Walt Disney F1Q07 (Qtr End 12/30/06) Earnings Call Transcript

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Walt Disney Company (NYSE:DIS) F1Q07 Earnings Call February 7, 2007 4:30 PM ET

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Bob Iger - President and CEO

Tom Staggs - SEVP and CFO

Teri Klein - VP, Investor Relations


Unidentified Audience Member - Analyst


Welcome to the Walt Disney Company's quarter one fiscal year 2007 earnings presentation. And now, I turn you over to the live Q1 earnings commentary being presented from Disney's 2007 investor conference at Walt Disney World, Florida. Please note this webcast is a listen-only and that all questions for the Q&A will come live from the conference floor.

Bob Iger

Good afternoon. It's great to be here at Walt Disney World, particularly in light of the quarterly results that we just announced. I am very pleased to report such strong quarterly earnings to kick off 2007. I think these results are particularly gratifying, given the fact that we had such a great year in 2006. And I think they are another clear sign that our strategy is driving growth and creating real shareholder value.

And you're going to be hearing from a variety of people at the Walt Disney Company over the next day and a half. There is a lot going on at the Company, as you'd expect, and my team and I are looking forward to the interaction with all of you. I'll be getting up tomorrow morning to make some opening remarks, and then I'll be available at the end of the day tomorrow after all the business units have presented to take your questions.

And so with that, here is Tom Staggs, our CFO, to give you the details of the quarter. Tom? You don't get the florist that I got, no music, no. Here is Tom.


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Tom Staggs

Well, the earnings are better than our technical prowess seriously. Thanks for coming. To all of you here, welcome to Walt Disney World. And also to all of you listening in, welcome to Disney's 2007 investor conference.

It's a pleasure to be with you here again in Orlando. If you've seen by now, the creativity, hard work, financial discipline, and unwavering focus of our managers drove another quarter of exceptional financial performance. The segment operating profit and earnings per share are each up by over 40%.

In our sessions later tonight and tomorrow, you'll hear a great deal about each of our major lines of business, and the integrated approach we're taking to manage them delivered continued strong financial results and increased value to our shareholders. So for this session, I'm going to focus on our current quarter earnings and some of the swing factors we see for the balance of the year.

In many ways, strong results like the ones we just reported speak for themselves. So I'm going to keep these comments brief. But any discussion of the quarter has to start with "Pirates" and "Cars." They represented two of our biggest performing films in theaters last year, and their home video releases helped drive record Studio results in Q1.

Together with the release of "Little Mermaid," Pirates and Cars drove an increase of more than $475 million in Studio operating income for the quarter. Between these titles, we recorded over 50 million DVD unit sales. For the quarter as the whole, we sold 128 million DVDs compared to a little over 70 million in Q1 of last year.

The conversion of box office results to DVD sales was especially strong for Cars, which generated the highest conversion rate for any Pixar animated film since "Finding Nemo." Our success with Little Mermaid is another reminder of the particular strength of a longevity of our library, and all indications are that we've added another evergreen title to our inventory with Cars.

The success of the Cars and Pirates films is tremendous, but the benefits that these franchises will continue to deliver to the entire company and the Disney brand well into the future is the real value creation story. As we've said for some time, creating high-quality branded content with enduring franchise potential, like Pirates and Cars, is central to our business and investment strategy.

Our Studio performance also indicates that the distribution of our films on new digital platforms is not cannibalizing traditional platforms. To date, over 1.5 million of our movies have been downloaded through iTunes, and we think this broader distribution of our product is a catalyst for broader consumption of our product.

The quarter's stronger video performance was somewhat offset by theatrical results given that last year's quarter included the release of "The Chronicles of Narnia." For the rest of 2007, the primary swing factors in our Studio results will be our remaining major theatrical releases. These include the Touchstone release, "Wild Hogs," and Disney's next animated feature, "Meet The Robinsons."

You should note that since Robinsons opens on March 30th, the majority of our marketing spend for that title will hit the March quarter with substantially all of the revenue from the theatrical window coming in the June quarter.

Our two most notable theatrical releases this summer will, of course, be the third installment of "Pirates of the Caribbean" and our next Disney/Pixar film, "Ratatouille." You'll hear more about these films during the Studio's presentation tomorrow.

