Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
MF logo

Walt Disney Company (NYSE:DIS)

F2Q07 Earnings Call

May 8, 2007 4:30 pm ET

Executives

Bob Iger – President, CEO

Tom Staggs - CFO

Lowell Singer - VP, Investor Relations

Analysts

Anthony Noto – Goldman Sachs

Doug Mitchelson – Deutsche Bank

Michael Nathanson – Sanford Bernstein

Spencer Wang – Bear Stearns

Jessica Reif-Cohen - Merrill Lynch

Kathy Styponias - Prudential

David Miller - SMH Capital

Tuna Amobi – Standard & Poor’s

Anthony DiClemente – Lehman Brothers

Imran Khan - JP Morgan

Gordon Hodge - Thomas Weisel

Presentation

Operator

Good day, ladies and gentlemen. Welcome to the second quarter 2007 Walt Disney earnings conference call. (Operator Instructions) I would now like to turn the call over to your host for today's presentation, Mr. Tom Staggs, Senior Executive Vice President and Chief Financial Officer of Walt Disney Company. Please proceed, sir.

Tom Staggs

Thank you, Bill. Hello, everyone and welcome to our second quarter earnings call. Before we get started, I'd like to take a minute to welcome Lowell Singer, who we've just named Senior Vice President of Investor Relations. Lowell, as many of you know, has covered the media sector as an analyst for the past ten years from a research perspective, and brings a deep understanding of the investment community and the entertainment industry. So we're very pleased to have Lowell. He's joining us on the call today, and will be back in a bit.

First, let me turn things over to Bob Iger to talk about the quarter.

TRANSCRIPT SPONSOR

MF logo

Did the analysts get it right?

Wall Street hires some smart cookies. But is it in their best interest to put the hard questions to management? Are YOU even their top priority?

Motley Fool co-founder David Gardner is still bullish on Disney. In April 2003, he recommended Pixar to his Motley Fool Stock Advisor subscribers. Pixar went on to be bought by Disney and is up 190% since then. Now, discover the companies David and his brother Tom recommend in their free research report “The Motley Fool's 2 Top Picks - Plus Wall Street's Dirtiest Secret.”

Read it courtesy of Seeking Alpha FREE.

* Returns as of 6/12/2007

To sponsor a Seeking Alpha transcript click here.

Bob Iger

Thank you very much, Tom and good afternoon. I'm pleased to report that we have had another excellent quarter, posting double-digit increases in net income and earnings per share. These results are evidence of our ability to nurture great creativity, our strength in operating a broad range of businesses, and our commitment to financial discipline. Combined with the strong performance over the last two years, they also validate our strategic vision and demonstrate the quality of the Disney management team.

Since our last report, we've continued to advance our priorities, which are designed to enhance long-term shareholder value. On the creative front, this is an exciting time for us. The studio will soon premier Pirates of the Caribbean: At World's End, the third installment of one of our most successful franchises. Having seen the film, I can tell you, it is simply great.

We're also very excited about the June release of Brad Bird's Ratatouille, simply the most gorgeous animated film I've ever seen. And in the best Disney and Pixar traditions, it's a terrific, funny, original story with a lot of heart that has all the makings of a classic.

On the DVD front, this month we will launch a visually stunning Blu-ray version of Pirates II that's packed with great extra features. As more blockbusters are released on Blu-ray and the price of hardware decreases, we expect the format to grow nicely, a perfect example of how value is created when quality, creative content combines with digital technology to provide the consumer with an enhanced experience.

Disney Channel also continues to deliver, solidifying its position as the place for kids, tweens and families, as well as a key source of content that's leveraged across the entire company. High School Musical 2, the encore to our breakout 2006 hit that spawned everything from a sell-out concert tour to New York Times best selling books, will likely take the excitement to a whole new level when it airs this coming August.

I'm also happy to say that we are capturing the interest of preschoolers with Playhouse Disney's Mickey Mouse Clubhouse, which since the start of 2007 has climbed 36% in ratings among kids 2 to 5, and 32% in total viewers. Another one of our major franchise properties, Winnie the Pooh, will debut next Saturday in a CGI series, My Friends Tigger and Pooh, that should make the Disney Channel an even bigger destination for preschoolers.

On the ABC front, going into the upfronts next week, we are starting from a solid foundation with seven of the top 20 shows in the key 18 to 49 demographic. The current ad market also looks strong, which should contribute to a successful upfront. Network TV provides unique value to national advertisers because it dominates a broad range of advertising metrics, produces great content, and maintains a wider reach than other media. Among networks, ABC reaches more affluent families in the most coveted demographic.

Disney's digital media platforms are gaining traction. Already the number one website with kids and families, the new Disney.com which debuted in February is now the place where kids and families can be entertained and interact with friends in an environment designed with safety in mind. We've seen strong usage of the site, particularly among kids. Registrations have significantly increased, and we're pleased with the amount of time people are spending on Disney.com, as well as their level of engagement with all of the new features. We continue to view the broadband-enabled Internet as an important entertainment medium and our creative and technological investments in Disney, ESPN and ABC.com are designed with that premise in mind.

