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Disney earnings: The movie business suffers, but interactive turns around

Disney made less money in its first fiscal 2013 quarter but still beat Wall Street expectations. And its online and social gaming segment swung to a profit.
Disney made less money in its first fiscal 2013 quarter but still beat Wall Street expectations. And its online and social gaming segment swung to a profit.
Thomas Samson/AFP/Getty Images

The Walt Disney Co. just announced fiscal 2013 first quarter earnings. They slightly beat Wall Street expectations, at 79 cents per share on $11.34 billion in revenue; analysts who follow the company expected 76 cents per share on $11.21 billion in revenue.

Profits for the quarter were 3 percent lower than a year ago. In after hours trading, the stock was up almost 4 percent.

As with all Disney quarterly earnings announcement, you have to drill into how the company's operating segments performed to get the full picture.

The most interesting wrinkle for the first fiscal quarter was that Disney's movie business lagged all the other operating segments while the previously troubled Interactive segment began to show signs of life.

But before we get to that, let's put the overall business into perspective. Of that $11.34 billion in gross revenue, $5.1 billion — 45 percent — came from Media Networks, which includes ESPN, and believe it not, ESPN actually contributed to a loss in income for Disney in the quarter.

The loss was tied to higher rights fees for football and NBA broadcasts, the company reported. Disney Channels, ABC Family, and A&E Television Networks compensated for that. (Outside Disney, most observers regard ESPN as a license to print money.)

The next biggest chunk came from the parks business, which brought in $3.39 billion in revenue. Parks have been a stalwart for Disney for some time.

But then you get to Studio Entertainment — the movie business — which accounted for $1.55 billion in revenue but topped losses for operating income with a 43 percent decline from last year's quarter.


As Disney noted, it was going to be tough to beat a home entertainment re-release of "The Lion King" and "Cars 2" in 2011 with "Brave" and "Cinderella" in 2012.

The movie business has been uneven for a while now. There was the "John Carter" debacle and the exit of Disney studio head Rich Ross, followed by the boffo success of "The Avengers," not to mention the $4 billion purchase of Lucasfilm and the "Star Wars" franchise late last year.

On the earnings call, CEO Bob Iger tossed props to J. J. Abrams, who has been tapped to direct the 2015 release of "Star Wars: Episode 7." AND he announced on CNBC that Disney will create some "Star Wars" spinoff films in upcoming years.

But obviously you're not doing too badly as an entertainment company if the very core of your being — movies — can take a hit of nearly 50 percent year-over-year and you still make money and beat quarterly earnings expectations.

The true problem child for Disney hasn't been moviemaking but the Interactive segment, which lost $28 million in last year's December quarter but made $9 million in the first fiscal quarter of 2013. That's quite a turnaround that takes some of the pressure off Interactive's double-headed leadership, John Pleasants and James Pitaro, to become profitable in 2013. Evidently that's made Iger cautiously happy.

But one good quarter won't take off all the pressure. As Disney Chief Financial Officer Jay Rasulo noted on the earnings call, "while we continue to target profit, we expect losses in Interactive to be comparable with the past."

Double ouch!

Iger said that a new Interactive product, Infinity, "remains a big swing factor for the year — if it does well, we're going to be pleased." He also indicated that investment in the division could bring back the red ink.

Infinity allows players to "insert" figurines they purchase into a virual gaming world. It looks as if it will permit characters from multiple Disney universes — from Pixar to "Pirates of the Caribbean" — to interact.

Disney doesn't really need to get Interactive right immediately and, Iger said, its fortunes aren't expected to turn decisively until the third quarter.

But if it wants to compete in the future of entertainment, dropping Interactive if it doesn't come through isn't an option — even if the segment continues to contribute very little to the bottom line.

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