In home video, we'll face some tougher comparisons in the remainder of 2007, especially in Q3, when we will be comparing against The Chronicles of Narnia, which was our bestselling DVD title last year.

The popularity of Pirates and Cars also bolstered our Consumer Products results, along with our portfolio of evergreen franchises like Princesses, Mickey and Pooh. Q1 represents our third straight quarter of double-digit year-over-year growth in earned royalties at merchandise licensing. However, that growth was offset by lower guaranteed revenue recognition in the quarter.

As we noted at the beginning of the year, we expect to record roughly 70 million less in minimum guaranteed revenues in 2007 than we did in fiscal 2006. Roughly, 44 million of that year-over-year impact hit us in Q1.

We completed the $300 million sale of our stake in Us Weekly at the beginning of this last quarter. We invested $30 million in Us six years ago for a 50% stake in the magazine. Since that time, Jann Wenner substantially increased its value giving us a great return on our investment, until the sale of this business rolled up into Consumer Products and accounted for approximately $25 million in operating profit in 2006.

As we'll discuss in greater length tomorrow, we continue to ramp up our investment in video games. This business is important to us, both as a potential source of future growth and as a creative engine for our company. As we ramp up, this spending will dampen Consumer Products' results.

In addition, Q1 of last year included two of our strongest titles, Chronicles of Narnia and Chicken Little, which together sold more than 3 million units. Our most important releases for this year, which include Meet the Robinsons and Pirates 3, launched in Q2 and Q3, respectively.

We expect to increase video game development spending to roughly $130 million in 2007, about 30% higher than our 2006 levels. As we have said previously, over the next five to seven years, we're targeting to increase our video game development spending to $350 million per year.

In Broadcasting, the absence of the NFL dampened revenue growth for the quarter but resulted in increased profit. This change coupled with primetime CPM increases of a little under 4% versus upfront pricing more than made up for a slight ratings decline in primetime.

So far, in Q2, we've seen a very strong ad market with CPMs up low double digits ahead of upfront pricing, which if the trend continues is a good sign, as we enter this year's upfront selling season.

Positive network results were offset in the quarter by higher TV production costs, as well as costs associated with shows that were cancelled during the quarter. Although we saw higher cost of the television fees this quarter, there is a significant upside from owning some of our most successful shows.

As we've noted before, shows that are currently in or slated for syndication including, "According to Jim," "My Wife and Kids," "Lost," "Grey's" and "Desperate Housewives," should contribute over $1 billion in operating profit to our TV studio as we distribute them in syndication, on DVDs and through other new platforms. Our TV stations are also extremely well positioned in their markets, thanks to the strength of our local news franchises, syndicated programming and of course the ABC schedule.

This past November Sweeps, 8 out of 10 of our stations again ranked Number 1 in primetime. And our top five stations ranked Number 1 from sign-on to sign-off. They also ranked number one for their 5:00 pm and 6:00 pm newscasts and for ABC World News with Charlie Gibson.

This performance, coupled with political spending prior to the midterm elections, helped drive a particularly good December quarter for the stations with ad sales up roughly 15% versus last year. Of course, in Q2, our TV stations faced difficult comparisons to last year, which includes the Super Bowl on ABC and as you'd expect, ad sales to stations thus far are pacing down by mid-single digits.

At radio, our ad sales grew by 3% in Q1. And this quarter's pacings are also up low single digits ahead of the prior year. The ABC radio transaction is on track to close early this summer and we anticipate distributing the stock received in the form of a spin-off. When this deal is concluded the portion of our radio assets involved will be treated as discontinued operations for all periods that we present in our financials. These assets represented roughly $0.04 of our 2006 EPS.

In Q1, broadcasting results also reflect the ramp-up of our investment for Disney mobile's ongoing rollout. So far, sales are tracking in line with our plan and we're pleased with consumer response, as Steve Wadsworth will discuss in greater detail tomorrow.

Our cable networks met with great success this quarter, reflecting our ongoing focus on branded content and sports programming that we can leverage across different businesses and different distribution platforms. At ESPN, the multimedia success of Monday Night Football contributed to solid ad revenue growth for our cable businesses in the quarter. Online, espn.com's NFL and Monday Night Surround content viewed on computers and wireless devices generated an average of 24 million page views on Mondays, up more than 50% over page views last year. This in turn helped reinforce TV viewership, driving an increase of 40% in revenue per game versus Sunday night football last year.

