disney speakers: bob...
TRANSCRIPT
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Q1 FY07 Earnings Presentation
FEBRUARY 7, 2007
Disney Speakers:
Bob Iger President and Chief Executive Officer
Tom Staggs
Senior Executive Vice-President and CFO P R E S E N T A T I O N OPERATOR Welcome to the Walt Disney Company’s quarter one fiscal year 2007 earnings
presentation. And now, I turn you over to the live Q1 earnings commentary being
presented from Disney's 2007 investor conference at Walt Disney World in Florida.
[OPERATOR INSTRUCTIONS]
Q1 FY07 Earnings Presentation February 7, 2007
Bob Iger – President and Chief Executive Officer, The Walt Disney Company Good afternoon. It's great to be here at Walt Disney World, particularly in light of the
quarter results that we just announced. I'm very pleased to report such strong quarterly
earnings to kick off 2007. I think these results are particularly gratifying given the fact
that we had such a great year in 2006, and I think they're another clear sign that our
strategy is driving growth and creating real shareholder value.
You're going to be hearing from a variety of people at The Walt Disney Company over
the next day and a half. There's a lot going on with the company, as you'd expect, and
my team and I are looking forward to the interaction with all of you. I'll be getting up
tomorrow morning to make some opening remarks, and then I'll be available at the end
of the day tomorrow after all the business units have presented to take your questions,
and so with that, here is Tom Staggs, our CFO, to give you the details of the quarter.
Tom?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company To all of you here, welcome to Walt Disney World. To all of you listening in, welcome
to Disney’s 2007 investor conference. It's a pleasure to be with you here again in
Orlando. As you’ve seen by now, the creativity, hard work, financial discipline and
unwavering focus of our managers drove another quarter of exceptional financial
performance, with segment operating profit and earnings per share each up by over
40%.
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Q1 FY07 Earnings Presentation February 7, 2007
In our sessions later tonight and tomorrow, you’ll hear a great deal about each of our
major lines of business and the integrated approach we’re taking to managing them to
deliver continued strong financial results and increased value to our shareholders. So
for this session, I want to focus on our current quarter earnings and some of the swing
factors we see for the balance of the year. In many ways, strong results like the ones we
just reported speak for themselves, so I will keep my comments brief.
Any discussion of this quarter has to start with Pirates and Cars. They represented two
of our biggest performing films in theaters last year and their home video releases
helped drive record studio results in Q1.
Together with the release of Little Mermaid, Pirates and Cars drove an increase of more
than $475 million in Studio operating income for the quarter. Between these titles we
recorded over 50 million DVD unit sales. For the quarter as a whole, we sold 128
million DVDs, compared to a little over 70 million in Q1 of last year.
The conversion of box office results to DVD sales was especially strong for Cars, which
generated the highest conversion rate for any Pixar animated film since Finding Nemo.
Our success with Little Mermaid is another reminder of the particular strength and
longevity of our library and all indications are that we have added another evergreen
title to our inventory with Cars.
The success of the Cars and Pirates films is tremendous. But the benefits these
franchises will continue to deliver to the entire company - and the Disney brand - well
into the future is the real value-creation story. As we have said for some time, creating
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Q1 FY07 Earnings Presentation February 7, 2007
high quality, branded content with enduring franchise potential like Pirates and Cars is
central to our business and investment strategy.
Our studio performance also indicates that distribution of our films on new digital
platforms is not cannibalizing traditional platforms. To date, over 1.5 million of our
movies have been downloaded through iTunes and we think this broader distribution
of our product is a catalyst for broader consumption of our product.
The quarter’s strong home video performance was somewhat offset by theatrical
results, given that last year’s quarter included the release of The Chronicles of Narnia.
For the rest of 2007, the primary swing factors in our Studio results will be our
remaining major theatrical releases. These include the Touchstone release Wild Hogs
and Disney’s next animated feature Meet the Robinsons. You should note that since
Robinsons opens on March 30th the majority of our marketing spend will hit the March
quarter, with substantially all of the revenue from the theatrical window coming in the
June quarter.
Our two most notable theatrical releases this summer will be the third installment of
Pirates of the Caribbean and our next Disney/Pixar film Ratatouille. You’ll hear more
about these films during Studio’s presentation tomorrow.
In home video, we’ll face some tougher comparisons in 2007, especially in Q3 when
we’ll be comparing against The Chronicles of Narnia which was our best-selling DVD title
last year. The popularity of Pirates and Cars also bolstered our Consumer Products
results, along with our portfolio of evergreen franchises like Princess, Mickey and Pooh.
