Disney Profit Grows Despite Drop at ESPN

Higher costs for college football and NBA hurt sports network
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The Walt Disney Co. reported higher profits in its second quarter but said that profits fell at ESPN.

Net income in Disney’s fiscal second quarter rose 11% to $2.388 billion, or $1.50 a share, from $2.143 billion, or $1.30 a share a year ago.

Revenue rose 3% to $13.3 billion.

Operating income at Disney’s media networks fell 3% to $2.223 billion.

Cable networks operating income fell 3% to $1.8 billion because of a decrease at ESPN.

ESPN, whose performance is being closely watched by the industry and by investors, had higher programming costs because three more college football bowl games fell in the second quarter instead of the first. ESPN is also paying higher rates under its new contract with the NBA. ESPN fired about 100 staffers, including many on-camera personnel, in order to cut costs and adjust to a changing media environment.

Related: ESPN Adds MLB Network Program to Lineup

Revenue was up 3% to $5.946 billion. Affiliate revenue was up at ESPN despite a decline in subscribers. Advertising revenue was up 5%, but would have been down 1% without the added college bowl games.

Disney CFO Christine McCarthy said on the company's earnings cal that ad sales  in the fiscal third quarter are pacing down for ESPN, reflecting a softness in the overall ad marketplace. But she said ESPN was pleased with what it’s seeing with the NBA. “Ratings strength is encouraging,” she said, and with the teams remaining in the playoffs, the conference finals and finals should be strong.

Overall rating for live sports have been strong for recent events including the NFL draft, MLB baseball and the NCAA women’s basketball championship, she added..

Also on the call, CEO Bob Iger praised ESPN’s effort to adjust to a shift in the industry. He noted that ratings were at record levels in the quarter and that viewership was 10% higher when the Watch Disney app and out-of-home audiences were included.

Iger added that ESPN has been pumping up its mobile offerings. He said ESPN mobile apps reach 23 million unique users, who spent 5.2 billion minutes engaging with ESPN during the quarter.

ESPN has also been a key part of new distribution platforms. While those new digital distributors are a small part of ESPN’s business now, they will be “a much bigger part going forward,” Iger said. Someday, ESPN as a whole might go direct to consumer, but there are no plans at this point, he said.

ESPN, via BAMTech, will also be offering a new ESPN-branded direct-to-consumer product later this year.

Asked about lower ratings for SportsCenter, Iger said that ESPN has already made changes in talent and would be making changes in its non-love sports programming.

He said ESPN’s mobile apps were increasingly becoming a new way that people are using ESPN to get sports news and that because of personalization, the apps should become a bigger source of revenue.

The Disney Channels and Freeform had increases in operating income as costs fell and distribution revenue rose. Ad revenue was down at Freeform.

Broadcasting operating income increased 14% to $344 million. There were higher program sales income, affiliate revenue growth and a decrease in primetime marketing costs. Revenues were up 3% to $1.9 billion.

Broadcast advertising revenues were down because of fewer network impressions and lower political advertising at the ABC-owned stations.ABC's ad revenue were down 2%. Going into the upfront, ABC scatter prices were 23% higher than last year's upfront.

Disney also absorbed a 42% drop in equity income as BAMTech had a loss, Hulu’s losses grew and A+E Networks’ income fell. A+E had lower advertising revenue.

Related: Hulu Launches Live Streaming Service Beta at $39.99 a Month

Disney's earnings topped analysts estimates, but revenue was a below forecasts.

“Disney delivered another quarter of double-digit EPS growth, driven by the strong performance of our Studio and Parks and Resorts,” said CEO Bob Iger. “Our continued strong performance is a direct result of our proven strategic focus on great branded content, innovative technology and global growth. We’re pleased with our results in Q2 and remain confident in our ability to continue to deliver significant shareholder value over the long term.”

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