The Walt Disney Company's CEO Discusses F1Q 2014 Results - Earnings Call Transcript

The Walt Disney Company (NYSE:DIS) F1Q 2014 Earnings Call February 5, 2014 5:00 PM ET

Executives

Lowell Singer - Investor Relations
Bob Iger - Chairman and Chief Executive Officer
Jay Rasulo - Senior Executive Vice President and Chief Financial Officer

Analysts

Alexia Quadrani - JPMorgan
Douglas Mitchelson - Deutsche Bank
Michael Nathanson - MoffettNathanson
Jessica Reif Cohen - Bank of America Merrill Lynch
Todd Juenger - Sanford Bernstein
Ben Swinburne - Morgan Stanley
Anthony DiClemente - Nomura
David Bank - RBC Capital Markets
Jason Bazinet - Citi
Marci Ryvicker - Wells Fargo
David Miller - Topeka Capital Markets
Tuna Amobi - S&P Capital IQ
Michael Morris - Guggenheim Securities

Operator

Welcome to the Q1 2014 Walt Disney Company Earnings Conference Call. My name is Robert, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Mr. Lowell Singer, Senior Vice President of Investor Relations. Mr. Singer, you may begin.

Lowell Singer

Thanks, operator. Good afternoon, everybody. Welcome to the Walt Disney Company's first quarter 2014 earnings call. Our press release was issued about 45 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and the webcast and a transcript will also be available on our website.

Joining me for today's call in Burbank are Bob Iger, Disney's Chairman and Chief Executive Officer and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer.

Bob will lead off followed by Jay, and then of course we will be happy to take your questions.

With that, let me turn the call over to Bob, and we'll get started.

Bob Iger

Thanks, Lowell, and good afternoon. We had a very strong first quarter with earnings per share up 32% when adjusted for comparability and operating income, up double digits across all business segments. Our Parks and Resorts had a great quarter setting attendance records at Walt Disney World, Hong Kong Disneyland and Tokyo Disney Resort. The popularity of Disney Infinity drove Interactive's profitability for the second consecutive quarter. The demands for Frozen, Star Wars and Disney Junior merchandise added up to a great quarter for our Consumer Products division.

Our Media Networks delivered 20% growth in operating income, led in part by higher affiliate and advertising revenues of EPSN. While all our operating units delivered solid results this part quarter, we are particularly pleased with the performance of our studio, driven by the enormous success of Disney Animation's Frozen, Marvel's Thor: The Dark World and Walt Disney Studio's Saving Mr. Banks and that's where I want to focus on today.

As we have articulated in the past, our studio strategy is to essentially make three types of movies, big releases with broad appeal and franchise potential under the Disney, Marvel and Lucasfilm brands. Animation, which is the heart and soul of this company is stronger than ever under the Pixar and Disney brands, and lower budget original films that entertain audiences and enhance the Disney brand through exceptional storytelling. In today's global marketplace big franchise films play extremely well, particularly those with action or family appeal.

In fact, of the world's top-20 highest grossing movies of all time, 19 are franchised drivers and almost half of those carried the Disney, Pixar, Marvel or Lucasfilm brand. With all the creative brands that are now part of our company as well as the thousands of characters and phenomenal storytelling behind them we believe we are uniquely positioned to maximize the ever-expanding global movie market. Our success with Marvel is a great example. There is no question, the phenomenal success in Avengers, strengthened the Avengers franchise and is now driving subsequent Avengers based character films to stronger box-office performance.

Iron Man 3 topped $1.2 billion in global box-office, far exceeding the $632 million for Iron Man 2. Likewise, Thor: The Dark World, has delivered more than $635 million global box-office versus $450 million for the first Thor movie. We expect this trend to continue when Captain America: The Winter Soldier opens on April 4^th, in the United States. Having seen it a few times already, I can tell you this sequel takes the Captain America story to an incredible new level and I think audiences are going to be more invested in this character than ever before.

Because, all Marvel content and characters exist in connected universe, this movie also sets some critical events in motion that will lead directly into Avengers: Age of Ultron and some facets of the story in Captain America: The Winter Soldier, will also be reflected in upcoming episodes of Marvel's Agents of S.H.I.E.L.D. on ABC.

In August, we will release Guardians of the Galaxy, introducing audiences to a new cast of great Marvel characters. As we announced last quarter, Star Wars: Episode VII premiers in December of 2015 and it looks to be one of the biggest movies we have ever released. Nothing I say here today could ever capture or convey the magnitude global anticipation for this movie, so I am just going to say the excitement is fully justified and leave it to that.

We are also very pleased with the work being done at Walt Disney Studios, blending their own form of tempo films with lower budget great original films like Saving Mr. Banks. They do so much to enhance the Disney brand image and we are excited about our upcoming slate, including Muppets Most Wanted, Angelina Jolie as Maleficent, Jon Hamm in Million Dollar Arm, George Clooney in Tomorrowland, which is directed by Brad Bird, and Disney's first even live action Cinderella. Lastly, animation is one of our biggest priorities, because it's one of our most important creative businesses.

With Pixar and the created resurgence of Disney Animation, we now have the two strongest animations brands generating some of the greatest creative work in the industry, with Frozen being the most recent example. Frozen has now surpassed The Lion King to become the most successful Disney Animation movie of all time. It exceeded $870 million in global box-office before even being released in two of our most important markets. It just opened in China in the last 24 hours and it will open in Japan on March 15^th. Frozen is not only a tremendous financial success, it's also an incredible creative trial earning the Golden Globe for Best Animated Feature Film of the Year, as well as Oscar nominations for Best Animated Film and Best Song. It has also just picked up 5 Emmy Awards for Outstanding Achievement in Animation.

