As Walt Disney's (NYSE: DIS) ESPN subscribers continued to tumble and Disney faced off against tough comparisons for its studio entertainment segment, the company's fiscal 2017 was challenging, marked by 1% and 6% year-over-year declines in revenue and operating income, respectively.
Though management kept promising a better future for ESPN and even shared plans for aggressive new streaming services, investors struggled to fully embrace the optimistic outlook. Since Disney reported its fourth-quarter and full-year results for fiscal 2016 last November, the stock has gained only 5%. In the same period, the S&P 500 climbed a much higher 19%.
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Here's what investors should know about Disney's fiscal 2017 and what to look for in the coming quarters.
Operating income headwinds
Investors following Disney in fiscal 2017 are undoubtedly familiar with the media giant's challenging environment in its media networks segment, which is primarily influenced by ESPN. An 11% year-over-year drop in its media networks operating income weighed on Disney's overall profitability in fiscal 2017. Media networks operating income fell from $7.8 billion in fiscal 2016 quarter to $6.9 billion in fiscal 2017, playing a primary role in the company's 6% year-over-year decrease in overall operating profits.
Disney said media networks' results were adversely affected by higher programming costs, lower advertising revenue, and a slide in subscribers.
Of course, year-over-year declines in fiscal 2017 studio entertainment and "consumer products and interactive media" also weighed on results but to a lesser degree. Studio entertainment operating income fell 13%, from $2.7 billion to $2.4 billion. Consumer products and interactive media operating income slumped 11% from $2.0 billion to $1.7 billion.
But unlike media networks, lower operating income in Disney's studio entertainment and consumer products and interactive media segments wasn't due to operational or secular challenges. Their declines were simply a result of the extraordinary comparisons Disney was up against given the exceptional performance of the Star Wars franchise in fiscal 2016. In 2016, Star Wars benefited all of its distribution channels, Disney said.
Big successes at Disney resorts
While Disney faced year-over-year headwinds in its media networks, studio entertainment, and consumer and interactive media segments, it gained from notable growth in its parks and resorts segment. Fiscal 2017 revenue and operating income in the segment were up 8% and 14%, respectively, year over year.
Disney said the solid performance in parks and resorts was driven by increases both domestically and internationally. The company detailed the segment's fiscal 2017 performance in its most recent quarterly press release:
Looking ahead, investors should focus on Disney's ability to address challenges for ESPN in this evolving media landscape, as well as look for the company to begin executing on its plans for Netflix-like streaming services.
Regarding ESPN, Disney CEO Bob Iger reaffirmed management's confidence in the sports network's future.
Iger went on to say that he believes new technology will ultimately be an enabler for ESPN, not a headwind, as the company utilizes user-friendly platforms, data measurement, and improved monetization in a multiscreen, direct-to-consumer environment.
For Disney's upcoming streaming services, investors will want management to launch these services on time and see that they will be compelling services. Disney plans to launch an ESPN streaming service in 2018 and a Disney-branded service in late 2019.
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