At the same time, ESPN's reported operating income was impacted by the fact that we deferred $60 million more in affiliate revenue this quarter than we did in Q1 of 2006. In Q2, we expected to defer roughly $85 million more in affiliate fess than we did in Q2 of the prior year. In both instances, we expect to recognize the deferred revenue in the second half of this year. So far in our March quarter, overall ad sales for ESPN are pacing low to mid-single digits ahead of last year.

This weekend, we launched our ESPN coverage of the NASCAR Busch series. It's early but sales are going well and our first race is sold out. We've made a big investment in key sports rights and high-quality live sports have been a cornerstone of ESPN's success. But ESPN's results demonstrate our ability to leverage these rights across platforms to generate consistent growth. In addition, the strength and reach of ESPN provides unique multiplatform coverage that is increasingly important to sports leagues in achieving the reach and recognition that they seek.

As with ESPN and our studio, our experience at Disney Channel reinforces our belief that digital distribution can broaden audiences. By making hit shows available on disney.com, broadband player, we're seeing greatly enhanced traffic at the site and driving ratings success at the same time. Average monthly unique visitors to the site in Q1 more than doubled versus last year. And Disney Channel was the number one basic cable network in prime time with both kids 6 to 11 and tweens 9 to 14 for the fourth consecutive year in calendar 2006. Although, the Disney Channel is not ad supported, this quarter's results demonstrate the value of the hit programming that Rich Ross and his team are creating there.

DVD sales of "High School Musical" and "Cheetah Girls 2," coupled with songs from -- Hannah Montana's soundtrack sales helped drive a double digit percentage increase in operating income at our cable businesses this quarter and helped bolster the studio segments results as well.

At Disney Parks and Resorts, we again posted solid growth in revenue, profits and margins. Overall attendance for our domestic products came in flat, with Disneyland Resort down 5% because of difficult comparisons to the 50th Anniversary celebration. Walt Disney World attendance was up 3%, which was noteworthy given last year's record holiday season. Per capita spending at our Walt Disney World parks grew 7%. At Disneyland, per capita spending came in just below last year due to the substantial merchandise sales associated with the 50th Anniversary.

On the resort side, our Orlando hotel occupancies increased to 85% and per room spending grew 2%. At Disneyland, occupancies were 94%, down just slightly from the prior year, while per room spending came in just above the last year.

As we look head, advance bookings for our combined domestic parks for the March quarter are trending about 3% ahead of last year, as The Year of a Million Dreams celebration appears to be resonating with our guests.

The first quarter reflected lower than expected results at Hong Kong Disneyland with attendance and per caps falling short of our expectations. The early going in Hong Kong has been more challenging than we had hoped, as Jay Rasulo will discuss in his presentation later this evening. At the same time, we remain both confident and committed to the long term success of our project there.

This quarter's asset sales and our pending ABC radio transaction reflect our focus on maximizing the value of our assets. We'll continue to direct resources primarily toward branded entertainment experiences that can be leveraged across businesses and platforms in order to benefit the whole Company. We'll also to continue to allocate excess capital to share repurchase and dividends.

This year's $0.31 dividend represented our 51st consecutive year of dividend payments and during Q1 we also repurchased 29 million shares of Disney stock for roughly $1 billion. Through last Friday, we've purchased over 18 million additional shares, bringing our fiscal year total share repurchase to roughly $1.6 billion.

The keys to Disney's success are the quality of our content, consumer affinity for our brands and our ability to leverage creative success across the scope of our businesses. Our Company-wide focus on these competencies has resulted in the earnings growth, strong cash flow and improving returns you've seen us deliver for four straight years now. And will, we believe, always remain at the core of Disney's success. Tonight and tomorrow, you'll hear more about our efforts to strengthen and extend Disney's competitive advantages in our various businesses in response to the changing environment.

Our outstanding Q1 financial performance on the heels of our record 2006 results is an indication of our progress in that regard. At the end of the conference tomorrow afternoon, as Bob mentioned, we'll be back -- he and I will be back to address your questions about the Company and the business as a whole. But for this evening, I'd be happy to take a few questions regarding the results we've just reported. Since we're webcasting our sessions, please wait for a microphone before you ask your question so that people that are listening in can hear them.