Two months after opening, Frozen is still big in theaters. It was second in U.S. box-office just this past weekend. Additionally, the sound track is at the top of the charts and high demand for Frozen merchandise continues to drive strong retail sales. With tradition of The Lion King and Beauty and the Beast, Disney's Frozen will also be going to Broadway.

When we acquired Pixar in 2006, our goal was to not only support and benefit from the continued creative and commercial success of Pixar, but to rejuvenate Disney Animation under the leadership. Accomplishing this was not only a priority, but something that is and will continue to drive value across the company for years to come. We congratulate all those involved with Frozen and success speaks volumes, about the future of animation at our company. We are obviously proud of our performance this quarter and it's very satisfying to see long-term strategies come to fruition delivering results and driving greater value for our company and shareholders.

I am going to turn the call over to Jay to talk about the details of our quarter performance and be back for questions later on. Jay?

Jay Rasulo

Thanks, Bob, and good afternoon, everyone. We are pleased with our first quarter results. Segment operating income was up 27% on revenue growth of 9%. The strong financial performance was broad-based as each segment posted double-digit growth in operating income and margin expansion compared to prior year. I think, once again this quarter demonstrates that our investment strategy continues to create value.

Media Networks delivered another great quarter of financial performance led by cable networks, which generated an impressive 34% increase in operating income driven by growth at ESPN and higher equity income. This more than offset a decline in operating income at broadcasting.

Growth in ESPN's operating income was due to higher affiliate and advertising revenue. ESPN also benefited in the quarter from the absence of losses at our ESPN U.K. business, which was sold in the fourth quarter last year. Programming costs at ESPN were comparable to prior year as contractual increases for the NFL and college football were offset by the absence of costs for U.K. sports rights.

During the first quarter, ESPN deferred $18 million less in affiliate revenue than last year. As we look to the second quarter, we expect ESPN to differ approximately $75 million less in affiliate revenue than last year. Ad revenue, ESPN's was up 10% in the first quarter due to higher rates and an increase in units sold, partially offset by lower ratings. So far this quarter, ESPN ad sales are pacing up slightly despite the impact of the Winter Olympics.

Over last couple of years, we have provided insight into our cable affiliate revenue growth on an aggregate basis. Given some of the recent business model changes internationally, and the impact of foreign exchange rates, we think it might be more helpful to breakout the domestic affiliate growth as it constitutes the majority of our affiliate revenue.

As such, our domestic cable affiliate revenue growth was up high single-digits in the quarter. Adjust for the timing of deferred revenue at ESPN, growth in domestic cable affiliate revenue was still up high single-digits. It's also important to note that the growth in Q1 reflected the last quarter in which year-over-year comparisons were aided by the new affiliate deals that took effect in the second fiscal quarter of 2013. Equity income was up in the quarter due to higher income from our investment in A&E Television Networks, as well as the absence of equity losses from our investment in the ESPN STAR Sports joint venture, which we sold in the prior year.

At Broadcasting\ lower operating income was driven by higher programming expenses at the ABC Network, due to write-offs as well as the contractual rate increase for Modern Family. Program sales in the quarter were down compared to last year when we sold Revenge and Army Wives. Ad revenue at the Network was up low-single digits in the quarter as a result of higher rates and increased units sold, partially offset by lower ratings. Quarter-to-date scatter pricing at the ABC Network is running more than 10% above upfront levels.

At Parks and Resorts growth in operating income was once again, due to strength at our domestic operations, as investments at Walt Disney World and the Disneyland Resort continued to pay off. Results at our international operations were up modestly over the prior year, with growth in Hong Kong Disneyland partially offset by a decline at Disneyland Paris. Total segment margins were up 170 basis points in the first quarter.

Growth in operating income at our domestic operations was driven by higher guest spending at Walt Disney World and the Disneyland Resort, partially offset by higher costs primarily related to the continued rollout of MyMagic+. For the quarter, per capita spending in the Parks was up 8% on higher ticket prices and food and beverage spending.

Per room spending at our hotels was up 5%. Attendance at our domestic Parks and occupancy at the hotels were comparable to first quarter last year, in which we saw increased visitation due to the opening of Cars Land at Disney California Adventure and with the grand opening of Fantasyland expansion at Walt Disney World, the last phase of which will complete in a few months with the launch of Seven Dwarfs Mine Train.

So far this quarter, domestic resort reservations are pacing up 7% compared to prior year levels while booked rates are up 2%. As Bob said, Studio Entertainment had a great quarter as a result of the global box-office success of both, Frozen and Thor: The Dark World, compared to Wreck-It Ralph and no Marvel title in the first quarter, last year. Studio operating income was up 75%, driven by increases in our theatrical business and to a lesser extent an increase in home entertainment due to lower distribution and marketing costs partially offset by lower unit sales.

Our Consumer Products' operating income increased 24% and margins were higher by 400 basis points, reflecting strength in our Merchandise Licensing business and continued improvement at Retail. Growth in licensing was driven by the inclusion of Lucasfilm's results, as well as higher revenue from Planes, Disney Junior properties and Monsters.

