Challenges and Restructuring Efforts
Walt Disney has recently disclosed ESPN’s financial figures separately for the first time. Despite being a significant profit engine for its parent company, ESPN is facing challenges due to falling revenue and a relatively low operating margin.
Revelations from the Filing
In a filing published on Wednesday, Disney revealed that ESPN and other sports-related businesses generated an operating profit of $1.48 billion in the nine months leading up to July 1. However, their revenue witnessed a decline of 1.3% compared to the same period the previous year, amounting to $13.2 billion.
Insights into Disney’s Profitability
The earnings from ESPN accounted for approximately 19% of Disney’s operating profit during that period. This disclosure of financials marks the first step in Disney’s restructuring efforts, aimed at attracting external investments in ESPN. The company hopes to interest sports leagues, whose games are broadcasted by ESPN, in becoming partners.
Examining the Figures
At first glance, the revealed figures do not project a windfall for Disney. KeyBanc analyst Brandon Nispel expressed disappointment with these numbers as they do not align with his previous estimate valuing ESPN at around $30 billion. Nispel highlighted that investors would likely find the midteens percentage operating margin underwhelming.
Disney’s decision to separate ESPN’s financials is a strategic move intended to address the challenges faced by the sports broadcaster. With this move, the company aims to attract external investments while retaining key details about ESPN’s profitability. While the figures might not be as promising as expected, Disney remains committed to finding solutions and ensuring ESPN’s continued success as a leader in sports broadcasting.
Disney’s Challenges and Future Plans
Disney is facing potential difficulties in increasing its operating income due to escalating sports costs, particularly with the upcoming NBA renewal. This concern is highlighted in a research note by Nispel.
CEO Bob Iger has outlined Disney’s future strategy, which involves transitioning ESPN towards a comprehensive direct-to-consumer model. Currently, their streaming service ESPN+ only provides limited access to live sporting events. This move ultimately reduces the likelihood of spinning off the business. Instead, the company is exploring strategic options for its linear TV channels such as ABC, FX, and National Geographic.
Macquarie analyst Tim Nollen believes this update assists in establishing expectations for the financials of a future ESPN over-the-top (OTT) service, as well as providing valuable insights into the valuation of potential asset divestitures. It is worth noting that an OTT service aligns with Disney’s plan for ESPN’s future direction as outlined by Iger.
Nollen currently holds a Neutral rating on Disney stock with a target price of $94. As of premarket trading on Thursday, Disney shares experienced a modest increase of 0.4%, reaching $85.03.