Walt Disney Studios Q2 Biz Deflects Pandemic; Worse Still to Come

With the extent of the coronavirus not impacting its studio operations until March, Walt Disney Studios May 5 revealed it managed to avoid a fiscal catastrophe in the second quarter (ended March 28).

Studio revenue for the quarter increased 18% to $2.5 billion, and segment operating income decreased 8% from the previous-year period to $466 million. The decrease in operating income was due to lower results at legacy operations, partially offset by the consolidation of the 20th Century Fox businesses that Disney took over a year ago. The decrease at legacy operations was due to higher film impairments and decreases in theatrical distribution and stage-play results, partially offset by an increase from TV/SVOD distribution.

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Theatrical distribution in the quarter was still negatively impacted by COVID-19 as theaters closed domestically beginning in mid-March and internationally at various times beginning late January.

Theatrical distribution results in the quarter included an increase in bad debt expense and also reflected an adverse impact from COVID-19 on the performance of Onward, which was released domestically on March 6. Other significant titles in the current quarter included Frozen II and Star Wars: The Rise of Skywalker compared to Captain Marvel, Mary Poppins Returns and Dumbo in the prior-year quarter.

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Stage-play results in the quarter were negatively impacted as live entertainment theaters also were closed. Growth in TV/SVOD distribution results was due to sales of content to Disney+ driven by The Lion King, Toy Story 4, Frozen II and Aladdin. This was partially offset by a decrease in sales to third parties in the pay and free television windows. The benefit from the Fox businesses reflected income from TV/SVOD distribution, partially offset by a loss from theatrical distribution and general and administrative costs. Fox theatrical releases in the current quarter included The Call of the Wild and Downhill.

“While the COVID-19 pandemic has had an appreciable financial impact on a number of our businesses, we are confident in our ability to withstand this disruption and emerge from it in a strong position,” CEO Bob Chapek said in a statement. “Disney has repeatedly shown that it is exceptionally resilient, bolstered by the quality of our storytelling and the strong affinity consumers have for our brands, which is evident in the extraordinary response to Disney+ since its launch last November.”

This is Disney’s first earnings report with former home entertainment chief Chapek as CEO. Former CEO Bob Iger in February said he would turn the reins of the company over to Chapek, who previously had run the parks division, and transition to executive chairman.

Just weeks after Chapek officially took over, the novel coronavirus led to a succession of stay-at-home orders throughout the country, and Iger stepped back in work with Chapek on day-to-day operations, according to a New York Times report.

The coronavirus pandemic has hit Disney particularly hard. Movie theaters have shuttered, productions have shut down, live sporting events have been canceled and theme parks are closed indefinitely. Theme parks accounted for 37% of Disney’s $69.6 billion total revenue in 2019.

Disney said it expects the pandemic to negatively impact the company by $1.4 billion in the current third quarter, which ends June 30.

To cut costs, Disney has furloughed thousands of workers, mostly across theme parks and resorts; taken out a $5 billion line of credit; and slashed executive pay, including a 50% pay cut for Chapek. Iger is forgoing his salary, according CNBC.