Analysis: Disney Q3 2016 Earnings Results

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In our continuing effort to corner the market on Disney Parks fiscal analysis and projections (all 23 of you!), this post covers The Walt Disney Company’s Q3 Fiscal Year 2016 earnings results. I don’t know whether this is something in which readers are actually interested, I figured it would be worth giving this a whirl once.

This should be a telling quarter for Parks & Resorts given the opening of Shanghai Disneyland, attendance decreases at the parks, and current/future capex projects on the table. It also might provide an idea as to the validity of assumptions made in our 2017: Year of the Discount at Walt Disney World? post.

If you want to play along at home, Disney will discuss its Q3 results via a live audio webcast beginning at 5:00 p.m. EDT / 2:00 p.m. PDT on Tuesday, August 9, 2016. We’re posting this “preview” in advance of that so you can follow along with the live webcast–we will update the post after the webcast with our final analysis (check back around 8 p.m. EDT for that). Maybe if there’s demand (is there?) I’ll try to find some sort of live-blogging widget to embed in this page to include my running snark over the course of the webcast.

If you’ve never listened to an earnings report, don’t expect it to be some thrilling spectacle where you receive the insider scoop on all the upcoming attractions. In actuality, Parks & Resorts is just one of segment of The Walt Disney Company, and it’s typically the less “sexy” one. A stable workhorse delivering fairly reliable results.

Instead, the focus will probably be on the studios’ phenomenal results with The Jungle Book, Captain America: Civil War, and Finding Dory, and the likelihood of a record-breaking year at the box office for Disney (pretty much a foregone conclusion unless Rogue One inexplicably flops).

ESPN is a significant concern for investors, so a lot of time will probably be spent trying to explain-away apprehensions, and fielding questions about ESPN’s business plans going forward. ESPN’s vulnerability is of paramount concern because it (has) represent(ed) a significant portion of operating income in the past.

While the report will certainly have cut and dry financial analysis in terms of revenue, operating & net income, and cash flow, there’s a lot more to it than what’s in the printed report. Other numbers Disney emphasizes during the call are typically those that look good. The aim is to present the qualitative analysis and fiscal health in as positive of a light possible. Quarterly reports underscore Wall Street’s fixation with short-term results, and the beat-or-miss/thrive-or-fail dichotomy that is endemic of the market.

As such, companies try to paint an optimistic picture of the immediate past and future, even if that requires tortured analysis and highlighting of different metrics. If Disney’s Hollywood Studios were overtaken tomorrow by Sith Lords and closed forever to the public, the message in the next quarterly report would not be that attendance at Walt Disney World is down–it would be that daily per park numbers are up.

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Parks & Resorts will certainly be discussed during the report, but to what degree is the question. Comcast and SeaWorld already reported attendance being down at their Orlando parks for the quarter, but their numbers were buoyed by California numbers. With Disneyland probably not seeing year over year gains (given that the 60th Anniversary kickoff was a huge boon for last year’s Q3 results) and Paris & Hong Kong definitely not seeing gains, it’s difficult to put a positive spin on attendance.

About the only way that could occur is obfuscating the analysis by lumping in Shanghai Disneyland (a park that wasn’t open before this quarter) with the rest. Irrespective of whether that happens, Shanghai Disneyland will likely be a major topic, especially as it has performed well and is finally generating operating revenue. Even though Disney has already warned that the park won’t be immediately profitable, the fact that it’s no longer hemorrhaging capex is likely to be highlighted, as is the positive guest response to the park.

We should hear briefly about some of the capex projects that are ongoing in the parks, but don’t expect any bombshell news there. If anything, there might be some insight into future spending beyond known projects and perhaps rough timelines for major openings. Don’t hold your breath on either.

There’s also the possibility that Disney will address attendance numbers head-on, but attributing them to the world economy (in the case of Walt Disney World’s decrease in international guests) or terrorist attacks (in the case of Disneyland Paris). This is what I would expect to occur, and where we could hear a mention of future efforts (read: discounting) to boost attendance.

