SBD/May 7, 2014/Finance

Higher Affiliate Fees, Lower Costs At ESPN Help Boost Disney Q2 Results

Higher fees for ESPN helped to deliver Q2 results for Disney that were "nothing short of spectacular," according to Brooks Barnes of the N.Y. TIMES.  The company yesterday reported net income of $1.92B, up 27% from $1.51B in the year-ago period. Disney's largest division, Media Networks, which includes ESPN, delivered an operating income of $2.13B, up 15%. Among the factors cited by the company for the increase were "higher affiliate fees and lower costs at ESPN, partly offset by lower ad revenue" (N.Y. TIMES, 5/7). RBC Capital Markets Managing Dir David Bank this morning said results at ESPN "were solid." But CNBC's Brian Sullivan said despite the "good results," ESPN will is "probably going to have to pay up continually for sports rights." Bank said in terms of paying for sports rights, "you'd be worried about a mismatch between what you have to pay and what you're going to earn." Bank: "This is a business with a tremendous amount of visibility, where you've locked in those affiliate fees so you know where you're going to get paid for the next kind of five to 10 years and you know where you're going to spend. We have pretty decent visibility into the operating leverage in the business that as MLB steps up, as the NFL steps up, so do the affiliate fees. The question is more probably on the advertising side to a lesser extent but there's pretty good visibility." BTIG media analyst Rich Greenfield said ESPN is a "very solid business that investors feel very comfortable" about. Greenfield said of the growth of NBCSN and FS1 and whether or not they can compete with ESPN, "These are great opportunities for everyone that's doing these sports networks" ("Squawk Box," CNBC, 5/7). Meanwhile, FBR Capital Markets Analyst Barton Crockett said the cable networks business is "working terrifically," as ESPN is "close to half" of the operating income for Disney. Crockett: "ESPN is a machine. The reliability of that, the long-term view you have on growth, on content cost means I think you can feel safer about giving it a higher multiple" ("Fast Money," CNBC, 5/6). At presstime, shares of Disney were trading at $81.54, up 0.6% from close of business yesterday (THE DAILY).
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