Disney Q2 earnings fall due to COVID-19 impact on parks

It’s like Thanos taking Disney’s wallet and snapping his fingers. The Walt Disney Company reported earnings for its second fiscal quarter ended March 28, 2020. Diluted earnings per share (EPS) from continuing operations for the quarter decreased 93% to $0.26 from $3.53 in the prior-year quarter. Excluding certain items affecting comparability(1), diluted EPS for the quarter decreased 63% to $0.60 from $1.61 in the prior-year quarter.

EPS from continuing operations for the six months ended March 28, 2020 decreased 73% to $1.44 from $5.42 in the prior-year period. Excluding certain items affecting comparability(1), EPS for the six months decreased 38% to $2.14 from $3.45 in the prior-year period. Results in the quarter and six months ended March 28, 2020 were adversely impacted by the novel coronavirus (“COVID-19”) pandemic.

“While the COVID-19 pandemic has had an appreciable financial impact on a number of our businesses, we are confident in our ability to withstand this disruption and emerge from it in a strong position,” said Bob Chapek, Chief Executive Officer, The Walt Disney Company. “Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands, which is evident in the extraordinary response to Disney+ since its launch last November.”

Results for the current quarter and six months reflect the consolidation of TFCF Corporation (TFCF) and Hulu LLC (Hulu), which the Company started consolidating on March 20, 2019.


The Company evaluates the performance of its operating segments based on segment operating income, and management uses total segment operating income as a measure of the performance of operating businesses separate from non-operating factors.

The Company believes that information about total 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.

The impact of COVID-19 and measures to prevent its spread are affecting our segments in a number of ways, most significantly at Parks, Experiences and Products where we have closed our theme parks and retail stores, suspended cruise ship sailings and guided tours and experienced supply chain disruptions.

In addition, Disney has delayed, or in some cases, shortened or cancelled theatrical releases and suspended stage play performances at Studio Entertainment and have seen advertising sales impacts at Media Networks and Direct-to-Consumer & International.

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The company reports experiencing disruptions in the production and availability of content, including the cancellation or deferral of certain sports events and suspension of production of most film and television content. Many of these businesses have been closed consistent with government mandates or guidance.

Disney estimates the COVID-19 impact on operating income at Parks, Experiences and Products segment was approximately $1.0 billion primarily due to revenue lost as a result of the closures. In total, Disney estimates that the COVID-19 impacts on our current quarter income from continuing operations before income taxes across all of businesses was as much as $1.4 billion, inclusive of the impact at the Parks, Experiences and Products segment.

Impacts at other segments include lower advertising revenue at Media Networks and Direct-to-Consumer & International driven by a decrease in viewership in the current quarter reflecting COVID-19’s impact on live sports events and higher bad debt expense and a loss of revenue at Studio Entertainment due to theater and stage play closures.

Media Networks

Media Networks revenues for the quarter increased 28% to $7.3 billion, and segment operating income increased 7% to $2.4 billion.

Cable Networks

Cable Networks revenues for the quarter increased 17% to $4.4 billion and operating income increased 1% to $1.8 billion. The increase in operating income was due to the consolidation of TFCF businesses (primarily the FX and National Geographic networks), partially offset by a decrease at ESPN, and to a lesser extent, the Domestic Disney Channels and Freeform.

The decrease at ESPN was due to higher programming and production costs and lower advertising revenue, partially offset by higher affiliate revenue. Higher programming and production costs were driven by rate increases for College Football Playoffs and other college sports as well as costs for the ACC Network, which launched in August 2019.

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The decrease in advertising revenue was due to lower average viewership, partially offset by higher rates. Lower average viewership was driven by the cancellation of major sporting events beginning in mid-March as a result of COVID-19. Affiliate revenue growth was due to an increase in contractual rates, partially offset by a decrease in subscribers. The decrease in subscribers was net of the impact of the ACC Network launch.

Lower Disney Channel results were due to a decrease in affiliate revenue and higher marketing costs. Lower affiliate revenue reflected a decrease in subscribers, partially offset by an increase in contractual rates.

The decrease at Freeform was due to higher cost programming, lower advertising revenue and higher marketing cost, partially offset by higher income from program sales. The decrease in advertising revenue was driven by lower impressions, partially offset by an increase in rates.


Broadcasting revenues for the quarter increased 49% to $2.8 billion and operating income increased 53% to $397 million. The increase in operating income was due to the consolidation of TFCF, largely reflecting program sales, and to a lesser extent, an increase at our legacy operations.

The increase at our legacy operations was due to higher affiliate revenue driven by higher rates and lower network programming and production costs, partially offset by lower ABC Studios program sales and higher network marketing costs.

