Disney Falls After Cable Division Registers Profit Drop

Walt Disney Co. (DIS) dropped in extended trading after reporting lower income at cable networks including ESPN, the company's biggest source of profit.

Disney fell as much 3.3 percent to $64.95 after releasing fourth-quarter results yesterday. The stock lost 2.7 percent to $67.15 at the close in New York and has gained 35 percent this year, compared with a 19 percent advance for the Dow Jones Industrial Average. (INDU)

Higher programming costs for football and baseball weighed on a division that typically produces 40 percent of Disney's earnings, according to Martin Pyykkonen, an analyst at Wedge Partners Corp. Profit from cable, largely ESPN and the Disney Channels, slid 7 percent, the company said yesterday.

"We remain confident in ESPN's value and continued reign as the leader in sports," Chairman and Chief Executive Officer Robert Iger said on a conference call.

Net income for the quarter rose 12 percent to $1.39 billion, or 77 cents a share, from a year earlier, Burbank, California-based Disney said yesterday, citing growth at its theme parks, consumer products and film studio.

Profit topped the 76-cent average of 27 analysts' estimates compiled by Bloomberg. Revenue grew 7.3 percent to $11.6 billion in the period ended Sept. 28, beating the $11.4 billion average of estimates.

Those gains were overshadowed by the rare profit drop in cable, where ESPN faced new competition from Rupert Murdoch's new Fox Sports 1. In addition to higher programming costs, Disney recognized $172 million less in deferred affiliate revenue after recording the payments earlier in the year.

Disney Channel

Investments in the Disney Channel in Germany also crimped cable profit, Chief Financial Officer Jay Rasulo said on the call. In addition, Disney recorded less income from its investment in A&E Television Networks and sold ESPN U.K.

"We think the Street will view the results as soft given that cable networks revenue and operating income came in below our estimates," Vasily Karasyov, an analyst at Sterne Agee & Leach Inc., said in a note after the results were announced.

Profit at Disney's parks and resorts division increased 15 percent to $571 million in the quarter, as revenue grew 8.5 percent. New attractions at U.S. resorts spurred higher guest spending and occupancy, and let the company increase ticket prices. Disney is working on "Star Wars" attractions for the parks, Iger said on Bloomberg Television.

"There is a fair amount of development going on at Disney Imagineering right now to expand the 'Star Wars' presence in California and in Orlando, and eventually in other parks around the world," Iger said.

Johnny Depp

Popular films such as "Planes" and "Monsters University" led to growth at the consumer products division, Disney said. The unit boosted profit by 30 percent to $347 million, with sales growing 14 percent. The results were also driven by sales of merchandise tied to the Disney Junior cable network for preschoolers. They doubled to $1.8 billion at retail for the fiscal year.

Disney's film studio increased its profit to $108 million from $80 million as revenue grew 7.4 percent, while weathering a loss on the Johnny Depp film "The Lone Ranger." The company credited growth from television and subscription video on demand services, such as Netflix Inc. (NFLX)

Disney said yesterday it will produce four Marvel superhero TV series for Netflix, leveraging a brand that has produced box-office-leading returns for the company. Disney will also make more original content for other outlets. Iger cited the potential of Twitter Inc. (TWTR), which went public yesterday.

Twitter Potential

"It's yet another means of distribution," Iger said. "We're also seeing that migration in media, you know yesterday's short is today's long. I think we have to be mindful of that, too."

Disney's "Iron Man 3" is the top-performing film of 2013 with $1.22 billion in worldwide box-office sales, underscoring the growing value of Marvel to Disney. "Thor: The Dark World," also from Marvel, opens today.

The first "Star Wars" film under Disney's ownership of Lucasfilm is scheduled for release on Dec. 18, 2015.

Disney Interactive, which began selling the new Disney Infinity video-game products, posted a profit of $16 million in the quarter, reversing a year earlier loss. Revenue more than doubled to $396 million.

Profit at Disney's ABC broadcast division fell 18 percent to $158 million, with revenue growing 2 percent to $1.37 billion. The company isn't selling its local TV stations, Iger said.

"As long as we're in the network business, we'll be in the station business," Iger said on the call.