The Walt Disney Company Reports First Quarter Earnings for Fiscal 2019

BURBANK, Calif.–(BUSINESS WIRE)–The Walt Disney Company (NYSE: DIS) today reported quarterly earnings
for its first fiscal quarter ended December 29, 2018. Diluted earnings
per share (EPS) for the quarter decreased 36% to $1.86 from $2.91 in the
prior-year quarter. Excluding certain items affecting comparability⁽¹⁾,
EPS for the quarter decreased 3% to $1.84 from $1.89 in the prior-year
quarter.

“After a solid first quarter, with diluted EPS of $1.86, we look forward
to the transformative year ahead, including the successful completion of
our 21st Century Fox acquisition and the launch of our Disney+ streaming
service,” said Robert A. Iger, Chairman and Chief Executive Officer, The
Walt Disney Company. “Building a robust direct-to-consumer business is
our top priority, and we continue to invest in exceptional content and
innovative technology to drive our success in this space.”

The following table summarizes the first quarter results for fiscal 2019
and 2018 (in millions, except per share amounts):

SEGMENT RESULTS

The following table summarizes the first quarter segment operating
results for fiscal 2019 and 2018 (in millions):

Media Networks

Media Networks revenues for the quarter increased 7% to $5.9 billion and
segment operating income increased 7% to $1.3 billion.

The following table provides further detail of the Media Networks
results (in millions):

Cable Networks

Cable Networks revenues for the quarter increased 4% to $4.0 billion and
operating income decreased 6% to $743 million. Lower operating income
was due to a decrease at ESPN and Freeform, partially offset by an
increase at the Disney Channels.

The decrease at ESPN was due to higher programming costs, partially
offset by affiliate revenue growth and an increase in advertising
revenue. The increase in programming costs was due to contractual rate
increases for key sports programming and a shift in the mix of College
Football Playoff (CFP) games. Two semi-final games and one “host” game
were aired in the current quarter, whereas three host games aired in the
prior-year quarter. Semi-final games generally have a higher cost than
host games. Affiliate revenue growth reflected contractual rate
increases, partially offset by a decline in subscribers. Higher
advertising revenue was due to an increase in rates and impressions. The
increase in impressions was due to higher units delivered, partially
offset by lower average viewership. Advertising revenue benefited from
the shift in mix of CFP games.

Lower operating income at Freeform was due to decreases in advertising
revenue and program sales, partially offset by lower programming costs.
The decrease in advertising revenue was due to lower average viewership,
partially offset by higher rates.

Growth at the Disney Channels was due to higher income from program
sales and an increase in affiliate revenue. Affiliate revenue growth was
due to contractual rate increases, partially offset by a decline in
subscribers. Program sales included a benefit from the adoption of a new
revenue accounting standard (ASC 606) (see page 4).

Broadcasting

Broadcasting revenues for the quarter increased 12% to $1.9 billion and
operating income increased 40% to $408 million. The increase in
operating income was due to affiliate revenue growth, increased
advertising revenue and higher program sales, partially offset by higher
programming costs.

Growth in affiliate revenue was due to contractual rate increases and an
impact from the adoption of ASC 606 (see page 4). The increase in
advertising revenue was due to higher network rates and an increase in
political advertising at the owned television stations, partially offset
by lower network average viewership. The increase in program sales was
due to higher revenues from programs licensed to Hulu and the sale of The
Punisher in the current quarter. The programming cost increase was
driven by higher primetime costs, including the impact of The Conners and
Dancing with the Stars in the current quarter.

Equity in the Income of Investees

Equity in the income of investees increased from $159 million in the
prior-year quarter to $179 million in the current quarter due to higher
income from A+E Television Networks driven by lower marketing and
programming costs.

Parks, Experiences & Consumer Products

Parks, Experiences, & Consumer Products revenues for the quarter
increased 5% to $6.8 billion and segment operating income increased 10%
to $2.2 billion. Operating income growth for the quarter was due to an
increase at our domestic theme parks and resorts, partially offset by a
decrease from licensing activities.

Operating income growth at our domestic theme parks and resorts was due
to increased guest spending and higher occupied room nights. Guest
spending growth was due to higher average ticket prices, an increase in
food, beverage and merchandise spending and higher average hotel room
rates.

Operating income at our international parks and resorts was down
modestly compared to the prior-year quarter as lower results at Shanghai
Disney Resort and Disneyland Paris were largely offset by an increase at
Hong Kong Disneyland Resort. Lower operating income at Shanghai Disney
Resort was primarily due to lower attendance and higher costs, partially
offset by increased guest spending. Lower operating income at Disneyland
Paris was due to increased costs, partially offset by higher average
ticket prices. At Hong Kong Disneyland Resort, the increase in operating
income was driven by increased guest spending and higher occupied room
nights.