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Q1 FY07 Earnings Presentation February 7, 2007
Q1 represents our third straight quarter of double-digit, year-over-year growth in
earned royalties at merchandise licensing. However, that growth was offset by lower
guaranteed revenue recognition in the quarter. As we noted at the beginning of the
year, we expect to record roughly $70 million less in minimum guarantee revenues in
2007 than we did in fiscal 2006. Roughly $44 million of that year-over-year impact hit
us in Q1.
We completed the $300 million sale of our stake in US Weekly at the beginning of this
last quarter. We invested $30 million in “Us” six years ago for a 50% stake in the
magazine. Since that time, Jann Wenner substantially increased its value, giving us a
great return on our investment. Until the sale, this business rolled up into Consumer
Products and accounted for approximately $25 million in operating profit in 2006.
As we will discuss in greater length tomorrow, we continue to ramp up our investment
in video games. This business is important to us both as a potential source of future
growth and as a creative engine for our company. As we ramp-up, this spending
dampens Consumer Products results for the quarter and the year. In addition, Q1 of
last year included two of our strongest titles, Chronicles of Narnia and Chicken Little,
which sold more than 3 million units combined. Our most important releases for this
year, which include Meet the Robinsons and Pirates 3, launch in Q2 and Q3 respectively.
We expect to increase video game development spending to roughly $130 million in
2007 - 30% higher than our 2006 levels. As we have said previously, over the next 5 – 7
years, we’re targeting to increase our video game development spending to $350
million per year.
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Q1 FY07 Earnings Presentation February 7, 2007
In broadcasting, the absence of the NFL dampened revenue growth for the quarter, but
resulted in increased profit. This change, coupled with Primetime CPM increases of a
little under 4% versus upfront pricing, more than made up for a slight ratings decline in
Primetime. So far in Q2, we’ve seen a very strong ad market with CPMs up low
double-digits ahead of upfront pricing which – if the trend continues – is a good sign as
we enter this year’s upfront selling season.
Positive network results were offset in the quarter by higher TV production costs as
well as costs associated with shows that were cancelled during the quarter.
Although we saw higher costs at the television studio this quarter, there is significant
upside from owning some of our most successful shows. As we’ve noted before, shows
that are currently in – or slated for – syndication including According to Jim, My Wife and
Kids, Lost, Grey’s, and Desperate Housewives – should contribute over $1 billion in
operating profit to our TV studio as we distribute them in syndication, on DVDs and
through other new platforms.
Our TV stations are also extremely well positioned in their markets, thanks to the
strength of our local news franchises, syndicated programming and the ABC schedule.
This past November Sweep, 8 out of 10 of our stations again ranked #1 in primetime,
and our top five stations actually ranked #1 from sign-on to sign-off. They also ranked
#1 for their 5 p.m. and 6 p.m. newscasts and for ABC World News with Charlie Gibson.
This performance – coupled with political spending prior to the mid-term elections -
helped drive a particularly good December quarter, with ad sales up roughly 15%
versus last year.
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Q1 FY07 Earnings Presentation February 7, 2007
Of course, in Q2 our TV stations face difficult comparisons to last year which included
the Super Bowl, and as you would expect, ad sales at the stations thus far are pacing
down by mid single digits.
At radio our ad sales grew by 3% in Q1 and this quarter pacings are also up low-single
digits ahead of the prior year. The ABC Radio transaction is on track to close early this
summer, and we anticipate distributing the stock we receive in the form of a spin-off.
When this deal is concluded, the portion of our radio assets involved will be treated as
discontinued operations for all periods that we present in our financials. These assets
represented roughly 4 cents of our 2006 EPS.
In Q1, broadcasting results also reflect the ramp-up in our investment for Disney
Mobile’s ongoing roll-out. So far sales are tracking in-line with our plan and we’re
pleased with consumer response as Steve Wadsworth will discuss in greater detail
tomorrow.
Our cable networks met with great success this quarter, reflecting our ongoing focus on
branded content and sports programming that we can leverage across different
businesses and different distribution platforms.
At ESPN, the multi-media success of Monday Night Football contributed to solid ad
revenue growth for our cable businesses in the quarter. Online, ESPN.com’s NFL and
Monday Night Surround content viewed on computers and wireless devices generated an
average of 24 million page views on Mondays, up more than 50% over page views last
year. This in turn helped reinforce TV viewership, driving an increase of 40% in
revenue-per-game versus Sunday Night Football last year.
