Highlights From Disney's (DIS) Q1 Conference Call: Strong Movie Line-Up Through 2011; EPSN Reported Record Ratings

February 10, 2010 11:45 AM EST

Disney (NYSE: DIS) reports Q1 EPS of $0.47, 9cents better than the analyst estimate of $0.38. Revenue for the quarter was $9.74 billion, which compares to the estimate of $9.66 billion. Shares are down 1.57% today.

Highlights From DIS's Q1 Conference Call:

• (CEO) Q1 was better than last year's due in part to improved advertising and affiliate revenue at our media networks and better attendance at our parks and resorts.
  
• At this point, we have limited visibility regarding the economy and its impact on our businesses, and thus we will continue to focus on controlling costs while creating great content and experiences and building our brands.
  
• We're also maintaining our focus on long-term growth strategies in a world of rapid technological change and evolving consumer behavior.
  
• Our movie studio under its new leadership is focused on improving its creative performance through high quality branded films Disney, Pixar, and Marvel.
  
• The studio has also restructured its organization to produce, market, and distribute movies more efficiently in light of the challenges the movie business is facing. This will help reduce costs and better position the studio with regard to the timing, pricing, and distribution of its films.
  
• Through our long-term commitment to 3-D, we and others in the film industry have proved that a better experience can draw more people to the theater and increase box office.
  
• We're excited about our upcoming live action slate, including Alice in Wonderland, Prince of Persia, Sorcerer's Apprentice, and Iron Man 2, the first Marvel film to be released since we completed our acquisition. Tron, our December live action release, is looking very promising. And we're about to start production on Pirates 4, which will be released in May of 2011.
  
• The second installment of Cars, another strong franchise for the Company, will hit theaters in the summer of 2011.
  
• At Media Networks, we've been pleased with the success of our Wednesday night ABC comedy block of The Middle, Modern Family, and Cougar Town, and the strength shown by such returning dramas as Grey's Anatomy, Castle, and particularly Lost, which delivered terrific ratings in its final season premiere last week.
  
• We're also benefiting from the growing international strength of Disney Channel and the record ratings performance of ESPN.
  
• Over the last few weeks, we have started work on significant expansion projects at Hong Kong Disneyland and the Magic Kingdom at Disney World. Construction is also well underway at our Aulani resort in Hawaii, which will open late next year.
  
• This summer, our expansion and improvement of California Adventure begins to roll out with a magnificent new experience, World of Color, while next January the Disney Dream, the first of our two new cruise ships, will set sail on its maiden voyage.
  
• In closing, we believe our consistent strategic focus, our innovative use of technology, and our growing range of high quality branded content puts us in a good competitive position to deliver long-term growth.
  
• (CFO) ESPN enjoyed record ratings in Q1, up over 7% from prior year, driven by Monday Night Football and college football.
  
• Broadcasting operating income was higher compared to prior year, largely as a result of the bad debt expense associated with the Tribune bankruptcy filing that was incurred in last year's first quarter.
  
• Advertising at our TV stations was 5% lower than last quarter when there were strong political ad sales.
  
• So far in Q2, scatter pricing for ABC Network is running almost 30% above upfront levels.
  
• Our Interactive Media segment reported lower revenue because we released fewer video game titles in the quarter. Operating losses were trimmed through lower marketing and other costs at Disney Interactive Studios.
  
• At Consumer Products, lower licensing revenue impacted our results. Earned revenue decreased by 18% compared to prior Q1, when we benefited from strong sales of Hannah Montana and High School Musical merchandise.
  
• For the remainder of the year, results at both Interactive Media and Consumer Product segment will be heavily influenced by the success of their respective initiatives tied to the theatrical release of Toy Story 3.
  
• At Parks and Resorts, domestic attendance came in 9% higher than prior years. These results benefited from the calendar shift of the New Year's holiday into Q1 this year from the second quarter of the prior year.
  
• We estimate that without this shift, combined domestic attendance was up approximately 4%, with Disneyland up 15% and Walt Disney World down by one percentage point.
  
• Segment operating income came in 2% below prior Q1 as higher results at our domestic operations did not fully offset lower results at Disneyland Paris. Performance at Disneyland Paris decreased due to lower attendance and hotel occupancy.
  
• Domestically, our promotional activities helped to maintain high levels of attendance during the quarter but contributed to lower average guest spending and ticket pricing.
  
• Per capita guest spending decreased by 4%. Occupancy in Orlando came in four percentage points lower than in the prior year at 81%, while occupancy in Anaheim was down seven percentage points at 78%.
  
• Costs at our domestic operations improved over the first quarter when our results were impacted by a roughly $40 million in mark-to-market adjustment for fuel hedges.
  
• During Q1, we purchased only a moderate number of shares given the constraints imposed by our then pending acquisition of Marvel. We intend to buy back the shares we issued for the acquisition by the end of fiscal 2010, and we expect the deal to be dilutive to our reported EPS by mid-single digit percentages in fiscal 2010.
  
