Financial Performance

Disney Shares Tumble on Weak Q3 Results

The company announces a major shift to streaming content as operating income from media networks, including ESPN, takes another dive.
Matthew HellerAugust 9, 2017

Walt Disney Co.’s announcement of a major shift to streaming content wasn’t enough to avert the worst day for its stock in 15 months amid weak third-quarter results.

The company’s adjusted earnings beat analysts’ estimates but operating income declined 10% year over year to $4.01 billion, reflecting in part a 22% drop to $1.84 billion at the media networks unit, which houses ESPN and ABC.

“The decrease at ESPN was due to higher programming costs, lower advertising revenue and severance and contract termination costs, partially offset by affiliate revenue growth,” Disney said in a news release.

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Media networks’ operating income has fallen for five quarters in a row year over year amid continued subscriber losses at ESPN. Analysts had been expecting third-quarter income of $1.99 billion from media networks.

On news of the earnings, Disney stock closed nearly 4% lower at $102.83., its worst day since May 2016, when it fell 4.04%.

As the Los Angeles Times reports, “ESPN has long been the profit engine for Disney. But ESPN has been squeezed by rising sports rights costs at a time when pay-TV revenue has been under threat because of cord-cutting.”

Disney CEO Bob Iger has said the company is “confident in ESPN’s future” and believes “live sports is still a huge driver of consumption.” But it announced Wednesday that it would launch a direct-to-consumer streaming service for sports and another for films and television shows.

The ESPN service, which would be available next year, is expected to feature 10,000 sporting events annually.

Robin Diedrich, an analyst with Edward Jones Research, said the ESPN subscriber losses probably drove Disney’s decision to launch the new platforms.

“We continue to see more erosion of general subscribers in the traditional business,” she told the Times. “That is the concern and probably what was pushing them to do this sooner rather than later.”

The service for films and TV means Disney will cut ties with streaming giant Netflix. “This is a declaration of independence by Disney, and now you have a direct competition between these two behemoth players,” said Peter Csathy, founder of the advisory firm Creatv Media.