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The Walt Disney Company (NYSE:DIS)

F4Q06 (Qtr End 9/30/06) Earnings Call

November 9, 2006 4:30 pm ET

Executives

Teri Klein - Vice President, Investor Relations

Robert A. Iger - President and Chief Executive Officer

Thomas O. Staggs - Senior Executive Vice President and Chief Financial Officer

Analysts

Anthony Noto - Goldman Sachs

Doug Mitchelson - Deutsche Bank Securities

Jessica Reif Cohen - Merrill Lynch

Kathy Styponias - Prudential Equity Group

Michael Nathanson - Sanford C. Bernstein & Company

Aryeh Bourkoff - UBS

Lowell Singer - Cowen and Company

David Miller - Sanders Morris Harris

Vijay Jayant - Lehman Brothers

Spencer Wang - Bear Stearns

Imran Khan - JP Morgan

Jason Bazinet - Citigroup

Presentation

Operator

Good day, ladies and gentlemen, and welcome to the fiscal full-year and fourth quarter 2006 Walt Disney earnings conference call. My name is Angela and I will be your coordinator for today. At this time, all participants are in a listen-only mode. We will be conducting a question-and-answer session towards the end of today’s conference.

(Operator Instructions)

Now, I would like to turn the presentation over to your host for today’s conference, Ms. Teri Klein, Vice President, Investor Relations. Please proceed, Madam.

Teri Klein

Thank you. Hi, everyone, and thank you for joining us. A quick note that for your convenience, our investor relations website will provide not only a replay of this call, but also an MP3 file and an archived written transcript of today’s remarks.

Here with us in Burbank are Bob Iger, Disney’s President and Chief Executive Officer, and Tom Staggs, Senior Executive Vice President and Chief Financial Officer. Bob will lead off, followed by Tom, then we will open up the call to you for Q&A.

Let me turn the call over to Bob and we will get started.

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Robert A. Iger

Thank you, Teri, and good afternoon. I am pleased to report that we have had a great year by just about every measure. We posted record revenues, record net income, record cash flow, and record operating income for our 2006 fiscal year, bolstered by a strong fourth quarter performance. In doing so, we delivered our fourth straight year of double-digit earnings growth and continued to improve capital returns.

Our performance is a tribute to a flourishing culture of creative excellence and a clear strategy executed by our strong management team. The creation of high-quality content, the use of technology to expand consumer access, and a focus on growing in international markets forms the core of our strategy. We are also building a portfolio of digital assets to enhance and expand Disney’s creative offerings.

Our goal is to connect more directly with consumers and to have them connect more directly to us, and we are investing in new platforms, making new alliances, and pursuing new opportunities.

We believe our overall strategy can create a self-reinforcing cycle that produces great returns. Key franchises, both new and traditional, appear and reappear across different businesses, platforms, and markets, all along growing in new audiences of multiple generations.

This was patently clear this year with the performance of Pirates of the Caribbean: Dead Man’s Chest, and all its ancillary businesses, from video games to books and Halloween costumes. In terms of global box office, Pirates is the number one movie of the year, and the third-biggest in history, crossing the $1 billion mark.

We expect the DVD and downloadable version available in time for Christmas, as well as Pirates 3, which opens May 25th, and a soon-to-be-launched Pirates online multi-player game, to be successful additions to what has become one of our biggest cross-platform franchises.

While we are proud of our ability to build on an existing franchise like Pirates, we are equally enthusiastic about the long-term prospects for some of our new creative properties, particularly at Disney Channel.

High School Musical has set global performance records across multiple categories, including Billboard’s best-selling record of the year, the top-selling TV home video release of 2006 and, believe it or not, a New York Times bestseller.

We expect High School Musical to assert itself as an even more powerful presence in the coming year. There is a sequel movie, a national concert tour, thousands of licensed play performances in schools and drama clubs across the country, and a new merchandise line.

We are also impressed with the momentum of Hannah Montana, a hit Disney Channel show which yielded the first ever TV show soundtrack to debut at number one on the Billboard Hot 200, where it remains for a second week.

Alongside these newcomers, some of our most beloved characters have also been retaining their vigor. Mickey is starring in Mickey Mouse Clubhouse, a top cable show among two- to five-year olds, and in Kingdom Hearts 2, one of the year’s biggest selling video games.

The Little Mermaid is also capturing the imagination of a new generation, and since its October 3rd debut, some 6 million units of the limited release DVD have been sold, and we believe sales could exceed 10 million units worldwide.

Since we made our movies available on the Apple platform in mid-September, almost half-a-million have been downloaded. This underlines the strength and uniqueness of our film library, and indicates there is a consumer appetite for movie downloads that complements demand for DVDs.

We were also pleased with the Pixar integration. It has spurred tremendous creative energy at the Disney Animation Studios, and brought into our company a wealth of talent and exciting new Pixar projects. I am sure that those of you who have already seen the trailer for next summer’s Ratatouille can see why we think it will enthrall kids and adults alike.

Speaking of Pixar, over 5 million Cars DVDs were sold in their first two days in stores, putting the DVD on track to be the industry’s 2006 biggest seller in the U.S. Cars is already the number one animated movie of the year, and the number two film in domestic box office. We expect to see a holiday boost for Cars merchandise, which has been one of our biggest lines of the year, with retail sales around $1 billion.