On a comparable basis, earned licensing revenue for the first quarter was up 5% versus last year and that follows the 9% growth in earned revenue in the fourth quarter. We continue to be pleased with the results of our Retail business, specifically in North America where comp store sales were up due to strong sales of Frozen and Disney Junior merchandise, demonstrating the power of our franchises to drive our Retail businesses as well as the Disney Store's ability to support company franchise.

The North American stores have now posted comp store sales growth for eight consecutive quarters. At Interactive, we had another profitable quarter driven primarily by significant improvement in core gains, and to a lesser extent, continued growth in our Japan mobile business. Higher operating income in core gains was due to strong sales of Disney Infinity, compared to the Epic Mickey 2 last year.

As we look at the second quarter, I want to point out that the Easter holiday will fall entirely in Q3 this year, whereas one week of the two-week holiday period fell in Q2 last year. We estimate the impact of this one week shift on Parks results to be roughly $45 million in operating income, shifting out of Q2 into Q3.

At Interactive, we expect quarterly results to be somewhat lumpy throughout the year and they will largely follow the timing of key game releases. While the segment posted an operating profit in Q1, we expect an operating loss in the second quarter that's comparable to the loss in Q2 last year. We significantly increased our pace of share repurchase during the first quarter by buying back 25.3 million shares for about $1.7 billion. Fiscal year to-date, we have repurchased 33.7 million shares for $2.3 billion.

Overall, we feel great about the start of the fiscal year. Our financial position is strong, and given recent and ongoing investments, we remain confident in our ability to drive growth and thus create value for our shareholders.

With that, we are now ready to take your questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Our first question comes from Alexia Quadrani from JPMorgan. Please go ahead.

Alexia Quadrani - JPMorgan

Thank you. Frozen seems to have had a really incredible staying power at the box-office, still doing so well domestically many weeks after its initial release. Can you help us frame, I guess, both, the benefit we may see to the studio in the March quarter from these box-office results, but also home video release, I believe, in the middle of March, and maybe the longer-term benefits both, in film and maybe Consumer Products?

Bob Iger

Well, we won't give you specific numbers Alexia, but obviously the film's success continues in the quarter that we are currently in, although it was released as you know in November, Thanksgiving weekend, so the box-office is still growing, both domestically and internationally. We are second this past weekend with our sing-along. Internationally, it continues to grow.

We just opened in China within the last 24 hours and we opened in Japan on March 15^th. We had a mammoth opening and a great success in South Korea. It's actually the biggest animated film ever in South Korea, box-office, above $45 million, so we think that bodes well for both, the Asian markets that we are just opening or will open.

It's continuing to drive sales in our stores and across licensing, so it will have an affect there. Clearly, we are having success on the music front, albeit small from a numbers perspective, and this has real franchise potential, so just beyond the quarter that we are in, expect to see not just with new product that we create from Frozen, but expect to see continued interest in this and continued impact on the bottom line for quite a while.

Alexia Quadrani - JPMorgan

Just a related follow-up if I may. Just on the Consumer Products business. Can you size just about, I guess, roughly how big the business is in China? Can that business in general, or should that business in general post the Shanghai opening really have a much bigger opportunity?

Bob Iger

Consumer Products in China is still somewhat small for us. We don't have stores we had some licensing, but by and large the numbers are fairly modest, but they are growing. We do believe that Shanghai will have an impact on the Disney brand in China, which should affect both, Consumer Products, and well actually movies and television post-opening, but we have no idea what that will be, but clearly it is a growth market for us. It's become one of the largest markets in the world from a movie perspective, because of all the added screens that have gone into China. The product will have obviously a big effect on the future of our business there, so we continue to believe and are very bullish in that market.

Alexia Quadrani - JPMorgan

Thank you very much.

Operator

Our next question comes from Doug Mitchelson from Deutsche Bank. Please go ahead.

Douglas Mitchelson - Deutsche Bank

Thanks so much. One for Bob and one for Jay. Bob, I think there was a natural limit to the number of brands each business or one company could support, so maybe it's an odd question but I'm curious if you see any challenges managing these many franchises and any comment about the company's ability to build more franchises at this point?

Jay, did affiliate revenue benefit in the quarter from a higher accrual rate for DISH even though the DISH deal wasn't done and do you plan on ever signing a DISH deal? Thanks.

Bob Iger

I think, we do plan on signing a DISH deal. Look, I think the key brands of the company are ESPN, Disney, obviously, Marvel, Pixar, Lucas, ABC. We are not really looking to build additional brands right now either organically or through acquisition, but these brands all have a lot of growth potential both, by mining them better across platforms and across the world but also by creating new franchises within each brand, so we have already demonstrated. For instance, under Marvel, just how strong The Avengers franchise is, and as my remarks indicated, what impact that has on the individual components Iron Man, Thor, Captain America, specifically.

We are trying and believe we have a real opportunity to create other franchises under Marvel, Guardians of the Galaxy is the next one up which is for next summer or coming summer, so we think that the opportunity for franchise building, given all the characters and storytelling capabilities of these businesses are great for the company.

We don't really have a problem managing the array of brands that we have. We actually think that we are in quite an enviable position. We met recently just to look at our movie slate going forward and everything seems to be fitting in nicely. Meaning, we don't seem to be proud or bumping up against sort of one another within the company and we think that we really are well positioned to take advantage of the marketplace without really creating traffic jams.

Douglas Mitchelson - Deutsche Bank

Okay. Great.