So, if we can bring the microphones around, we'll start up here in front with Anthony.


Tom Staggs

All right and the mics. I'll just repeat the questions then.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tom Staggs

Sure. So the first question has to do with scatter pricing that we're seeing on the network and whether or not it's industry related or particular to ABC?

And the second question has to do with the -- our investment at the Disney Channel and whether we're looking to ramp-up that investment given the success we've seen in those shows?

With regard to the scatter market, I think it's a generally strong scatter market that we're seeing. There is not a terribly large amount of inventory out there. So I think there's some impact to the fact that there's a little bit less supply. And as some folks have less to sell than others. I don't have the exact tracking for what the other networks are selling. But it looks to me that it's the ad market itself is strong. But the fact that we have some of the most sought-after shows I think is helping us quite a bit as well.

So, it's clear that just like we saw in DVDs, etcetera, that people are making choices as to where to put their money, whether it's buying content or whether it's advertising in content. And so, we're obviously pleased with the strength of what we've seen in the network, especially with the move of "Grey's" to Thursday night, etcetera.

With regard to the spending at the Disney Channel, we talked at the beginning of the year and, in fact, talked some last year about the fact that we'd like to continue to ramp-up our investment in programming for the Disney Channel and Disney branded programming more broadly. We're going to do that both in terms of the domestic Disney Channels, but we're also spending more to create programming around the world, specifically for certain countries. And then when we have hits in certain countries, we're exporting those

Rich Ross is going to talk a little bit more about those plans tomorrow as we give you a sense of how we're thinking about measuring that investment. But we think there's an opportunity to invest more in Disney branded programming, both domestically and internationally.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tom Staggs

So the first question has to do with deferred revenue at ESPN and the profitability impact. And the second has to do with sort of the timing for when there would be a material impact from digital downloads etcetera.

As I mentioned, we deferred $60 million more in revenues in Q1 of this year than we did -- than we deferred in Q1 of last year. And the -- but with that deferral there are no deferred cost that go with it. Only revenues are deferred. And therefore, all other things equal, that should be a direct shift of profitability from one quarter to another. And as I said, that money would -- we expect to recognize in the second half of the year.

With regard to digital downloads, it's -- I think it's inherent in your question that it's early still. We're, right now, pacing that our downloads, for example, from the Studio and iTunes, it's at a pace to do a little better than about $25 million of downloads for the year. It's nice because it looks like that's a purely incremental audience by all accounts. Certainly our DVD sales in the first quarter would point to that being worst-case and not cannibalistic. Best case, audience expanding. And I think it's probably the latter that's true.

So the -- having that extra revenue certainly, already impacts the bottomline. I think it's going to continue to grow. We don't want to make any projections about just how fast it will grow. But it looks like the digital download audience is going to continue to expand and become a more important part of our overall Studio business.

Again, we also think that the impact of that is that the pie will continue to grow as a result. You'll hear more about that from our Studio folks tomorrow and in some of the comments that Bob will make in his opening.

Okay. We've got -- whoever has the microphone can just speak.

Unidentified Audience Member

Great. Thanks, Tom. So the first question is on the Studio. The number is very strong. It looks like you converted about 80% of the incremental revenue in TV to the Studio. So was that just a function of mix or is there something else going on there that's helping the margins, because I don't think you've had a 23% margin at the Studio in a long time.

And then secondly, on the free cash flow line that was down about $100 million. And it looks like it was mostly the increase in receivables. Was that also related to the DVD sales?

Tom Staggs

Right. So with regard to Studio margins, we did have a very nice flow through rate. A couple of things are going on there. Number one, just for the fact that it was being driven by home video. As you all know, when we amortize the cost of a given film in its initial release, we amortize those costs based on our estimate of the windows through which they'll go. And we adjust those as we go along.

There's only so much of the cost that will come forward into video, of course, because we still have very robust ancillary windows for future revenue. And so, as you add incremental sales, you get a very nice flow through rate of that from a profitability standpoint.

We also, as I mentioned, saw a lot of strength from our 'Little Mermaid' release. There that's a fully amortized title, and it's something we've talked about in the past. The nature of our branded -- Disney branded library is such that it continues to show evergreen qualities. And when it sells through as strongly as we're seeing, it has a very strong impact on our profitability, as you would expect.

