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Executives

Lowell Singer - Senior Vice President, Investor Relations

Robert A. Iger - President, Chief Executive Officer, Director

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

Analysts

Jessica Reif-Cohen - Merrill Lynch

Doug Mitchelson - Deutsche Bank

Benjamin Swinburne - Morgan Stanley

Michael Morris - UBS

Ingrid Chung - Goldman Sachs

Jason Bazinet - Citigroup

Rich Greenfield - Pali Capital

Drew Borst - Sanford C. Bernstein

David Bank - RBC Capital Markets

Alan Gould - Natixis Bleichroeder

Jason Helfstein - Oppenheimer

Imran Khan - J.P. Morgan

Anthony DiClemente - Lehman Brothers

David Miller - SMH Capital

The Walt Disney Company (DIS) F2Q08 Earnings Call May 6, 2008 4:30 PM ET

Operator

Good day, ladies and gentlemen, and welcome to the second quarter 2008 Walt Disney earnings conference call. (Operator Instructions) I would now like to turn the presentation over to Mr. Lowell Singer, Senior Vice President of Investor Relations. Please proceed.

Lowell Singer

Thanks, Danielle. Good afternoon, everyone and welcome to our second quarter 2008 call. Our press release was issued a few minutes ago and is now available on our website at www.disney.com/investors. Today’s call is also being webcast and that webcast can also be accessed on our website. After the call, a replay and a transcript of today’s call will be available on, you guess it, our website. And as you can tell, we are trying to grow page views on the IR website, so that be next quarter we can actually sell some advertising.

Joining me in Burbank here today 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. We’ll then open it up to take your questions and then, given the overwhelming popular demand, I will once again read the Safe Harbor provisions.

So with that, let me turn the call over to Bob and we’ll get started.

Robert A. Iger

Thanks, Lowell and good afternoon, everyone. We had an outstanding second quarter financially and creatively at The Walt Disney Company. Our diluted net earnings per share from continuing operations grew by an impressive 35%, putting our earnings per share in the first half of the year on par with what we delivered for all of fiscal 2005.

This performance demonstrates how the Disney difference gives us a critical and sustainable market advantage, and that difference centers on our proven ability to create high quality content, which benefits from Disney branding and from our wide-ranging distribution and promotional platforms.

In turn, we leverage that great content across our multiple businesses and across global markets, and I believe our creative pipeline has never been stronger.

In the coming weeks, we will be releasing two terrific Disney branded movies, Prince Caspian, the second instalment in The Chronicle of Narnia, and our latest animated film from Pixar, WALL•E. While we don’t normally give guidance, I am breaking my rule by politely guiding all of you to go see these two movies. I’ve seen them both and they are great.

We are also tremendously enthusiastic about Disney Channel. At last weekend’s Disney Channel games in Orlando, thousands of fans came out to enjoy a live performance by Miley Cyrus and other stars, and with a new season of shows coming up, a new record in July, and a theatrical film next year, the Hannah Montana/Miley Cyrus franchise remains incredibly robust.

Rising stars The Jonas Brothers are another example of the Disney difference in action. The bad got great exposure on the Hannah Montana concert tour and subsequent 3D movie. That led to radio hits, a sold out U.S. concert tour, and a platinum CD. And next month they are starring in an original Disney Channel movie, Camp Rock, which premiers on four successive nights across four platforms -- the Disney Channel, ABC, ABC Family, and Disney.com. And next year, they will be in their own Disney Channel series and a 3D theatrical release.

Clearly we are managing our assets in an integrated way and leveraging success across businesses to create more value. Two years ago we acquired Pixar to regain our leadership position in animation and to show just how strong our animation pipeline has since become, we recently unveiled a slate of 10 new movies to be released through 2012. Five of these animated films support important existing Disney franchises -- Toy Story is set to open in 2010, following the 3D releases of the first two Toy Story movies; Cars 2 will premiere in 2012, building on the strength of our successful consumer products franchise, as well as the opening of Cars Land, a collection of exciting new attractions we are building at Disney’s California Adventure. And from Rapunzel, Princess and the Frog, and Bear and the Bow, we are adding three new princesses to the ranks of the incredibly valuable Disney Princess franchise.

The last two films I mentioned, plus the remainder of the slate, are based on original ideas backed by an impressive array of producing and directing talent, and combining great storytelling with new technology has created huge value for us and these films are excellent examples of that principle.

That same combination is also the big idea behind Disney Nature, our first new Disney film label in 60 years. Over the next four years, we plan to release seven Disney Nature films theatrically. They will be supported across our entire company and we believe they can generate some exciting business opportunities.

We’ve spoken a lot lately about the Disney difference but this integrated approach to managing our businesses applies equally to ESPN, which has created an impressive competitive advantage by leveraging great sports content across multiple platforms in order to provide fans with high quality coverage and information more broadly and deeply than anyone else in the business. As such, ESPN also creates enormous shareholder value.

Last quarter’s results certainly make that point -- ESPN network ratings were up by double-digits and whenever a big event comes to ESPN, its platform drives big results and that was certainly the case at the Masters where the Friday coverage of the Masters was the most viewed golf telecast in cable history.

Now let me conclude by talking about our parks and resort segment, since I know it’s top of mind for many of you. Given the economic environment, we are pleased with the performance last quarter of our parks and resorts. And while I am not predicting future performance, I think there are several reasons why our parks have been so resilient to date.

The first is that our parks offer a unique experience that simply is not available elsewhere and we’ve invested capital wisely from a creative perspective to make sure they continue to do so. We’ve opened up some really thrilling new attractions and we’ve taken advantage of our strong content pipeline across Disney to create new experiences for our guests.

In the last two years alone, we opened Finding Nemo Submarine Voyage at Disneyland, Tower of Terror at Disney Studios Paris and at Tokyo Disney C, and Expedition Everest at Disney’s Animal Kingdom. It’s a Small World opened last week in Hong Kong Disneyland while Toy Story Mania will debut in the next six weeks at both Disney’s California Adventure and Walt Disney World’s Hollywood Studios.