We've expanded our Emmy award winning ABC.com to offer viewers more ways to enjoy their favorite ABC shows online. Since September, nearly 92 million ad-supported episodes have been requested by viewers. On Disneychannel.com, 91 million episodes have been initiated in the course of the last year. On iTunes, around 23.7 million of our shows and 2 million of our movies have been sold.

ESPN continues to expand its already powerful brand across a multitude of platforms. Its websites are booming, and ESPN recently signed multi-platform, multi-year deals with the Big 10 and Big 12 conferences and will be bringing college football back to ABC on Saturday next fall.

As a testament to the strength of our Disney, ABC, and ESPN content, a new multi-year carriage agreement has been reached with Time Warner, offering additional choice and functionality to viewers, using the latest technology.

We're particularly gratified by how well our Disney Parks and Resorts are performing. Walt Disney World just set a new 15-day Easter period attendance record. Overall bookings remain strong, even in comparison with the record numbers drawn by the 50th anniversary of Disneyland, showing that our Year of a Million Dreams campaign is having a tremendous impact. The new attractions we're opening, like the Finding Nemo Submarine Voyage at Disneyland will really showcase our creativity and innovation.

Demand also remains robust for the Disney Cruise Line. We've just signed a contract with Germany's Meyer Werft Shipbuilders to build two spectacular new ships that will allow us to grow this already successful business. Our Disney Vacation Club sales have been growing strongly, as well. Along with the Cruise Line, the Vacation Clubs validate the notion that there are many ways by which we can provide a high quality experience for the whole family.

Our consumer products business has also been exceeding expectations. We have a treasure trove of great content to work from and a team that's coming up with new and exciting products to sustain interest in our many creative franchises, ranging from Pirates to Disney Princesses to Cars. Take Cars, for instance. Typically merchandise sales decline the year after a movie is released. But in the case of Cars, retail sales by our licensees is expected to increase substantially this year.

I'm also excited about Disney's growing global reach. Having just returned from Russia, I saw how infrastructure improvements and increasing affluence can create opportunities to build a real business in a market where the Disney brand has been known for years. Having launched in South Africa, Turkey, and Poland in recent months, Disney Channel programming is available in 127 countries and locally-produced Disney and ABC original shows are now airing in Europe, India, and Latin America.

In China, our consumer products business is growing rapidly. We are about release our first Disney-branded local movie, The Secret of the Magic Gourd. One of the most effective ways to achieve international growth is to increase our investment in Disney-branded, locally-produced movies and TV shows. Creating and producing indigenous content is a critical aspect of our global brand building strategy, one we believe can lead to solid return on investment.

The continued strength of our performance demonstrates that our core strategies are working and that we've established a healthy base of businesses, positioning us well for future growth. We're also building steadily on our reputation as a great place to work. We believe that all of this provides the basis for sustainable, long-term value to our shareholders.

Finally, I would like to welcome Susan Arnold to our Board of Directors. Susan has had an illustrious career at Proctor and Gamble where she is Vice Chairman, Proctor and Gamble Beauty and Health. Her expertise in connecting with consumers and in producing consistent growth from a broad portfolio of brands fits perfectly with our own goals, and we're really excited and fortunate to have her on our Board.

So with that, I will turn things over to Tom.

Tom Staggs

Thank you, Bob. It's gratifying to report on the continued broad-based strength in our company's performance. Operating income at each of our segments grew by double-digits, and media networks was our biggest profit driver again in Q2. Cable networks and especially ESPN led the way in this segment, reflecting our ongoing focus on delivering quality, branded content and sports programming that can be leveraged across multiple platforms.

ESPN's multiplatform marketing success and brand extensions, including U.S. and international cable networks and video game licensing, helped ESPN deliver solid growth in both revenue and profits for the quarter. Although ESPN deferred roughly $85 million more in affiliate revenue in Q2 of this year versus Q2 of last year, costs came down primarily due to the absence of an NFL regular season game in the second quarter, along with decreased investment spending for ESPN Mobile.

ESPN debuted NASCAR in February, with six of the Busch Series races falling in Q2. The majority of the races will air in Q4, but so far we're pleased with the response to NASCAR we're seeing across our ESPN platforms.

Disney Channel extended its ratings success in the quarter. Jump In was the quarter's top-rated telecast among total viewers in basic cable, followed by Cory in the House as the second most watched program. Driven by hit shows, such as Hannah Montana, Disney Channel is connecting well with audiences all over the world, and its creative success is enhancing revenue across the company through home video, sound track sales, sold out concert tours, video games and merchandising.

