Disney Net Income Drops 46 Percent as Ad Sales Slips

The Walt Disney Co. reported a marked decline in second-quarter (fiscal year) profits, as a staggering economy took its toll on the company’s studio, television and theme parks units.

For the three months ended March 31, Disney posted $613 million in net income, a 46 percent drop versus the year-ago period, on revenues of $8.09 billion.

Disney’s movie business accounted for the greatest segment declines, as studio revenue fell 21 percent, to $1.44 billion. On the other hand, the Mouse’s media networks unit posted slight gains versus FY Q2, as the TV arm grew revenue 2 percent to $3.62 billion.

Operating income at the media networks unit declined 4 percent in the quarter, to $1.31 billion, as lower ad sales at ABC’s owned-and-operated stations and increased programming costs at ABC contributed to a 38 percent drop in broadcasting income. At the same time, the cable holdings (ESPN, Disney Channel, ABC Family, et al) grew operating income 5 percent, to $1.14 billion.

“Ad sales at ABC were down modestly versus last year,” said Tom Staggs, senior executive vp and chief financial officer,” who added that scatter pricing is coming in slightly over upfront rates. “We see some stabilization in the marketplace, and while it’s certainly not as robust as a year ago, there’s a market there to be had.”

At ESPN, ad sales were off “by a high single-digit percentage, consistent with what we saw in Q1,” Skaggs said. Results were driven down by weaknesses in core sports categories (automotive, financial services, consumer electronics).

While Disney did not provide specific percentages, the cable unit seemed to outperform analysts’ expectations. A week ago, UBS analyst Michael Morris told investors to expect a 12 percent drop in ad dollars at ESPN, while predicting a 9 percent fall-off for the entire Disney cable group.

“Automotive is one of our biggest categories, but it isn’t as prevalent at ESPN as it is, say, at the TV stations,” Skaggs said, before adding that ESPN has been able to round up replacement dollars. “We have seen [ESPN/ABC Sports ad sales chief] Ed Erhadt’s team make up some ground with men’s grooming and insurance. It doesn’t make up for all of [the lost auto dollars], but they’re out there doing a good job in this marketplace.”
 
Disney president and CEO Robert Iger added that ESPN has done quite well with its NBA and Major League Baseball packages, and that “movie studios and quick-serve restaurants have been quite helpful.”

Increased affiliate revenue went a long way toward offsetting ESPN’s ad sales declines. All told, the cable nets grew their quarterly revenues 4 percent to $2.2 billion. Broadcast fell 2 percent, to $1.42 billion.

Interactive media revenues dropped 17 percent to $129 million. That figure does not reflect online revenue generated from various ABC, ESPN or Disney properties, as those incremental numbers are included in Disney’s media networks tally.

Last week, Disney bought a stake in YouTube rival Hulu, making it the third broadcaster to invest in venture. (CBS remains the lone holdout.) Iger told analysts that the decision to join Hulu was driven the “need to be where our consumers are going.” He also said that the offering could help combat piracy.

“If we don’t make our programming available online on a well-timed, well-priced basis, consumers will find it anyway,” Iger said. “it’s only going to grow in size from a consumption perspective, so it’s really important to establish ourselves there … and to engage consumers wherever they are.”

Iger downplayed fear that the ‘Net will only serve to cannibalize traditional media platforms. “The movie theater isn’t going away, nor is broadcast television,” Iger said. “The same can be said for new media. … Ultimately, we’ll be fairly compensated for it.”