Jay Rasulo

Relative to DISH, Doug, I'm not going to comment on the financial terms of that renewal, but as Bob had said before, we continue to expand our agreement with them as we continue to have productive forward looking conversation that we believe will result in us moving forward with them for the long-term.

Douglas Mitchelson - Deutsche Bank

Jay, specifically I was just wondering if the December quarter benefitted from your estimates as to what the new rate card would be, so in other words the benefit of DISH renewal already begun or is it delayed until a deal is actually signed?

Jay Rasulo

No. I understand your question, but I'm not going to give any guidance on that.

Operator

Douglas Mitchelson - Deutsche Bank

All right. Thank you.

Operator

Our next question comes from Michael Nathanson from MoffettNathanson. Please go ahead.

Michael Nathanson - MoffettNathanson

Thanks. I have one for Jay, and one for Bob. Jay, thanks for giving the pace of all the [slate] affiliate revenue growth or domestic. That's one of my go-to questions, so let me ask this question. There is no real lumpiness in cable networks expansion in the past couple of quarters. If our math is right, this quarter costs were flat for cable in general, so if you talk a bit about expectations this fiscal year for cable expense growth and the phasing of that growth over the next fiscal year?

Jay Rasulo

Sure. Cable program expenses, we expect them to grow in high single digits for the entirety of fiscal '14, and of course that's mostly driven by ESPN. That will be very back-loaded this year, Michael. The reason for that is basically the kick-in of a series of new deals just to tick through the major league baseball, their contract will kick-in in Q3 and Q4, the NFL contractual increase in Q1 '14 and the new deal in Q4 '14 World Cup, which, you know when that is, in our third fiscal quarter and college football Q1 '14 in Q4 and the launch of the SEC Network, which will begin in Q4 '14, so most of those increases will occur in Q3 and Q4.

Michael Nathanson - MoffettNathanson

Okay. Then for Bob, you guys had talked about the cost of MyMagic+ this quarter, but can you give us some indications of how the rollout's going on revenue and customer behavior, because per capita is really good at this point, so what's going on with MyMagic+?

Bob Iger

I can't quantify it from a financial perspective yet. It's still early and we are still rolling out facets of it. What I can say is, that what has been rolled out has been a real success both, for the guest and for us. To give you, for instance, our Parks people in Walt Disney World believe during the peak holiday season that we were able to accommodate about 3,000 more additional guests in the Magic Kingdom per day. Thanks to Magic+.

One of the most attractive features, and one that I think will have possibly the biggest benefit, is the FastPass+, which is the ability to reserve three times on three attractions per day, either before you visited the park if you are a resort guest or on the day that you enter the park if you are a same day or a single day ticket holder. What we are seeing there is substantially higher utilization of that product among our guests than we saw with the traditional FastPass, by the way by a wide margin.

Since the goal of this was to make the guest experience better, enable the guests to experience more, to do some more efficiently and essentially to be able to customize, we think that these are very, very good signs for us, because clearly guest satisfaction is very, very important to the value equation for us both, how they spend their time when they are with us and the determining factor in terms of whether they come back, so, this is all very good.

I'd say the biggest impact is, one, being able to accommodate more people. This is just more efficient. Secondly, enabling guests to have a substantially better experience than they have had before, because they are doing more.

Jay Rasulo

Michael, since you mentioned the higher spending. We reported out 170 basis points, but our margin improvement this quarter, but actually on an underlying operating basis, the quarter is actually even stronger than that because everything that Bob just mentioned we are in rollout, the new initiatives are a drag on our margins almost to the tune of 190 basis points. Now there are some pension benefit in there that we have talked about before at the Parks guest, but when you look at adding back 190 basis points to the 170 basis points we reported, so very strong operating quarter for Parks and Resorts.

Michael Nathanson - MoffettNathanson

Thanks, Jay. Thanks, Bob.

Operator

Our next question comes from Jessica Reif Cohen from Bank of America Merrill Lynch. Please go ahead.

Jessica Reif Cohen - Bank of America Merrill Lynch

Thanks. I guess, at this point, follow-up to some of the questions asked, but Bob just on the film strategy overall, you have such a unique strategy with these very definable brands and each studio I guess doing one to two films per annum, so I was just wondering is there a benefit in terms of marketing cost, because they are focused what you are getting with Marvel or Pixar and what's the effect to other Disney businesses? I mean obviously there is a huge benefit in these franchise from home entertainment and consumer products, but is there somebody like a tie ratio that's it's like a relative improvement that you know is coming because of these kinds of films?

Bob Iger

Yeah. Well, there's definitely benefit on the marketing front. When you put the name Marvel on a movie, we think that it gives us essentially a head start with the audience. Just by the way the anticipation of these of films suggest that, before we even go into the marketplace with the significant marketing spend, awareness among the potential audience is very, very high. Now that's the probably the most obviously when it comes to Star Wars, but I have really been impressed with the early buzz that we're seeing for the Marvel films.

Captain America is just huge now. We are already in the marketplace with some marketing but it has been relatively limited. We had a pre-game, for instance, in the Super Bowl and yet didn't, so to speak, in the interest in The Captain America film, which comes out here in the States April 4^th, seems much louder that it would be for, well, I'll call it non-branded film.

I believe that Marvel, Pixar, Disney, certainly Lucas, Star Wars all basically fall under similar categories. The ripple effect across all of our business from these films is already not only clear, but pretty significant for us and we believe it will only grow in significance.

