By Ben Fritz 

It was the quarter during which Walt Disney Co. released a movie that grossed $2 billion at the box office and drove $3 billion in merchandise sales. But the biggest story for the company that successfully revived "Star Wars" continues to be subscriber trends at its ESPN cable network.

Delving into a level of detail rarely seen at a company worth more than $150 billion, Disney Chief Executive Robert Iger said on a conference call with analysts Tuesday that ESPN has experienced an uptick in subscriber numbers in the past couple of months. The remarks were part of an effort to counter the arguments that ESPN's business is in decline, a narrative that has driven the media giant's stock down 24% since August.

"The notion that the [cable] bundle is experiencing its demise or that ESPN is cratering in any way from a sub[scriber] perspective is just ridiculous," Mr. Iger said. "We feel great about the product and we believe the predictions many have made are more dire than they should be."

Despite the recent growth Mr. Iger mentioned, ESPN lost subscribers in the quarter ended Jan. 2 at the same time that programming costs rose, due to costly deals for the rights to sports such as professional and college football. ESPN's costs also rose thanks to the timing of the college football playoffs, which occurred in the company's fiscal first quarter, ended Jan. 2 this year, but were in the fiscal second quarter a year earlier.

Operating income for Disney's television business, of which ESPN is the largest segment, fell 6% in the quarter to $1.41 billion, while revenue rose 8% to $6.33 billion. Excluding the timing of the college football playoffs and the rising value of the U.S. dollar, television operating income growth would have been close to revenue growth, said Disney's Chief Financial Officer Christine McCarthy.

ESPN ad revenue grew a robust 25% in the quarter from a year ago. Ms. McCarthy said the growth rate would have been 14%, excluding the timing of the college football playoffs and the absence this year of Nascar.

Much of the recent modest uptick in ESPN subscribers came from so-called skinny packages that have fewer channels and are aimed at cost-conscious young consumers, said Mr. Iger. He specifically pointed to gains from Dish Network Corp.'s Sling TV. He said the company is pushing aggressively to include ESPN and its other channels in similar offerings.

However the CEO said he wasn't ready to predict that the recent positive trend in subscriber numbers would continue. As of the end of Disney's last fiscal year in October, ESPN has 92 million subscribers in the U.S., the company said in a regulatory filing, down from 95 million the prior year and 99 million in 2013.

Disney shares were down 3% in after-hours trading Tuesday, reflecting continued concerns about the future of cable.

Nonetheless, "Star Wars: The Force Awakens" drove a strong quarter for Disney's movie and consumer products businesses. Though it came out just two weeks before the end of the fiscal year, the movie sparked a 46% rise in revenue at the studio to $4.28 billion and an 86% increase in operating income to $1.01 billion--the first time Disney's movie business has earned more than $1 billion in a quarter.

Consumer products and interactive media revenue grew 8% to $1.91 billion and operating income increased 23% to $860 million thanks in large part to Star Wars merchandise, including a hit videogame from Electronic Arts Inc. At more than $3 billion, world-wide sales of Star Wars merchandise last quarter were more than three times as high as one year ago.

Digital downloads and DVD sales of the original six "Star Wars" films also increased last quarter, leading to an increase in home-entertainment revenue for Disney's studio, a rarity at time when that overall business has been declining for years throughout Hollywood.

Mr. Iger said consumer products sales were surprisingly strong in some markets where the movie "didn't perform as we had hoped." Among the countries where "The Force Awakens" wasn't a blockbuster hit as in the U.S. were China, Russia and South Korea.

With new "Star Wars" movies scheduled to come out every year, Mr. Iger said he didn't believe the first sequel to the science-fiction franchise in a decade fueled a one-time surge in revenue. "We think we're not seeing something aberrational now, but the establishment of an old franchise at a much higher level," he said.

At Disney's theme parks business, 10% growth in attendance and 7% growth in spending at domestic theme parks led to a 9% increase in revenue to $4.28 billion and 22% increase in operating income to $981 million. International parks continue to struggle--particularly in France, where Disney closed its resort for four days in November following terrorist attacks in Paris.

International costs also grew as Disney gears up for the opening of its Shanghai theme park in June.

Disney shares closed up less than 1% at $92.32 Tuesday before financial results were released.

Write to Ben Fritz at ben.fritz@wsj.com

 

(END) Dow Jones Newswires

February 09, 2016 19:54 ET (00:54 GMT)

Copyright (c) 2016 Dow Jones & Company, Inc.
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