Disney Earnings Call: Networks Facing Difficult Times; Virtual Worlds, Mobile 'Closer' To Profit

This story was written by Rory Maher.

As we reported in our earlier post, starting today Disney is reporting much of its Interactive Media business as a segment; that doesn't include ABC.com, ESPN.com or any sites operated by other divisions. Pricing pressure and increased production and marketing costs related to video games hurt interactive results in the quarter, but Iger said that the company would invest materially in the interactive segment in 2009 with most of the increased investment being allocated to video games. Iger explained the virtual worlds and mobile content offering within the segment are closer to profitability and will thus need less investment in 2009, providing further indications that this industry is weathering the economic downturn relatively well.

The Media Networks segment results were significantly below consensus estimates with broadcast revenue decreasing 14 percent during the quarter versus consensus expectations of a 6 percent drop and cable revenues increasing 2 percent versus consensus estimates of 5 percent growth.  The significant drop in TV revenue, while driven partly by ratings, is surprising given that Disney's affiliates benefited from significant political advertising it did not earn during the previous year's quarter.  Stripping out the political advertising earned during the quarter, TV revenues were probably down more than 25 percent.

Theme parks results beat expectations driven by higher attendance and tempered by significant price discounts. Attendance at the theme parks continues to remain ahead of the previous year though revenue has been impacted by the aggressive price discounts on tickets and lodging in order to drive attendance levels.

The implications of the results on the media industry are very much like those drawn from earnings releases made during the past few weeksprepare for a continued difficult environment and accept that no one seems confident enough to predict when the increasing weakness will start to turn for the better. Iger and Staggs said that advertising growth during the current quarter at ABC was pacing "significantly" behind last year, which we interpret to mean down 25 percent to 35 percent given the lack of political advertising this quarter versus the quarter ended March 31, 2008.  In our earnings preview we told you to watch for guidance on the important auto and consumer advertising categories, but there was no indication from Iger or Staggs whether those advertising categories show accelerating weaknessthough they did note the two categories were a significant contributor to the previous quarter's weakness.

By Rory Maher