ABC’s television gains will not bail out Disney

Nov 11, 2002  •  Post A Comment

Any ratings and revenue gains that the ABC Television Network makes this year will not help The Walt Disney Co. in 2003 or do much to diminish another $500 million-plus that ABC will lose in the new fiscal year.
That, along with weaker-than-expected returns from its cable networks and theme parks, did little to assuage Wall Street concerns that caused several analyst downgrades and Disney’s already battered stock, to close down Friday at $17.50 a share.
Disney warned of more tough times ahead while reporting during an earnings call late last Thursday that its fiscal fourth-quarter earnings rose 18 percent to $222 million on 12 percent higher revenues of $6.7 billion.
But analysts generally were stunned that fiscal fourth-quarter cable network operating income declined 40 percent to $170 million, even on a 17.5 percent rise in revenues to $1.3 billion. Theme parks, which contribute more than 40 percent of Disney’s overall profits, saw operating income fall 25 percent from the previous year to $235 million on revenues of $1.66 billion, down 1.4 percent. In both cases, margins were sliced to about 13 percent.
ABC has improved ratings on Tuesday and Wednesday nights. It has commanded scatter prices that are up 25 percent from the upfront. But 90 percent of advertisers are sticking to their upfront commitments rather than exercise a pullout option, which has made scatter inventory tight, limiting ABC’s ability to reap the higher scatter prices. The gains are offset by higher programming costs, though Disney owns and produces most of its new prime-time series.
Disney President and Chief Operating Officer Bob Iger’s warning that “financial success will lag ratings success” was taken by Sanford Bernstein analyst Tom Wolzien to mean that “ABC will take longer to come back than generally thought.”
Although the company declined to elaborate, Michael Gallant of CIBC World Markets estimates that ABC this season will come in 5 percent short of the average estimated 3 rating among adults 18 to 49 for its entertainment programming in prime time that it guaranteed to advertisers in the upfront. If so, that would translate into $75 million in advertiser make-goods, Mr. Gallant said. Last season, ABC paid well over $350 million in advertising make-goods, which contributed to nearly $600 million in losses in the fiscal year just ended. Although ABC currently faces no make-goods, competitors Mr. Wolzien spoke with speculated that a make-goods situation could exist by spring if current viewing trends continue, he said.
But Disney now is being hit by the double whammy, with the sudden and steep weakness of its cable networks, which bolstered the company’s overall financial performance during the past year.
Family Channel is a weakness
Tom Staggs, Disney chief financial officer, warned that cable network margins, which were cut in half to 13 percent in the fiscal fourth quarter even on a 17 percent gain in revenues, would continue to be weak until pricing and ratings improve, and will be hindered early next year by higher rights fees for NFL and NBA telecasts. Fourth-quarter cable network earnings were about $100 million below most analyst expectations.
The situation has been exacerbated by significant weakness at ABC Family Channel, where fiscal fourth-quarter operating income was down 50 percent despite most ratings improvement, reflecting advertising weakness for general-interest cable outlets.
For all of fiscal 2002, cable networks revenues grew 12 percent but broadcast revenues fell 15 percent. Cable network operating income of about $1 billion offset $36 billion in losses from overall broadcast, in which the operating profits from the owned TV networks help to offset record losses at the ABC TV network.