Additionally, we are taking advantage of the creative success of our other parts of the company in our parks around the world. High School Musical is a perfect example. Shows and music and dance numbers from this great franchise can now be seen in our parks in the U.S., in France, and in Hong Kong.

We are also benefiting from new marketing and pricing strategies put into place over the last few years, enabling us to extend length of stay, serve more guests in on-property hotels, and grow revenues through sophisticated pricing initiatives.

Our investments in a world-class yield management system are really helping us to maximize our performance. Over the last several years, we’ve made our parks more accessible to an even broader audience, adding significantly more value priced hotel rooms and creating vacation packages that allow a family of four to visit for seven days while staying six nights in one of our hotels for only $1600.

So we believe creativity, focused capital investment, and strategic pricing have helped to make us more resilient to economic downturns than in the past and our recent results are evidence of that. Our parks and resorts business remains unique and is a strong competitive advantage and we believe this segment can sustain success for years to come.

In summary, The Walt Disney Company clearly continues to thrive. We are intensely focused on our goals and believe nothing substitutes for quality when it comes to setting yourself consistently apart in the eyes of consumers. And I am very proud of where we are and where we are going, and with that, I will turn to Tom.

Thomas O. Staggs

Thank you, Bob and good afternoon, everyone. We are pleased to report another strong quarter with substantial growth in revenue, operating income, and earnings per share. We are also pleased with the overall pace of business across our various divisions.

At our media segment, cable networks delivered a double-digit increase in operating income. ESPN was again the key driver of our growth. They generated healthy gains in both affiliate fees and advertising, partially offset by higher marketing costs and sports rights fees, primarily for college basketball.

Bear in mind that for the first two quarters of fiscal 2008, ESPN deferred approximately $65 million more in affiliate revenue than in fiscal 2007. Based on our current expectations, certain programming commitments that ESPN reached in the third quarter last year will be met this year in the fourth fiscal quarter. On that basis, net revenue deferrals in Q3 of this year will be about $120 million greater than in last year’s Q3. As such, we expect $185 million in net incremental deferred revenues for the year to be recognized in Q4.

As we’ve discussed in the past, our Disney Channels and Disney branded programming slots are importantly daily touch points between consumers and the Disney brand at more than 130 countries worldwide. Here in the U.S., the Disney Channel ranked as the number two cable network in primetime last quarter. We continue to invest in Disney branded television programming, including locally produced content in key international markets.

Disney Channel’s successful original programming, such as Hannah Montana and High School Musical continues to enhance revenues in our other business like consumer products and studio entertainment through merchandising, music sales, concerts, and theatrical releases.

At broadcasting, ABC’s successful owned series, particularly Gray’s Anatomy and Lost, sold well in international markets, which helped to drive strong growth in operating income despite lower advertising revenues at the ABC network.

Like most other broadcast networks, ABC’s lineup included fewer original scripted shows during Q2, which contributed to lower ratings. The effect of this change was partially offset by primetime scatter CPMs for Q2 that were healthy double-digits above up-front levels, driven by strong demand and tight supply.

Thus far in Q3, we continue to see comparable strength in the scatter market. Fewer hours of new original scripted episodes in Q2 also lowered the network’s programming costs in the quarter.

In Q3, we anticipate having fewer episodes of our own scripted series available for international sales as compared to Q3 last year and somewhat higher programming costs compared to the prior year as ABC studios will produce more original episodes of key primetime shows.

At our television stations, Q2 revenue and operating income came in modestly higher than in fiscal 2007. So far in Q3 ad sales in stations are pacing below prior year by mid-single-digit percentages.

Studio entertainment delivered an outstanding second quarter, with significant increases in both revenue and operating income, driven by the strong performance of our home video slate and theatrical releases.

In home video, titles like Enchanted, Game Plan, and best picture winner, No Country for Old Men, contributed to a 15% increase in units sold compared to Q2 of last year. We believe that our ratio of home video unit sales to box office revenues continues to outperform the industry average, especially for our Disney branded titles.

The studio’s theatrical results improved due to both higher revenues from our new releases this year and higher marketing costs in last year’s Q2 from Meet the Robinsons. This year’s releases included National Treasure 2: Book of Secrets, which has delivered over $455 million in worldwide gross box office, 30% above the first quarter.

We also had great results from Hannah Montana/Miley Cyrus 3D Concert movie, which generated over $65 million worldwide box office revenues in only 683 theaters. As importantly, the movie served to illustrate the exciting business opportunity offered by digital technology for both theater owners and film studios.

As we look ahead at studio entertainment, the key swing factors for the remainder of the year are Chronicles of Narnia: Prince Caspian, opening in the U.S. on May 16th, and WALL•E, which opens on June 27th. Bear in mind that last year’s Q3 included the worldwide release of Pirates of the Caribbean: At World’s End, whereas Prince Caspian, which is co-produced with Walden Media, will first be release in the U.S. in May and will roll out to international markets throughout the rest of the year.

Parks and resorts have once again delivered terrific growth in revenue and operating income on strong results at Walt Disney World and Disneyland Resort Paris. Attendance trends have been especially good at both our Paris and Hong Kong locations, each of which grew their attendance by double-digit percentages.

We are also pleased with trends at our domestic parks for the quarter, where combined attendance was up 5% versus the prior year, with Walt Disney World attendance increasing 7% and Disneyland attendance coming in just above the prior year.

Of course, Easter fell in Q2 this year versus Q3 last year but even excluding our estimate of the Easter shift impact, combined attendance at our domestic parks was slightly ahead of prior year.

Attendance growth was driven by increased visitation from our domestic and international guest segments, with the higher percentage increase coming from international.

Per capita spending was also strong with growth of 3% at Walt Disney World and spending at Disneyland up by 8%.