Lower income from licensing activities was driven by a decrease in
revenue from products based on Star Wars and Cars and higher third-party
royalty expense, partially offset by an increase from minimum guarantee
shortfall recognition, higher revenues from products based on Spider-Man
and an increase in licensee settlements. Higher minimum guarantee
shortfall recognition was due to an impact from the adoption of ASC 606
(see below).

Studio Entertainment

Studio Entertainment revenues for the quarter decreased 27% to $1.8
billion and segment operating income decreased 63% to $309 million.
Lower operating income was due to a decrease in theatrical distribution
results, partially offset by growth in TV/SVOD distribution.

The decrease in theatrical distribution results was due to the strong
performance of Star Wars: The Last Jedi and Thor: Ragnarok
in the prior-year quarter compared to Mary Poppins Returns and The
Nutcracker and the Four Realms in the current year. Other
significant releases included Ralph Breaks the Internet in the
current quarter, while the prior-year quarter included Coco.

Growth in TV/SVOD distribution results was due to the performance of Incredibles
2 and Avengers: Infinity War in the current quarter compared
to Cars 3 and Guardians of the Galaxy Vol. 2 in the
prior-year quarter, more title availabilities, and to a lesser extent,
an impact from the adoption of ASC 606 (see below).

Direct-to-Consumer & International

Direct-to-Consumer & International revenues for the quarter decreased 1%
to $918 million and segment operating loss increased from $42 million to
$136 million. Revenues reflected a 4% decrease from an unfavorable
foreign currency impact. The increase in operating loss was due to the
investment ramp-up in ESPN+, which was launched in April 2018, a loss
from streaming technology services and costs associated with the
upcoming launch of Disney+, partially offset by an increase at our
International Channels and a lower equity loss from our investment in
Hulu.

The increase at our International Channels was due to lower costs,
affiliate revenue growth and higher program sales (all on a constant
currency basis), partially offset by an unfavorable foreign currency
impact.

Hulu results reflected increases in subscription and advertising
revenue, partially offset by higher programming costs.

ADOPTION OF NEW REVENUE RECOGNITION ACCOUNTING STANDARD

At the beginning of fiscal 2019, the Company adopted a new revenue
recognition accounting standard (ASC 606). Results for fiscal 2019 are
presented under ASC 606, while prior period amounts continue to be
reported in accordance with our historic accounting.

The current quarter includes a $115 million favorable impact on segment
operating income from the ASC 606 adoption. The most significant
benefits were $56 million at Media Networks and $34 million at Parks,
Experiences & Consumer Products, both of which reflected a change in the
timing of revenue recognition on contracts with minimum guarantees.

OTHER FINANCIAL INFORMATION

Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses increased $11 million to $161
million in the current quarter primarily due to costs incurred in
connection with the Twenty-First Century Fox (21CF) acquisition,
partially offset by lower compensation costs.

Interest expense, net

Interest expense, net was as follows (in millions):

The increase in interest expense was due to financing costs related to
the 21CF acquisition and higher average interest rates, partially offset
by lower average debt balances and higher capitalized interest.

The increase in interest income, investment income and other was due to
unrealized investment gains in the current quarter and the inclusion of
a $25 million benefit related to pension and postretirement plan costs,
other than service cost. The Company adopted a new accounting standard
in fiscal 2019 and now presents the elements of pension and
postretirement plan costs other than service cost in “Interest expense,
net.” A net benefit of $7 million in the prior-year quarter was reported
in “Costs and expenses.” The benefit in the current quarter was due to
the expected return on plan assets, partially offset by interest expense
on plan liabilities and amortization of prior net actuarial losses.

Income Taxes

The effective income tax rate was as follows:

The increase in the effective income tax rate for the quarter reflected
a $1.6 billion net benefit related to the Tax Act that was recognized in
the prior-year quarter. This net benefit drove a 41.6 percentage point
reduction in the prior-year effective tax rate. The $1.6 billion
reflected a $1.9 billion benefit due to the remeasurement of our net
federal deferred tax liability to new statutory rates (Deferred
Remeasurement), partially offset by a one-time tax of $0.3 billion on
certain accumulated foreign earnings (Deemed Repatriation Tax). The
current quarter benefited from a reduction in the Company’s U.S.
statutory federal income tax rate to 21.0% in fiscal 2019 from 24.5% in
fiscal 2018. In addition, in the current quarter the Company adjusted
its estimate of the Deferred Remeasurement and Deemed Repatriation Tax
impact and recognized a $34 million net benefit.