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Q1 FY07 Earnings Presentation February 7, 2007
At the same time, ESPN’s reported operating income was impacted by the fact that we
deferred $60 million more in affiliate revenues this quarter than we did in Q1 of 2006.
In Q2 we expect to defer roughly $85 million more in affiliate fees than we did in Q2 of
the prior year. In both instances, we expect to recognize the deferred revenues in the
second half of this year.
So far in our March quarter, overall ad sales for ESPN are pacing low-to-mid single
digits ahead of last year. This weekend, we launch our ESPN coverage of the NASCAR
Busch series. It’s early, but sales are going well and our first race is sold out.
We’ve made a big investment in key sports rights, and high-quality live sports has been
a cornerstone of ESPN’s success. But ESPN’s results demonstrate our ability to leverage
these rights across platforms to generate consistent growth. In addition, the strength
and reach of ESPN provides unique, multi-platform coverage that is increasingly
important to sports leagues in achieving the reach and recognition that they seek.
As with ESPN and our Studio, our experience at Disney Channel reinforces our belief
that digital distribution can broaden audiences. By making hit shows available on the
DisneyChannel.com broadband player, we’re seeing greatly enhanced traffic to the site
and driving ratings success at the same time.
Average monthly unique visitors to the site in Q1 more than doubled versus last year.
And, Disney Channel was the #1 basic cable network in primetime with both Kids 6-11
and Tweens 9-14 for the fourth consecutive year in calendar 2006.
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Although Disney Channel is not ad supported, this quarter’s results demonstrate the
value of the hit programming that Rich Ross and his team are creating there. DVD
sales of High School Musical and Cheetah Girls 2, coupled with strong Hannah Montana
soundtrack sales helped drive a double-digit percentage increase in operating income at
our cable businesses this quarter, and helped bolster the studio segment’s results as
well.
At Disney Parks & Resorts, we again posted solid growth in revenue, profits, and
margins. Overall attendance for our domestic parks came in flat, with Disneyland
Resort down 5% because of difficult comparisons to the 50th anniversary celebration.
Walt Disney World attendance was up 3% which was noteworthy given last year’s
record holiday season.
Per capita spending at our Walt Disney World parks grew 7%. At Disneyland, per
capita spending came in just below last year due to the substantial merchandise sales
associated with the 50th Anniversary last year.
On the resort side, our Orlando hotel occupancies increased to 85% and per room
spending grew 2%. At Disneyland occupancies were 94%, down slightly from the prior
year, while per room spending came in just above last year.
Looking ahead, advance bookings for our combined domestic parks for the March
quarter are trending about 3% ahead of last year, as the Year of a Million Dreams
celebration appears to be resonating with our guests.
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Q1 FY07 Earnings Presentation February 7, 2007
The first quarter reflected lower than expected results at Hong Kong Disneyland, with
attendance and per caps falling short of our expectations. The early going in Hong
Kong has been more challenging than we had hoped, as Jay Rasulo will discuss in his
presentation later this evening. At the same time, we remain both confident in - and
committed to - the long term success of our project there.
This quarter’s asset sales and our pending ABC Radio transaction, reflect our focus on
maximizing the value of our assets. We’ll continue to direct resources primarily toward
branded entertainment experiences that can be leveraged across businesses and
platforms in order to benefit the whole company. We will also continue to allocate
excess capital to share repurchase and dividends. This year’s $0.31 dividend
represented our 51st consecutive year of dividend payments.
During Q1, we also repurchased 29 million shares of Disney stock for roughly $1 billion
and through last Friday, we’ve purchased over 18 million additional shares, bringing
our fiscal year total share repurchase to roughly $1.6 billion.
The keys to Disney’s success are the quality of our content, consumer affinity for our
brands and our ability to leverage creative success across the scope of our businesses.
Our company-wide focus on these competencies has resulted in the earnings growth,
strong cash flow and improving returns you’ve seen us deliver for four straight years
now and will, we believe, always remain at the core of Disney’s success.
Tonight and tomorrow, you’ll hear more about our efforts to strengthen and extend
Disney’s competitive advantages in our various businesses in response to the changing
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environment. Our outstanding Q1 financial performance on the heels of our record
2006 results is an indication of our progress in that regard.
At the end of our conference tomorrow afternoon, Bob and I will be back to address
your questions about the company and business as a whole. But for this evening, I’d be
happy to take a few questions regarding the results we just reported. Since we’re
Webcasting our sessions, please wait for a microphone before asking your questions in
deference to those who aren’t here with us in the room.