At our Florida resorts, hotel occupancy was in line with prior year at 88% but higher average room rates and increased food and beverage spending helped us deliver a 7% year-over-year increase in per room spending. At Disneyland’s resorts, a 16% increase in per room spending versus last year’s Q2 more than offset some of the occupancy, which came in four percentage points below last year at 83%.

Parks and resorts also benefited in Q2 from the combined strength of our Disney Vacation Club business, in part due to successful sales of term extensions to existing DVC members.

While we won’t predict how the remainder of the year will unfold, we are pleased with advanced bookings at our resorts so far. Room reservations for our domestic resorts for the rest of the fiscal year are currently slightly ahead of the prior year, with strength in Q4 more than offsetting a slight decrease in Q3. Pricing per reservation on the books for the balance of the year is also trending higher than prior year.

Bear in mind that the shift in the timing of Easter that helped Q2 will make comparisons somewhat more difficult in Q3.

At consumer products, we continue to deliver solid growth in earned royalties and licensing, driven by strong merchandise sales based on our hit tween properties, Hannah Montana and High School Musical. As expected, comparisons in Q2 for consumer products were impacted by the recognition of about $30 million more in minimum guarantees in Q2 of last year.

At Disney Interactive Studios, profit contribution from our self-published titles increased but was offset by reduced licensing revenues and higher product development expense. We expect to continue ramping up our development spending in the second half of the year, resulting in approximately $200 million in total videogame development costs for fiscal 2008.

As we announced, we’ve just reacquired approximately 220 Disney retail stores. We are well aware of the challenges associated with this specialty retail business and we’ve taken those challenges into account in moving ahead with this transaction.

As we transition back to owning and operating the stores, we expect their results to modestly reduce profits in consumer products for the balance of the year. Going forward, we believe we can generate an appropriate return on the relatively modest capital the stores will require.

At the same time, we think the stores provide us with an important direct touch point with some of Disney’s best customers, giving us the ability to reinforce our brand, support our many franchises, and help us deepen our consumer relationships.

Our strong results have also fueled significant cash flow. Our first priority for our capital is to invest in future growth opportunities that can generate strong returns for our shareholders and we expect to find additional opportunities to invest internally or through acquisition to deliver profitable growth to our investors.

But our cash flow has also enabled us to return significant capital to shareholders through dividends and share repurchase. So far this fiscal year, we have bought over 74 million shares for roughly $2.4 billion. Given our strong balance sheet and cash flow, we expect to continue to repurchase shares going forward.

Our recent performance reflects both our creative momentum and financial discipline. We remain focused on capitalizing on our strong brands, creative strength, and franchise portfolio to drive higher returns while allocating capital strategically to build sustainable growth.

With that, I will turn the call over to Lowell for Q&A.

Lowell Singer

Thanks, Tom. Operator, we’ll be ready for the first question.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question will come from the line of Jessica Reif-Cohen with Merrill Lynch. Please proceed.

Jessica Reif-Cohen - Merrill Lynch

Thank you. Bob, I was wondering if you could comment on your view of the potential of an actor’s strike and what your plans are in that event. And also, if you could, one of you could comment on the impact of Blu-Ray in the quarter and expectations from that.

Robert A. Iger

The AMPTP companies, the producers and SAG, representatives of SAG are actually meeting as we speak. And because the discussions have been ongoing, it wouldn’t be right for me or anyone to characterize just how they are going, and nor do I really want to in any way either predict whether there will be another work stoppage and how we will react to it. Clearly the fact that we did deals with the writers and the directors should certainly signal our position on the critical issues and I think SAG is well aware of that and -- I guess I’m better off probably not elaborating.

In terms of Blu-Ray, the penetration of Blu-Ray players is still relatively modest and while we’ve got some titles out there, the real impact from Blu-Ray will be felt down the road. In fact, we’ve got some exciting titles coming up, including Nemo and -- all of a sudden I forgot the name -- National Treasure, exactly in May and then later in the year we’ve got Sleeping Beauty. Actually, Nemo is later in the year as well.

And we see penetration growing nicely, particularly as the cost of the players comes down. You’ll be seeing a lot more $300 and less inventory in terms of player costs on the shelves.

We’re believers because of the quality of the experience but it is going to take some time for the platform to penetrate the marketplace.

Thomas O. Staggs

I think for perspective, for a new release important title right now, you can easily see mid- to high-single-digit percentages of the units be Blu-Ray. Overall, total units are going to be probably more in the low-single-digit range because less Blu-Ray on catalog sales right now, but as Bob said, we think that’s going to continue to grow and especially as you get passed the next holiday season, it can be a more important component of the whole thing.

Robert A. Iger

And pricing as well is positive for us. The cost of the Blu-Ray DVD in the market or on the shelf to the consumer is running a few dollars higher -- actually, I guess it’s as much as $5 higher than the standard def and that obviously bodes well for us, although as it penetrates the market, we’ll see whether the pricing comes down.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Lowell Singer

Thanks, Jessica. Operator, next question, please.

Operator

Yes, sir. Your next question is from the line of Doug Mitchelson with Deutsche Bank. Please proceed.

Doug Mitchelson - Deutsche Bank

Thanks very much. For Bob, Warner Brothers seems very excited about the prospect for day-and-date VOD. I know we’ve been talking about this for a year now but with this actually starting, are you as bullish on the impact for your film business?

And then for Tom, if I could also throw in there, when you talk about your pacings, are you also seeing the same impact where international seems to be helping the pacing numbers in the theme parks more than domestic, as you said happened in the March quarter? Thanks.

Robert A. Iger

We’ve been bullish about day-and-date digital delivery or other forms of delivery of our movies for quite a while, although we’ve been in the marketplace with what was called an experiment with Comcast, and I have to say that the results -- well, they are kind of neither negative nor positive. They are not particularly conclusive. We don’t seem to see any signs that sales of films in the day-and-date VOD window are having a negative impact and I’d have to say that so far, they’ve been mildly positive because although the sales have been modest, I think we see them as basically incremental to our current business.