At the ABC network, although revenue was dampened primarily by the absence of the Super Bowl and fewer College Bowl games, the corresponding decline in sports rights costs contributed to an increase in operating income. In addition, prime time CPMs for Q2 were up by double-digit percentages versus up-front levels. Current CPMs for Q3 are also up double-digits.

We also benefited from our ownership of some of our most successful shows, with strong sales from established series such as Desperate Housewives, Grey's Anatomy and Lost, and new series Ugly Betty and Brothers and Sisters. At our TV station group, the absence of the Super Bowl led to a modest decline in ad revenues in Q2. So far in the June quarter, ad sales at our stations are pacing just over last year. Q2 ad sales at our radio business were flat compared to the prior year.

I'm pleased to announce that we've received all required regulatory approvals for our radio transaction with Citadel, and we therefore should be mailing the registration statement to shareholders perhaps later this week.

Q2 broadcasting results also reflect the investment ramp up in digital media, including Disney Mobile's ongoing rollout.

Our studio success continued in Q2 as well, driven by the impressive performance of Wild Hogs and Bridge to Terabithia in theaters, along with lower distribution costs from fewer theatrical releases. In addition, our music group registered double-digit growth, helped by the success of music from our Disney Channel properties.

Looking ahead at the studio, we face tough comps versus last year's Q3, which included the home video release of the Chronicles of Narnia, which was our best selling DVD title in fiscal 2006. The key swing factors for the remainder of the year, of course, are Pirates of the Caribbean: At World's End, opening on May 25th, and Ratatouille, coming to theaters on June 29.

The solid results at our Parks and Resorts demonstrate our competitive strength in this business in terms of scale, product quality, and reputation for exceeding the expectations of our guests. Our overall theme park revenue in Q2 grew by 9% and operating profit increased by 19%. At Walt Disney World, attendance increased by 7% with growth across all our guest segments, as our Year of a Million Dreams celebration appears to be resonating well. Per capita spending at the Florida parks grew by 3%. Occupancy at Walt Disney World increased to 88%, with occupied room nights up slightly versus last year, and per room spending increased modestly, as well.

As the Disneyland Resort, where we faced strong prior year results driven by the 50th Anniversary celebration, attendance came in just above last year's Q2, while per capita spending was up by 3%. Occupancy was 87%, about 1 percentage point below Q2 last year, but per room spending increased by double-digits.

Looking ahead, combined room reservations on the books for the rest of the fiscal year are pacing up slightly compared to prior year, with greater strength in the fourth quarter. Our Parks and Resorts operating profits also benefited from solid performance at Disneyland Resort Paris, where attendance and occupancy were up in the second quarter. We just launched the 15th Anniversary celebration at that park in April and we're pleased so far with the positive response by our guests.

Last quarter we told that you that Hong Kong Disneyland attendance and guest spending had fallen short of our expectations, and we remain focused on improving performance there. We're launching several marketing initiatives to boost attendance and address seasonality at the park. We view Hong Kong Disneyland as a valuable asset in a rapidly growing market, and we're confident in and committed to this project. We'll likely continue to invest in the park to help ensure its long-term success.

In consumer products, we continue to achieve growth in earned royalties and merchandise licensing from key properties, particularly Cars, which was offset by development spending in our video game division. Consumer products revenues for the quarter benefited from new game titles at Disney Interactive Studios. In March, we released Spectrobes, our first all-original title for the Nintendo DS platform, which shipped more than 700,000 units in the first six weeks, and is our best selling title on the DS platform.

Our next major game release will come in the third quarter, with the release of Pirates 3 across all major game platforms. This title could be an important factor in our second half results for consumer products. Because these titles are self-published, we have the opportunity to capture a much higher percentage of the upside than we do with just licensing.

It's also gratifying to see our earnings continue to translate into strong free cash flow. Of course, our first priority for our cash is to invest in future growth opportunities that we feel will generate strong capital returns for our shareholders. At the same time, we continue to return capital to our shareholders in the form of both dividends and share repurchase. During this last quarter, we purchased 67 million shares for approximately $2.3 billion. When we announced our Pixar acquisition, we said that we would repurchase as many shares as we issued in the transaction by the end of fiscal 2007. I am happy to announce we've more than achieved that goal as of end of Q2. We also announced today that our Board recently increased our repurchase authorization to 400 million shares.

We're pleased with this quarter's excellent performance. The results further validate our strategy to expand our core businesses through creative quality, innovation, strategic execution and financial discipline. This approach drives and will continue to drive our company, contributing to the strong earnings growth, cash flows and returns we have been achieving. And

Now I would like to turn the call over to Lowell for Q&A.

Lowell Singer

Thanks, Tom. I just want to say before we go to Q&A that I'm very excited to be here, and I'm looking forward to working with everyone in the investment community over the coming years. With that, operator, we'll turn the call over to you for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Anthony Noto – Goldman Sachs.

Anthony Noto – Goldman Sachs

Thank you very much, Bob, Tom and Lowell. Two questions. Tom, I was wondering if you would comment on broadcasting advertising revenue growth excluding sports, just so we could have an apples-to-apples comparison, and your view on the ratings trends there going into the end of the broadcast season.