The likelihood that Disney will directly state, “attendance was down by ___% for Q3 at Walt Disney World” is low. Still, the overall tone of the qualitative report and the numbers themselves will be telling, and when it’s over, we’ll return to this post to distill the results with some analysis…

(UPDATE: The results are now out, here’s our take…)

Results Analysis

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The earnings report call was interesting…but not for reasons at all related to theme parks. Just before the report was released, ESPN issued a statement that Disney had acquired a 33% stake in BAMTech, a video streaming and tech company formed by Major League Baseball for $1 billion. This acquisition is Disney’s biggest since it purchased Lucasfilm in 2012, and a call that was already destined to be primarily focused on ESPN became overwhelmingly so.

The Q3 Report is live here, and you can see earnings per share increased by 12%, and EPS slightly beat expectations. You can read the full results there, as we will only be focusing on Parks & Resorts, and what can be gleaned from statements in the report.

A lot was said on the call that is cause for investor optimism: Brexit and Zika haven’t had noticeable impacts on attendance, theme park operating income was up, per guest spending was up, and costs were down. I think it’s worth analyzing each of these statements…

Brexit and Zika didn’t have noticeable impacts. Of course they didn’t. Brexit occurred 8 days before the quarter ended, and the first case of local Zika in the United States made the news after the quarter ended. Those things wouldn’t start to impact numbers for at least another quarter. Probably longer–people don’t just impulsively cancel trips for which they’ve already paid.

Another note about attendance: the written report states that it was lower, and attributes that to Easter. On the call, Iger stated it was down 4%. While it’s true that Easter fell in Q2 this year, what isn’t mentioned is June numbers (the slow July won’t be reflected until the Q4 report) and how they contributed to this.

More significantly, Shanghai’s contribution to the attendance figures is not mentioned. As Shanghai is included in terms of lowering operating income due to pre-opening costs, it stands to reason that its attendance numbers are also included in the aggregates. Iger stated that 1 million guests visited Shanghai Disneyland in the first full month after it opened, which works out to be just over 30,000 guests per day (extrapolated for a full year, this would be on par with Epcot), which is about average for Disney’s parks.

With 10 parks now (Tokyo’s don’t count), that would mean Shanghai could’ve accounted for about 1.5% to 2% of total attendance for the quarter. That’s very rough math based on TEA numbers, but even at 1%, that’s certainly more noteworthy than a shift in Easter.

The rest of the results make sense. It comes as no surprise that per guest spending would be up–Disney raised prices across the board. Also no surprise that costs were down–Disney explicitly stated that “cost control initiatives contributed to lower opex [operating expenses] at the parks.” The question ultimately becomes whether fewer guests, higher prices, and lower costs is something that’s sustainable. (In fact, this question was asked during the Q&A.)

I think that’s what a lot of us are wondering, but primarily as fans. Fans have complained of a “tipping point” for years, but so far, that has not occurred with the general public. The latest round of ‘cost control initiatives’ have been especially noticeable, as have price increases. Eventually, that will have an impact on revenue. Maybe not in Q4, but probably by Q2 FY2017.

Our prediction remains the same: that world events will come to bear, as economic and other apprehensions will lead to further attendance declines in 2017 unless Disney rolls out more aggressive discounts to incentivize people to visit.

On the good news for fans front? Capex is up considerably. Here’s a particularly optimistic statement from the report: “Capital expenditures increased by $630 million to $3.7 billion for the nine months primarily due to higher spending at Walt Disney World Resort, Hong Kong Disneyland Resort and Disneyland Resort, partially offset by lower spending at Shanghai Disney Resort.”

This is really promising. Even as capex decreased at Shanghai Disneyland (because the project was wrapping up), it has still been up overall, and that’s primarily being driven by Walt Disney World and Disneyland. (HKDL is getting Iron Man Experience and a new hotel.) We only expect that to rise as work progresses on Star Wars Land and other projects.

Another thing that’s promising is that the opening of Shanghai Disneyland went so smoothly and the park has been well-received by guests. It’s still really early, but it’s already pretty clear that this will not be another EuroDisney situation, with the growth of other parks impacted for years because of that boondoggle.

Well, that’s our take for now. Not all that exciting or enlightening. We’ll continue the conversation in the comments…

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Your Thoughts…

Is this a topic that interests you? Would you like to follow-along/participate with a live blog during the earnings results today? Any questions about any of this? We love hearing from readers, so please share some of your predictions or any other thoughts or questions you have in the comments!


31 Responses to “Analysis: Disney Q3 2016 Earnings Results”
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