Analysis: Disney Q3 2016 Earnings Results
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.
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
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!
Thank you for this post! I thought it was very informative and interesting, and it adds a new spin for adult Disney fans who are interested in every aspects of the parks’ well-being, and projections for the future.
It’s absolutely ridiculous that ESPN doesn’t mimic the HBO NOW model. Charge a per month fee for standalone, on demand access.
For a company that is so forward-thinking with regards to theme parks, retail, hospitality, and film, it’s amazing how stubborn and dated Disney’s ESPN cable-based model is.
The problem is that independent analysis has shown that the *vast* majority of cable subscribers do not watch ESPN (I don’t recall the exact number, but I want to say around 70%), yet they pay a lot for it, anyway. Disney has to be careful with how they roll out an on-demand model, because cable providers could easily cut them out of the more expensive bundles and encourage those who do care to subscriber to the on-demand product in addition to a cheaper bundle.
That would be win-win for cable companies and consumers, but with significantly fewer ESPN subscribers, it would be a huge loss for Disney.
It’s like my two favorite things current events and Disney!! Totally nerding out!!
Thank you, Tom! I enjoyed this article. I have to admit even enjoying the discussion about ESPN. As a cord-cutter and a sports fan, I have to admit to being in the target demographic for direct sports streaming services, and figure I’d rather pay the sport directly for access to the games, than pay for an expensive cable package to watch only the games the national or local stations decide to broadcast.
As a DIS stockholder, as well as a WDW & DLR fanatic, I appreciate articles like this.
I’d been hoping for an eventual spin-off of the media holdings into it’s own security, as I could really care less about owning the cable/broadcast side of the business. But it doesn’t sound like that’s in the cards anytime soon.
Nonetheless, I still think the stock is currently very fairly valued for what you get.
As you say, nothing groundbreaking in the call. But thanks for the analysis.
Just wanted to chime in and say that I found this fascinating and hope that you continue to do them in the future! Loved reading the comments too… how often can you say that on the internet? 🙂
Suuuuuuuper interesting info and analysis. I’d love to see more of these in the future!
Thanks for posting this review!
I’m likely in the minority in enjoying earnings calls, but continuing to review the corporate side of P&R on the blog would bring awareness to a different side of the Company. Vlog entries talking about each of these various topics are another good idea.
Looking forward, do you think the ESPN / BAMTech acquisition is going to somehow involve (more) improvements to Wide World of Sports or get included into Disney Springs / Downtown Disney Anaheim? I would imagine Disney trying every possible way to profit on their new property, as I would guess they would take the majority ownership option.
Also, if Pandora / SWL really lives up to the hype, do you see a reduction in capex for a few quarters after their openings, tying into the “cost-cutting” movement as of late, or do they continue spending to take advantage of the momentum?
Good article, consider me one of the 23 of your target audience for this article.
I think the attendance being down for summer is a good thing, only because its an intentional move on Disney’s part. I remember Iger saying some time ago that they were looking for ways to even attendance out across the year, and it seems their plans are succeeding. So boo to higher prices, but yay to better experiences? I was there in July, and found the crowds to be not bad at all. I would say it was busier last year in November than it was during a peak week this year. It will be interesting to see if they can maintain that, as you said Tom, through the next fiscal year.
I don’t believe it was an intentional move on Disney’s part. I know Iger made such a statement, but I think that was to hedge his bets if dynamic pricing ended up resulting in lower crowds for peak season. In that case, if asked, he could say, “crowds are now more evenly spread throughout the year, as was our stated goal in implementing this pricing model.”
Rather, I think the hope was that they could keep attendance flat in the summer at higher price points, with the assumption that certain guests must visit during that timeframe, if at all. This isn’t to say the strategy has backfired, as I don’t think it has. Fewer guests but more revenue is not a bad thing–it’s just not as good as more guests and more revenue.
I think this is part of the reason why we are already seeing discounts for next summer during times they wouldn’t otherwise be offered. Maximize attendance by offering targeted discounts to those who have historically booked them, and charge higher prices to those who aren’t as discount-dependent.
And I am all for discounts!!! ( I plan on going in June this upcoming year, and am eagerly anticipating free dining 😉 ) I do realize that Disney would absolutely love more revenue AND more guests. That being said, I find it believable that Disney would not mind seeing lower attendances in some cases as a matter of quality control, at least until some of the massive construction projects are done, and the parks’ capacity increases. A business first, but golly gee, I just like to believe they do want their guest to be happy. I watched a lot of uncle Walt as kid lol.
I just wanted to let you know how much my husband and I really enjoy all you postings on here, Travel Caffeine, and your new Vlog. This lastest is very interesting and I hope you keep breaking down Disney finances as it relates to the health of the parks. Seriously, you’ve inspired us to go to all the parks. We’re going to Tokyo this Sept. Paris for the Christmas in November and hope to go to Shanghai/Hong Kong in April, still working on those two. As 60+ couple your indepth reports really help.
Thanks!
Very interesting. Thanks for this. See you next quarter.
Thank you for bringing this to my attention! I never would have thought I would enjoy listening to this call but it has been absolutely fascinating.
Can’t wait for your thoughts 🙂
Did I just hear them say that domestic park attendance was down because of the Easter Holiday being in the 2nd Quarter? How on earth does that explain why attendance in July is down? Great way to avoid the issue.