Frozen probably is a great example. Now, you have seen countless times over the past, where a big franchise animated film has really the ability to lift the number of our businesses. We have gotten that over the last ten years mostly from our Pixar films, the fact that we are starting to generate that form Disney films, Tangled, a great example of that. This is a huge example suggest that we are creating some momentum there. Of course, the consumer products obviously, what we are doing in the bottom line in terms of music, the impact course on home video all big, but for instance one of the characters in Frozen with a host of a Christmas show, the World of Color or the holiday World of Color version at California Adventure, before the movie even opened and there were a huge crowds just to see the character and the movie wasn't in the marketplace, so that ended up obviously helped us - movie came out.

I think that there a, I hate to use the word synergy, maybe the better word is our ability to leverage the success of these characters and franchises not just across the Company, but across the world is, I think, really significant and will only grow in significance.

Also, just a few other things, we announced an Iron Man attraction for Hong Kong. We've talked about developing more Star Wars presence at the park. We don't have specifics there, but I can tell you there is a lot of active development there not just for domestic products, but for some of our international locations.

You will see Frozen in more places than you have certainly seen today. There is much more potential from Marvel in certain products too. What we are doing on the interactive front, I think, is also key. The fact that the Infinity game did so well as great in 1.0, but you can imagine what will happen when we fuel future iterations of that game with an even broader set of our stories, our intellectual property, and our brands. There is just a lot. I know that I sound like a huge cheerleader for the Disney brands, but I obviously, I'm feeling rather enthusiastic today because of these earnings, but continue to feel very optimistic about the potential.

Jessica Reif Cohen - Bank of America Merrill Lynch

No. It's obvious you have a very unique strategy in the [businesses]. Then just my second question on MyMagic+, I know you said the benefit of guest satisfaction, but there must be some benefit to revenue to be able to put a device button, get out of the store, run to doors quickly. Is it showing up in the per cap revenues? On the cost side, how much more is there to go? How much more it is there to go now?

Bob Iger

Well, look, what we spend and how we account for it, I don't really want to get into that. There's some impact on the bottom line, but this is still a very new product, so we are not even close to being able to quantify it. In a public sense, fact, we are actually just learning more about how it's working and what impact it is having on our business today.

I think you may be jumping to conclusions that the per cap spending was the direct result of MyMagic+ at this point, it's still a little bit early. It's possible that it had some impact, but I can't say today that we know for sure that it did.

We do know, as I said, talking to George Kalogridis who runs Walt Disney World, [said] this morning that he really believes that he was able to accommodate 3,000 more people a day in the busiest period of the year in the Magic Kingdom, which is our number one park. That obviously has bottom line value, but we can't tell you what that is.

Jessica Reif Cohen - Bank of America Merrill Lynch

Okay. Thank you.

Operator

Our next question comes from Todd Juenger from Sanford Bernstein. Please go ahead.

Todd Juenger - Sanford Bernstein

Hi. Thank you. A quick one for Jay, and then one for Bob. Jay, just on A&E Television. Last quarter, I think we saw some surprising softness there. This quarter looks to come through particularly strong. Can you just comment like is either quarter more emblematic of how that business is performing or is the right answer somewhere in between? Thanks.

Then Bob, I was wondering what you think about like, what comes next at Interactive. You started talking about it few minutes ago in your fork lifting of all the great brand things at Disney, but you've been marching with a goal of profitability there for a long time and so you have gotten there, so what now? How big can that be? Are there more big products launches like Infinity to come, or do you just keep adding that for a while? Where do you want to take that business over the next X number of years? Thanks.

Jay Rasulo

Thanks, Todd. Starting with AETN. I would look at last quarter more of an outlier than I would this quarter. They basically saw higher advertising revenue driven by shows that you can probably tick off as easily as I can, Duck Dynasty, Pawn Stars, Ax Men, Dance Moms and on Lifetime, they have got some new scripted shows, so that's basically what is driving their success. They had some lower programming and marketing cost this quarter, but in general we are incredibly happy with our investment in A&E and I think that you can continue to look for good things there.

Bob Iger

On the interactive front, Todd, there will be new iterations of Infinity, what that game prove to us is the strength of that platform of basically the game-play itself which was great, and the fact that Disney characters, Disney intellectual property could work on that platform, so that's a big deal, so what's next of course is, new iterations of that, a 2.0 or 3.0 and mining a broader set of our more popular characters.

What we are doing, the rest of Interactive, you will see more licensing rather than publishing on the console side, except for Infinity. We are also basically tracking what we are seeing in the industry, doing a fair amount of work at creating efficiencies and moving off of some of the more traditional platforms into mobile-to-mobile space, mostly for social games and for other casual games. That's a big move for us and some of the announcements that were made this week are indicative of a shift in strategy there to both, reduce our spending in that space and to basically seek to grow the business where the customers or the users are which is more on mobile front.

I think, those are the two, Infinity and then a move to mobile, basically for all our games, the two big trends you will see. Again, all with an eye toward not just being profitable but improving profitability, and no guidance there in terms of how profitable this could become.

Todd Juenger - Sanford Bernstein

All right. Thank you for preempting my call. Thank you, Bob.

Operator

Our next question comes from Ben Swinburne from Morgan Stanley. Please go ahead.