• Jay, just following up on your comments on ESPN, you didn't mention any deferrals in the quarter. I just wanted to check and see if there weren't anything meaningfully positive or negative year on year on the affiliate fee side. And then on the parks, you took a lot of action last year in terms of head count and rationalizing the cost structure. Some of that seemed to flow through this quarter. I wonder if you could help size that up for us as we think about 2010 versus 2009. And then just a big picture question, Bob, if you could talk about how you're thinking about ESPN as you start to enter in some renegotiations on affiliate fees. I think from talking with investors, a lot of the concerns around Disney as a stock and ESPN as a business is whether there's significant upside to the affiliate fees you're currently generating in the US. Could you talk philosophically about how you think about approaching those negotiations and positioning the business as you look for potential increases on the fee front? (A)Okay, Ben, thank you for the questions. This is Jay. Let me start with your first question about deferrals at ESPN. There is nothing material in the first quarter that we need to talk about. Relative to Parks costs, I talked about some specifics. The mark to market on the fuel hedge from last year is about $40 million of the savings. And then there's a group of savings that are simply related to the volume declines, particularly at Walt Disney World where I mentioned a 1% volume decline. And of course there are direct costs that go directly with those. Coming to the last part of your question about pulling forward the cost savings from 2009, so far the team has done an excellent job at pulling those savings forward. So you know we took a restructuring charge last year and we talked about the reduction in head count that we did. And so far, those costs seem to be well managed and continue to carry us forward for this year.(A)On the ESPN
  front, Ben, we're not engaged in what I call a major active negotiation right now. And as you'd expect, I wouldn't attempt to in any way predict certainly publicly where future negotiations may go. I will say that as evidenced by the fantastic ratings performance by ESPN in the quarter that we just announced, clearly our investment in its programming and its brand are paying off. And with that, we're delivering more value to advertisers and more value to distributors while the consumer is clearly paying heed as well, as I said as evidenced by the great ratings. So we think that our position for ESPN going into a new round of negotiations is actually quite solid because of the value that we're generating. I also want to point out that the distributors do quite well with ESPN not just because of the overall value that we deliver, but the ads that they sell on a local basis are worth a considerable amount to the individual
  distributors, and ESPN generates more advertising revenue than any other channel in the cable universe.
  
• Jay, you talked about the pull forward change in calendar of New Year's Day in this quarter. Could you talk a bit about what the impact on the profitability was by shifting, by having the calendar shift, and is that weekend more profitable as people tend to probably book it without discounts? That's one, and I have one for Bob.(A)Yes, that is a very profitable week for us. Round numbers, it's about a $60 million OI swing for us from that single week.
  
• And logically, it's going to come out of the next quarter on the profit side.(A)Yes, it comes out of the next quarter, although I'll hasten to add that there is the add-back from one week of Easter. I'm sorry to say that one week of Easter is not quite as profitable as one week of Christmas, so we won't add it all back in the second quarter. In fact, only a third or so will get added back.
  
• I wonder on the Games side, the interactivity side, I wonder if you believe that the game opportunity now is as big as you first thought it was when you started investing in the Games side. And how much of the savings this quarter do you think is recurring?(A)I think that there's still a huge opportunity on the Games front, but I think it probably will be derived from a slightly changed strategy than the one that we began a few years ago. It's pretty clear that the higher end console games are a little bit more challenged in a world where not only are they more costly to produce and market, but there's just much more competition from casual games and games on platforms like the iPhone/iTouch platform. We also learned that the typical game that we've set out to make, which I'll call the Disney branded game, seems to perform better on the Nintendo Wii and DS platforms and on the platforms basically that are not the high end console games. So while we're going to continue to make games for the high end, we'll be very, very judicious in how many and which ones we choose. We're looking forward to our Toy Story 3 game, which will come out basically on all platforms. We're looking forward to the one that we're in development on for Mickey Mouse. We're looking forward to Tron. And then we have another really, really interesting racing game that also comes out relatively soon, called Split/Second by the way, which got a fair amount of attention when it was first brought out at E3. But I'd say our focus is going to be a little bit more diverse and a little bit less reliant on the highest end console games. We'll still maintain a similar mix of roughly 80% that would be Disney branded. I also want to mention, by the way, we think we have some interesting opportunities with Marvel, and that would be a brand that we think would do extremely well on the higher end consoles. And at the same time that we're looking to be a little bit more judicious in that area, we are looking to step up our efforts on the casual games front and on the Apple platforms, including the iPad. Since this might come up later, we're already talking about and in fact developing a product for ABC, for Disney, including a pretty cool digital books product for ESPN, which would probably be an even better version of their ScoreCenter app, and also for Marvel.
  
• One for Bob and one for Jay. First for Bob, some of your peers have been pretty aggressive in negotiating cash for retrans fees. I was wondering if you could just speak philosophically about how aggressive you would be trying to get cash for retrans? nd then for Jay, just a housekeeping question, did the $66 million in restructuring charges include the restructuring at the minority-owned channels like A&E and Lifetime? Thank you.(A)As you know, Spencer, we run some of the best stations in the country. They're market leaders in the markets that they are operated in. And we think that it's time to recognize the value that they provide to distributors and their importance to local communities as well as their importance to our viewers in those communities. And so we believe that it would be appropriate for us to seek cash for retransmission consent, and we believe that the same would be the case for our affiliates. I won't say how much and I won't describe any discussions we're having with the distribution community, but clearly there's a trend that we're observing that we fully intend to participate in.

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