Bob, could you talk a little bit about digital advertising revenue growth in the quarter, and whether or not the improvement that you are seeing in engagement and page views since Disney.com launched could in fact drive your revenue above the $700 million level you talked about previously? Thanks.

Bob Iger

I’ll take the second part of your question first, Anthony. With the new design at Disney.com, not only are we seeing some attractive usage patterns but we’ve created a significant increase in available space for advertising, so the revenue that we are seeing from advertising on that site is up very, very substantially from when we launched and from the prior site.

We are going to walk before we run, in that we are still working through what we think will be a real balance between revenue-generating opportunities and the right consumer experience when they go to the site. But we look at our online activity as having the ability to generate growth pretty much from multiple perspectives. One, we certainly believe it will generate growth in advertising revenue. Two, we are creating more opportunities for potential subscription or what I will call video-on-demand business. Three, it is very powerful from a CRM perspective. We are connecting customers to more of Disney in a very user-friendly way, and we think that has some real potential not just to better manage customers, but to give customers an opportunity to basically buy more of Disney.

So I think that this is certainly a significant step in the direction of growing our digital revenue beyond the number that you cited. We are not going to get specific in terms of what we did in the last quarter from a digital revenue perspective except to say again, what I said earlier. That is, with the increases in ad space on Disney.com and the usage patterns we are seeing, we have seen huge growth in advertising revenue, and believe that site as well as ABC.com and ESPN.com have the ability to generate significantly more advertising revenue than we are seeing today.

Tom Staggs

Anthony, with regard to ad revenues, when you exclude sports, I think the best way to look at it is there was some softness in ratings; that was made up for by increased inventory sell-through and higher CPMs, and so you had revenues, apples-to-apples, that were roughly on par.

I think the important thing to note is the syndication and other platform revenues for our owned shows did drive nice increases overall when you take a look at the business as a whole.

Operator

Your next question comes from Doug Mitchelson – Deutsche Bank.

Doug Mitchelson – Deutsche Bank

Tom, I think earlier in the year you mentioned that the margins at the theme parks would progressively get better during the year in terms of year-over-year comparisons. I just wanted to get an update there.

Bob, touching back on the digital comments that you just made, and since many of us are out here at the cable show, two of the areas of focus are faster broadband speeds, hundred megabits per second will be available soon, supposedly, and content on demand is taking off and gaining inertia. But in a funny way, those two developments are partly at odds with each other from your perspective in that you can use the faster broadband speeds to develop your own direct-to-consumer service and keep all the economics for yourself; or, you could partner more with the content on demand as it gains inertia.

So looking at ABC, which is pretty impressive, you have a pretty robust selection of content and the on-demand tests you’ve done with cable so far seem fairly limited. Can you just make any comments as to how you see this playing out the next few years? Where the greatest value for Disney might be?

Tom Staggs

Doug, with regard to the first question, parks margins, we have seen a continued increase in margins. If you look at the second quarter in particular, we saw some increase. Now this quarter that was driven by the international parks. If you just try to isolate the domestic parks the way we have done in the past, you would find that margins just in the quarter ticked down slightly; now that was driven by the timing of some spending and some investment we are doing in guest offerings. So if you look at the six months for the domestic parks as a whole, margins are still up by about a point for the year to date. We are still on track to continue to increase margins and we will continue to focus on that metric.

Bob Iger

Regarding the second part of your question, we view the developments in technology as being very, very favorable to us as content owners or content creators, as you know. We intend to take full advantage of them. There is probably about 50% penetration right now of broadband in households in the United States and we see that growing significantly over the next five years.

The way we are going to take advantage of it is really a blend of direct-to-consumer, what I will call sales; or, going through other aggregators such as Comcast and Cox and potentially other online aggregators. We think that we’ve got strong enough brands and significant enough traffic to make available on our proprietary sites product and in effect, sell directly to the consumer, particularly on the Disney.com side. But, we are also mindful of the fact that there are a lot of other entities out there that have a great customer base, great usage, and in effect provide great traffic and that we would be either selfish or narrow-minded if we didn’t take advantage of their traffic and their customer relationships.

So, we are looking at a blend. We look for the right platform, meaning the right environment, the right technologies, something which we think fundamentally works with consumers. We are looking for the right pricing or the right business proposition. Generally speaking, we are looking for deals that enable us the flexibility to continue to go direct to the consumer as well. So we are not entering into any exclusive deals. You are likely to see that trend – meaning the blend and essentially taking a non-exclusive approach both to our own sites and to third-party sites – for quite a while.

Operator

Your next question comes from Michael Nathanson – Sanford Bernstein.

Michael Nathanson – Sanford Bernstein

Bob, you mentioned before your support for Blu-ray in the coming year, and I wonder if you would ever consider jumping to HD DVD or supporting HD DVD if penetration of HD surpasses Blu-ray? And if not, why?