At our parks and resorts, we are coming off the highly successful 50th Anniversary Celebration, and we expect continued strong attendance, supported by several exciting new attractions. These include Expedition Everest in Animal Kingdom and the Finding Nemo Submarine Voyage in Disneyland, which opens next summer.

We are also encouraged by the enthusiastic early reaction to the Year of a Million Dreams campaign.

At the same time, we are leveraging the creative skills and operational expertise of our parks and resorts team to expand into new lines of related businesses and into new territories.

Interactive game publishing is another area in which we are bringing to life existing characters and developing new content that crosses multiple business lines. We see tremendous opportunity in the fact that kids and tween games account for about half of the $17 billion annual video game market.

Our Kingdom Hearts game franchise alone has sold over 10 million copies globally, and we are increasing investment over the next several years to publish our own titles, the majority of which will be Disney branded.

The emphasis on great content and innovative application of technology at our media networks is both enhancing the consumer experience and allowing us to reach more people more often. Over the last year, approximately 85 million of our TV shows, movies and shorts have been played or downloaded on iTunes, disneychannel.com, and abc.com. At the same time, both networks, ABC and The Disney Channel, have seen ratings increases.

By airing three of the five top shows on network television, ABC won the first six weeks of primetime in adults 18 to 49, the key sales demographic, marking its most competitive start to any TV season in nearly 30 years, and achieving the best season start of any broadcast network in seven years.

ABC has retained its number one status on Sunday nights with the pairing of Desperate Housewives and our new success, Brothers and Sisters. By moving Grey’s Anatomy and adding new hit, Ugly Better, to Thursdays, ABC ratings have jumped more than 150% among adults 18 to 49 on the night over the comparable point last season.

In addition, approximately 12 million ABC TV programs have been purchased since October, 2005 via iTunes downloads.

Viewers are also able to watch six of our primetime shows for free on advertiser-supported abc.com, starting the day after they air on the network. There have been almost 19 million requests for these episodes since we made them available just six weeks ago.

The multi-platform strategy is reaching viewers in new ways at our cable networks as well, and in the fourth quarter, Disney Channel posted its highest ever ratings for total day and for primetime with kids 6 to 11 and tweens 9 to 14, highlighting our strong slate of original programs, many of which have crossed over to other platforms, like music and merchandising.

Since June, 53 million shows have been played at disneychannel.com, again illustrating that TV viewing and web use can reinforce rather than cannibalize each other when you have a terrific product.

ESPN has evolved into a massive, multimedia machine, with Monday Night Football achieving all-time household audience records on cable. On October 23rd alone, 11.8 million households watched the New York Giants beat the Dallas Cowboys. ESPN led ratings for ad-supported cable last month with an average 3.5 million primetime viewers and a grip on all key male demos. Its success has also sent a surge of viewers to espn.com, and for the first eight weeks of Monday Night Football, we have averaged over 27 million page views each game day.

Our efforts to harness digital technology on behalf of consumers has prompted substantial ongoing upgrades of the espn.com and abc.com sites, and we will take another big step forward early next year by launching an all-new disney.com, already a premier family destination on the web.

Families will be able to enjoy a wide range of Disney content, from shows to movies and games, in a safe and friendly environment. Parents will be able to do everything from arrange a family getaway at one of our parks or on one of our cruise ships to purchasing Disney products. For kids, it will be the ultimate in customizable web networks, where they can watch their favorite Disney shows, play new interactive online games, like Pirates, chat with their friends, and swap music playlists.

The third element of our growth strategy is global expansion. In emerging markets, where disposable income is rising and mass communications infrastructure is growing, we made forcible strides last year to strengthen our market presence, particularly in India and China.

Hong Kong Disneyland is our anchor in China, and earlier this year, the highly successful theatrical run of Lion King introduced Disney to a whole new audience in Shanghai. In addition, we are focusing on retail merchandising through the licensing of thousands of Disney corners at big-box stores, and through the fast-growing mobile entertainment sector.

To expand in India, we acquired a local kids channel, Hungama . Disney channels reach 30 million households and hold the largest share of the children’s TV market. We also recently signed a distribution deal for our consumer products line.

Finally, I would like to emphasize our continued commitment to financial discipline. Our improved return on invested capital is a direct result of combining creative excellence with a sharp focus on bottom-line results.

Our emphasis on creative excellence, serving the consumer and improving the environment at Disney had other benefits this past year as well.

In October, BusinessWeek named Disney as the number one company for new college graduates to launch a career, and we also recently announced that we are putting our brand and characters to work in favor of healthier food options for kids at our parks and in our licensed consumer products here in the United States.

In coming months, we look forward to rolling out that initiative globally as well.

We made great progress in fulfilling the pledge made last year that Disney would be admired for its performance, for the quality and integrity of our products and people, and for being modern, innovative, and willing to take intelligent risks. We look forward to building on that pledge in 2007.

With that, I would like to turn the call over to Tom Staggs to provide more detail on the quarter and the year.

Thomas O. Staggs

Thank you, Bob. We began our 2006 fiscal year with a set of high goals and performance expectations, and it is a pleasure to report that we have exceeded them across the board.

We have discussed in the past that we use three key financial metrics in assessing our overall performance, and as a means of gauging how well our strategic initiatives are translating into delivering value to our shareholders. They are earnings per share, ROIC, and after-tax cash flow.

In 2006, we delivered earnings per share growth of 34%. We boosted return on invested capital for the fourth year in a row, and we delivered record after-tax cash flow from operations of over $6 billion, and record after-tax free cash flow of over $4.7 billion.