Audience Member My first question has to do with scatter pricing that you’re seeing at the network and
whether or not it's industry related or particular to ABC? And the second question has
to do with your investment at the Disney Channel and whether you’re looking to ramp
up that investment given the success you’ve seen in those shows?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to the scatter market, I think it's a generally strong scatter market that we're
seeing. There is not a terribly large amount of inventory out there. So I think there's
some impact from the fact that there's a little bit less supply, as some folks have less to
sell than others. I don't have the exact tracking for what the other networks are selling
but it looks to me that it's the ad market itself that is strong. The fact that we have some
of the most sought-after shows is helping us quite a bit as well. It’s clear that just like
we saw with DVDs, etc. people are making choices as to where to put their money,
whether it's buying content or whether it's advertising content. And so we're obviously
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pleased with the strength of what we've seen at the network, especially with the move
of Grey's to Thursday night, etc.
With regard to spending at Disney Channel, we talked at the beginning of the year and
in fact talked some last year about the fact that we'd like to continue to ramp up our
investment in programming for Disney Channel and Disney branded programming
more broadly. We're going to do that in terms of the domestic Disney Channels. But
we're also spending more to create programming around the world, specifically for
certain countries. Then, when we have hits in certain countries, we’ll export those.
Rich Ross is going to talk a bit more about those plans tomorrow as we give you a sense
of how we're thinking about measuring that investment. But overall we think there's an
opportunity to invest more in Disney branded programming, both domestically and
internationally.
Audience Member
My first question has to do with deferred revenue at ESPN and the profitability impact.
The second has to do with the timing for when there would be a material impact from
digital downloads, et cetera.
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company As I mentioned, we deferred $60 million more in revenues in Q1 of this year than we
deferred in Q1 of last year. There are no deferred costs that go with it; only revenues are
deferred. Therefore, with all other things being equal, that should result in a direct shift
of profitability from one quarter to another. And as I said, that money is expected to be
recognized in the second half of the year.
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With regard to digital downloads, it's early still. For example, right now for iTunes
downloads at the Studio we're pacing to do about $25 million in revenue for the year.
It's nice because it looks like that's a purely incremental audience by all accounts.
Certainly our DVD sales in the first quarter would point to the fact that the worst case
scenario is that [downloads] are not cannibalistic. The best case would be that they are
audience expanding. I think it's probably the latter that's true.
So, having that extra revenue certainly already impacts the bottom line and I think it's
going to continue to grow. We don't want to make any projections about just how fast it
will grow, but it looks like the digital download audience is going to continue to
expand and become a more important part of our overall studio business. Again, we
also think that the impact of that is that the overall pie will continue to grow as a result.
You'll hear more about that from our studio folks tomorrow and in some of the
comments that Bob will make in his opening.
Audience Member The first question is on the studio, where the number is very strong. It looks like you
converted about 80% of the incremental revenue in DVD to the studio. So, was that just
a function of mix or is there something else going on there that's helping the margins? I
don't think you've had a 23% margin at the studio in a long time. And then secondly,
the free cash flow line that was down about $100 million and it looks like it was mostly
due to the increase in receivables. Was that also related to the DVD sales?
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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to studio margins, we did have a very nice flow-through rate. A couple of
things are going on there. Number one just being the fact that it was being driven by
home video. As you all know, when we amortize the cost of a given film in its initial
release, we amortize those costs based on our estimate of the windows through which
they'll go and we adjust those as we go along. There's only so much of the cost that will
come forward into video, of course, because we still have very robust ancillary
windows for future revenue. And so, as you add incremental sales, you get a very nice
flow-through rate of that from a profitability standpoint.
We also, as I mentioned, saw a lot of strength from our Little Mermaid release which is a
fully amortized title. This is something we've talked about in the past. The nature of our
Disney branded library is such that it continues to show evergreen qualities. When it
sells through as strongly as we're seeing, it has a very strong impact on our profitability,
as you would expect.
With regard to the second question on cash flow, you hit the nail on the head. The
biggest impact to cash flow this year in terms of comparing it to the earnings and
comparing it to last year is that we had a much greater investment in receivables this
year than last. And as you expect, over two-thirds of that was driven by the studio.
We sold quite a few DVDs during the quarter and those generated a big uptick in
receivables-money that we'll be collecting over time. So, the cash flow will bounce back
as we make the collections on those receivables. There is a modest increase in capital
expenditures as well, consistent with what we talked about at the beginning of the year.