Tom, in the past you have said you expect about $1 billion in profits from the success of your own shows, and this quarter supports that. I wonder, what percent of $1 billion do you estimate has been realized to date?

Bob Iger

Michael, we made our bed with Blu-ray because we believed more in that format for a variety of reasons; some technical in nature, some due to the fact that it simply had broader support from a variety of industries, notably the motion picture studios but also what I’ll call the consumer electronics and the tech industry.

What we are seeing lately is that sales of Blu-ray discs are outpacing HD discs by at least two to one. As more quality Blu-ray product comes on the market, which is going to happen, notably with Pirates on May 22, we actually believe that the difference or the advantage of Blu-ray is only going to widen.

What we are also seeing is that the adoption of the platform right now is being held back a bit by a perception among consumers, really, that there is a format war; and that the hardware or the players are too expensive. We see the players coming down in price nicely, particularly by the Christmas season. We also believe that if Blu-ray continues to outpace HD DVD the retailers are ultimately going to weigh in, because they only have a limited amount of shelf space, and they are going to have to choose a format in order to manage their own shelf space. Once that happens, the advantage is going to go even more in Blu-ray’s direction.

I think the single greatest thing we can do right now is to not waffle, but to be very, very blunt about it, to continue our support of Blu-ray because we sense a real advantage. The best thing that could happen is for the format war to end, which will be very pro-consumer, particularly as hardware comes down.

The other thing I want to note is, if you look across the globe, the only place there is really a format war is in the United States. In other markets where next-gen DVD is starting to penetrate, Blu-ray is winning, and substantially; so much so there isn’t even a perceived format war.

So I think we made the right decision, the trends we are seeing seem to validate the decision. We think long-term, this is going to be a nice growth area for the company, because as you know sell-through DVD is a big business for the Walt Disney Company, even though we believe in things like VOD and the rental model. People want to own a Disney DVD, particularly in the next-generation format.

Tom Staggs

Michael, with regard to the syndication revenues, the syndication on other platforms and our own shows, you are right. We have been realizing the figures consistent with our prior projections we had talked about, starting in ’05; five years, over $1 billion.

If you just take a static look at those shows we were talking about, we are about halfway through that period, we are a little bit more than halfway through that set of revenues. The good news is that the pipeline has refilled so I think, looking forward for the next several years, we can continue the pace of revenues, roughly, that we have been seeing. So the pipeline is refilled, even though we are a little ways through the first projection, we feel good about where those figures are going forward.

We’ve got a strong set of markets to sell-in to, and barring a change in those, I think things look good there.

Operator

Your next question comes from Spencer Wang – Bear Stearns.

Spencer Wang – Bear Stearns

Thanks and good afternoon. I have one question on the studio. Your margins at studio have been above trend for the last two quarters or so. Tom, I was wondering if you could give us a little more clarity on what's driving that? Is that maybe timing of P&A spend, or is there something structurally that's changed? Cost-cutting initiatives or a combination of that or something else? Thank you.

Tom Staggs

Sure, Spencer. A couple of things going on. As you know, looking at margins quarter to quarter in the studio sometimes can give you a funny picture, because it's dictated a lot based on the timing of certain releases. But overall, we have seen a nice increase in studio margins, the trend is going exactly how we'd like it to.

A couple of things going on there. First of all, obviously, the success of the content that we've been putting out there has helped to drive margins. We've continued to see a robust home video market and so home video represents a strong part of our earnings and home video tends to have attractive margins, especially when you have a library like the Disney library which underpins that sell-through.

The cost-cutting that the studio has been doing is also giving us some traction in that regard. I think they've done a nice job of right-sizing their cost structure, even in the midst of that creative success. So the margins will be impact, of course, going forward and from time to time by what's happening in releases; but from the standpoint of a cost structure that it can leverage, the studio has done a nice job bringing down investment and bringing down overhead.

Operator

Your next question comes from Jessica Reif-Cohen - Merrill Lynch.

Jessica Reif-Cohen - Merrill Lynch

First, given the currency changes, the dollar, how are you changing your marketing of the U.S theme parks in Europe, and can you talk at all about your summer expectations from international visitors?

Bob mentioned investing, he said that you're increasing investment in local production with the Disney brands. Can you talk about the level of spending and how it will change and what markets are your key focus?

Finally, if you could just give us your updated thoughts on potential first strike/strikes.

Bob Iger

Multiple questions. On the international side with our parks, we're seeing double-digit improvement from international markets in general, which is quite good. There's actually more room for improvement. There are certain markets that we still haven't bounced back to the record levels that we saw earlier this decade. The UK, which has improved nicely, would be an example of that.