The decrease in network programming and production costs was due to a timing benefit from new accounting guidance, partially offset by more hours of higher cost specials and a contractual rate increase for The Academy Awards in the current quarter.

The decrease in program sales was driven by the comparison to prior-year sales of Jessica Jones and How to Get Away with Murder.

At the beginning of fiscal 2020, the Company adopted new accounting guidance, which generally results in lower amortization of capitalized episodic television costs during network airings for shows that we also expect to utilize on our direct-to-consumer services. Compared to the previous accounting, programming and production expense will generally be lower in the first half of the fiscal year and higher in the second half of the fiscal year as the capitalized costs are amortized.

Parks, Experiences and Products

Parks, Experiences and Products revenues for the quarter decreased 10% to $5.5 billion, and segment operating income decreased 58% to $639 million. Lower operating income for the quarter was due to decreases at both the domestic and international parks and experiences businesses and to a lesser extent, at our games and merchandise licensing businesses.

As a result of COVID-19, Disney closed its domestic parks and resorts, cruise line business and Disneyland Paris in mid-March, while Asia parks and resorts were closed earlier in the quarter. As a result, volumes were negatively impacted in the quarter. The estimated the total impact of COVID-19 on segment operating income in the quarter was approximately $1.0 billion.

Prior to the closure of domestic parks and resorts, volumes and guest spending were higher compared to the prior-year quarter.

Costs for the quarter were higher compared to the prior-year quarter due to an increase at our domestic parks and experiences driven by expenses for new guest offerings, which included Star Wars: Galaxy’s Edge, the net cost of pay to employees who were not performing services as a result of actions taken in response to COVID-19, and inflation.

Lower operating income at our games business was due to the prior-year sale of rights to a video game and lower royalties from the licensed title Kingdom Hearts III.

The decrease in merchandise licensing operating income was due to lower minimum guarantee shortfall recognition and a decrease in revenue from merchandise based on Mickey and Minnie and Avengers, partially offset by higher revenue from Frozen merchandise.

Revenues from merchandise based on Mickey and Minnie in the prior-year quarter included the benefit of Mickey’s 90th birthday. Merchandise licensing results for the current quarter were adversely impacted by COVID-19.

Studio Entertainment

Studio Entertainment revenues for the quarter increased 18% to $2.5 billion and segment operating income decreased 8% to $466 million. The decrease in operating income was due to lower results at our legacy operations, partially offset by the consolidation of the TFCF businesses.

The decrease at our legacy operations was due to higher film impairments and decreases in theatrical distribution and stage play results, partially offset by an increase from TV/SVOD distribution.

Theatrical distribution in the quarter was negatively impacted by COVID-19 as theaters closed domestically beginning in mid-March and internationally at various times beginning late January.

Theatrical distribution results in the quarter included an increase in bad debt expense and also reflected an adverse impact from COVID-19 on the performance of Onward, which was released domestically on March 6.

Other significant titles in the current quarter included Frozen II and Star Wars: The Rise of Skywalker compared to Captain Marvel, Mary Poppins Returns and Dumbo in the prior-year quarter. Stage play results in the quarter were negatively impacted as live entertainment theaters were also closed.

Growth in TV/SVOD distribution results was due to sales of content to Disney+ driven by The Lion KingToy Story 4Frozen II and Aladdin. This was partially offset by a decrease in sales to third parties in the pay and free television windows.

The benefit from the TFCF businesses reflected income from TV/SVOD distribution, partially offset by a loss from theatrical distribution and general and administrative costs. TFCF theatrical releases in the current quarter included Call of the Wild and Downhill.

Direct-to-Consumer & International

Direct-to-Consumer & International revenues for the quarter increased from $1.1 billion to $4.1 billion and segment operating loss increased from $385 million to $812 million. The increase in operating loss was due to costs associated with the launch of Disney+ and the consolidation of Hulu. Results for the quarter also reflected a benefit from the inclusion of the TFCF businesses due to income at the international channels, including Star.

Commencing March 20, 2019, as a result of our acquisition of a controlling interest in Hulu, 100% of Hulu’s revenues and expenses are included in the Direct-to-Consumer & International segment. Prior to March 20, 2019, only the Company’s ownership share of Hulu results was included (as equity in the loss of investees).

The average monthly revenue per paid subscriber for ESPN+ decreased from $5.13 to $4.24 due to the introduction of a bundled subscription package of Disney+, ESPN+ and Hulu beginning in November 2019. The bundled offering has a lower retail price than the aggregate standalone retail prices of the individual services.

The average monthly revenue per paid subscriber for the Hulu SVOD Only service decreased from $12.73 to $12.06 driven by lower retail pricing. The average monthly revenue per paid subscriber for the Hulu Live TV + SVOD service increased from $52.58 to $67.75 due to higher retail pricing.