But over the next five years, we think that you are going to see rollout of not only more films available through cable VOD but most of the other studios are joining us at Apple and selling movies on a day-and-date basis through that platform, and there will just be more ways that movies will be available and I think in general, that’s going to be positive to our business.

The DVD or the sale of physical goods will continue to be important for a long time and will dominate the marketplace, and for Disney it is particularly important because we’ve seen that families want to own the physical copies so that their kids can play it many, many more times and that’s obviously a positive thing. But we also are in general quite positive about other forms of delivery.

Thomas O. Staggs

Doug, with regard to the visitation trends that we are seeing, as I mentioned the biggest percentage growth rate last quarter came from international, although the biggest absolute growth rate in terms of actual attendees is still domestic, given that’s a larger portion of the attendee base.

I don’t have any reason today to believe that trend will stop but I think that we need to get deeper into the summer season to really know for sure, as we get into the real vacation season.

I think that the weaker dollar has probably helped us some with international visitation. I think it also encourages domestic vacationers to stay closer to home and perhaps we are seeing the benefit of that. So we’ll have to see as we go into the summer how that unfolds, but that’s been the trend that we’ve seen so far.

Doug Mitchelson - Deutsche Bank

Thank you.

Lowell Singer

Thanks, Doug. Operator, next question, please.

Operator

The next question is from the line of Benjamin Swinburne with Morgan Stanley. Please proceed.

Benjamin Swinburne - Morgan Stanley

Thanks a lot. If I could ask two, one on 3D; Bob, it’s place that is natural for Disney to take a leadership position on 3D. I’m wondering if you could talk about the impact on the average film costs -- all else being equal, how much does 3D add to the budget per film?

And then on the revenue front, are your expectations down the road that you will price these differently at the theater or will the DVDs cost more or do you just think this is a pure just market share gainer for you relative to what else is out there once we are deeper into the 3D story?

Robert A. Iger

The cost of producing a 3D movie for a live action film runs about 25% more than the typical cost, and for an animated film, it’s significantly less than that -- actually, relatively modest. So we don’t really view this as a cost issue.

We’ve been believers in 3D for a while and probably have the most experience, particularly since we released the Miley Cyrus/Hannah Montana concert film. And so generally, we’re bullish and one of the reasons that we’re bullish is because we believe it gives us the ability to price higher but it also, because the experience is generally better, should bring more people to the movies. So we see it as a combination of factors. It’s revenue from pricing and revenue from what I’ll call greater attendance.

And if you followed the announcement that we made back last month about our animated films, after WALL•E all of our animated films that we announced except Princess and the Frog will be in 3D.

Benjamin Swinburne - Morgan Stanley

Great. Thank you.

Lowell Singer

Thanks, Ben. Operator, next question, please.

Operator

The next question is from the line of Michael Morris with UBS. Please proceed.

Michael Morris - UBS

Thank you. Just two things on broadcasting -- first of all, I know you mentioned this but maybe a little more detail; it seems like ratings drove the decline in revenue at broadcasting in the quarter. Now that you are back on the air with the programming, do you feel comfortable that the ABC Network revenue growth is kind of returning to the same level it was before?

And then second of all, with respect to that impact to international syndication and perhaps on domestic syndication from having fewer programs in the pipeline from the writers’ strike, are you back on track? Do you think that you are going to make those up in this timeframe or are those shows perhaps lost forever? How should we think about that going forward? Thank you.

Robert A. Iger

The first one, we believe that from a revenue perspective and a ratings perspective, we’re seeing a couple of positive trends. First of all, scatter pricing remains incredibly strong, up over 50% over the up-front, which was the case in the first quarter as well. We believe that dynamic bodes quite well for the up-front but in particular, ABC is very well-positioned for the up-front because it will return to its schedule an incredibly strong foundation of programs -- Desperate Housewives, Lost, Gray’s Anatomy, to name a few, Dancing with the Stars. And those programs not only deliver really strong demographics 18 to 49, but over index in a higher income, higher education houses, or households. And that essentially puts us in a position for the up-front to grow CPMs.

And so we actually are going to the up-front feeling quite positive. I’m not making predictions about the total marketplace or the depth of the marketplace but believe that going into the up-front, we are quite well-positioned.

So up-front combined with a strong scatter and the fact that ratings are returning to ABC since the work stoppage, we think we are in good shape revenue wise for the rest of the year.

Thomas O. Staggs

In terms of the episodes, in most cases we think that we will catch up and ultimately make as many episodes as we might otherwise have, but whether that’s true for all of them remains to be seen. But I think that over time, we will more or less catch up.

Lowell Singer

Thanks, Mike. Operator, next question, please.

Operator

The next question is from the line of Ingrid Chung with Goldman Sachs. Please proceed.

Ingrid Chung - Goldman Sachs

Thank you very much. So the first question I have is on the Disney stores. I was wondering if you could talk a little bit about how you are going to approach the management of those stores differently from the way you managed them before. Also, do you have the right amount of stores now? Do you need more or less? And what kind of capital investment are you planning for those stores?

Robert A. Iger

Well, we are going to have a different management team. The team that led the stores years back is gone and it will be under new management but still under the leadership of Andy Mooney, who runs consumer products. But we will have new people running the stores.

In terms of the number of stores, we haven’t really made a decision in terms of the exact number although in all likelihood, it will be fewer than we have today than more. And we are mostly going to be focused on improving location -- that is, location in market location, location within markets, location within malls.

At the same time, the initial focus is going to be on improving the quality of the merchandise and the quality of the service before we make any absolute decisions about capital investment. But Tom mentioned earlier that our capital investment will be modest and that’s what we intend to do as we basically approach remodeling and redesigning these stores.