Creative success and innovation, especially around branded products with franchise potential, are the critical factors that drive our company’s performance. The huge success of Pirates of the Caribbean, Narnia, and Cars were obviously the highlights of our year at the studio, and we expect each of these properties to have a positive effect on our company for years to come.

At our live action business, we have reduced our overall investment levels and sharpened our focus on a smaller number of releases. In feature animation, the incorporation of Pixar adds to our already unparalleled library of animated content. At home video, greater efficiency on our marketing and distribution drove improved results for both the quarter and the year.

At our media networks, ESPN delivered double-digit growth in both revenue and operating profit for the fourth quarter and for the year. ESPN’s ratings were up by 22% in households for total day, and 20% for primetime in Q4, led by the success of Monday Night Football, which is generating significant ratings gains and double-digit CPM increases versus last year’s Sunday night games.

In the fourth quarter, we also recognized $87 million more in deferred affiliate revenues at ESPN than we did in Q4 of last year.

Our media networks results were dampened somewhat in the fourth quarter, largely because of launch costs for Disney Mobile and a $32 million impairment charge for FCC licenses, primarily associated with our ESPN radio stations.

However, for the year, ABC’s ratings success led to substantial growth in operating income with the network, making it the biggest contributor to broadcasting’s 31% growth in 2006.

We are seeing solid scatter sales for the network again in Q1, with primetime CPM’s pacing ahead of 2006 up-front levels by low- to mid-single-digits, which is generally consistent with what we saw last quarter as well.

At our television stations, Q4 ad sales were up by low-single-digits, but so far in the December quarter, TV station ad sales are up by double-digit percentages, spurred by political advertising.

At our theme parks, outstanding results again provided evidence of the significant, sustainable competitive advantage we have nurtured and reinforced in this business. Parks ended 2006 with operating profit up 30% and margins up 240 basis points to 15.5% on a consolidated basis.

Excluding the effect of consolidating Disneyland Resort Paris and Hong Kong Disneyland Resort, margins increased to just over 19%.

Given the success of the 50th Anniversary Celebration in Q4 of last year, our combined domestic parks attendance came in flat for the quarter, as a 7% decline in Disneyland was offset by an increase of 5% at Walt Disney World. However, guest spending at both our east and west coast parks grew by 4%.

Disneyland resort occupancies were off somewhat to a still strong 92%, while occupancies at Walt Disney World increased to 83%.

Per room spending increased by 5% at both our Disneyland and Walt Disney World resorts.

Looking ahead, rooms on the books at our combined domestic parks are trending in line with the prior year for the December quarter, which is encouraging, given that we had record holiday attendance during this quarter last year.

Results at our international theme parks in Q4 reflected increased attendance and guest spending at Disneyland Resort Paris, as well as a full quarter of operations at Hong Kong Disneyland versus two weeks in the prior year.

At consumer products, we again delivered meaningful gains in our merchandise licensing business. The strength of our Cars, Princess, and Pirates lines helped drive double-digit increases in earned royalties for the year, which is a key indicator of a thriving licensing business.

As expected, our ramp-up of development spending in video games dampened our overall consumer products performance.

Our performance in 2006 set a high bar, but we go into 2007 with a great foundation and confidence that our strong operating performance will continue. More importantly, we will invest more in programming and other initiatives that we are optimistic can drive longer-term performance in capital returns.

As we’ve discussed in the past, our goal is to highlight for you the key swing factors that could impact our performance, rather than give specific earnings guidance for any particular quarter or year.

Bob talked about our strategy of creating and leveraging strong content across different businesses and platforms, and in 2007, our business will reflect this approach. At our studio, for example, we have the Q1 release of Pirates 2 and Cars on DVD, as we continue to capitalize on the success of these hit films.

The two most notable theatrical releases for next year in terms of both investment and our expectations are obviously our third installment of Pirates of the Caribbean and the new Disney Pixar film, Ratatouille, both of which come out next summer.

Other key titles in our 2007 slate include Déjà Vu, from producer Jerry Bruckheimer and starring Denzel Washington, which comes out in two weeks; Wild Hogs, coming this spring with Tim Allen and John Travolta; and our next Disney feature animation release, Meet the Robinsons, opening at the end of March.

Our outlook for consumer products also anticipates that the popularity of the Pirates and Cars properties, added to existing franchises like Princess, Mickey and Pooh, will drive another year of robust growth in earned royalties. However, we expect that a $70 million decrease in minimum guarantee recognition in fiscal ’07 versus what we recognized in 2006 will make comparisons difficult for the segment overall.

In media nets, assuming continued strength in the ad market and our ratings, we believe we can generate solid profitability growth, led once again by ESPN and the ABC Network. We have already taken steps to fortify ESPN’s lineup with Monday Night Football, and our NASCAR event coverage begins in February.

We will also continue to invest in our creative pipeline, and with this in mind, in 2007, we are allocating resources to new content development at our Disney channels around the world, at ABC Family, as well as the new digital initiatives like Disney Mobile and disney.com.

In total, we believe that our Internet and download revenues could total approximately $700 million in fiscal ’07.

As Bob indicated, we are increasing our investment in video games, with roughly 30% more in development spending expected in fiscal 2007 than in 2006. Video games represents an important long-term growth opportunity for us, with the potential for very attractive returns on our investment. Looking ahead, we are targeting an increase in our annual video game development investment to roughly $350 million over the next five to seven years.