Ben Swinburne - Morgan Stanley

Thank you. Jay, I want to come back to the ESPN comments you made. First, on the expense side, I think you said high single-digit programming cost for the year for the cable segment, so overall mid-singles and you include SG&A and I don't know if you wanted to quantify the U.K. impact on the revenue and line in the quarter, but just trying to get a better sense to serve the organic trends in the ESPN business.

Jay Rasulo

Thanks, Ben. On coming back to the U.K. question, so you know that this was an unprofitable business for ESPN. In round numbers, the impact is about $20 million of benefit to the quarter, and they had round number $65 million of affiliate revenue that flowed to that company and obviously the expenses were higher.

Ben Swinburne - Morgan Stanley

Okay, and you made a comment in your prepared remarks that you were reminding us this is the last quarter of benefiting for some renewals. Are you suggesting there should be a bit of a slowdown in the March quarter on domestic affiliate? I just wanted to ask you a follow-up on that point.

Jay Rasulo

I'm not going to give you a prediction on what those numbers will look like. I'm just saying that we, as of next quarter, will be lapping those. I think it was five affiliate deals that were renewed in prior year.

Ben Swinburne - Morgan Stanley

Got it. Then just lastly, Bob, on the film business, one of the things that's been a headwind in the industry has been home video and I am wondering if you are feeling a little better about the outlook there given some of the successes on digital and EST. Is it sort of too early to get excited, or do you feel that maybe that business, that part of the film business starts to grow from here?

Bob Iger

Well, as at least as we it if you look back on '13 across the industry, you saw a low double-digit declines and I think the number I heard was 13% on the physical sales sides and an increase of about 50% on the digital side. Obviously, on a much smaller base. The result of both was that home video was relatively not flat for, the year. I guess that is a good sign, because the continued deterioration of the physical goods side at least is being mitigated somewhat by digital.

We have been bullish about digital, particularly our prospects in digital, because we think we got brand advantage there by creating destinations on digital platforms before our brands. I think Marvel, Disney, Pixar, Lucas, for instance. We think there will be opportunities either through current digital emporiums, emporia or directly, but I think it's still early in terms of just how significant that all could be.

I think the bottom line is that we are making movies that we believe stand a better chance of doing well in the secondary markets than non-branded, non-franchise movies, particularly movies that are directed at families.

Ben Swinburne - Morgan Stanley

Thank you very much.

Operator

Our next question comes from Anthony DiClemente from Nomura. Please go ahead.

Anthony DiClemente - Nomura

Thanks very much. Couple on ESPN. The 10% ad sales growth in the quarter. Just wondering, Jay, maybe if you could talk about the drivers of that. You were able to grow ad sales through some of the rating softness and just wanted to hear about how are drivers there. Then looking to the next quarter, if we were to kind of exclude the impact from the Olympics that you mentioned in your prepared remarks, what would be recurring ad sales growth of ESPN look like? Thanks and I have a follow up.

Jay Rasulo

Okay. Well, I hate to be topological, but what was really the ad revenue growth are the rates that ESPN received for the ad that sold in its programming and I think I also mentioned, but if I didn't, I will tell you that the units were also up for the quarter and that was somewhat offset by the lower ratings that you mentioned, so that was really the driver there.

Relative to the Olympics, we don't expect there to be a significant impact on our networks from the Olympic period coming forward. Nothing, I would say de minimis, if I were to describe it.

Anthony DiClemente - Nomura

Okay. Just a quick follow-up about the launch of the SEC Network, we would love to hear a little bit more about if you could just remind us about the opportunity there in terms of ad sales growth, affiliate fee growth, and will they be any launch cost associated? You mentioned about the right fees hitting, but are there any other launch costs that we should be mindful of as it pertain to SEC Network? Thanks.

Jay Rasulo

Well, obviously, Anthony, there will be production costs associated with the SEC Network in addition to the rights costs from the conference, but I don't like to predict out of the future in terms of what the rates and subscribers will look like as we ramp that up.

Suffice to say, we are extremely excited about this opportunity. Anyone who is at all interested in college football is well aware of the impact of the SEC, not only in the States that encompass the schools, but more broadly because of their powerhouse nature in college football and we feel great about the opportunity to sign a long-term deal with them.

Anthony DiClemente - Nomura

Okay. Thanks a lot.

Operator

Our next question comes from David Bank from RBC Capital Markets. Please go ahead.

David Bank - RBC Capital Markets

Thanks very much. This question is I guess for Bob. Bob, as improved VOD technology is being deployed and consumer behavior suggests they are sort of poised to [DVR] usage as the preferred method of time shift viewing. Disney and the rest of the existing TV ecosystem have opportunity to sort of out Netflix (Inaudible) you can enable viewers to sort of binge on stacked episodes of the best shows on television and you don't need digital SVOD services, but the issue with the opportunity seems to be that some of the contracts that you all signed with these digital guys limits the amounts of episodes you can stack on VOD. I guess my question is in the long run do you think that structure needs to change, would you like to see full seasoned stacking on VOD? What is stopping that? How do you see it evolving?

Bob Iger

That's a very good question. Our feeling on this first of all that product is differentiated from Netflix, and that Netflix, at least their off network deals offering prior seasoned shows, first of all, for subscription. The VOD largely has look back of five episodes. The demand for essentially a full season which is think is growing, is out there but I think that's an opportunity in terms of monetization for us, either directly from the consumer or by the distributor or from the distributor I should say.

