Earnings: Disney Interactive Revenues Up 13 Percent But New Segment Turns In A Loss

While everyone else looks at the big picture—The Walt Disney (NYSE: DIS) Company runs into the economic version of the law of gravity—we've been waiting for a different set of numbers: Interactive Media, reporting as a segment for the first time and the results are mixed. Interactive Media revenues rose 13 percent to $313 million, but segment operating income dropped $58 million to a loss of $45 million.

Overall, the company reported an 8 percent drop in revenue to $9.5 billion from $10.4 billion the previous year and a 32 percent decrease in profit, to $845 million from $1.25 billion. Disney earned 45 cents per share for the holiday quarter, down 29 percent from 63 cents last year; analysts polled by FactSet Research (via MarketWatch) expected Disney to post a profit of 52 cents a share on revenue of $10.1 billion.

The new segment represents the Disney Interactive Media Group, headed by Disney digital vet Steve Wadsworth and formed last year by the merger of the Disney Interactive Group with video gaming unit Disney Interactive Studios, and "certain new business initiatives." The chief operating businesses are Disney Online and DIS. It does not include the results for ABC.com, ESPN.com, among others—that means it does not reflect a large portion of the company's revenue from digital media sales. When the segment results came up during the earnings call, CEO Bob Iger said the company would continue to invest in video games and that the virtual worlds and mobile content areas are closer to profitability. More after the jump.

The company attributed the decrease "primarily" to a decline at Disney Interactive Studios " as higher sales volume was more than offset by an increase in unit cost of sales and higher marketing expenses in the current quarter." DIMG also manages Disney-branded mobile and provides the tech infrastructure for ABC.com, ESPB.com, Disneyshopping,com, the theme parks online, etc. DIMG gets paid for those services but the sites are managed from their respective groups and their results are included in the relevant segments.

Through last year, DIS and WDIG results were folded in with Consumer Products and Media Networks, respectively; new business initiatives were reported in corporate and unallocated shared expenses. Along with earnings results today, Disney filed an amended annual report for the year ended Sept. 28, 2008. The change provides a peek into the company's interactive activity over the past 28 months. Some items of note:

—FY08: Interactive Media increased revenues 47 percent to $719 million from $490 million in FY07. DIS contributed the bulk of the increase— $160 million—due to new self-published video games (an important initiative for the company) for High School Musical, Hannah Montana andTurok. (The previous year's releases were Pirates of the Caribbean, Spectrobes and Meet the Robinsons.) Disney Online's revenue increased $71 million aided by the first year of full revenue from virtual world Club Penguin.

But costs, including video game and internet content development, rose 25 percent for the fiscal year, to $974 million. For instance, Disney Online benefited from Club Penguin on the rev side, but it was also the first full year of carrying the virtual world's costs, while the increased emphasis on developing video games meant more investment. The $258 million loss was tempered by an unlikely source—lower costs for mobile services following the shut down of the Disney MVNO in the first quarter—and decreased 11 percent over FY07.

—Not a profit center yet: During eight quarters in FY08 and FY07, Interactive Media operations showed a profit only once—$13 million in Q108, on revenues of $276 million.

—New businesses: Think Digisynd, Ideal Bite. A Disney spokesman wasn't naming names but added some explanation: "The emerging businesses referenced are a number of small acquisitions and some internal projects that allow us to participate in new forms of interactive media content and services. The businesses are managed separately from the rest of DIMG and are seen as incubation investments."