By: Hayley Chazan
Business earnings increased more than two-fold in The Walt Disney Company’s Studio Entertainment division, according to the 2014 annual report, but at least one analyst cautions that this growth may not be sustainable.
In his annual letter to shareholders, Disney CEO Robert Iger boasted, “…Disney Animation’s Frozen achieved almost $1.3B in global box office, making it the highest grossing animated feature ever released.”
According to Jacob Campbell, an analyst for Transport Canada’s Deputy Minister, the 2014 growth in Studio Entertainment earnings (referred to as operating income in the annual report) was due in large part to the success of Disney’s Frozen.
Photo of Jacob Campbell used with permission
Operating income is a company’s earnings from its primary business before interest and taxes are taken into account. In this case, the primary business is Studio Entertainment. To calculate operating income, both revenue and expenses are taken into consideration. Operating income can grow if either revenue increases or expenses decrease.
“Operating income is a much better measure than net income in determining a company’s performance, because it excludes other items that have little relevance to the actual performance of a company, such as asset sales, debt and financing arrangements,” according to Campbell.
In Disney’s annual reports, Studio Entertainment revenue is divided into three sub-sections sections: theatrical distribution, home entertainment and television and Subscription Video on Demand (SVOD) distribution and other.
Looking back a year to 2013, Studio Entertainment revenue increased only slightly due to poor unit sales of Disney movies Brave, Wreck-It Ralph and Iron Man 3.
In 2014, however, everything changed. High DVD and Blue Ray sales of Frozen led to a massive increase in home entertainment revenue. Sales from this one movie alone were strong enough to increase growth in home entertainment by over 20%. According to the notes to the financial statements, all three revenue sub-categories were influenced in whole, or in part by the release of Frozen. This goes to show that just one film’s impact on revenue and operating income can be extremely high.
While many of Disney’s business segments experienced operating income growth in 2014, the Studio Entertainment division displayed the largest increase. Its operating income grew from $661M in 2013 to $1.549B in 2014, an increase of more than 100%.
Walt Disney Company’s stock prices in 2014 fiscal year by hchazan on TradingView.com
While an increase in share price is good news for investors, Campbell fears that Disney’s 2014 strong performance might create unreal expectations for 2015. Campbell says, “Share price has risen under the expectation that the future performance of the company will continue to rise at that same rate. This means that if the company fails to maintain continuous growth, the share price will come down to reflect a more reasonable and long-term growth rate.”
Frozen is fifth on the list of highest earning films of all time. The only other Disney blockbuster that earned more theatrical revenue than Frozen was Marvel’s The Avengers, released in 2012. With the exception of The Avengers, Frozen’s success is unprecedented. Campbell therefore finds it unlikely that Disney will be able to produce a continually growing number of successful box office hits like Frozen.
While Disney’s 2015 first quarter results have yet to be released, the company clearly has its work cut out for it if it intends to exceed this year’s levels. However, with the imminent release of Tomorrowland and Cinderella alongside a bit of Disney magic, perhaps dreams can come true.