‘Avengers’ and ‘Incredibles’ sequels boosted Disney profits in the third quarter, but Disneytoon closure results in write-down

Walt Disney Co.’s earnings surged in its third fiscal quarter, thanks to blockbuster sequels such as “Avengers: Infinity War” and “Incredibles 2” and an uptick at its theme parks business.

But the company’s growth still missed analysts’ expectations, as the studio took a hit on a pair of animated films it no longer intends to release.

Burbank-based Disney on Tuesday reported net income of $2.9 billion, or $1.87 a share, in the quarter that ended June 30.

Although the earnings jumped 18% from the same quarter a year ago, the results fell short of the $1.95 a share in profit that analysts had predicted, according to data compiled by FactSet.

Total revenue for the entertainment giant rose 7% to $15.2 billion in the quarter, barely shy of the $15.3 billion analysts predicted.

Shares fell more than 2% in after-hours trading on the revenue and profit miss, but recovered later in the day. Disney’s stock closed at $116.56 a share on Wall Street on Tuesday, before the earnings announcement. The shares have risen about 8% so far this year.

The company’s studio entertainment business was a key driver, with revenues growing 20% to $2.9 billion. Operating income jumped 11% to $708 million.

Disney released several major films during the third quarter. Marvel’s “Avengers: Infinity War” grossed $2 billion in worldwide box office, and “Incredibles 2” collected more than $1 billion in receipts. The May release of “Solo: A Star Wars Story” was a rare disappointment for the studio, grossing $391 million, though Disney did not post a write-down on the film.

Profit was hampered partly by the recent closure of Disneytoon Studios, the mostly direct-to-video division of Walt Disney Animation Studios, which resulted in dozens of layoffs at the company.

Disney said it took impairment charges of $100 million in the quarter related to a Disneytoon movie it will not release and another canceled animation project in early development. Disneytoon’s closure followed the exit of top animation executive John Lasseter amid allegations of inappropriate behavior.

“The write-down was unexpected, so that definitely contributed,” said Edward Jones analyst Robin Diedrich. “But that is seen as a one-time event, so that’s why you’re not seeing much of a stock reaction.”

The results come after Disney won a tense showdown with Philadelphia-based cable giant Comcast Corp. over its planned purchase of much of Rupert Murdoch’s 21st Century Fox. Disney in July emerged victorious with its $71-billion deal to buy Fox assets, after Comcast bowed out. Walt Disney Co. and 21st Century Fox shareholders on July 27 overwhelmingly approved the proposed takeover.

The deal, which includes the 20th Century Fox film and TV studios and television networks such as FX, is a major component of Walt Disney Co. Chairman and Chief Executive Robert Iger’s plan to make Disney a more powerful competitor in the face of growing competition from tech giants that include Netflix, Amazon and Apple.

Disney and Fox remain entangled in a battle with Comcast for control of European pay-TV giant Sky Plc. Fox already owns 39% of Sky and is trying to buy the remaining 61%. Comcast has the highest bid, at $34 billion, although many analysts expect Disney and Fox to drive up the price of Sky with another offer.

The Fox acquisition is partly driven by Disney’s desire to have more film and TV content for its streaming service business, which includes a Disney-branded offering set to launch next year and an ESPN streaming service that is already on the market. Once the deal closes, Disney will also own a 60% stake in Hulu, giving it three major streaming platforms for its content.

Each service will target different audience tastes and demographics, Iger said in a conference call. He highlighted several Fox assets that would boost its direct-to-consumer products, including FX, National Geographic and Fox Searchlight.

Disney has not said what its entertainment service, overseen by veteran marketing executive Ricky Strauss, will cost consumers. It is expected to feature original content based on franchises such as “Star Wars” and the Pixar and Marvel properties. Projects in the works include a live-action “Star Wars” series, a live-action version of “Lady and the Tramp” and a “High School Musical” series.

Iger said that the service would not have as much content as rival Netflix, but that the quality of the shows and movies would draw subscribers.

“We’re going to walk before we run, as it relates to volume of content,” Iger said. “We feel that it does not have to have anything close to the volume of what Netflix has, because of the value of the brands and the specific value of the programs that will be included on it.”

The company’s parks business grew profits by 15% to $1.3 billion in the quarter, due to an increase in consumer spending on admissions and food, and growth at its Shanghai Disney Resort and Hong Kong Disneyland Resort.

Operating income for Disney’s cable networks business declined 5% in the quarter to $1.4 billion. The slide reflected a loss at digital platform BAMTech because of its investment in the ESPN streaming service, and a decrease in profit at Freeform. Those declines were offset by an increase at ESPN, Disney said.

Overall media networks revenue, which includes ABC and cable channels, grew 5% to $6.1 billion. The segment’s profit declined 1% to $1.8 billion. Income from Disney’s consumer products business declined 10% to $324 million, driven by lower sales.

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UPDATES:

4:15 p.m.: This article was updated with a comments from Disney CEO Robert Iger and more details about the company’s earnings.

This article was originally published at 2:05 p.m.