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Audience Member Can you talk about on the cable network segment, where you had some very strong
international growth? Of the 22% year-over-year operating income growth, how much
was international versus domestic at Disney Channel? Secondly, on the iTunes contract,
when does that expire and would you look to renegotiate given the profitability of your
DVD segment? How do you look at the iTunes contract for film and also on the TV side
versus where you have it today in terms of a renewal possibility? And then related to
that, have you had any discussions with YouTube about pulling down the content as
Viacom did last week? Or are you any closer to a negotiation there?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company I'll try to track through those. I'll go in reverse order and no doubt forget the first
question by the time I get there. With regard to YouTube, I'm not going to comment
specifically about any discussions that we're having. At the end of the day, it's
obviously an issue that we're looking at closely. In the comments we'll make over the
next day and a half, you'll get a sense of how we want to be aggressive in terms of being
out there on additional platforms and how we continue to favor a market-based
solution to these things. At the same time, when we think about video out there on the
Web, we want to make sure that it's out there in a way that respects the copyright
holders, both ourselves and others. It’s an issue that's going to evolve over time but
there's no set answer to it at this point.
With regard to the iTunes contract, we've been very satisfied with what we've seen
there. We've talked about the film downloads to date and we've talked about the ABC
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television shows. Anne Sweeney is going to talk a little bit more about it tomorrow. I
wouldn't anticipate any dramatic changes going forward.
The cable networks' strong results were driven primarily domestically, but we also saw
strong results internationally. Again, Disney Channel programming is really resonating
around the world and we're seeing some strong figures there. The High School Musical
DVD was a very big seller in the U.K., for example, outselling major theatrical releases
there even though it had been on television several times, free TV, and on the Disney
Channel. So, we're seeing strength in both areas.
Audience Member Two questions. First, could you give us a sense how the NASCAR contract is going to
get amortized by quarter? I know you started the Busch series but I think the NASCAR
series is at the end of the year. And second, for football, have you looked at the
profitability of your deal with the NFL this year versus last year when you had it on
both networks? Is it more profitable, about the same, or less profitable? Can you give us
a sense of what the overall impact is on the Company? Thank you.
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Sure. So, with regard to NASCAR, I mentioned that we've got the first race coming up.
But the bulk of the races are in the fourth quarter and that's where you're going to see
most of the amortization. Remember that this year, only about 60% or so of the first
year of NASCAR will be in the fiscal year. And something on the order of 70% of that
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will be amortized in the fourth quarter. So, it's back-end loaded and it's not quite a full
season this year for NASCAR.
We look hard at the profitability of football and there are a number of different ways to
look at that profitability. At the end of the day, I talked about some very, very strong
results and those results exceeded our expectations. So we're pleased with the relative
profitability of the NFL. How you allocate revenues to the NFL is going to have a great
impact on how you view the profitability of that contract. I would say to you that it's a
contract we're pleased to have and it's one that I think benefits the NFL and one that
benefits ESPN. I really have to commend ESPN for the job they've done in this first
year, moving to Monday night, driving performance across platforms. I don't want to
steal George's thunder because I know he's going to talk about it more tomorrow but
it’s really been a spectacular job by him and his team.
Audience Member
To follow up on the ESPN comment for a second. Not to pigeonhole you too much here
but if we add back the $60 million, it seems pretty apparent that ESPN had underlying
EBIT growth of over 10%. Can you confirm that? And given that, in the face of the
step-up in the NFL programming, I would think your confidence in ESPN’s ability to
deliver double digit growth is probably quite strong. Is that accurate? And then
separately, you just delivered 10% earnings growth for the year in the first quarter. Are
you ready to commit to 10% earnings growth for the Company overall for the year?
Thanks.
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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
So, let me translate those questions. You'd like guidance on ESPN and guidance on
earnings.
Audience Member Yes. Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company We really have made a point of saying that we don't think the best thing we can do for
our business is to give guidance but I am happy to try to talk about swing factors. It's
obviously a great start to the year. When I think about the remainder of the year, I think
the toughest comparables are in Q2 and Q3 in terms of the lineup that we've got from
the film release standpoint and that sort of thing. We’ll be watching those closely to see
where the overall year turns out. But it's hard not to be pleased where we are, out of
the blocks here. We've tried to convey our confidence in ESPN in a number of ways.
Our confidence hasn't waned at all. I'm not going to make a specific projection about
ESPN's growth this year. But in response to the question that I think Anthony asked in
the last conference call, I mentioned that we had said that ESPN would grow on
average double-digits through 2009 and that this year's growth rate would be consistent
with that goal. I'm happy to stand by that comment.
