Theme park revenue soared, but the YouTube dispute took a toll on Disney’s Q1 earnings

A record fiscal quarter for Walt Disney Co.’s theme parks division was dampened slightly by a streaming acquisition and a protracted fight with YouTube, the Burbank media and entertainment giant reported Monday.

Disney recorded overall revenue of about $26 billion in the three-month period that ended Dec. 27, up 5% compared to the previous year. Disney’s income before income taxes totaled nearly $3.7 billion, a 1% jump from the same time period last year. Earnings per share were $1.34 for the quarter, down from $1.40.

The company beat Wall Street estimates for revenue and earnings per share, largely propelled by its theme parks and streaming businesses. But investors weren’t convinced; shares of Disney were down 5.7% to $106.39 early Monday morning.

“I’m incredibly proud of all that we’ve accomplished over the past three years to set Disney on the path of continued growth,” Disney Chief Executive Bob Iger said during a Monday morning call with analysts. “I’m inspired and energized by the opportunities ahead of this wonderful company.”

The company’s future is a major topic of conversation within the industry, as Disney’s board of directors could name Iger’s successor as early as this week, with theme parks chief Josh D’Amaro considered the leading contender.

Iger noted the “healthy competition” that now exists between Disney’s streaming and movie business and its experiences sector — which includes its theme parks, cruise line and Aulani resort and spa in Hawaii — to be the top driver of profitability. The rivalry is significant since both businesses had flagged during different parts of his tenure.

“It’s clear that the future of both of those businesses … is also bright, and it’s going to grow,” Iger said.

Both businesses also propelled the company’s first quarter earnings results.

The experiences sector reported $10 billion in revenue for the quarter — a first — aided by a 1% bump in attendance at its domestic theme parks and higher guest spending. The launch of the new Disney Destiny cruise ship and in November and the company’s growing capacity at sea also helped boost operating income to $3.3 billion, a 6% boost compared to the previous year.

Operating income for the company’s international theme parks was up 2% compared to the prior year’s quarter, driven by higher attendance and guest spending.

But Disney signaled some potential headwinds for its economic engine.

In the fiscal second quarter, the company expects “modest” segment operating income growth in the experiences division due to factors including pre-launch costs related to its new cruise ship and an upcoming “Frozen”-themed land in Disneyland Paris, as well as “international visitation headwinds at our domestic parks” — an issue Disney said it is monitoring.

To keep attendance rates up, Disney has shifted its marketing, sales and promotional efforts to a more domestic audience, said Hugh Johnston, senior executive vice president and chief financial officer. The company also said it has seen a 5% increase in room booking rates at Florida’s Walt Disney World, weighted toward the back half of the year.

Disney’s box office success with billion-dollar hits like “Zootopia 2” and “Avatar: Fire and Ash” helped propel revenue for its entertainment division by 7% to $11.6 billion. The company’s streaming business also drove growth, with revenue of $5.3 billion, up 11% from $4.8 billion. Streaming operating income also grew about $190 million to $450 million, leading to an operating margin of 8.4% for the quarter.

But costs related to its acquisition of a majority stake in FuboTV, as well as higher marketing and production costs in theatrical distribution and streaming services affected the sector’s operating income, which declined 35% to $1.1 billion. (Disney had nine theatrical releases in that quarter, compared to four during the previous year.)

The dip in operating income from the entertainment sector took a toll on the company’s total segment operating income, which was down 9% to $4.6 billion. That was also partly due to Disney’s contract dispute last fall with YouTube TV, which lasted for nearly 15 days and resulted in a blackout of Disney channels.

The temporary suspension of Disney channels on YouTube TV took a $110 million toll on operating income within Disney’s sports division, which was down 23% to $191 million. Sports revenue for the quarter totaled $4.9 billion, up 1% compared to the previous year.

Though the sports division, which includes ESPN, saw a 10% boost in advertising revenue, that number could not completely offset the higher cost of programming and production, particularly the increased contractual rates for college football and WWE.

Analysts homed in on the increased costs for Disney.

“In the short term, Disney needs to get costs back under control,” Brian Mulberry, senior client portfolio manager at Zacks Investment Management, said in a statement.