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Volume 26 No. 228
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Disney Misses Q3 Expectations, Hurt By Recently Acquired Fox Assets

Disney "fell short of analysts' expectations" for Q3, as the "three months ended June 29 were marred by the weak performance of Fox entertainment assets purchased" in the $71.3B deal that closed in March, according to Schwartzel & Armental of the WALL STREET JOURNAL. Disney's purchase of the "high-profile assets" from Fox gave it "valuable franchises like 'Avatar' and significant overseas expansion." But it also "tied the industry leader to a smaller rival that has lagged behind so far this year." Disney's Q3 profit declined 40% to $1.76B. Revenue in Q3 was $20.25B (WALL STREET JOURNAL, 8/7). Disney Chair & CEO Bob Iger said that he has a "'bullish view of the future' despite a lackluster quarter, but that it will be a couple of years before Disney turns around the fortunes of Fox live-action content" (HOLLYWOODREPORTER.com, 8/6). CNBC’s David Faber said before earnings were released yesterday, some investors were wondering, "Are we going to return to talking about weakness at ESPN given all the cord-cutting?" That "really was not where the weakness was.” CNBC's Julia Boorstin said there was “some strength at ESPN in terms of advertising rates increasing." But with the whole media networks business, there is "declining viewership because of the cord-cutting issue, and it’s not just a Disney issue” (“Squawk on the Street,” CNBC, 8/7). At presstime, Disney shares were trading at $134.23, down 5% from the close of business yesterday (THE DAILY).

INVESTING IN ITS FUTURE:VARIETY's Brent Lang noted Disney "attributed the deeper losses to increased investment" in ESPN+, as well as "costs associated with the upcoming launch" of Disney+. Not only does Disney "need to invest in the technology behind the new streaming service, it will also forgo licensing revenue as it begins to claw back the rights to its films to save them for its subscribers." Cable network revenues for Q3 jumped 24% to $4.5B, but "operating income increased" 15% to $1.6B. Disney "ascribed the hit to profits to the cost of consolidating" Fox' cable brands and "higher programming costs at ESPN" (VARIETY.com, 8/6). Pence Capital Management Chief Investment Officer Dryden Pence said Disney "has the ability to time this out." Pence: "They're not under a tremendous amount of pressure. It's a very long game for them" ("Squawk Box," CNBC, 8/7).

TWITTER REAX: Yahoo Finance's Daniel Roberts wrote something you "rarely see" in Disney earnings is "higher revenue from ESPN." CNN's Paul LaMonica: "Nothing looks bad in Disney earnings per se. In fact, ESPN is stabilizing, helping to boost cable revenue and profit." Investor Ross Gerber: "All said and done it’s going to take the next 12 months for all this to settle out. They are a huge monster now."