If distributors are going to be given the ability to offer their customers essentially same season, full season stacking then there is a cost associated with this and we expect to get paid for it, again, an interesting opportunity for us. The other opportunity, of course, is a world where consumers do not have the burden of having to set their DVRs for shows and in effect have access to many more shows without having to essentially do something premeditated or before-a-show-airs perspective.

That will increase, in my opinion the non-live viewing of programming and then the question is what is our monetization capability there? Right now, there is some disablement of the commercial skipping in the C3 window, and so we are actually getting ratings for and thus getting paid by advertisers in that window. If consumption increases there and I believe it will because of the availability or the ease of use in that window then I think that monetization can increase as well. That's why I think it's very, very important for us in that window to protect the value of a commercial. Eventually, there will be dynamic ad insertion and that will, I think, result in even more opportunities for IP owners or networks to monetize, but that's just starting.

David Bank - RBC Capital Markets

Okay. Thank you very much.

Operator

Our next question comes from Jason Bazinet from Citi. Please go ahead.

Jason Bazinet - Citi

Thanks so much. This is second quarter in a row. I just wasn't surprised with the strength in your consumer products division and I was just wondering if you may not have this, but is there any rule of thumb you could share with us in terms of the linkage between box-office growth and Consumer Products sales? In other words, if the movie sort of naturally fits towards selling consumer products you will do $10 at box-office, you will do x dollars in consumer products and the reason I ask is my sense is this could be very big as we glide towards Star Wars VII? Thanks.

Bob Iger

Jason, there is no rule of thumb, because it's not really about box-office. Although box-office has an impact. It's about whether the storytelling and the characters easily leveraged or adapted to various forms of consumer products, whether it's toys or books or whatever clothing, you name it, so it's more about that. If you have both, with Frozen as a good case in point, you also play patterns, for instance, Princess.

You've got great characters, you've got great music and you have huge box-office. That's as good as it gets. The Marvel movies tend to fit into that category, as we know, not all at an equal level, but certainly they have that opportunity and then you mentioned Star Wars, of course, that's probably the at the top of the heap. Cars was another great example of that.

Obviously, box-office has an impact because it suggests popularity of characters and stories, but you still have to have the right characters and stories to ultimately monetize on the Consumer Products side. Also, it's not just about movies, it's also about television, so if you look at Disney consumer products today and you look at the last couple of quarters, one of the reasons why you continue to see growth is the success of programs on Disney Junior, which is a platform that we only launched within the last year and it suddenly hit big in terms of interest with young kids two to five, where actually it's done well in ratings even kids older than five, with a number of shows Doc McStuffins and Sofia the first two obvious examples that are very monetizable on the consumer products front.

Jason Bazinet - Citi

Thank you very much.

Operator

Our next question comes from Marci Ryvicker from Wells Fargo. Please go ahead.

Marci Ryvicker - Wells Fargo

Thanks. I've two quick questions. First, it sounds like there was a benefit from the absence of EPSN Star Sports, so how much of a drag was this last year in the comparable quarter? Then secondly, Jay, you mentioned fiscal Q2, there'll be a loss in Interactive and can you just talk about what that's from?

Jay Rasulo

Starting with your second question, our results at Interactive are very tied to game releases. In Q2, we are not releasing any big games. Obviously, you know the division continues in terms of its production capabilities and distribution capabilities, so without the release of a title of significant revenue, we are going to have some downdraft in those quarters. To your first question, relative to ESS, STAR Sports. Look, round numbers, it's about $20 million of drag that we got to release from this quarter.

Marci Ryvicker - Wells Fargo

Great. Thank you.

Operator

Our next question comes from David Miller from Topeka Capital Markets. Please go ahead.

David Miller - Topeka Capital Markets

Congratulations on a stellar results. Bob, I'm just curious if you guys are in negotiations with the domestic theater circuit here, so far on Star Wars. Are you in discussions with these guys about maybe taking advantage of just pent up demand here? A massive amount of pent-up demand, and maybe gunning for more than 52% on theatrical splits or are you just not there yet. It's just too early? Anything you are willing to tell us would be great. Thanks very much.

Bob Iger

We did some new deals with the domestic distributors within the last year. I'm not aware that we are in negotiations now, but we did some deals last year and those deals reflected the strength of our studio slate in the year and years to come, so that would obviously include Star Wars, and there are potentially additional opportunities worldwide, but I can't really comment further on the state of any negotiation or whether there is any negotiation going on.

David Miller - Topeka Capital Markets

Thank you.

Operator

Our next question comes from Tuna Amobi from S&P Capital IQ. Please go ahead.

Tuna Amobi - S&P Capital IQ

Hi. Thank you so much. Bob, with regard to the WATCH Apps, I was wondering if there is any new data points you can share with us and I know you had outlined various avenues to monetize that. If you can update us on which of those you see getting the most traction would be helpful.

Then separately for Jay, your retail business, I believe in North America, clearly I think seems to be outperforming the overall industry for the holiday season. I know a lot of retailers had actually reported lackluster results and you guys have put together some really consecutive streak there, so I'm just wondering what you see as the main driver add or are there any trends that you see in terms of any particular items or [SKUs] that are driving the momentum any kind of color for the future would also be helpful. Thank you.