Audience Member
Just one quick question. Given the very robust DVD unit sales in the quarter, my
question is, holding the great content aside, are there other changes that have occurred
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in the business, either in terms of pricing or distribution agreements or higher
marketing budgets and accounts that were robust?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Well, this [performance] wasn't driven by higher marketing budgets. We obviously
used a pricing strategy that was generally consistent with what we've done before. So,
there aren't major changes there. I think [this performance] is consistent with what
we've been talking about for a while. Our biggest job is to make sure we're making very
high-quality product. We have the benefit of creating that profit under the Disney
label. We think it's going to help to take advantage of whatever market was there. It
turns out that the market was quite strong. But the consumer is increasingly getting
used to choice. And as the consumer's ability to choose increases, being focused on
quality content that's marketed under strong recognizable brands is a winning strategy.
We're going to talk tomorrow about where we're taking the studio strategy and it's
consistent with that. It's what we see going on in the marketplace, basically business by
business. We were very pleased with our creative success last year. We know that we
have to continue to be successful creatively. But at the same time, in doing so under
these brands, you can see us deliver an enhanced return on our investment and a
greater ability to access whatever market strength there is.
Audience Member Question one relates to just trying to better understand the organic growth rate of
revenues and operating income of broadcasting when you adjust for the year-over-year
change that you've had with football including the negative impact on revenues and the
positive impact on cash flows. And the second piece, when you look at some of your
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peers that have had huge fourth quarters in DVD shipments, sometimes there have
been issues with some of them struggling with actually getting those to be accounted
for at the end of the day in terms of returns. What type of visibility do you have or
how much comfort or reserve has been taken into account for the visibility that seems to
have changed over the last couple of years in the DVD business?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to reserves in the DVD business, whenever the sales are that big, we have
to take a very, very hard look at the return reserves. And it's something we take very
seriously. I'm very comfortable with where we peg them. But it is something that we
pour over and have to exercise judgment about. I think that you should assume that we
try to be relatively conservative in that regard so that we feel good about where the
sales are.
I don't know that I would encourage you to try to use any given quarter to judge
organic growth in a business like broadcasting. With this quarter, obviously for our
network, the NFL moving over to ESPN had a pretty big impact on the quarter as a
whole. At the end of the day, if you take that out, it was solid performance but not
spectacular growth. We remain pleased even absent the improvement that we saw in
sports with where the network is going.
Remember, the picture isn't just the network by itself anymore. I think you've got to
look at the overall programming business. We create shows, we launch them on the
network, we launch them in other networks in certain instances. We sell those shows in
syndication. If you look at that overall picture, I think that it's a business that continues
to be robust. We were very pleased with the growth in international syndication
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markets this last year. We had an ad market that was up versus the upfronts. We
continue to see a very solid business environment. We continue to see great success
with some of our key shows.
And if you think about ABC - and it's something that we'll talk about tomorrow - and
the collection of key shows there, I'm not sure I would trade with any of the networks.
They have a very solid set of key shows. The name of the game is to continue to create
great shows and to put them on the air.
Audience Member
[Inaudible question - microphone inaccessible; question was regarding
the cruise business, including the great results Disney has had to date and how we
would feel about expansion.]
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company I'm not going to answer in great detail right now because later on this evening you're
going to hear from Jay Rasulo. He’s going to talk a lot about our attitude towards
growing the theme park business. So, I want to leave the detailed comments to Jay for
this evening. Having said that, we have had great results with cruise. We've got a
very, very strong return business there, double-digit returns on invested capital. To the
extent that we feel there's an opportunity to earn attractive incremental returns on our
capital by investing more, we'll look hard at that but it has to be the right circumstance
and it's something that Jay will address himself later this evening.
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Audience Member
You mentioned that scatter premiums at this point [are 10+% above upfront] are
putting you guys in a pretty good position with regard to going to the upfront season
here in May and June. And yet media buyers already -- here it is February 7 - media
buyers are basically saying they're not going to pay for anything this year except for live
ratings. Not live plus one or live plus two or live plus a week or anything like that.
Last year, you guys changed your negotiating stance on that at the last minute. I think it
was Mike Shaw that was directing that. Do you have any sense of how you'll prepare
for that this time and what stance you'll take with regard to live ratings? Thanks.
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company Well, I don't think it's appropriate for me to have the debate about live ratings in this
forum. That's primarily for Mike Shaw to do with the buyers at the right point in time.
