Disney's Fiscal 2Q16 Results: Why Did EPS Fall Short?

(Continued from Prior Part)

Disney’s Consumer Products and Interactive segment in fiscal 2Q16

During fiscal 2Q16, The Walt Disney Company (DIS) announced a charge of $147 million in connection with the company’s decision to discontinue its Disney Infinity console games business. The company said in its fiscal 2Q16 earnings call that going forward, it expects that its “console games strategy will focus solely on licensing our great portfolio of content.”

In fiscal 2Q16, Disney’s Consumer Products and Interactive (or DCPI) segment had revenues of $1.2 billion, a decline of 2% over fiscal 2Q15. This segment had an operating income of $357 million in fiscal 2Q16, an 8% decline year-over-year. The reason for the decline in revenues was falling sales of Disney Infinity console games and a 2% impact on revenues due to the adverse impact of currency fluctuations.

As the graph below shows, licensing, publishing, and games revenues comprised 70%, or $829 million, of DCPI’s total revenues in fiscal 2Q16. Retail revenues comprised the remaining 30%.

Factors affecting Disney’s console games business

According to a Wall Street Journal report, citing research from NPD Group, the toys-to-life or interactive gaming toys had revenues of $720.5 million in the United States in 2015, an increase of 7% year-over-year. A major part of that growth was attributed to accessories and toys. In contrast, interactive toys saw sales fall by 4% year-over-year.

Disney had spent around $100 million developing its Infinity console games, which was quite a lot. The company admitted on its fiscal 2Q16 earnings call that the company didn’t have confidence in this genre and the stability of it from “a self-publishing perspective.”

Disney also stated that a large part of its $147 million in write-offs was inventory from its self-publishing business. Also, recent versions of the games had to contend with increasing competition from other players in the industry. These included Activision Blizzard’s (ATVI) Skylanders, Nintendo’s (NTDOY) Amiibo, and Time Warner’s (TWX) Warner Bros. Lego Dimensions.

Disney makes up 0.86% of the SPDR S&P 500 ETF (SPY). SPY has an exposure of 3.4% to the computers sector.

In the next part of this series, we’ll see why Disney’s intellectual property value is on the rise in China.

Continue to Next Part

Browse this series on Market Realist: