Disney Posts Mixed Q3 due to Coronavirus; Mulan to PVOD

As expected, Disney’s DIS fiscal third quarter was hit hard by the pandemic as revenue at the parks and studio segments were down 85% and 55%, respectively. While some parks have reopened, we still expect minimal revenue in the fiscal fourth quarter due to limited capacity and surges in cases in local markets. Disney+ remains a bright spot as the service now has over 60 million subscribers, with launches planned in Northern Europe, Latin America, and now Indonesia before end of the calendar year. Despite the COVID-19-related revenue drop, the long-term outlook is positive as Disney continues to expand its direct relationships with consumers around the world. We maintain our wide moat and our $127 fair value estimate.

Revenue for the quarter collapsed 42% year over year to $11.8 billion. Media networks revenue fell by 2% to $6.6 billion as strength at the broadcast division was offset by decline at the cable networks. Affiliate fee revenue in the quarter was up 2%, which was made up of a 7 point gain from higher pricing, with a 4 point decline from fewer subs. As expected, ad revenue at cable networks fell heavily, down 61% in the quarter due to the lack of live sports. Broadcast revenue was up 12% due largely to licensing to Hulu, Disney+, and third parties. Segment operating income margin for media networks improved to 48.0% from 31.8% due to sports rights costs moving out to later quarters and production shutdowns.

Revenue at the direct-to-consumer segment grew 2% to $4.0 billion as the launch of Disney+ offset lower ad revenue along with lower international channel revenue. The 55% drop in studio revenue was driven by the 98% decline in box office sales. Given the uncertain reopening of theaters, Mulan will now premiere on premium video on demand for Disney+ subscribers in the U.S., Canada, Australia, New Zealand and specific Western European countries on Sept. 4. The $30 price is well above the $20 price for films like Trolls, but Mulan is a tentpole film.

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