We think the most important thing right now, at least initially, is to get into the stores a higher quality of merchandise that better represents the great array of franchise product that the company now has, which we did not have when the stores left us some years ago. And when you look at the success of the shows that we’ve talked about a lot during this call -- Jonas Brothers, Hannah Montana, High School Musical, plus the films, Cars and Narnia and Pirates, that’s a far cry from where we were when we had the stores. And I think that the ability to basically tap those great franchises, combine with new management and more focus -- we had many more stores back then. We had well above 500. At one point we were well above 300 when we exited the business and now that we’ve got roughly 220 or so and probably will end up going less, it will give us the ability to be more focused in general and basically take advantage of better locations in the marketplace.

Ingrid Chung - Goldman Sachs

Great. Thank you.

Lowell Singer

Thanks, Ingrid. Operator, next question, please.

Operator

The next question is from the line of Jason Bazinet with Citigroup. Please proceed.

Jason Bazinet - Citigroup

I think it was a year or two ago you guys described an initiative to begin self-production of videogames as sort of slightly higher risk but potentially much greater return. I was just wondering if you could share with us any color and any early lessons thus far.

Thomas O. Staggs

Sure. It was a few years ago that we embarked on that initiative and as I mentioned, we will invest about $200 million this year in product development for self-published videogames. And we are finding what we expected to be true to be true -- very attractive returns on Disney branded titles, especially those titles that are based on some of the established and hit properties that we’ve got being created throughout the rest of the company. And so we are very encouraged so far. We don’t necessarily -- we’re not announcing that we are all the way there. We think that we will continue to ramp up our spending, even as we try to build upon our creative capacity in this area. But as we look down the road a few years, we are quite hopeful that we will have created another vibrant creative center within the organization, still very heavily skewed towards Disney branded titles and skewed within the Disney brand towards properties that are established. And that I think is a very good formula for strong returns and attractive top of industry kind of margins if we continue to execute well.

Jason Bazinet - Citigroup

If you isolated that business today, would it generate cash today or it’s still a few years out?

Thomas O. Staggs

Well, the reason today that it hovers around, for example, in 2008 it will not contribute meaningfully one way or the other in terms of the bottom line. We expense all product development as it is incurred and so here as we go forward, I am hopeful that we are at a bit of an inflection point and we will start to see both cash flow and profitability grow going forward.

Robert A. Iger

Jason, I’ll mention one more thing -- we’ve seen in the last few years a demographic expansion among videogame consumers to basically include younger kids as well as more girls than we saw years back. And that’s a great benefit to Disney and part of that is due to the success of the Nintendo platforms, both the DS and the Wii. So the Disney name, Disney brand and the products that we are essentially tapping into to make videogames are playing very well on these new platforms across demographics that we would have not seen three, four, five years ago.

Jason Bazinet - Citigroup

Very helpful. Thank you.

Lowell Singer

Thanks, Jason. Operator, next question, please.

Operator

Rich Greenfield with Pali Capital, please proceed.

Rich Greenfield - Pali Capital

A couple of questions -- one, when you look at your theme park comments, Tom, it sounded like you were looking for tougher attendance trends in the third quarter. Just wondering, given the strength of your international parks, the strength of your in-park spending as well as the hotel gains year over year, is it still logical to expect revenues to actually be up in both the back half quarters?

And then just on the Disney Channel, especially with the Jonas Brothers coming, it seems like you are monetizing this stuff through so many difference pieces of Disney -- what percentage of revenue actually comes from Disney Channel branded entities, just to get a feel for how important it is to the whole company? Thanks.

Thomas O. Staggs

With regard to your first question, I wanted to point out of course that we’ve got that reversal of the Easter comparison in the third quarter and beyond that, we really don’t want to make any predictions about what Q3 or Q4 are going to look like. I mentioned that on a combined basis, that bookings were slightly ahead of the prior year, although there is greater strength in Q4 than in Q3, as you might imaging, given that Easter shift.

But in terms of predicting revenues and that sort of thing, I don’t -- that’s further on guidance than we would typically go and I think we’ll leave it at that.

Robert A. Iger

We can say though that even though Easter shifted into the second quarter from the third, the first month of the new quarter was very strong at Disney World from an occupancy perspective -- over 95% and that’s a good sign.

And I want to go back and elaborate a little bit more on some of the comments I made earlier, because clearly what -- there’s a lot of attention on this segment for good reason and what I essentially said was we’ve got great creativity, we’ve invested in the right attractions, we put our capital in the right place. We are clearly leveraging other company franchises -- I mentioned the Disney Channel Games is a great example of that but High School Musical in Hong Kong is a perfect example of that.

We are definitely benefiting from the dollar weakness, as Tom mentioned, in two ways and then lastly these pricing strategies and marketing strategies have helped. We’ve extended length of stay, which was a primary goal, we’ve moved a lot more people off property on property. That’s obviously a good thing.

When you look at the mix of our hotel rooms, we find this is also interesting and probably making us more resilient as well, and that is that we now have about 75% of our hotel rooms in Walt Disney World in the moderately priced or value-priced category. And when you look back at 1991 when there was a recession, over 55% of our rooms then were considered premium priced.

And so we have basically built out a portfolio of rooms that are more accessible to more people, to a broader section. Now, you are getting the same experience whether you are in a moderately priced or a value priced room or you are in a premium priced room -- you are still riding the same attractions and seeing the same shows and essentially the price/value relationship is probably considered a lot stronger than it was back then and we think all these factors are contributing nicely to the results that we’ve seen.

And while Tom and I have both said a number of times we don’t make predictions, we made a comment about the general bookings for the rest of the year, but I think what we are trying to say is while we don’t know where the marketplace will take us, we believe we are much better positioned in a difficult economic cycle than we were in the past, certainly back in 1991.

Thomas O. Staggs

You asked about the revenues for Disney Channel properties around the company and while we don’t break things out that way, clearly High School Musical and Hannah Montana in particular have been important drivers of our results, especially in the first and second quarters of this year. And we expect that they are going to continue to deliver for us. You mentioned the Jonas Brothers, that’s coming on strong and I think as Bob mentioned in his remarks, the creative pipeline at the company and especially at Disney Channel feels very robust, so we think that those franchises can continue to deliver well into the future.