At our parks, we believe that the Year of a Million Dreams Celebration can help drive attendance across our properties. With the strength of our assets and competitive position, and given a positive economic climate, we remain confident in our ability to deliver continued growth in our parks business.

We will also see an approximately $190 million decrease in pension and post-retirement medical expense next year, due to the increase in the discount rate used in calculating these expenses. The biggest portion of that reduction will benefit the parks.

Our Pixar transaction closed more than half-way through fiscal ’06, meaning we will see a substantially greater dilutive effect from that deal in fiscal ’07, a portion of which will be offset by our share repurchases.

We had about $0.05 per share in favorable tax impacts in 2006 that we do not expect to recur in 2007, related to the declining FISC-ETI benefit that we have discussed in prior disclosures.

With regard to our pending radio transaction, we have had discussions regarding possible modifications to the agreement to facilitate Citadel’s post-closing financing. We would now anticipate closing the transaction in the first-half of calendar year 2007. Upon completion of the transaction, the portion of our radio assets involved will be treated as discontinued operations. Accordingly, financial results for the assets included in the deal would be excluded for all periods. These assets represented roughly $0.04 of our 2006 EPS.

Our cash flow generation in fiscal 2006 was extraordinary, and it reflects our commitment to maximizing the cash efficiency of our operations and our balance sheet. This year, we generated after-tax free cash flow per share well above our after-tax earnings per share. Although we will continue to generate substantial after-tax free cash flow, that disparity is unlikely to continue. Much of the difference comes from our move to decrease our overall investment in live-action film, the timing of certain spending and amortization expenses, and timing and improvements in our working capital.

In 2007, we also expect an increase in our overall capital expenditures in the neighborhood of $400 million to $500 million. Roughly half of this increase will occur at theme parks, and the majority of the rest will be related to digital initiatives at media networks.

In past earnings calls, we have laid out our priorities for investing our cash flow. Our first choice is to invest in existing or new business opportunities that can generate growth and strong returns.

Our second preference is to use cash for share repurchase and dividends, and it is likely that our free cash flow will afford us the opportunity to continue returning capital in this way.

In 2006, our strong cash flow and financial position allowed us to aggressively repurchase our stock.

At the time of the Pixar transaction, we indicated that we would be aggressive in buying our stock and we are well ahead of the pace we set at that time. During the year, we repurchased 243 million shares of Disney stock for $6.9 billion, with 96 million of those shares purchased in the fourth quarter. In fact, over roughly the last two years, we have repurchased nearly $10 billion worth of our stock, while at the same time strengthening our financial position.

Our repurchase activity reflects not only our discipline in returning cash to shareholders, but also our confidence in our ability to grow shareholder value over time.

We also target modest sustainable dividend increases and we will recommend that the Board continue that pattern when it meets at the end of this month.

In 2006, our efforts resulted in unquestionable success. We are obviously pleased with those results, but we are by no means complacent. In fact, we are more focused than ever on continuing to expand and capitalize on our company’s strength to deliver growth and value to our shareholders in fiscal 2007 and beyond.

Now, we would be happy to take a few questions.

Teri Klein

Thanks, Tom. Operator, we are ready to take the first question, please.

Question-and-Answer Session

Operator

(Operator Instructions)

Your first question will come from the line of Anthony Noto with Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you very much. Tom, in the swing factors that you mentioned, you did not mention syndication revenue, and in the past, you have talked about $1 billion of syndication revenue over five years. Could you talk about how this impacts the spread between ’07 and subsequent years?

Bob, at our conference in September, you had talked about the disney.com initiative. Could you talk about the progress you have made against that and when it may launch and what the prospects are in 2007? Thank you.

Thomas O. Staggs

Sure. Anthony, with regard to syndication, we have said that the shows that we have on the air and that we own, we did expect to generate over $1 billion in contribution to earnings, to operating income over the five-year period and we still believe that to be the case.

We had a large amount of availability in 2006. We probably have a little bit less availability in 2007, so I do not think that it is -- it is not a ramp-up year to year that we would project at this point.

I think you will see strong syndication contributions across the period of the next four or five years, anyway.

Robert A. Iger

Regarding disney.com, a rather extensive project is underway that began mid-year, mid calendar year, and should conclude some time after the first of the year that will result in a relaunch of the site that is going to have extremely robust features in shopping, television, movies, travel, music, social networking, and community.

It will be highly customizable, particularly for different demographic groups, extremely robust in terms of its ability to support new media, and basically state of the art in terms of general features and utilities.

I am extremely excited about the progress. It has been a company-wide effort. All the business units are behind it. It is going to offer consumers a fairly deep and convenient or seamless experience on all things Disney, and we will be revealing more of its features and all the details some time after the new year.

Teri Klein

Thank you. We will take the next question, please.

Operator

Your next question will come from the line of Doug Mitchelson with Deutsche Bank Securities. Please proceed.

Doug Mitchelson - Deutsche Bank Securities

Thank you very much. My questions are on ESPN, but I was also wondering if anything has changed since last quarter regarding the impact on Disney of the potential options back-dating issues at Pixar from prior to its acquisition.

Looking at ESPN, just two clarifications as we look out into ’07. You added NASCAR programming again this year. I am wondering how much the impact on costs might be and how the amortization schedule for that contract will look. As you are headed towards the finish line potentially with negotiations with Comcast, should we expect any change in the base rate charge for ESPN, or just a change in how fast its rate grows going forward? Should we expect another round of affiliate revenue deferrals as the new contracts are signed? Thank you.