You heard correct, and it’s an odd statement. However, this call would not address July attendance one way or the other, as the quarter ended July 2. As I wrote in the revised post, I think attendance is down more than Disney is letting on…
This will finally put to rest the “Thanks Shanghai” scurrilous rumor started by a blogster that knows nothing about corporate economics.
Definitely interested in quarterly results of the organization in general, and econo-political spin that’s promoted to Wall Street analysts in hopes of soothing investors.
Feel free to keep this type of content on the site — it’s enlightening to say the least.
I honestly believe that the alligator attack did more to harm Disney’s public image than anything I’ve ever seen. That, combined with their “surge” ticket pricing and overall price increases for food, drinks, and hotels has likely brought down attendance over the summer. I have a theory that around the opening of new fantasyland attendance began to ramp up heavily, and blogs like yours gained in popularity and drove up excitement and appreciation for the various aspects of experiencing disney parks. However, that surge in popularity the past few years also created a large amount of guests who had seen and experienced more of the parks than ever. Disney park fatigue might be setting in for those who created that surge of attendance since 2010. In other words, I think social media, blogs, massive box office success, and advertising created an influx of new disney park fans who couldn’t get enough. However, fans (like myself) have found that it IS possible to get enough, especially as prices skyrocket along with crowd levels. Epcot is growing more and more sad all the time, hollywood studios is half of a park now with tired attractions (not classic, TIRED or closed), animal kingdom’s rivers of light debacle didn’t help anything, and the magic kingdom was an endless construction project that still doesn’t have an e-ticket attraction that truly rivals what is being constructed in places in like universal, shanghai, and Tokyo. We’ve visited Disney parks nine times in the past six years, but 2017 might be the first year we don’t return. I hate saying that, but I’m starting to understand the “pinch” of the cost now that we’ll be paying for our son’s airline ticket and disney ticket. Disney Parks are still the most fantastic place in the world as far as I’m concerned, and if I had an annual pass and lived in florida of California I’d go several times a month just to sit on a bench and soak in the joy and wonder of it all. However, the cost of bringing my family for a week is greater than my excitement level. I imagine many others feel the same.
Or perhaps I’m just being completely myopic and ignorantly anecdotal while the only reason attendance is down for the summer is because of brexit and the south american economy =)
I think surge pricing could’ve played a part, but I doubt the alligator attack was significant for Q3. Most of those trips were booked months in advance, and canceling at the last minute is a costly proposition. I do think the alligator attack will impact/has impacted bookings going forward, but we won’t see that fully until Spring Break/Summer 2017.
The rest of what you’re saying is right on. There was a while both before and after New Fantasyland when capex wasn’t being spent at nearly the levels it should’ve been for consistent, sustained growth, but that was occurring anyways due to other factors (be it a rebounding economy, brand awareness, etc.). Now, capex is back to levels where it should be (or above them), but we won’t see the “fruits” of that for several more years.
Insightful! I agree. Recent years of healthy economy and new draws enticed visitors who had put off vacations for years. Hopefully their goals have been met for a while. Along with outside factors diminishing attendance, parks might (please!) see less joy-inhibiting masses and simplified, quick-fix “improvements”. Hopefully we will see the return of classic, quality, invested-in, ambiance soon. The improvements you mentioned would cap off his evolving of Disney World to its former awe, thoughtfully maintained detail, and enjoyableness! That was what built its fan base all along.
I agree Mitch. Thanks for putting it so well. I am going this month but it’s been 2.5 years and this will di for a while.
I have to agree with your comments. I have been going to WDW since I was 6 years old, going every year then every other year. We took several years off since I got married and now at 36 and paying for my family to go for a week is getting outrageously expensive. Particially because the way our family travels is a little of the ‘we’re on vacation’ view point and normally don’t spare any expense but for my week at Disney I could stay at the Ritz Carlton or One and Only beach club somewhere, and for my $20,000 (not DVC members) I’m staying in a hotel room that isn’t that nice. The cost of the trip is slowly outweighing the nostalgia and excitement. We are going Thanksgiving week this year and I hate to say it but will be our last for quite awhile.
A day without snark is like a day without…well snark. Sadly, I’ve got a few things going on this evening so I won’t be able to enjoy anything real-time, I’ll leave that to the other twenty two people who are about the financial report. You know the big question the stock people want to discuss is “Has ESPN stopped bleeding subs!?!” The dip in parks will just be the cherry on their dire rantings.
The problem is that there is no answer for the ESPN house of cards. None. As cord-cutting continues and unbundling is an ever-looming inevitability, all Disney can do is attempt to stem the bleeding a bit with innovative alternatives (none of which we’ve really seen yet). The problem is that ESPN way overpaid for many of its contracts based on the false assumption that its numbers would stay at their past levels. Now those long term deals are an albatross that will continue to drag them down for several years.
I can only imagine how the stock price would look if the studios and parks were doing as poorly as cable/media.
That first bit sounded like they are going to try to join em since they can’t beat em. As you pointed out, it won’t stop it from being a drag due to existing deals but it might at least make the brand seem to be something more than an anchor.
I think cable companies have to change the way they do business. They just can’t compete with companies like Netflix. $50+ for cable is expensive compared to $10 for Netflix. My kids can watch whatever they want at whatever time on Netflix, and there are no commercials (less pester power). Hopefully Disney can figure out how to boost ESPN over the next few years.
What’s BAM tech?