I mentioned at the beginning of the year that we expected that High School Musical, which had made about $100 million in operating profit contribution in its previous 18 months of life, that in fiscal 2008 it would exceed that and it’s actually even exceeded our expectations from there. So it is a very strong contributor and along with the established properties, Mickey Mouse, Winnie the Pooh, Princess, Fairies is coming on -- we think we’ve built a much broader base of business from these established Disney franchises and that base gives us a nice place to operate from in terms of driving continued good results and future results.

Robert A. Iger

And it’s also seen across a lot of our businesses, so it’s obviously improved our studio, the Hannah Montana concert, the Jonas Brothers concert coming up, High School Musical 3 which comes out in October. I talked about it improving our parks, we’ve talked about it improving licensing. We haven’t mentioned today what it’s done to our music business but we have grown a very healthy and robust music business that essentially continues to leverage itself in the sense that it’s a more attractive place for new talent. And when you see Camp Rock, you’ll see what we mean. We just have a collection of platforms that are basically feeding into one another to grow current talent, attract talent, and essentially impact all of the businesses.

Rich Greenfield - Pali Capital

Can you just give us a sense of that 95% you cited for April ’08, what’s the comparable to April ’07 as just a way to think about up or down or flat?

Thomas O. Staggs

April last year had Easter in it. It was also a very high occupancy month and occupancy actually isn’t the primary place that you see the effect of Easter. It’s in actual attendance, and so I think that occupancy level, while comparable to last year, doesn’t necessarily tell the whole store.

Rich Greenfield - Pali Capital

Thanks so much.

Lowell Singer

Okay, thanks, Rich. Operator, next question, please.

Operator

The next question is from Drew Borst with Sanford Bernstein. Please proceed.

Drew Borst - Sanford C. Bernstein

Thanks. I have two questions on the parks. The first question, one of your competitors down in Orlando had mentioned that they had seen some weakness in March and despite Easter. I was wondering if you could just discuss some of the trends that you guys saw monthly during the quarter. That’s the first question.

The second question, I was wondering, Tom, if you could share with us the impact of, you know, you mentioned the Disney Vacation Clubs were contributing nicely to revenue. I was wondering if you could just discuss how much that contributed to revenue growth and maybe also talk about the operating income impact. Thank you.

Thomas O. Staggs

With regard to trends in March, as you can see from the results, and given the timing of Spring Break, et cetera, it is impossible to have those results without having a strong March. I can’t speak to what other people have experienced but we are obviously pleased with the pace of business that we saw in Q2 at our domestic parks, as well as our international parks.

With regard to Disney Vacation Club, this has become a very important business for us and one of the things that I think Bob has cited in talking about the resiliency of the business overall. And the -- so DVC did contribute to the revenue growth in the quarter. It wasn’t the biggest driver of revenue growth but we did see an increase in DVC revenue. Similarly, it was a component of -- although not the biggest component on its own in terms of unit sales of operating income growth. We also had higher rentals of Disney Vacation Club units and that showed up in our results, although it doesn’t come through as DVC. Obviously it’s different than selling the units but we have units available for rent with the rest of our room inventory. That contributed.

I mentioned hat we had some term extensions at old Key West, which I think is a tribute to the product because this is really when we sell our vacation club memberships with defined terms and we’ve had a nice response to offering to extend those terms for people that want to have that property for a longer period of time and perhaps pass that property down within the family, et cetera. And so this business continues to be a very nice driver for us and contributed nicely to our growth in the quarter.

Drew Borst - Sanford C. Bernstein

Is there any way to -- I mean, your U.S. park revenue went up by $172 million when you strip out the royalties. I mean, is there any way to specifically quantify how much was from the vacation clubs?

Thomas O. Staggs

Yeah, I mean -- you should infer from my comments that it’s well under a quarter of the revenue increase, or a under a quarter of the revenue increase in terms of revenues. We have nice profitability from our vacation club sales and so the profitability contribution was strong. But that’s as much as we really break that business out.

By the way, one of the reasons is that what we do in the vacation club isn’t on a quarter by quarter basis. It’s going to have a fair amount to do with the inventory of units we have available for sale. So in other words, Saratoga Springs, which is now about 90% sold, we had less and less to sell there, whereas Animal Kingdom Lodge was ramping up in the quarter. So as we shift properties, quarter to quarter comparisons in the vacation club become a little bit tricky. When you look at it overall, this business has shown nice growth for us over the last several years and I suspect it will continue to contribute nicely going forward.

Drew Borst - Sanford C. Bernstein

I’m sorry, just one last point and I’ll get off but in terms of the inventory that’s coming online over the next couple of quarters, I mean, you’ll continue to see a steady ramp?

Thomas O. Staggs

We’ll continue to have inventory available. There isn’t a substantial up-tick in inventory available necessarily in the next couple of quarters but we have new properties under development as you look forward over the coming years.

Drew Borst - Sanford C. Bernstein

Okay, great. Thanks a lot.

Lowell Singer

Thanks, Drew. Operator, next question, please.

Operator

The next question is from the line of David Bank with RBC Capital Markets. Please proceed.

David Bank - RBC Capital Markets

Thank you. First off, I was wondering, kind of given where we are in the season, could you quantify where you think the primetime ratings actually are season to date? And could you help us get our arms around the core trends a little bit better? You know, there’s a lot of moving parts here. You’ve kind of got the C3 to live, plus seven, you’ve got the WGA strike -- what do you think on a kind of live plus to live plus seven that the core trends are? And what do you think the strike took away?

And then if I can, just a second question -- what percentage of the park or the hotel attendance and park business is attributable to business and convention visitors? And are those trends any different than the overall trends? Thanks very much.

Robert A. Iger

I think there are too many apples to oranges comparisons ratings wise from this season to last, mostly because of the strike. And so citing a trend is difficult. We also have essentially a difference in terms of the way we are really measuring this.