Revenue eliminations increased from $234 million to $1.5 billion and eliminations of segment operating income were $252 million in the current quarter compared to $41 million in the prior-year quarter. The eliminations of segment operating income in the current quarter were due to sales of Studio Entertainment titles to Disney+ driven by Frozen II, The Lion King, Toy Story 4 and Aladdin and sales of ABC Studios and Twentieth Century Fox Television titles to Hulu.


Corporate and Unallocated Shared Expenses

Corporate and unallocated shared expenses decreased $91 million from $279 million to $188 million for the quarter primarily due to lower compensation costs and lower costs related to TFCF, partially offset by the absence of a benefit from amortization of a deferred gain on a sale leaseback due to the adoption of new lease accounting guidance. The decrease in costs related to TFCF was due to lower acquisition-related professional fees, partially offset by the consolidation of TFCF.

Restructuring Charges

During the current and prior-year quarters, the Company recorded charges totaling $145 million and $662 million, respectively, primarily for severance, in connection with the integration of TFCF. The charge in the prior-year quarter also included the acceleration of equity based compensation, primarily for TFCF awards that vested upon closing the acquisition. These charges are recorded in “Restructuring and impairment charges” in the Condensed Consolidated Statement of Income.

Other Income

In the prior-year quarter, the Company acquired TFCF’s 30% interest in Hulu as part of the TFCF acquisition. As a result, upon the closing of the TFCF transaction, the Company owned a 60% interest in Hulu, began consolidating Hulu and recorded a one-time gain of $4.9 billion as a result of remeasuring our initial 30% interest in Hulu to fair value.

Interest Expense, net

The increase in interest expense was due to higher average debt balances as a result of the TFCF acquisition.

The increase in interest income, investment income and other was driven by higher interest on long-term receivables for film and television program sales, partially offset by a lower benefit related to pension and postretirement benefit costs, other than service cost.

Equity in the Income (Loss) of Investees

Equity in the income / (loss) of investees increased $444 million, from a loss of $309 million to income of $135 million, primarily due to the Vice impairment in the prior-year quarter and the consolidation of Hulu.

Income Taxes

The increase in the effective income tax rate was due to higher U.S. tax on foreign income and an increase in foreign losses for which the Company does not recognize a tax benefit, primarily related to our Asia theme parks.

Noncontrolling Interests

The decrease in net income from continuing operations attributable to noncontrolling interests was primarily due to lower results at Hong Kong Disneyland, Shanghai Disney Resort and ESPN. These decreases were partially offset by the accretion of the fair value of the redeemable noncontrolling interest in Hulu.

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 for the first six months of fiscal 2020 decreased by $1.2 billion from $6.0 billion in the prior-year six months to $4.8 billion in the current six months. The decrease was due to higher film and television production spending, lower segment operating income, an increase in severance payments related to TFCF integration and higher interest payments, partially offset by lower tax payments. The increase in film and television production spending was driven by the consolidation of TFCF’s and Hulu’s operations.

Capital Expenditures and Depreciation Expense

Capital expenditures increased from $2.4 billion to $2.6 billion driven by higher spending on technology to support our direct-to-consumer services and on corporate equipment, facilities and technology. These increases were partially offset by lower spending at our domestic parks and resorts due to a decrease in spending on Star Wars: Galaxy’s Edge.


This earnings release presents free cash flow, diluted EPS excluding the impact of certain items affecting comparability, and total 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 operating cash flow, diluted EPS or income from continuing operations before income taxes as determined in accordance with GAAP. Free cash flow, diluted EPS excluding certain items affecting comparability and total segment operating income as we have calculated them may not be comparable to similarly titled measures reported by other companies. See further discussion of total segment operating income on page 2.

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.

Diluted EPS excluding certain items affecting comparability – The Company uses diluted 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 diluted 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.

Certain statements and information in this communication may be deemed to be “forward-looking statements” within the meaning of the Federal Private Securities Litigation Reform Act of 1995, including statements such as business positioning or prospects, estimates and timing of expense and other statements that are not historical in nature. 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, asset acquisitions or dispositions, integration initiatives and timing of synergy realization) or other business decisions, 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, regulatory, political, or military developments;
  • technological developments; and
  • labor markets and activities;

Each such risk includes the impacts of, and is amplified by, COVID-19 and related mitigation efforts.

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;
  • construction;
  • 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
  • achievement of anticipated benefits of the TFCF transaction.

Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended September 28, 2019 under Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis,” Item 1, “Business,” and subsequent reports, including, among others, quarterly reports on Form 10-Q and Current Reports on Forms 8-K.

SOURCE: Disney