Disney misses analysts' expectations for second quarter and discontinues Infinity gaming line

Despite a strong showing for its movie studio, Walt Disney Co. reported lower than expected second-quarter profits Tuesday and announced it was discontinuing a line of video games.

It all amounted to a rare rocky quarter for Burbank-based Disney, the world’s largest entertainment firm, and sent shares tumbling more than 5% in after-hours trading. 

Disney delivered a profit of $2.1 billion in the three months ended April 2, up 2% from the same quarter a year ago.  But its earnings per share of $1.36 missed analysts' expectations of $1.40, according to investment research firm Zacks.

Revenue rose 4% from the same quarter a year ago, to $12.97 billion, but also was below the $13.26 billion that analysts had predicted.

The company surprised observers by announcing the discontinuation of Disney Infinity, a series of action-adventure console video games that incorporates physical toys based on Disney characters into the on-screen action. That led Disney to incur a $147-million charge that it said was "primarily due to an inventory write-down."

Disney also will lay off roughly 300 people and close its Avalanche Software studio in Utah, according to a person close to the company who was not authorized to comment publicly. The move means that Disney will no longer develop console games in-house and instead license its characters for such projects. (Disney already licenses “Star Wars” to Electronic Arts for a series of games made by that company.)

Although the Infinity series was popular, it was expensive to produce and Disney faced growing competition in the so-called toys-to-life category. The first Infinity game was released in 2013 after years of development and cost about $100 million to make. Three iterations of the game have been made for consoles, including Xbox One and PlayStation 4.

During a call with analysts, Disney Chief Executive and Chairman Robert Iger said that while the Infinity games have been successful, the risk of developing them in-house “caught up with us.”

“We thought we had a really good opportunity to launch our own product in that space,” said Iger. “We did quite well with the first iteration of it, and we did OK with the second iteration, but that business is a changing business."

Disney's consumer products and interactive division — the group that was responsible for Infinity — reported operating income of $357 million, which was down 8%. Revenue dropped 2% to $1.2 billion.

Disney’s gaming business has had an up-and-down history. In 2014, Disney Interactive eliminated roughly 700 jobs worldwide and closed several offices. That followed other cuts, and the closures of Junction Point Studios (2013) and Propaganda Games (2011).

Michael Pachter, an analyst for Wedbush Securities who covers video games, said that Disney’s unyielding dedication to its brands and characters can limit the company’s upside potential for video games.

“They are great because they don’t over-exploit their brands and they are limited because they don’t over-exploit their brands,” he said.

Disney's earnings also were weakened by the performance of its closely watched media networks unit, which is the company’s biggest business.

That unit, which includes ABC and ESPN, posted operating income of $2.3 billion, 9% higher than the same quarter a year ago. It generated revenue of $5.79 billion, down slightly from a year ago when sales were $5.82 billion. The broadcast division posted operating income of $278 million, which was down 8%. Revenue rose 3% to $1.84 billion. And the cable division, which houses crown jewel ESPN, recorded operating income of $2 billion, up 12% from a year ago. But revenue for the group was down 2% to $4 billion.

Disney attributed the cable networks group's operating income increase to the performance of ESPN, where there were lower programming costs and higher affiliate revenues — although those gains were "partially offset by a decrease in advertising revenue." The company also said that ESPN's affiliate revenue growth was "partially offset by a decline in subscribers."

Last year, Disney's stock plunged over concerns on Wall Street about subscriber losses at ESPN. Earlier this year, Nielsen Co. said that ESPN had lost 1.2 million subscribers in 2015.

The film studio had a strong quarter, generating $542 million in operating income, a 27% increase over last year. Revenue jumped 22% to $2 billion. The studio got a boost from the animated movie "Zootopia," which was released March 4 and has grossed $959 million at the box office worldwide, and "Star Wars: The Force Awakens," which was released late last year and has grossed more than $2 billion worldwide.

Another bright spot was the parks and resorts group, which posted operating income of $624 million, up 10% from a year earlier. Revenue rose 4% to $3.9 billion, reflecting an increase in spending at Disneyland and Walt Disney World.

Iger also addressed succession issues in the wake of the surprise announcement last month that Disney Chief Operating Officer Thomas Staggs would depart the company.  Iger said he has no plans to extend his contract after it expires in 2018 and that Disney's board has “ample time” to select a new CEO. Staggs, who had been viewed as Iger's successor, left May 6.

“Obviously, Tom was a valued colleague and a friend of mine and many others at the company,” Iger said. “And so we're sorry [about] what came to pass, but we don't really have much more to say about that.”

 

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daniel.miller@latimes.com

Twitter: @DanielNMiller

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