The focus from a sales perspective is on commercial ratings plus three and that will largely be the focus going into the up-front, as it was last year. I think it’s safe to say that the ratings were probably slightly down over where they were last year but then once the strike hit, that comparison was impossible. And they’ve come back, although that’s difficult as well because there are fewer people using television this time of the year because of daylight savings time and so it’s difficult to compare the ratings post strike with pre strike for that reason.

As I said earlier, we think we are well-positioned in the marketplace and I think that’s probably the best way to leave it.

In terms of the percentage of business and convention -- that business and convention business represents to the park, we don’t break that out. We have a good business there. It’s been a good business for quite a while and it continues to be.

Thomas O. Staggs

And in the quarter, there wasn’t a meaningful change or shift in the amount of business and conventions attendance or resort activity that I would spike out as being a dramatic driver of the results in either direction.

Robert A. Iger

It might have been slightly less only because Easter was there and there were fewer conventions going on because of the holiday season, but that would be the only change.

Thomas O. Staggs

Yeah, well we haven’t seen a dramatic shift in that business

Lowell Singer

Thanks, David. Operator, next question, please.

Operator

Alan Gould with Natixis, please proceed.

Alan Gould - Natixis Bleichroeder

Thank you. You’ve given us the scatter market. Could you give us some other ad trends -- what’s happening at ESPN, what’s happening at the local TV stations? And also, it seems to me there’s a big difference between -- a big gap between local and national ad trends this year. Could you comment on that?

Thomas O. Staggs

We are up at ESPN quarter to date. It’s been -- you know, a lot of this is supply driven but ESPN continues to see nice ad trends, sort of mid- to high-single-digits if you look over the last couple of weeks pacing over the prior year. The local TV stations I mentioned in the prepared remarks are down mid-single-digits or so versus the prior year -- again, that’s been -- that’s a little bit -- that’s Q3 I’m talking about. That’s a little bit of a choppy market as well.

Q2 by the way, ESPN was more like up high-single-digits in ad sales. So we continue to see good strength there but we’ve talked in the past about the fact that there is going to be a difference in the ad market between the network let’s say and the strongest of the cable networks and perhaps others, so I don’t know if that’s indicative of the cable market in general, although we’ve seen reasonably good strength there.

On of the drivers of our growth last quarter, as an example, was Lifetime and A&E. They had nice advertising sales. So I think that the local versus national trend is one that we all keep our eyes on and our television station business though, there we’ve managed to gain share pretty nicely over the last couple of years. We have an extraordinarily strong set of managers in our stations. They do a great job of capturing share but the -- we just have 10 stations. They are in the major markets and so I think they are a little bit better insulated from some of the trends in local that you might otherwise see. And in terms of the positioning of local stations, I think ours are in very, very good shape.

Alan Gould - Natixis Bleichroeder

Tom, are you worried that some of the local industry trends are going to start affecting national advertising?

Thomas O. Staggs

Well I think that what you are seeing, for example, during the strike obviously supply was constrained in national advertising and the response was that rates went up dramatically. It didn’t drive the advertising necessarily away from network television.

I think there is a unique context and a unique reach of network television that has yet to be matched by other media and I don’t see it being matched any time soon. So I think that that is a unique buy. It’s part of the reason that we think over time, although it’s certainly not a growth business, the 10 major market stations that we have will also fair reasonably well because they again provide context and a reach in a strong, large local market that is hard to replicate.

So only time will tell but I think that we are reasonably well-positioned.

Alan Gould - Natixis Bleichroeder

Okay. Thank you.

Lowell Singer

Thanks, Alan. Operator, next question, please.

Operator

Jason Helfstein with Oppenheimer, please proceed.

Jason Helfstein - Oppenheimer

Thanks. Two questions -- first, just not to harp on the parks but is there anything you guys are thinking about doing to offer incentives for the summer months to help offset the high price of gas, as that seems it’s going to get more focus in the press and politically? And then my second question, obviously this was a very strong studio growth quarter, particularly with margins and just the way it looks, it looks like you’ll finish the year with record margins in the studio. How does that set you up for next year as far as creating more difficult comps, given the tight cost controls this year? Thanks.

Robert A. Iger

We haven’t seen any evidence that the increased price of gasoline is having an impact on our park attendance and so we don’t believe there is any reason for us to consider any pricing strategies that are in any way tied to gasoline price increases. We still have a really strong business, as we’ve said a few times, and it continues to grow nicely and we don’t really -- we definitely have pricing strategies that reflect demand issues throughout the year but none that in any way reflect other things that are going on in the marketplace.

Thomas O. Staggs

With regard to the studio, I think it’s important to remember that in the studio entertainment business, there’s a piece of the business that get reinvented every year. That is fundamental to the strategy that we put in place to invest behind Disney branded films where we think there is a better chance of a return and a built-in sampling, if you will, because this brand means something. I think it also leads to greater consistency in returns, et cetera.

The business itself though will be determined on how successful the pipeline of films is. Bob mentioned our confidence in the strength of our film pipeline. We feel very good about it. Time will tell just how well it performs but we’ve got WALL•E coming out this summer. That’s a video release for next year. We’ve got Bolt, the first animated film out of the Disney Animation Studios since the deal with Pixar, we feel very good about that title for next year and that would likely have its home video release in 2009.

So at this point, we certainly wouldn’t make any predictions about where the studio will be next year. The best thing you can have is a studio that is continually setting up tough comparisons and right now we’ve got a studio that is doing that, so I feel pretty good about that.

Jason Helfstein - Oppenheimer

Thank you.

Lowell Singer

Thanks. Operator, next question, please.

Operator

Imran Khan with J.P. Morgan, please proceed.

Imran Khan - J.P. Morgan

Thank you for taking my questions; two questions, one for Bob and one for Tom. Tom, you know, your cable networks margins are improving for the last few years, so I was wondering how should we think about the cable networks margins for fiscal 2008 and over the next three to five years?

And the second question, Bob, you talked about how videogames extending the demographics and that’s an opportunity for Disney. Could you give us some color -- do you believe that the Disney characters driven videogame has a broader appeal in the international market? And are you satisfied with your studio? Do you see a need to acquire a larger studio for videogame makers, basically? Thank you.