One of the things that we found is that by creating more of a global marketing organization which we previously did not have, we actually have the ability to better market all of our parks managed as one. So as a for instance, we're doing a lot more marketing in Europe of both the park in Paris but also the park in Orlando, with similar creativity and a much more concerted or coordinated effort. We're marketing more to people who go to Paris, for instance. We're marketing Orlando better. We previously had not done that. We're finding that there are a lot of Europeans who have visited Disneyland in Paris who actually want another Disney experience, one that's different, so we're better marketing from Paris to Orlando.

In general, we think that clearly the currency fluctuations are working in our favor, although there are always other conditions that can have an impact. We feel positive about the prospects internationally for the parks, particularly as we improved our product offerings as well.

In terms of the level of international investment in local production, we never really made Disney-branded product indigenous to other markets or in other markets. I'd say probably 95% to 98% of the Disney product we made at this company we made in the United States and we moved it around the world quite well by putting high quality, local language tracks on and distributing effectively.

But as we look at growing internationally, particularly as we see a trend with more local competition, we think we've got an ability to grow our international business more effectively by creating a balance of product that's made in the United States and exported around the world, but also product that's made in each market. So the motion picture that I cited, Secret of the Magic Gourd in Mandarin in China which is Disney-branded is a great example. We're looking at lot of other markets where we can do that.

Some we've talked about, like with High School Musical, but we also are starting to look at developing with local talent, Disney-branded original films and television shows. I'm not going to mention a number nor am I going to cite any other markets except to say that we believe that we are justified in increasing our investment in international Disney-branded productions significantly, and that there are many, many markets around the world that are ripe for this kind of investment. We feel good about it.

Third question on the guilds. Today, what I'm sure of is there's a lot of posturing going on and I'm also sure that the issues are really complicated. The studios are definitely gearing up for a possible work stoppage, but it's very premature to predict whether there will be one. I certainly hope that we're going to spend a significant amount of time and effort as an industry on trying to avoid such an occurrence, and we're going to do our best to balance the need to manage these businesses to create shareholder value while also realizing there are a lot of issues on the other side.

There's clearly a burning need for all those involved to recognize and accept there's been a dramatic change that has swept over the industry and it's evident in the way consumers are enjoying our product but it's also evident in the tremendous increase in competition. So, it is too early to say. There's going to be a lot of time spent on this. There's probably going to be a lot of rhetoric available on this subject and because the issues are so complicated, I think it's going to take a fair amount of time.

Operator

Your next question comes from Kathy Styponias - Prudential.

Kathy Styponias – Prudential

Thank you and congratulations, Lowell. My question is in regard to the trials that are going on with the cable companies for VOD. We've heard from at least two of them now and it sounds like from their end they're pretty happy with the results and have suggested that the studios are happy with the results as well. That it doesn't look like it is cannibalizing existing businesses, especially sell-through. I was wondering if you would comment on that and whether or not some of the comments that Steve Burke made yesterday at the Cable Show where he talked about day and date release of theatrical releases on VOD is something you'd consider in your next phase of the trial. Thanks.

Bob Iger

Thanks, Kathy. First of all, as a company, we’ve been pretty upfront on this. We're going to continue to track very carefully the trends that we're seeing in the consumer behavior and we're going to continue to make changes in our business approach in order to basically improve our business model.

To the point that Steve Burke made, we are not contemplating selling first-run films to cable in the same window as theatrical. We are making films available to cable on VOD as you cited, Kathy, in the same window as DVD. This is being done on a test basis in multiple markets and so far, it's still too early in terms of really reading the data. But I can say that during the period of time that we've been testing, albeit in limited fashion, our sell-through business at Disney has been extremely, extremely strong.

To the point that Steve Burke made, the theatrical window clearly is important and valuable to the theater owners and distributors and filmmakers but we also have to be mindful to provide consumers with a great price to value relationship, and that includes great experience in movie theaters but also making sure that we're giving people access to the movies that they love on a well-timed, well-priced basis to market. That doesn't mean there is going to be radical change, I actually believe that over time you are going to see more evolutionary change than radical or revolutionary change.

I think it's safe to assume that the VOD business is likely to grow. The point that was made earlier about broadband penetration and broadband speeds increasing, and the number of flat-panel TVs being sold and next-generation DVD, you're basically going to have greater consumption of media in the home than ever before. When and how people get their movies and TV I think you're going to end up seeing a variety of ways. As I said, I think you're going to see more evolution than revolution.

I want to emphasize the point that we're not in discussions to sell movies to cable in the same window as theatrical.

Operator

Your next question comes from David Miller - SMH Capital.

David Miller - SMH Capital

Bob, obviously a lot of us were watching Meet the Robinsons very carefully, because it was the first film that had a Pixar influence over a hit Disney branded animated film. The film I think has grossed $137 million worldwide to-date, which I think you wouldn't disagree is not that great just given the economics of the film. Do you see Mr. Lassiter making any other changes to the Disney animated unit that you can comment on, on this call?

Tom, I didn't hear you talk about an international attendance figure at Walt Disney World. If you could comment on that, that would be great.