And the second question was -- the cash flow. So the -- you hit the nail on the head. The biggest impact to cash flow this year in terms of comparing it to the earnings and comparing it to last year is that we had a much greater investment in receivables this year than last. And as you expect, over two thirds of that was really driven by the Studio.

We sold quite a few DVDs during the year -- during the quarter, sorry. And those generated a big uptick in receivables, money that we'll be collecting here over time. So the cash flow is back as we make the collections on those receivables. So there's a modest increase in capital expenditures as well, consistent with what we talked about at the beginning of the year.

Unidentified Audience Member

You mentioned -- can you talk about on the cable network segment, you had some very strong international growth. Of the 22% operating growth year-over-year, how much was international versus domestic strictly at the Disney Channel?

Secondly, on iTunes contract, when does that expire, and would you look to renegotiate given the profitability of your DVD segment? How do you look at the iTunes contract for film and also on the TV side versus where you have it today in terms of a renewal possibility? And then on -- related to that, have you had any discussions with U2 about pulling down the content as [Spycom] did last week, or are you any closer to a negotiation there?

Tom Staggs

Okay. So I'll try to track through those. I'll go in reverse order and no doubt forget the first question by the time I get there. But with regards to YouTube, I'm not going to comment specifically about any discussions that we're having. At the end of the day, it's obviously an issue that we're looking at closely. And I think it's something that you'll hear us -- in the comments that we'll make over the next day and a half, you'll get a sense of how we want to be aggressive in terms of being out there on additional platforms.

We continue to favor a market-based solution to these things. But at the same time, when we think about video out there on the web, we want to make sure that it's out there in a way that respects the copyright holders, both ourselves and others out there. So it's an issue that's going to evolve overtime. But there's no set answer to it at this point.

Give me the second question again?

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tom Staggs

The iTunes contract. We've been very satisfied as you can imagine with what we've seen there. We've talked about the downloads to-date, we've talked about the ABC television shows. Anne Sweeney is going to talk a little bit more about it tomorrow. I wouldn't anticipate any dramatic changes in that going forward. The cable networks strong results were driven primarily domestically, but we also saw strong results internationally. Again, the Disney Channel programming is really resonating around the world. And so we're seeing some strong figures there.

The 'High School Musical' DVD was a very big seller in the UK, for example, outselling major theatrical releases there, even though it had been on television several times, free TV, and on the Disney Channel. So we're seeing strength in both areas.

Unidentified Audience Member

Tom, Two questions. First, could you give us a sense how the NASCAR contract is going to get amortized by quarters? I know you started the Busch series, but I think the NASCAR series is at the end of the year, so what is the amortization look like.

And second, for football, have you looked at the profitability of your deal with the NFL this year versus last year when you had it on both networks? Is it more profitable, about the same, less profitable? Can you give us a sense of how the overall impact is on the Company? Thanks.

Tom Staggs

Sure. So with regard NASCAR, I mentioned that we've got the first race coming up. But the bulk of the races, the bulk of the value of the races is in the fourth quarter and that's where you're going to see most of the amortization. Remember that this year, only about 60% or so of the first year of NASCAR will be in the fiscal year. And something on the order of 70% of that will be amortized in the fourth quarter.

So it's back-end loaded and it's not quite a full season this year for NASCAR. We look hard at the profitability of football and there's a number of different ways to look at that profitability. At the end of the day, I talked about some very, very strong results and those results exceeded our expectations.

So we're pleased with the relative profitability of the NFL. How you allocate revenues to the NFL can have a great impact on how you view the profitability of that contract. I would say to you that it's a contract, we're pleased to have. And it's one that, I think, benefits the NFL and I think it's one that benefits ESPN at the end of the day.

And I really have to commend ESPN for the job they've done in this first year, moving to Monday night, driving across platforms. I don't want to steal George's thunder because I know he's going to talk about it more tomorrow, but really a spectacular job by he and his team.

Unidentified Audience Member

Okay. To follow-up on the ESPN comment for a second -- follow-up on the ESPN comment for a second. Not to pigeonhole you too much here, but if we add back the $16 million, it seems pretty apparent that ESPN had underlying EBIT growth of over 10%. Can you confirm that?

