(Updated: 8:55 p.m. ET)
Disney reported slightly higher earnings in the third quarter, with cable growth offset by declines in its broadcasting and movie businesses.
Net income rose 1% to $1.85 billion, or 1.01 a share in the third quarter, from $1.83 billion, or $1.01 a share a year ago.
Revenues rose 4% to $11.6 billion.
"We are pleased with the results we delivered in the third quarter," CEO Bob Iger said in a statement. "We are confident that our strategy of creating high-quality branded content positions us well for the future."
Operating income rose 8% to $2.3 billion at Disney’s Media Networks segment, which includes ESPN and ABC. Revenues rose 5% to $5.35 billion.
Disney’s cable networks turned in a 12% increase in operating income to $2.1 billion because of growth at ESPN, A+E Television Networks (now 50% owned by Disney) and the domestic Disney Channels, offset by lower income at ABC Family, which had higher programming costs.
Cable revenue rose 8% to $3.9 billion.
During the company’s earnings conference call with analysts, Iger felt the need to discuss ESPN’s result after a quarter in which its ratings fell 30%. “We remain confident in ESPN's value and its position as the Number One brand in sports over the long-term,” he said.
Disney CFO Jay Rasulo said that ESPN recognized $137 million more in deferred affiliate revenue than expected in the quarter because it met its programming commitments to distributors earlier than planned. That put affiliate revenue up 10% for the quarter. Without the additional deferred income, affiliate revenue was still up a bit more than 6%.
Rasulo said ESPN's cash ad sales were up 9% in the quarter, but its reported ad revenue was up only 3%, because “the increase in cash ad sales was partially offset by lower ratings,” which were mainly due to fewer NBA regular season games and lower ratings for NBA playoff games than a year ago.
So far this quarter, ESPN's cash ad sales are pacing up 11%, Rasulo said.
Iger said that ESPN had a strong upfront, in terms of price increases and overall revenue. He said the networks “did not detect any impact whatsoever for any new competitive forces, including Fox Sports 1.”
As football season approaches, Iger noted that ESPN has new advertising opportunities on its Watch ESPN app, which is sold separately from the linear networks. He said those sales are relatively small, in the tens of millions at this point, but we believe they will continue to grow.” Iger called the growth in adoption of mobile media by consumers “one of the most dramatic changes we've seen in the media business in a very long time. And I think provides us with a great opportunity.”
Broadcast operating income dropped 21% to $213 million as programming costs rose and ad revenue declined while affiliate revenue increased. Broadcast revenue was flat overall at $1.5 billion. The company also had lower income from selling shows.
Iger was optimistic about ABC’s prospects this season.
“We've been saying now for a few quarters that ABC is due to put on its schedule a couple of new strong shows to replace what was the foundation of the schedule over the sort of Desperate Housewives, Lost, Grey's Anatomy years. We're hopeful that their new schedule will deliver what ABC needs, not only in terms of what I'll call downstream revenue through owning the programs, but also from a ratings perspective and ultimately an advertising perspective,” he said. “We think they've got a couple of really hot comedies and a couple of hot dramas, I mentioned one earlier in S.H.I.E.L.D. We're going to go into the fall feeling relatively bullish about ABC's ability to strengthen its schedule and deliver better bottom line, but until the season unfolds you never can quite tell.
At the stations, Rasulo said ad sales were pacing down from a year ago. Last year, ABC had the Emmy’s which was worth 3 to 4 percentage points, and there is less political advertising than a year ago.
Iger was asked about the effect of potential consolidation among cable operators. “This is probably the most robust year we've ever seen from a distribution perspective, meaning the number of outlets that are available to us and to other content owners to distribute their product has grown significantly and pretty dramatically in some cases, obviously, Netflix is a – is probably the most recent one,” he said. “And we feel that some consolidation among cable owners if that occurs is going to have no impact whatsoever on our business because there are so many buyers in the marketplace. We also have, as you know, an array of services that everybody wants fortunately, and therefore, we think that we have basically the kind of leverage necessary not just to gain access, but to achieve the kind of pricing that we need to achieve to grow our businesses.”
Iger was also asked about the CBS-Time Warner Cable dispute and the likelihood the current blackout would lead action by the government.
“We never like to see battles like this obviously, because we think that sometimes they bring attention to the business that isn't necessarily helpful. That said, maybe you'd expect this from a programmer, but we feel strongly about the need for broadcasters to be paid adequately for the value that they deliver, both to consumers or customers of multichannel services on to the distributors themselves,” he said. “Even though these broadcast stations, can be, as you know, obtained for free, over the air, we know that distributors repackage these signals and in fact sell them as part of other services to consumers and thus we think we should get paid. We also believe that the combination of programming both national and network and local, particularly news is really compelling as evidenced by the ratings that these stations deliver compared with the ratings of numerous other channels and therefore we think that the stations should get paid accordingly. I don't really have details about this negotiation. So, I don't really want to weigh in specifically about it.”
The government would probably prefer that broadcasters and distributors work out their own disputes, Iger said. “I don't sense that the government is close to jumping into the fray on this one.”