Robert A. Iger

Doug, that was a three-in-one question. You were asked by the operator to only ask one question.

With regard to your first question, it has been widely reported in the press that many companies have received inquiries from the SEC and the Justice Department related to stock option grant practices. We too have received such inquiries related to stock option grants at Pixar prior to the acquisition. Our Board is conducting an independent review of them.

However, as we previously said, we are not aware of any basis under which stock options that were issued by Pixar would have a material impact on our financial statements.

Tom will handle your question about NASCAR. Before he does, on Comcast, we are in the final stage of the negotiations. It is actually possible that a deal could be signed within the next week. The details are at this point not something we are going to disclose, except that what we have said in the past in terms of a general rate structure remains. I am actually really pleased with where we are, because I think this gives us the ability with Comcast to expand our businesses together, and points to what I think is going to be a very healthy relationship in the future.

It is clear that their investment in technology, not just in their standard business but in their new businesses, particularly broadband and the phone service area, provide us with significant opportunities as the owner of great brands and great content to really expand our relationship with them and to provide services to their customers that is going to be great for both companies. We are really looking forward to concluding the deal and really looking to a future that I think is going to be pretty interesting.

Thomas O. Staggs

With regard to NASCAR, I would anticipate at this point that the accounting treatment for NASCAR will, like football, be a gradual increase over time. The payment stream for NASCAR has modest increases, and the amortization will therefore mirror the payment stream.

I think one thing to bear in mind is that we have a big chunk of the NASCAR season in fiscal 2007, but not a whole season.

Teri Klein

Thank you. We are ready for the next question, please.

Operator

Your next question will come from the line of Jessica Reif Cohen with Merrill Lynch. Please proceed.

Jessica Reif Cohen - Merrill Lynch

I would like to follow-up on something Bob said, and then ask my question, so I hope the first one doesn’t count. Bob, what you just said about Comcast, could you do an exclusive -- it sounds really interesting. Can you do anything exclusive, meaning no other provider could have what you will offer them?

Robert A. Iger

As you know, Jessica, our general approach has been to pursue non-exclusive relationships with distributors, but I think this is going to contradict that a little bit. You should think about our relationship with these distributors in a way that might be analogous to our relationship with mass retailers, in that we do business with all of them, and then in general, the overall relationship is not exclusive, but we create products that are unique to each relationship, in effect exclusive, that give these retailers the ability to sell things that others cannot sell.

A good example of that would be the Classic Pooh line that we have with Target, where they have some exclusivity, but we sell Pooh products to all mass retailers.

What I think you could think about in terms of Comcast is that access to our main products, ESPN, The Disney Channel, et cetera, will be non-exclusive, but the possibility of creating something that is unique just to that relationship with Comcast that they could use as a differentiator is something that we are going to explore.

Jessica Reif Cohen - Merrill Lynch

Thank you. Okay, here’s my question. On Disney Channel, you have had really an incredible amount of hits over the last few years. Are you prohibited by your cable contracts from offering advertising? Given the ratings growth, would you reconsider that, if you can?

The amount of number one music titles in the last couple of months has also been astounding. Could you break out that music number?

Robert A. Iger

The Disney Channel carriage agreements which, particularly when we close Comcast and we eventually get Time Warner done, are all long-term deals. They do preclude us from selling advertising in the traditional way. They do give us the ability to create some relationship with sponsors that I will call PBS type advertising. We are not really considering changing that structure because the fee structure that we have negotiated for the channel is rather significant, and we like the fact that it is in effect a guarantee that does not fall prey to competitive issues or the ups and downs of an advertising market.

However, given the success that we have had with Disney Channel programming, and given how incredibly successful our efforts on new media platforms are turning out, particularly disneychannel.com and ultimately disney.com, we have the ability on those services to convert usage to advertising. We are starting to see a very, very exciting trend in that regard. That is also true, by the way, at abc.com, where we are growing our advertising very, very nicely on our streaming on abc.com.

When we look to the Disney Channel, again we see basically status quo with no advertising but a pretty high rate structure compared with the rest of the business, and then basically using content fairly aggressively on new media platforms to grow revenue in that direction.

On music, I will let Tom talk to the numbers, but one of the things that is very exciting, particularly as we focus on the Disney brand and the kind of programming that we are creating, is that we are creating business opportunities that go well beyond the platform that the product is originally created for. Obviously that was true with Pirates, which was a theme park attraction, and look at what is done with that.

But something like Hannah Montana or So Raven or The Suite Life of Zack & Cody, and a number of other programs -- High School Musical a great example of that, a product that we find we have the ability with the Disney brand to essentially exploit in many, many different ways, and music is one way. The success this past year has been extraordinary and we are really focused on growing that in the future.

We think we have created a very interesting formula to be successful in music, and it is Disney branded. I think there are some interesting opportunities there.

Thomas O. Staggs

I think that music has become more important to us and Bob Cavallo and his team have done a great job of building up that business. It is less than 10% of the growth at the studio was represented by the growth in music, so it is still a relatively small piece, but it is important piece, and as Bob said, one that we hope to grow over time.

Robert A. Iger

There is also a great synergy when it comes to music between the Disney Channel, disney.com, Radio Disney, and the Disney Phone. There will be very, very robust music offerings that in effect tie into one another across all those platforms.

Teri Klein

Thank you. We are ready for the next question, please.

Operator

Your next question will come from the line of Kathy Styponias with Prudential. Please proceed. .

