Disney ( DIS) says its fourth-quarter lurch won't turn into something more serious. Investors are less sure. The entertainment giant reported a 27% decline in year-over-year profits Thursday night thanks to a significant loss in its movie studio. Disney, which warned investors that spotty home-video sales and contract buyouts would produce the red ink, also posted quarterly sales that were about $150 million short of estimates. In recent trading, the stock was down 66 cents, or 2.5%, to $25.33. To soothe wounded bulls, CFO Thomas Staggs projected on a conference call that Disney would resume its recent trend of posting year-over-year per share earnings growth in the double-digit percent range in fiscal 2006. The company earned $2.53 billion, or $1.22 a share, on $31.94 billion in sales in fiscal 2005, up from earnings of $2.35 billion, or $1.12 a share, on $30.75 billion in sales in fiscal 2004. That's about an 8% jump in per-share earnings year over year. However, sans an accounting change related to the valuation of its broadcasting licenses, the company would have earned $2.57 billion, or $1.24 a share, 11% more than what it earned last year. Disney expects the second half of its fiscal year to provide the lion's share of its revenue and earnings, Staggs said. The poor performance of the company's recent studio films will continue to weigh on the company in the first half of next year as those films make their way to DVD and home video, he said. In the just completed fourth quarter, Disney earned $379 million, or 19 cents a share, in the quarter, compared with $516 million, or 25 cents a share, a year ago. Backing out stock options expenses, an accounting change and several other items, earnings were 20 cents a share. Analysts were forecasting 18 cents a share.
Disney said revenue rose 3% from a year ago to $7.73 billion, compared with estimates of $7.87 billion. In after-hours trading, shares of Disney were off 51 cents, or 2%, to $25.48. The main reason for Disney's lower earnings was its studio entertainment segment, where revenue slid 20% to $1.5 billion and the operating loss totaled $304 million before options expenses, reversing a small profit in the year-ago period. Disney blamed declining home-video sales, partially offset by an improvement in domestic theatrical motion picture distribution and lower film cost write-downs. "The decline in worldwide home entertainment was due to an overall decline in unit sales resulting from a lower performing slate of current year titles, including a decline in the ratio of home video unit sales to the related total domestic box-office results for feature films," the company said in a statement. At Disney's media networks division, revenues increased 16% from last year to $3.4 billion and segment operating income adjusted to exclude stock option expense rose 47% to $659 million. In cable networks, third-quarter operating income excluding options rose 14% to $594 million, driven by growth at ESPN, partially offset by a decline at ABC Family Channel due to higher programming expenses. In its broadcasting division, operating income adjusted to exclude stock options rose by $140 million to $65 million primarily due to improved performance at Television Production and Distribution and the ABC Television Network. At Disney's parks and resorts division, quarterly revenue rose 9% to $2.4 billion and segment operating income adjusted for options rose 14% to $321 million. Meanwhile, the company expects to get a boon from deferred revenue from affiliate deals by ESPN and other cable channels in the second half of next year, Staggs said. And the company's expenses should subside somewhat in the second half as it laps the opening costs related to its new Hong Kong-based theme park, he said.
Disney also touted its ability to capitalize on new technology, citing a recent agreement with Apple ( AAPL) to provide video content for the iPod. "As a modern media company Disney is well positioned to take advantage of these changes by continuing to develop strong content and leverage that content across our businesses and new technologies. Our agreement with Apple to make programming available on the iPod is a fitting example of our efforts in that regard. As the media landscape continues to change, our creative excellence and consumer focus will enable us to continue delivering benefits to shareholders." But some of the company's new initiatives will be a drain on the company in the near term, officials warned. Specifically, Disney is investing heavily in both developing video games and in a new wireless phone service. The company expects to lose $130 million, for instance, on its new mobile phone service next year, Staggs said. And because the company will initially lose money on each customer it signs up for the service, its losses in the wireless area will widen the more successful it is at acquiring users. Company officials had little to say about Disney's relationship with Pixar ( PIXR), the film studio headed by Steve Jobs that has produced a number of hit films distributed by Disney. Jobs
said last week that the two companies were in "deep discussions" about continuing or expanding their relationship. Jobs also said he hoped to work out a distribution relationship for Pixar's films by the end of the year. On the conference call, Disney CEO Robert Iger declined to go beyond Jobs' comments. Regardless of how the talks conclude, Disney will distribute Pixar's upcoming film Cars this summer and expects to do well with it, Iger said. Disney is going to benefit from the Pixar relationship this year, "no matter what happens," Iger said.