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Walt Disney sports segment margin is ‘lumpy’ – Bernstein

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© Walt Disney (DIS) sports segment margin is ‘lumpy’ – Bernstein

Walt Disney (NYSE:) released its long-anticipated recast financials for its new reporting structure yesterday evening. Here’s how analysts reacted.

Barclays analysts said the main change in the reporting structure involved the separation of the sports business into a separate segment from .

“While we don’t have a lot of details at this point, the reported margins of 14.4% YTD fiscal 2023 (excluding the impact of ESPN+ losses) is lower than we had expected,” the analysts, who have an Equal Weight rating and $88 price target on Disney.

However, they noted that this is on account of the inclusion of the company’s Indian sports channels in the sports segment, as the company had to pay up significantly for Cricket rights even as it lost distribution for a while due to a major carriage dispute.

“Excluding Star Sports, ESPN+ and ESPN’s international business (which is also running at roughly breakeven levels), ESPN’s domestic linear margins appear to be ~20.4% YTD this year vs 26.1% for full year ’22,” analysts added.

Barclays notes that ESPN’s domestic operating income for the first three quarters of the current fiscal had margins ~100bps lower than same period last year despite the fact that ESPN+ losses appear to be running lower, “which implies an even bigger drag on ESPN margins YoY.”

At Bernstein, analysts explained that Disney allocated 56% of nine-months of revenue of the old Linear Networks to Sports, “yet the aggregate OI margin for Sports was 11% over the three quarters.” The analysts added that it seems low but makes sense given the high cost of sports rights.

They noted that Sports topline is stable, but its margin is “lumpy.”

“ESPN faces the fundamental challenge of not owning the underlying content. With the cost of sports rights continuing to escalate, Disney needs to prove that ESPN can be the sports aggregator and thus earns its keep in that manner,” said analysts.

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