The extended audience - that is the audience beyond live, live plus 24 hours, live plus 7
days - is becoming a more important part of the audience. This is something that over
time we and our advertising partners have to address because it's an important
audience for us both to be capturing. If we're capturing it, we need to make sure that
we're taking it into account in terms of the advertising opportunities that we're selling.
How that evolves, at what pace, I won't predict today but I think it's something that will
continue to be a topic for discussion.
Audience Member Can you discuss the impact of the weak dollar on your businesses? How much of your
revenue is from international right now? And particularly in the theme parks, what
percentage of visitors are now international?
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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
As you all know, the change in the value of the dollar won't generally have an
immediate impact from a foreign currency translation standpoint to any large extent
because of the hedging activities that we do. So, we try to make sure that the impact is
sort of “feathered in” over time. Having said that, clearly, broad fluctuations in the
value of the dollar can impact our businesses.
Interestingly enough, though, I talked about theme park attendance this past quarter.
International was not the driver of growth at Walt Disney World. In fact, domestic and
residence attendance was a stronger factor in growth than international. I don't think
there's anything much to read into that other than the fact that it doesn't look like the
weak dollar sent a flood of people -- or an abnormally large number of people -- over to
our theme parks.
The mix of international versus domestic attendance has ticked up modestly over the
last several years and it will probably continue to do so. But, it's not dramatically
different than we've seen in the last couple of years. At Disneyland last year, our 50th
Anniversary celebration had a huge impact and it had the biggest impact with domestic
tourists. So, the slight decline we saw at Disneyland this year had mostly to do with not
comping as strongly against the domestic tourists. I don't see a fundamental shift in
the baseline of attendance in those numbers.
Audience Member
One of the surprises I saw was the consumer products on the revenue side. Not the
operating income but the revenue down 6%, particularly with the contributions of those
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Pirates and Cars merchandise. So, the question is, if you strip out those two franchises,
can you give a sense of what that did? Can you provide some color on Princess, which
is something you've talked about in the past? What's the outlook on the revenue side for
consumer products, which you believe is sustainable?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
In merchandise licensing, we saw strength across all product categories, and that's
home, hard-lines, toys, etc. We also saw strength across each of our major properties.
Cars and Pirates were clearly standouts but there was strength across the board.
The reason that you saw what you saw in the revenues is two-fold. One, we had $44
million less in guaranteed revenue recognition in Q1 of 2007 versus Q1 of 2006. Second
is that Narnia and Chicken Little were self-published titles in home video that we
released in Q1 of 2006. There were not comparable releases in Q1 of 2007. That had a
very big impact on the revenue side, because as you know, when you sell self-published
titles, you're collecting the whole piece of wholesale revenue on the books. And so
those two things combined are really what drove the revenue decline in consumer
products. The underlying merchandise licensing business was quite strong, as I
mentioned. Double digit, year-over-year growth in earned royalties in merchandising
licensing.
So, it's pretty much as we expected it to be. You'll hear more from Andy Mooney but
I'm pleased with the strength of that business overall. There was not a lot of growth in
publishing but we had said before that that wasn't a segment that we expected to grow
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as quickly. We thought the big potential was in licensing and that's turning out to be
the case.
Audience Member
Equity and income investing-wise, do your results include E! and Us Weekly for the
quarter or were those taken out?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company “Us” was not included in the quarter because it closed right at the beginning of the
quarter. E! is in the quarter, up until November 27. So, you've got a partial quarter of
E! in there. E! will be gone altogether for the second quarter.
Audience Member
[Inaudible question - microphone inaccessible]
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company The question was what was the big driver in the improvement in the equity of affiliates
line. We saw nice improvements across the different equity affiliates. They were all
good performers, there was no standout, no exceptional performers. They all turned in
a very nice quarter overall.
Audience Member [Inaudible question - microphone inaccessible]
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Q1 FY07 Earnings Presentation February 7, 2007
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company The question is, what are peak occupancy levels in Orlando? (A question I'm almost
certain not to answer.) We’ve really changed the dynamic here. As you know, we've
built out a tremendous number of hotel rooms and vacation units and we're a much
bigger player in the resort segment. If you go back 15 years or so, we had occupancy
levels that far exceeded those that we're seeing today. I think there's room for growth in
occupancy levels. If you take a look at the market as a whole, we're still leading the
market. I think bringing new individuals down to the Orlando area and bringing new
individuals on property are a big part of the strategy that Jay and his team have been
employing. This has really been key to pushing that occupancy number up. I don't
think that it's peaked out. But I also don’t think it's something that you just can grow
overnight, either, given the sheer number of rooms we've got in market.