Bob Iger

We announced the acquisition of Pixar a year ago January and the deal didn't close until basically a year ago this month. At that point, Meet the Robinsons, which was slated for a December release was pretty much baked, meaning most of the movie was completed. We debated with John and Ed and others whether we should let them take a shot at Meet the Robinsons, meaning work with the director and see whether there was any more room for improvement, and we decided that we would basically approach it very conservatively. Meaning, take a look, make some what I will call small changes, delay the movie which we did just a few months, and move on. John was able to work with the very talented director on that film and together they got some work done and made some improvements and I think released a film that was really quite a nice film.

But in fairness, it's not what I'll call or quote you, a heavily Pixar-influenced film at all because of the timing. The work that John and Ed and others are doing at Disney animation will be evidenced more in future films, notably the release of American Dog. It wouldn't be fair to judge the influence of Pixar over Disney animation at least until that film.

I can say, as we’ve said in prior earnings calls and in prior public appearances that the integration of Pixar has been very, very smooth. Not only is Pixar running well, but the leadership that John and Ed have provided to Disney animation where there's a tremendous amount of talent that is certainly enjoying the ability to work with John and Ed has been really quite profound and quite positive. I think you will see that in the long-term results and the results of the films that will be released in the future. But again, not fair to judge Meet the Robinsons performance on a potential Pixar influence.

Tom Staggs

With regard to Walt Disney World attendance, I mentioned that overall attendance was up 7%. Each of the guest segments was up. International was up the most on percentage terms but the strength is really across the board.

Operator

Your next question comes from Tuna Amobi – Standard & Poor’s.

Tuna Amobi – Standard & Poor’s

Thank you very much. Bob, of the 23 million TV shows and 2 million movie titles, can you perhaps provide some color on the percentage of current versus catalog titles?

On Pirates, any number you can give us on the DVD shipments to date? Looking ahead to Pirates 3, I know Bob said that the movie was great, but I was wondering if he would venture some kind of a projection in terms of how that film might do compared to the second installment of Pirates? Thank you.

Bob Iger

I am only going to reiterate the fact that the film is great. I am not going there, Tuna. I think that in the sense of the early success of Spider-Man bodes well for the movie industry this summer, clearly moviegoers are excited about not only going back to big movies, but to sequels of films that they have left before, so that is a good thing.

In terms of DVD shipments, we typically are not public about a number except that the worldwide sales of Pirates DVDs has been rather significant, the same with Cars, by the way. And Tom, I think we have not been specific.

Tom Staggs

No, Pirates and Cars have sold quite well. Of course, the majority of that was in the first quarter. They were not big drivers of profitability in the second quarter. If you were talking about shipments as we go forward, I think it is important, I mentioned in the prepared remarks., the shipments for Q3 titles to date, you’d be looking at Narnia last year, a very, very big title without a comparable title this year, so you would expect shipments at this point in time for Q3 to be well behind the shipment pace of last year, because we don’t have the Narnia title.

Bob Iger

To your first question, the sales of movies and TV shows on iTunes is pretty much concentrated on what I will call the big titles. So on the television side, you just have to look at the charts on iTunes and you can see, but for the most part you are looking at Lost, Grey’s Anatomy, Desperate Housewives leading the pack. A couple of Disney Channel shows show up nicely as well.

And on the movie side, just as you would expect, Pirates and Cars led the way in terms of titles. We’ve done well with some other movies too, but people are flocking primarily to the top titles, and also to what I will call new titles, since right now we are the only studio making current titles available, we pretty much have the market to ourselves on iTunes. There is a lot of library available now from Paramount and other studios. We are finding that the fresh titles are selling the most.

Operator

Your next question comes from Anthony DiClemente – Lehman Brothers.

Anthony DiClemente – Lehman Brothers

On the subject of big titles, in view of the multi-platform strategy that you have outlined for us, Bob, where you are focusing on these big titles, driving returns at each of the other business segments, it would appear that at least some of that strategy is being driven by mega hits at the film and TV segments like Cars and Pirates.

So the question is, with the reduction in the number of film titles and the success you have had recently on those mega-hits, is there a risk going forward of volatility in that strategy?

Bob Iger

We're focused in general as a company on creating great content, great experiences, and then maximizing the value on a global basis. With a Disney-branded product like High School Musical or Pirates or Cars, we have the infrastructure in place, meaning the collection of assets and the collection of distribution entities and a presence globally to really turn successful Disney-branded films into multi-platform, multi-business, multi-market franchises. We believe that with that approach, we're actually taking the volatility out of the business.

Now, there will always be volatility in a business that relies on creativity, because creativity isn't perfect and there are going to be hits and there are going to be misses. But one of the key reasons why we're investing in Disney movies versus non-Disney is the effect on this to the system: to market, to distribution and ultimately to exploit from a shareholder value perspective. We actually think that reducing the number of titles and concentrating more on franchises will result in not only less volatility, but higher margins, the point that was asked earlier of Tom, and greater value for the company.