Bob Iger

To get them to carry the WATCH App and to enable us to monetize them, that's the component of the negotiations that are underway right now, so growth and adoption will come in part from not just consumer demand, but new deals that we cut. We are also seeing some modest advertising growth. We believe that will increase obviously with greater adoption, but also when we start getting more meaningful data from Nielsen on consumption on mobile platforms, so all very positive as we are concerned and clearly the quality of the devices is improving as well both, from a speed perspective, the quality of screens and that's a good sign too.

Jay Rasulo

On your question on North American stores, Tuna, obviously we are very, very happy with the development of our North American retail business. I think, I mentioned this two year in a row every quarter. We have seen ups. You know what? there are a couple of pieces to that.

First of all, you will recall that we have reoriented our stores in our best locations, which are more franchised-focused from what they were before which for lack of a better term, I'll call a more emporium focus. Highlighting franchises that are hot and popular, that's had a definite impact on the results of the Disney Store, and it has resulted not only in quarter-to-quarter higher comp sales, but also higher gross margins across as we get to really front items that have better margins and those items end up getting purchased in part because of how they are merchandised, but you can't forget the power of the franchises that backs those.

Over the most recent quarter, obviously, if I had to pick out a single item, I would say Frozen items were the single-most demanded items at Disney Store, but quickly followed by the power of the Disney Junior properties that have come on amazingly strong. The combination of powerful franchisees as Bob mentioned 10 or 15 minutes ago in terms of the quality that drives consumer products in addition to just better merchandising has resulted in much better results over the last couple of years.

Tuna Amobi - S&P Capital IQ

Okay. That's very helpful. Did the new concept have anything to do with that at all? I know you were starting to roll that out a couple of years ago. Where do you stand with that now?

Jay Rasulo

Yes. That was the first thing I said as we renovated a lot of - we are up to almost a 100 stores now worldwide renovated into IP, what we call imagination park stores, that really reoriented the way we merchandise to highlight franchises of the company rather than being an emporium style, where you might go to find anything Disney.

Tuna Amobi - S&P Capital IQ

Thank you so much.

Lowell Singer

Thanks. Operator, we have time for one more question.

Operator

Okay. Our last question comes from Michael Morris from Guggenheim Securities Please go ahead.

Michael Morris - Guggenheim Securities

Thank you. Good afternoon, guys. Two questions. One is just back on the strength in advertising of the ESPN in the quarter. Can you talk a bit? Most of us believe that advertising on related to sports is more valuable due to the DVR resistant of the content. Can you talk about the relationship in pricing between sports inventory in general and entertainment inventory? Is it much higher on sports inventory and are you seeing the value increase at a faster pace there?

Then secondly, talking about the films in China, you did the production partnership on Iron Man 3. Can you talk about whether or not you think that was a big contributor to the strength that that film had in China compared to the second film in the series and whether you plan to do more partnership like that in the future? Thanks.

Bob Iger

Thanks, Michael. On your question on advertising, look, I am not a 100% sure how to answer that, because obviously there is a wide variety of programming across the ESPN network, some that demand very high rates and some that go on a lesser rates, so I don't know how to compare that head-to-head to the kind of advertising on entertainment product.

There is also the notion of the multiplatform capabilities of ESPN, that, of course, they have sold, we have talked about to you folks are very aggressively in that. Being number one in all, but magazine publishing in terms of platforms, really gives ESPN incredible leverage and advertisers lots of opportunities to take their products broadly to consumers where those consumers live today.

Jay Rasulo

On the China question, the success of Iron Man 3, I think it was mostly due to the film itself and the continued interest in the knowledge of Marvel, and Iron Man, in that particular case. We think that the Marvel brand as it grows in China, bodes well for future films, starting with our next one. I don't think it's a function of necessarily of partnerships.

Michael Morris - Guggenheim Securities

Maybe if I could, just on the first question, ask you it different way. For the same size audience is it more expensive to buy, let's say, a produced sporting event than it is a scripted original program that's because a lot - high quality program. If so, are you seeing a differential in, let's say, those two types of programs expanding as time progresses?

Bob Iger

Not sure if there's easy answer to that. You are selling basically the same size audience or a specific size audience within a demographic. Whether that's delivered in live or whether it's delivered in the C3 window. Now, obviously, C3 is not a selling demographic or a selling point in sports, because it is live but you are basically selling eyeballs whether they are delivered right away or within three days. I don't think you see a diminishment in quality if you deliver the eyeballs live versus if you deliver them within that window.

There are plenty of entertainment programs that are sold on a C3 basis and with comparable ratings do just as well as sporting events. Again, with comfortable ratings. Again, I'm talking delivery of demographics. The advantage of course of live is that it doesn't fall out of the C3 window or the non-monetizable window, it's one of the reasons why we are all are interested in monetizing consumption beyond just three days.

I was looking by the way at numbers for our prime time schedule and I was pretty impressed with the live LIVE+7 ratings. We have got shows that jump over 50% in 18 to 49 delivery in the L+7 rating category, and yet we are only monetizing C3, so that just speaks to more of an opportunity there, but I don't think you are seeing much of a differential in terms of absolute rates, again, for comparable audience delivery sports live versus another program that is not live.

Michael Morris - Guggenheim Securities

Great. Thank you.

Bob Iger

Thanks, Mike. Thanks again everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our website. Let me also remind you that certain statements on this call may constitute forward-statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements.

Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of the variety of factors, including factors contained in our Annual Report on Form 10-K and on our other filings with the Securities and Exchange Commission.

This concludes today's call. Have a good night everyone.

Operator

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.