Kathy Styponias - Prudential Equity Group

Thank you. Tom, I am wondering if you could just break out for us, from ’06 to ’07, what you expect to spend incrementally for both video games and for Disney Mobile? I know you said that you expect to spend an incremental $350 million, but that is over the next five to seven years. What kind of impact should we expect in the coming year? Thank you.

Thomas O. Staggs

I mentioned in the prepared remarks that we would be up about 30% in spending in 2007 in video games, and that is off a base in 2006, it was around $100 million. It is about a $30 million increase in the development spend there. As you know, Kathy, we amortize the development spend as it is incurred, and so that will dampen the profits at games and consumer products as a whole, because a lot of what they are spending on is for future release, post 2007, so that has an impact.

With mobile, I think the thing to think about is that we are ramping up the spending at Disney Mobile. It just launched late this year, but it will be, when you look at the media networks line as a whole, it will be offset by the decreased spending at ESPN mobile, because we have transitioned that into a part of our licensing business, so that will not be a driver of year-over-year increased spend on a combined basis in mobile.

Robert A. Iger

Kathy, since you brought up games, what we are trying to accomplish is to basically build a Disney branded game business, and we have been buying or building developers. We actually just announced such yesterday, a developer that will be located in Salt Lake City called Fall Line that is going to be focused on making Disney branded products for the new Nintendo Wii platform, as well as for the Nintendo DS platform.

I mentioned in my remarks that a very large portion of the games business is a kid and tween business, and we have a huge number of Disney assets, both new and what I will call library assets, that we can exploit in games. Kingdom Hearts is certainly a great example of that, all the activity for Pirates, and ultimately all the things we will be able to do in animation.

Our goal is ultimately to end up with a significant games business, and we believe we will be able to do so by deploying the strategy that we have been deploying these last few years, which is essentially build organically and make opportunistic, relatively low-cost acquisitions versus being in the market to buy a large, existing game publisher.

Teri Klein

Thank you. We are ready for the next question, please.

Operator

Your next question will come from the line of Michael Nathanson with Bernstein. Please proceed.

Michael Nathanson - Sanford C. Bernstein & Company

Thank you. I have one for Tom. Tom, you mentioned that you are going to spend about $400 million more in cap-ex at theme parks this year. I wonder, where is that investment going? Should we be assuming that this is a new level of spending that will continue, or is it incremental?

Thomas O. Staggs

The $400 million to $500 million increase is actually for overall capital expenditures, so I am glad you asked this so we could clarify it, in case I was not clear before. That is total company. Roughly half of that increase is at theme parks, and predominantly that is spending on new attractions, as you would suspect.

The theme park capital expenditures domestically were only a little bit over $600 million, so I would expect the run-rate of those numbers to be a little bit higher than that. As we have said before, we expect spending at our domestic parks to be meaningfully under $1 billion, as vague as that might be. I think the trend that you are seeing here get us back up so comfortably under that $1 billion mark.

The biggest piece of the remainder of that capital expenditure increase is really on new media initiatives, ESPN taking up a big chunk of that, as we continue to invest in its cross-platform capabilities as Bob discussed in his comments.

Teri Klein

Thank you. We are ready for the next question, please.

Operator

(Operator Instructions)

Your next question comes from the line of Aryeh Bourkoff with UBS. Please proceed.

Aryeh Bourkoff - UBS

Thanks very much. Good afternoon, guys. Could you confirm that for fiscal ’07, you are targeting double-digit operating income growth at ESPN? I know you do have some costs with the sports, but can you achieve that?

Secondly, for Bob, could you talk about which areas of digital media revenue, you mentioned the numbers in ’07, are you most excited about in terms of maybe breaking out some of the key components of that digital media revenue number? Thank you.

Thomas O. Staggs

We have said in the past that we are targeting double-digit growth for ESPN on average from 2004 through 2009. We purposefully speak in terms of average growth rates because year over year variables are hard to predict over the long run, and we do not like to give guidance in the first place, so we give it somewhat begrudgingly.

Having said all that, we expect another year of strong growth from ESPN in 2007 that is generally consistent with that overall goal.

Robert A. Iger

In terms of the growth in our digital media business in ’07, we are expecting growth to come in multiple directions, from downloads and streams, from advertiser-supported experiences to purchases. I am not going to point out any one aspect that might grow faster than the others, except that we believe we will see significant growth. I mentioned the number of numbers in my opening remarks.

To put it in perspective, just on the advertising side, ABC -- which has been streaming shows really since May, they did if for a month in May and they have been at it regularly since September -- has experienced over 19 million streams requested of six television programs. We have assembled a group of about 36 different advertisers to sponsor those shows, one advertiser per show. The CPM rate, now admittedly it is early, is four to five times the CPM rate in delivery of adults 18 to 49 in primetime, which is a rather significant number.

That comes because one, there is a rich, rich demographic associated with it -- younger, higher income, but secondly, the recall rates of advertising are tremendous. We said after the May experiment that over 85% of the people that watch the streams remember the advertiser that was in those streams. That obviously provides advertisers with value that is just tremendous.

We believe, particularly as we build out our capability, abc.com, espn.com, disney.com, that the ability to grow advertising online for these media assets is significant. At the same time, we have done extremely well on the iTunes platform. We have launched on two other movie platforms and given some of the announcements that have been made this past week, we believe we will have opportunities to sell movies and television shows on many other new platforms, and since those deals are not exclusive and we are taking basically a platform agnostic approach, our growth in what I will call purchases is going to increase substantially too.