Audience Member
In light of Wal-Mart and Target's pretty public protests about you putting movies on
iTunes, I was wondering if you saw less of a mix of DVDs sold through those channels
this quarter and/or do you expect to see a change in subsequent quarters?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company I think that it's safe to assume that given the strong results we saw in DVD, we were
selling through strong numbers through all of our major retail partners. We're pleased
and hopefully, they're pleased. We also feel that they must see the same evidence of the
lack of cannibalization. Yesterday we announced that we will participate in Wal-Mart's
movie download program. And so, we'll be there for Wal-Mart downloads. So, I'd say
that we're pleased with where that relationship is and we think they’re a great
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Q1 FY07 Earnings Presentation February 7, 2007
distribution partner to have. And, with the strong content we've had, I think we made a
difference in their quarters as well.
Audience Member
Tom, two questions. First, is there a public position for Disney on getting cash
retransmisssion payments from the cable industry and was that an issue of contention
with Comcast? And the second question is, my thinking was that the net difference
between amortization of TV and film investment as related to the amortization would
be a negative number on the free cash flow. This quarter it seemed positive.
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company In terms of cash retransmission consent, the answer is we haven't taken a public
position on it. And as we discussed before, when it comes to the Comcast negotiation,
that was a negotiation that evolved for a long period of time around new platforms,
new opportunities to be on those platforms, et cetera. Cable rates and the
retransmission consent part hadn't been an issue for quite some time there, so that
wasn't a hang-up in that negotiation.
Investment amortization in the television business. That number is going to fluctuate
from quarter to quarter. I think you should expect that given what I've said about
investment in Disney branded programming, we're looking for opportunities to invest
profitably. And we'll ramp up programming spending. I said last year that we would
expect to increase our overall investment in programming this year versus the prior
year. So what you're looking at is really a quarterly timing issue as opposed to a change
in that trend.
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Audience Member
Good afternoon. You mentioned you have about a $1 billion dollar pipeline of
syndication ahead of you here on the TV side. I'm just curious when you look at the
timing of the shows, what do you expect this year or next year?
Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
When I think about the timing of the syndication, a lot will depend on what could be a
changing market in terms of when shows are made available, when is the right time to
go to market, et cetera. But having said that, I would expect 2007 would be slightly
lower than what we saw in 2006. But not dramatically lower. I think right now that
2008, depending on what happens with some of our new shows, is likely to be
meaningfully lower than 2007. And then in 2009 we’ll see an uptick back up closer to
these levels. So, it really is something that can fluctuate. I just have to emphasize that
the timing I just gave you can change because our folks go to market and make shows
available based on a whole bunch of different factors. But I do think 2007 will be
slightly lower than 2006 in terms of the operating income impact from those shows in
syndication.
Audience Member Just one follow-up. You gave a $700 million target revenue number for digital for the
year. Could you talk about what that was in the quarter and how it's pacing towards
that number?
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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
We’re targeting north of $700 million in terms of the digital-based initiatives including
Internet, et cetera, for the year as a whole. We expect that number to be ramping up
throughout the year. Last year [the comparable number] was a little over $500 million.
So you get a sense for the growth rate. The first quarter was consistent with that
anticipated growth rate. The one piece that we'll look to see ramping up a little more in
the middle of the year as we really get our legs is MVNO. So, the only one that sort of
was a little behind that growth rate expectation was MVNO. We're just ramping up
that effort and should be selling more later in the year. So, we're on track to hit the
numbers that we talked about.
Thank you very much. We have a day and a half where any of the remaining questions
you have will be answered. And we'll be back tomorrow night, Bob and I, to answer
some more.
# # #
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Q1 FY07 Earnings Presentation February 7, 2007
Management believes certain statements in this call may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:
- adverse weather conditions or natural disasters; - health concerns; - international, political, or military developments; - technological developments; and - changes in domestic and global economic conditions, competitive conditions and consumer preferences.
Such developments may affect travel and leisure businesses generally and may, among other things, affect: - the performance of the Company’s theatrical and home entertainment releases; - the advertising market for broadcast and cable television programming;
- expenses of providing medical and pension benefits; - demand for our products; and - performance of some or all company businesses either directly or through their impact on those who distribute our products.
Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”. Reconciliations of non-GAAP financial measures to equivalent GAAP financial measures are available on Disney’s Investor Relations website.
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