurchased 23.3 million of its own shares for $800 million. Year to date, it has bought 33 million shares for $1.2 billion.

Jon Lafayette

Jon has been business editor of Broadcasting+Cable since 2010. He focuses on revenue-generating activities, including advertising and distribution, as well as executive intrigue and merger and acquisition activity. Just about any story is fair game, if a dollar sign can make its way into the article. Before B+C, Jon covered the industry for TVWeek, Cable World, Electronic Media, Advertising Age and The New York Post. A native New Yorker, Jon is hiding in plain sight in the suburbs of Chicago.