Noncontrolling Interests

Net (income) loss attributable to noncontrolling interests was as
follows (in millions):

The change in net (income)/loss attributable to noncontrolling interests
was due to lower results at ESPN and Shanghai Disney Resort, and losses
at our direct-to-consumer sports business, partially offset by growth at
Hong Kong Disneyland Resort. Lower results at ESPN were largely due to
the benefit of the Tax Act in the prior-year quarter.

Net income attributable to noncontrolling interests is determined on
income after royalties and management fees, financing costs and income
taxes, as applicable.

Cash Flow

Cash provided by operations and free cash flow were as follows (in
millions):

Cash provided by operations decreased by $0.1 billion from $2.2 billion
in the prior-year quarter to $2.1 billion in the current quarter. The
decrease was driven by lower segment operating results and higher tax
payments, partially offset by a decrease in film and television
production spending.

Capital Expenditures and Depreciation Expense

Investments in parks, resorts and other property were as follows (in
millions):

Capital expenditures increased by $214 million to $1.2 billion driven by
higher spending on new attractions at our domestic theme parks and
resorts.

Depreciation expense was as follows (in millions):

Non-GAAP Financial Measures

This earnings release presents EPS excluding the impact of certain items
affecting comparability, free cash flow and aggregate segment operating
income, all of which are important financial measures for the Company,
but are not financial measures defined by GAAP.

These measures should be reviewed in conjunction with the relevant GAAP
financial measures and are not presented as alternative measures of EPS,
cash flow or net income as determined in accordance with GAAP. EPS
excluding certain items affecting comparability, free cash flow and
aggregate segment operating income as we have calculated them may not be
comparable to similarly titled measures reported by other companies.

EPS excluding certain items affecting comparability
– The Company uses EPS excluding certain items to evaluate the
performance of the Company’s operations exclusive of certain items
affecting comparability of results from period to period. The Company
believes that information about EPS exclusive of these items is useful
to investors, particularly where the impact of the excluded items is
significant in relation to reported earnings, because the measure allows
for comparability between periods of the operating performance of the
Company’s business and allows investors to evaluate the impact of these
items separately from the impact of the operations of the business.

The following table reconciles reported EPS to EPS excluding certain
items affecting comparability for the quarter.

Free cash flow – The Company uses free cash
flow (cash provided by operations less investments in parks, resorts and
other property), among other measures, to evaluate the ability of its
operations to generate cash that is available for purposes other than
capital expenditures. Management believes that information about free
cash flow provides investors with an important perspective on the cash
available to service debt obligations, make strategic acquisitions and
investments and pay dividends or repurchase shares.

Aggregate segment operating income – The
Company evaluates the performance of its operating segments based on
segment operating income, and management uses aggregate segment
operating income as a measure of the performance of operating businesses
separate from non-operating factors. The Company believes that
information about aggregate segment operating income assists investors
by allowing them to evaluate changes in the operating results of the
Company’s portfolio of businesses separate from non-operational factors
that affect net income, thus providing separate insight into both
operations and the other factors that affect reported results.

A reconciliation of income before income taxes to segment operating
income is as follows (in millions):

CONFERENCE CALL INFORMATION

In conjunction with this release, The Walt Disney Company will host a
conference call today, February 5, 2019, at 4:30 PM EST/1:30 PM PST via
a live Webcast. To access the Webcast go to www.disney.com/investors.
The discussion will be archived.

FORWARD-LOOKING STATEMENTS

Management believes certain statements in this earnings release may
constitute “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements are
made on the basis of management’s views and assumptions regarding future
events and business performance as of the time the statements are made.
Management does not undertake any obligation to update these statements.

Actual results may differ materially from those expressed or
implied. Such differences may result from actions taken by the Company,
including restructuring or strategic initiatives (including capital
investments or asset acquisitions or dispositions), as well as from
developments beyond the Company’s control, including:

• changes in domestic and global economic conditions, competitive
  conditions and consumer preferences;
• adverse weather conditions or natural disasters;
• health concerns;
• international, political, or military developments; and
• technological developments.

Such developments may affect entertainment, travel and leisure
businesses generally and may, among other things, affect:

• the performance of the Company’s theatrical and home entertainment
  releases;
• the advertising market for broadcast and cable television programming;
• demand for our products and services;
• expenses of providing medical and pension benefits;
• income tax expense;
• performance of some or all company businesses either directly or
  through their impact on those who distribute our products; and
• completion of the pending transaction with 21CF.

Additional factors are set forth in the Company’s Annual Report on Form
10-K for the year ended September 29, 2018 under Item 1A, “Risk
Factors,” and subsequent reports.

Contacts

Zenia Mucha
Corporate Communications
818-560-5300

Lowell Singer
Investor Relations
818-560-6601

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