Operator

Your next question comes from Imran Khan - JP Morgan.

Imran Khan - JP Morgan

Thank you very much for taking my question. Congratulations on a good quarter. I think you raised your admission prices twice last year. I wonder if you can comment on whether there's still room for raising prices for theme parks?

Secondly, given the film schedule this year, do you see an impact on the P&A costs, domestically or internationally? Thanks.

Bob Iger

Well, we think there is price elasticity at our theme parks, but when we raise prices typically the attention is paid to single-day admission prices. When you look at our parks, particularly Walt Disney World, a significant number of people enter those parks on passes or tickets that are not single day admissions and, in fact, are part of a longer length of stay package. While we've got the ability to raise prices, we're also making available to our guests a variety of different packages that makes it more likely they're going to stay longer which creates other value for us.

Actually, some of the lift that you're seeing in the theme park segment domestically, particularly at Walt Disney World, is due in part to not necessarily ticket price increases or even attendance increases, but longer length of stay and moving more people into Disney-owned hotel properties or on-property hotels versus off-property hotels. So it's a real blend in terms of the strategy from a pricing perspective. It goes well beyond just our ticket pricing, it is more a pricing and a packaging and a marketing strategy.

We're also trying to reach broader demographics and one way to do that is to create packages for people in lower economic brackets and in effect to make Disney World in particular more affordable, and that's worked nicely for us as well.

Tom Staggs

With regard to P&A, I think as you point out, a number of the films that we're releasing are more expensive films, obviously Pirates 3 is not an inexpensive film to make. The issue there is the studio is really trying to focus its investment in those areas where we think we have films with franchise potential and on Disney-branded films. That's where we think we can earn the best and most sustainable returns. So while we continue like other studios, I think, to try to push against increasing film costs, the more important pieces of puzzle for us is to channel the film investment into those areas where we think we've got the best opportunity for returns. You've seen that in increasing ROIC at the studio, they are having another good year in that regard this year, and that is one of the key metrics that we focus on as we think about managing that business.

Operator

Your final question comes from Gordon Hodge - Thomas Weisel.

Gordon Hodge - Thomas Weisel

Just a question on home video again. I think last quarter you gave out the home video units and revenue -- or maybe just units, I can't remember. I'd be curious if you have that year-over-year comparison available.

You had mentioned earlier that you were the only company or studio providing new releases to iTunes, and I think the reason other studios haven't pursued new releases with iTunes is just concerns that iTunes' pricing appears to be running below retail pricing for DVD. I'm just wondering if you're rethinking that at all or if you are happy with the iTunes pricing strategy and whether that has any impact on your DVD business. Thanks.

Tom Staggs

With regard to DVD units, units in Q2 were, all things considered, about on par with last year. Both years were a little over 60 million units over all so there wasn’t a lot going on there in terms of a change. As I mentioned, we continue to see a strong underlying market for our videos there, but unit sales wasn't a big driver of change in profitability for the quarter. That was really the improvement in theatrical results of the studio that did that.

Bob Iger

On the pricing side, the pricing for our movies on iTunes is essential margin neutral to us, meaning the money that we derive from the sale of a movie on iTunes is equal to what we derive on the sale of a film in basically hard goods sell-through at retail. We've been comfortable with that pricing. There are cost of goods essentially that are factored out of the equation, or into the equation would be the way to look at it, in determining what we charge to Apple for those films and, in effect, when you factor in the cost of goods or the lack thereof in the digital sale you essential enable Apple to sell at lower price although that's their decision, and enable us to take revenue out that is equal to in terms of a per click sale, what we sell to mass retail. So we are actually quite comfortable with it.

Lowell Singer

Thanks, Gordon. Thanks again, everyone for joining us today. Note that a reconciliation of non-GAAP measures referred to on this call to equivalent GAAP measures can be found on our Investor Relations website.

Let me also remind you that certain statements in today's press release and 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 performances 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 other filings with the Securities and Exchange Commission.

This concludes today's second quarter conference call. Thanks everyone for joining us.

TRANSCRIPT SPONSOR

MF logo

Did the analysts get it right?

Wall Street hires some smart cookies. But is it in their best interest to put the hard questions to management? Are YOU even their top priority?

Motley Fool co-founder David Gardner is still bullish on Disney. In April 2003, he recommended Pixar to his Motley Fool Stock Advisor subscribers. Pixar went on to be bought by Disney and is up 190% since then. Now, discover the companies David and his brother Tom recommend in their free research report “The Motley Fool's 2 Top Picks - Plus Wall Street's Dirtiest Secret.”

Read it courtesy of Seeking Alpha FREE.

* Returns as of 6/12/2007

To sponsor a Seeking Alpha transcript click here.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Walt Disney F2Q07 (Qtr End 03/31/07) Earnings Call Transcript
This Transcript
All Transcripts