Lastly, an aspect of these cable deals that we are excited about is video on demand for both movies and television shows. On the movies side, there will be purchases. On the TV side, it will be a combination of advertiser supported and purchased, and again we think we have some interesting opportunities to raise revenue, both from a pay-per-view experience as well as from an advertiser experience.

Teri Klein

Thank you. Next question, please.

Operator

Your next question will come from the line of Lowell Singer with Cowen and Company.

Lowell Singer - Cowen and Company

Thank you. Tom, I just have two quick modeling questions. Could you talk at all about what you expect your tax rate to be in ’07? Do you expect a similar pattern of deferrals at ESPN as we have seen the last few years?

Thomas O. Staggs

Sure. I think that, as I mentioned, the FISC-ETI benefits, which deals with extra-territorial income, those are being sunset. So the biggest driver for a change in the tax rate over this year is really what amounts to about $0.05 a share that comes from FISC-ETI that we saw in 2006 that we will not see in 2007. That will be the biggest driver of change. As you can imagine, that drives up the rate by several points.

We also had some settlements of prior tax matters as we broke out in our prior 10-Qs. That has an impact as well. So you will see an increase in the tax rate. It is a bit early in the year to predict an exact rate, but something close to that 37% range that we have talked about in the past is being about where we would come out.

You asked about ESPN deferral. Because of growth in the affiliate rates and the fact that we are looking at, we have new contracts to be signed, and this can vary depending on when we might complete the discussions with Comcast and with Time Warner, sitting here today, I would expect that roughly $180 million more in revenue would be deferred from the first-half of the year to the second-half of the year than we deferred in fiscal 2006.

That gives you a rough order of magnitude. It could be impacted by the timing of deals.

Teri Klein

Thank you. Next question, please.

Operator

Your next question will come from the line of David Miller of Sanders Morris Harris. Please proceed.

David Miller - Sanders Morris Harris

Hi, congratulations on the stellar results. Tom, two brief questions for you. Children’s Place I believe will begin to pay royalties to Disney in the second anniversary of the closing of that deal, which I think is the current quarter. If you could refresh my memory as to what the formula of that is, that would be great.

At this point, given where Disney stock is and given current market conditions, are you favoring a spin-off or a split-off, or a combination of both with regard to Radio Spinco? Thanks very much.

Thomas O. Staggs

With regard to the Children’s Place, you are right. The royalty holiday does sunset this year, and as they have disclosed in their documentation, the base business has a 5% royalty to it, online revenues are a royalty of 10%. We haven’t made any predictions about what that will come out to be, and of course, they are ramping up into an important holiday season, so it would be premature for me to do that anyway.

With radio, I guess the core of your question is spin versus split. We said that when we get down to near the closing of that transaction, we would make a final determination on the spin versus split.

I do not want to make too big a deal out of it. We will make the decision at that point in time. Either one, we are distributing the value of that business to our shareholders on a very tax-efficient basis. The tax treatment is basically the same, so either way, it is a very efficient way to distribute the value of that business and that deal, so we think we will make the decision down the road.

Teri Klein

Thank you. Next question, please.

Operator

Your next question will come from the line of Vijay Jayant with Lehman Brothers. Please proceed.

Vijay Jayant - Lehman Brothers

Tom, in terms of your hotels, given your occupancy is pretty high, when do you start thinking about expanding in rooms? How much before they sort of come online do you need to plan for that?

If I may, on a second question, on Pirates of the Caribbean, given they were filmed together, is the cost in ’07 versus the third movie compared to the one in ’06, is it equal? Is it proportionately higher in one year or the other? Thank you.

Robert A. Iger

In terms of your first question, we have not announced any additional expansion of rooms. We did announce an expansion of our vacation clubs, but that is a different business.

As you mentioned, we had an excellent year from an occupancy perspective. In fact, and I found this to be a very interesting fact, we had the largest on-site population in Orlando as a percent of the total Orlando hotel occupancy in 2006, so we are obviously utilizing our investment in hotels quite well.

We will take a wait-and-see approach in terms of further expansion. We have been focused a lot on the family suites business. We added about 200 family suites to a hotel called the All Star in Orlando. They have done extremely well. We are going to look for opportunities to build out more family suites, because of the trends that we are seeing in that business.

At the moment, no definitive plans to build new hotel capacity. Again, we had a great year this past year, helped a lot by the 50th anniversary. We believe heavily in our Year of a Million Dreams, but no immediate need right now to add more capacity.

The other thing I want to point out is one of things we have done in terms of growth is we have taken market share, obviously, and a lot of that has to do with the strategy that we put in place a couple of years ago, which was both a pricing strategy and a strategy that had us adding on all kinds of essentially new benefits to guests who were staying in on-property hotels versus off-property hotels. That occupancy fact that I mentioned earlier is clearly a result of a strategy that is definitely working.

Thomas O. Staggs

The important thing that I would add is that we were successful in bringing people on property, so new hotels is something we study, but as Bob said, we will continue to study it and make the move when and if the time is right.

With regard to Pirates 2 versus Pirates 3, it comes as no surprise that Pirates 2 was an expensive film. Pirates 3 will also be an expensive film. We studiously avoid giving out the exact numbers. Pirates 3 will be somewhat more expensive than Pirates 2.

