Walt Disney Company — Q1 FY2020 10-Q
Reporting period: Quarter ended December 28, 2019; comparisons are with the quarter ended December 29, 2018. Amounts are in U.S. dollars. The March 2019 TFCF (21st Century Fox) acquisition and Hulu consolidation materially affect year-over-year comparability.
Financial performance
| Metric | Q1 FY2020 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $20.858 billion | $15.303 billion | +36% |
| Segment operating income | $4.002 billion | $3.655 billion | +9% |
| Income from continuing operations | $2.173 billion | $2.786 billion | -22% |
| Net income attributable to Disney | $2.107 billion | $2.788 billion | -24% |
| Diluted EPS from continuing operations | $1.17 | $1.86 | -37% |
| Cash from continuing operations | $1.630 billion | $2.099 billion | -22% |
| Investments in parks, resorts and other property | $1.338 billion | $1.195 billion | +$143 million |
Net margin was approximately 10.1%, versus 18.2% in the prior-year quarter, calculated as Disney-attributable net income divided by revenue. Segment operating margin was approximately 19.2%, versus 23.9%. Lower reported earnings and margins reflected $700 million of TFCF/Hulu purchase-accounting amortization, $150 million of restructuring and impairment charges, higher interest expense, and increased shares outstanding. The prior-year quarter included a $34 million tax benefit.
Segments and material changes
- Media Networks: Revenue of $7.361 billion (+24%); segment operating income of $1.630 billion (+23%). TFCF consolidation lifted results, while lower results at ESPN and owned television stations partly offset gains.
- Parks, Experiences and Products: Revenue of $7.396 billion (+8%); operating income of $2.338 billion (+9%). Higher ticket prices and per-capita spending helped; international parks attendance fell 8%, and international hotel occupancy declined to 73% from 86%.
- Studio Entertainment: Revenue of $3.764 billion versus $1.824 billion; operating income of $948 million versus $309 million. Current-quarter releases included Frozen II and Star Wars: The Rise of Skywalker.
- Direct-to-Consumer & International: Revenue of $3.987 billion versus $918 million, while segment operating loss widened to $693 million from $136 million. The segment reflects acquired businesses and Disney+ launch and programming costs.
Disney+ launched in November 2019 and had 26.5 million paid subscribers at quarter-end. ESPN+ had 6.6 million subscribers; Hulu had 30.4 million total subscribers. TFCF and Hulu consolidation contributed substantially to reported revenue growth, so headline growth should not be treated as wholly organic.
Cash, debt and liquidity
- Cash and cash equivalents were $6.833 billion at December 28, 2019, up from $5.418 billion at fiscal year-end. Cash, cash equivalents and restricted cash totaled $6.874 billion.
- Total borrowings were approximately $48.075 billion, including $10.018 billion current and $38.057 billion long-term, versus $46.986 billion at September 28, 2019. Net borrowings during the quarter were $1.2 billion.
- Unused committed bank facilities totaled $12.25 billion. Disney reported that it met its interest-coverage covenant by a significant margin and considered its liquidity adequate for operating needs and planned investment.
- Capital expenditures were $1.338 billion. Management expected FY2020 capital expenditures to be approximately $0.5 billion above FY2019’s $4.9 billion, primarily due to technology and corporate investment.
Outlook, risks and unusual items
- Disney reported that its Shanghai and Hong Kong parks had recently closed amid the coronavirus situation. Management said this would negatively affect Q2 and full-year results; the impact depended on the duration of closures and pace of reopening. No quantified estimate was provided.
- Management planned further Disney+ launches across Europe, Latin America and Asia-Pacific during calendar 2020 and 2021. It expected to increase exclusive-content investment and forgo some third-party licensing revenue as content moved to Disney+.
- The TFCF integration restructuring plan is expected to be substantially complete by the end of FY2021. Cumulative restructuring charges were $1.3 billion; management anticipated total severance costs of about $1.5 billion and said remaining other restructuring costs were expected to be immaterial.
- Legal proceedings were disclosed, but management did not believe any would result in a probable material loss. The company also guaranteed up to $285 million of remaining Anaheim Public Authority debt service obligations; tax revenues had exceeded payments to date.
- Other risks include travel and tourism disruptions, health concerns, consumer demand, advertising and subscriber trends, content performance, foreign exchange, interest rates, and uncertainties in estimates for content amortization and asset impairment. Disney cautioned that quarterly results are seasonal and not necessarily indicative of full-year results.
Important facts for investors to verify
- How long the Shanghai and Hong Kong park closures lasted and the eventual effect on attendance, revenue and operating income.
- Disney+ subscriber retention, average revenue per subscriber, content spending and progress toward improving direct-to-consumer profitability.
- The portion of revenue and segment growth attributable to TFCF/Hulu consolidation versus underlying business growth.
- Debt reduction, interest costs, cash generation and actual FY2020 capital expenditures against management’s outlook.
- Whether restructuring charges, content amortization and other acquisition-related costs develop as expected.