Thomas O. Staggs

We have seen margin improvement in the cable nets and I think that one of the primary drivers of that, of course, is ESPN. Because ESPN has its affiliate agreements locked in for several years in the future and because the major sports rights for the most part are locked in for a period of time going forward, we’ve mentioned that we think that we’ve got a leverageable cost base.

We’ve also been investing quite actively in Disney branded programming for our Disney Channels and our Disney programming blocks around the world. And we had said a few years ago that we expected to show less growth in the Disney Channels as we invested in that programming, and that the benefit of that would be seen across our other businesses and that’s exactly what we are seeing.

We’ll continue to make those investments but as our efforts to broaden distribution -- this is looking out over the next three to five years -- as our efforts to broaden distribution internationally, as those channels mature and as we start to anniversary some of our higher programming investment, I think there is an opportunity for the Disney Channels to start to contribute to margin growth as you get out towards the end of that time period.

So I think that we feel there is more we can do in terms of margins at the cable networks with continued creative success and given the strength and positioning of ESPN. So we are hopeful that we’ll continue to deliver on margins the way we have been.

Robert A. Iger

On the game side, we are comfortable with the developers that we’ve bought. They’ve enabled us to ramp up investment and production in a focused and deliberate way. We never intended to go from zero to 60 in four seconds because that business is both risky and is highly dependent upon not only quality titles but quality production. And so we’ve taken what I’ll call a combination of an aggressive and a patient approach, meaning aggressive in terms of our intent to go into the business at a significant level but patient in the sense that we didn’t believe that it had to happen all at once. And we like that discipline.

We’ll remain open to buying more development teams and more talent if we believe that that’s how it can basically fuel our production of quality titles. But again at this point, we are pretty satisfied with where we are. And we do see the ability to leverage Disney games titles on a global basis not just on what I’ll call console platforms or handheld devices but also online, which in some markets like Asia and notably South Korea and China, will become more and more important, and are more important today.

Imran Khan - J.P. Morgan

Great. Thank you.

Lowell Singer

Thanks. Operator, next question, please.

Operator

Anthony DiClemente with Lehman Brothers, please proceed.

Anthony DiClemente - Lehman Brothers

Thanks for taking my questions. One for Tom and one for Bob; Tom, at the parks, you talked about the strength in occupancy. Last quarter the number of room nights available were slightly down year over year in the 1Q. I was wondering if that trend continued in the 2Q. Is that a way that you can manage the efficiency of the park, both in terms of costs and in terms of occupancy level?

And then Bob, following up on the comments on cable networks, just given the strength of ESPN and Disney Channel and given the strength of your balance sheet, I just wonder if you’ve considered growing your exposure to the cable networks businesses via acquisition. There might be some properties out there that could fit well with the Disney brand. Thank you.

Thomas O. Staggs

Well, with regard to park occupancy, the available room nights wasn’t dramatically different year over year at all in this Q2 and occupied rooms actually at Walt Disney World, for example, was within 1% year over year. So there’s not a lot of shift as a result of that.

But you asked about efficiency -- yes, to the extent that we needed to, we would look at total rooms available and from a standpoint of managing costs across our properties. We’ve done that in the past, to the extent that we saw an opportunity to both manage costs and also take advantage of an enhanced opportunity to do routine maintenance, et cetera. So that’s a weapon at our disposal, should it be necessary.

Anthony DiClemente - Lehman Brothers

And how does that actually work? Do you shut down portions of certain hotels or how does that mechanically work, if you were to go that route?

Thomas O. Staggs

Yes, in other words, what we’ve done in the past in -- after 2001, we selectively shut down wings of certain hotels that were due for scheduled maintenance. We were able to do the maintenance during the day on a concerted basis. It saved us on the maintenance. It also saved us on the cost of operating the hotel, so that’s something that we can look at if it becomes an issue.

As you can tell from the occupancies that we are reporting, however, it’s not an issue right now.

Robert A. Iger

And on the cable net side, we look at any potential acquisitions with similar discipline in a way, whether they fit well strategically, whether we believe that they are right priced and have the ability to grow and deliver the kind of returns that we typically demand.

Specifically in the cable business, we are more bullish on channels or businesses that are branded, that are specific in terms of their program focus, and would be less interested in what I’ll call general entertainment, more commoditized cable program plays. But again, the first criteria would be again right price and whether we would have the ability to grow the business within the Walt Disney Company.

Lowell Singer

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

Operator

David Miller with SMH Capital, please proceed.

David Miller - SMH Capital

Bob, just sort of an offbeat question for you with regard to WALL•E -- if you look at the last few Pixar films, besides just being huge box office winners, they’ve enhanced your other businesses in different ways. Cars, for example, huge consumer products play. Finding Nemo as a big home video seller. Ratatouille, not really a consumer products play but a huge revenue generator overseas in terms of box office. Now here we go with WALL•E -- can you just sort of talk about the overall tone of the film and how you see it enhancing the other businesses within your platform? Thank you.

Robert A. Iger

Well, first of all we see WALL•E as a great film by a great director from a great studio, and we’ve seen a fair amount of creativity already in terms of consumer products. There’s some great toys and we are working on a variety of potential applications for our parks, but -- and so we are poised to take advantage of broad and deep success when it comes. But right now, I can’t say exactly how we’ll be able to leverage the success of this until we really see it. But we are big believers in the film and the concept and in particular the lead character.

I can tell you that, since I know you have kids, Dave, you ought to get in line to buy the WALL•E robot because it is going to be a pretty hot seller. Having played with it, I think it’s going to be real in demand for Christmas season, about the time that the DVD comes out.

David Miller - SMH Capital

Thank you.

Lowell Singer

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

Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of 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 today’s second quarter call. Have a good day.

Operator

Ladies and gentlemen, this concludes your presentation. You may now disconnect and have a great day.

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