The good news really is that Jerry Bruckheimer, Gore Verbinski, and Bruce Hendricks, who manage production, do a great job and made sure the spending ends up on the screen, and that really showed up in Pirates 2. We think it is going to show up again in Pirates 3. We think it is money well spent and we are kind of looking forward to the summer.

Teri Klein

Thank you. Next question, please.

Operator

Your next question will come from the line of Spencer Wang with Bear Stearns. Please proceed.

Spencer Wang - Bear Stearns

Thank you. Good afternoon. Just one question on advertising. Tom, if I take out the $171 million in deferred affiliate revenues, it looks like the organic revenue growth was 6% to 7%. So if affiliate revenues were up low double-digits, does that mean that ad revenues were flat to low single-digits? Similarly, just on broadcasting, why was the revenue growth only 1.4%? Thank you.

Thomas O. Staggs

I think you are looking at a couple of different things there. One is that in the fourth quarter, there was $87 million more recognized in deferred revenues than there was in the prior year, so I think the organic revenue growth might be a little higher than the one that you have said.

We talked about the fact that there were moderating growth rates in affiliate revenue, but we also talked about the fact that they were prompting our ability to translate the growth rates we are going to see into continued strong results at ESPN, so I feel pretty good about that overall. I think we are in good shape there.

Broadcasting as a whole in terms of the revenue growth, I think that one of the most important things to remember is that there was Monday Night Football in the year and in the fourth quarter last year, and the fourth quarter this year did not have Monday Night Football on ABC. So Monday Night Football comes with a lot of revenues, but a lot of costs, so that makes the year-over-year revenue comparisons difficult.

Teri Klein

Thank you. We will take the next question, please.

Operator

Your next question will come from the line of Imran Khan with JP Morgan. Please proceed.

Imran Khan - JP Morgan

Thank you. One question for Bob and one question for Tom. Bob, you talked about 0.5 million download on iPod. It has been reported that Wal-mart and Target are a little uncomfortable with your iPod initiatives. I was wondering, have you heard anything from them and if so, how you tried to balance that with the very high margin business that you generate from Wal-mart and Target?

Secondly, Tom, you had a very strong ratings on ABC. I was wondering, could you give us some color, how should we think about ABC margins? Thank you.

Robert A. Iger

In general, our relationship with mass retailers is actually very strong, which is evidenced by both our growing DVD business, as well as our growth in our consumer products business. We are in a lot of discussions with a lot of different retailers about their own digital download capabilities, and we actually expect to cooperate with them when they launch such services.

Clearly the digital download initiatives, particularly movies, has created some tension over issues like pricing and windowing, but we ultimately believe that tension is going to dissipate over time as we learn more about how the business is impacting the consumer.

I also want to emphasize that Disney’s presence at mass retail is sizable. It comes in many different forms. In general, we have seen great growth, both in our direct to licensing relationships with mass retail and our relationships through third party licensees at mass retail.

The sale of Disney DVDs at mass retail is very, very, very robust these days. If you look interestingly enough at the last year and you look at the top 10 video titles, a number of them were Disney. Narnia was clearly one of them, and so was Little Mermaid, but Bambi and Lady and the Tramp are in that number as well. The Disney DVD business at retail is in good shape.

We have not seen any impact, by the way, that is negative or cannibalistic from our download experience, and actually believe that we are growing market share rather than moving business from one platform to the other.

Have we had discussions? Yes, absolutely. In general, though, I think our relationship with these retailers is in good shape.

Thomas O. Staggs

With regard to ABC margins, I think I would offer up a couple of things to think about. Number one, as I mentioned before, Monday Night Football came off of the network, and that is important obviously from a revenue standpoint and from a margin standpoint, because we lost money on Monday Night Football on the network. Last year, we also had the Super Bowl, and I think the way to think about the Super Bowl is that it had a bunch of revenue associated with it that when you combine the network and the television stations, that was offset by the rights costs.

The other thing I would mention is that we had good results in the up-front. We continue to have strong ratings, and so far we have had a robust spot market, so that all bodes well. The other piece of the equation I think is that if you look at programming costs, the average cost per hour of entertainment programming for ABC in primetime should be about even this year versus last year, so that is going to give you -- all those combined gives you the opportunity for strong margin improvement at ABC this year.

Teri Klein

Thank you. We have time for just one more question.

Operator

Your final question will come from the line of Jason Bazinet with Citigroup. Please proceed.

Jason Bazinet - Citigroup

Thanks so much. Given the appreciation in your share price over the last year or so, I was wondering if there has been any change in thinking in terms of your preference for dividend over share repurchases at all? Thanks so much.

Thomas O. Staggs

We like both, by the way, and I think you should expect us, as I mentioned, to recommend an increased dividend to the board. It is, of course, for them to consider and determine.

I think you should also expect us to continue to be buyers of our stock, despite the run-up, given our outlook for long-term value growth. We do not tend to be short-term stock watchers. We like to think of our value in a long-term basis. I think that makes us very comfortable today with a continued repurchase program and our strong cash flow.

Teri Klein

Thank you. Thank you again for joining us today. Note that a reconciliation of non-GAAP measures referred to in this call to equivalent GAAP measures can be found on our investor relations website. Let me also remind you that certain statements on this conference call may constitute forward-looking statements under the securities laws. These statements were made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements were made, and management does not undertake any obligation to update these statements.

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

This concludes Disney’s fiscal year-end 2006 conference call. Thank you.

Operator

Ladies and gentlemen, we thank you for your participation in today’s conference. This does conclude the presentation and you may now disconnect. Good day.

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