And given that in the face of the step up in the NFL programming, I mean, I would think your confidence in ESPN is 10% [question inaudible - mic inaccessible] is that accurate? And then separately, you just delivered almost 10% earnings growth for the year in the first quarter $0.15 improving year-over-year.

I know you shied away from committing the 10% earnings growth for this fiscal year, may just be a little bit nervous. Are you ready to commit to 10% earnings growth for the year? Thanks.

Tom Staggs

So let me translate those questions. You'd like guidance on ESPN and guidance on earnings? Okay. You know, we really have made a point of saying that, we don't think the best thing we can do for our business is to give guidance. But I am happy to try to talk about swing factors etcetera.

It's obviously, a great start to the year. When I think about the remainder of the year, I think the toughest comparables are in Q2 and Q3, in terms of comparisons. And in terms of, the lineup that we've got from the film release standpoint and that sort of thing. So, we'll be watching those closely to see whether the overall year turns out. But it's hard not to be pleased with where we are, out of the blocks here.

We've tried to convey our confidence in ESPN any number of ways. Our confidence hasn't waned at all. While I'm not going to make a specific projection about ESPN's growth this year, in response to the question that I think, Anthony asked in the last conference call. I mentioned that we had said that ESPN would grow on average double digits through 2008.

And that this year's growth rate would be consistent with that goal, and I'm happy to stand by that comment. Who's got the mic?

Unidentified Audience Member

Just one quick question. Given the very robust DVD unit sales in the quarter, I guess my question is, holding the great content aside, are there other changes that have occurred in the business, either in terms of pricing or distribution agreements or higher marketing budgets and accounts that were robust?

Tom Staggs

Well, this wasn't driven by higher marketing budgets. And we obviously, approached it with a pricing strategy that generally is consistent with what we've done before. So, there aren't major changes there. I think that it's consistent with what we've been talking about for a while. That, you know, our biggest job is to make sure we're making very high-quality product. We have the benefit of creating that products under the Disney label.

We think that's going to help us to take advantage of whatever market is there. It turns out that the market was quite strong. But the consumer is increasingly getting used to choice. And as the consumer's ability to choose increases, I think you get -- being focused on quality content that's marketed under strong recognizable brands, is a winning strategy.

We're going to talk tomorrow about, where we're taking the Studio strategy and it's consistent with that. It's what we see going on the marketplace, you know, basically business by business. So I think the -- we were very pleased with our creative success last year. We know that we have to continue, to be successful creatively. But at the same time, in doing so under these brands, I think that you can see us deliver an enhanced return on our investment for that, and a greater ability to access, whatever market strength there is.

Unidentified Audience Member

Questions one relates to just trying to better understand the organic growth rate of revenues and operating income of broadcasting when you adjust for the year-over-year change that you've had with football, the negative impact on revenues and the positive impact on cash flows. We really get a sense of what the organic growth rate is between broadcasting segment?

And the second piece, you know, when you look at some of your peers that have had huge fourth quarters in DVD shipments. Sometimes there's been issues with some of them struggling with actually getting those actually be accounted for at the end of the day in terms of return.

I guess as what type of visibility do you have or how much comfort or reserve has been taken into account for the visibility that seems to have changed over the last couple of years in the DVD business?

Tom Staggs

Yes. With regard to reserves in the DVD business, whenever the sales are that big, we have to take a very, very hard look at the return reserves. And it's something we take very seriously. I'm very comfortable with where we peg them. And the -- but it is something that we pour over and we have to exercise judgment in that. And I think that you should assume that we're -- that we try to be relatively conservative in that regard, so that we feel good about where the sales are.

I don't know that I would encourage you to try to use any given quarter to judge organic growth in a business like broadcasting. But with this quarter, obviously for our network, the NFL moving over to ESPN had a pretty big impact on the quarter as a whole. And the -- at the end of the day, if you take that out, it was solid performance but not spectacular growth. And I think that -- but we remain pleased even absent the improvement that we saw in sports with where the networks going.

Remember, that it's not -- the picture isn't just the network by itself anymore. I think you've got to look at the overall programming business. We create shows. We launch them on the network. We launch them in other networks in certain instances. We sell those shows in syndication.

If you look at that overall picture, I think that it's a business that continues to be robust. We were very pleased with the growth in international syndication markets this last year. And so, you know, I think that we had an ad market that was up versus the up front. We continue to see a very solid business environment. We continue to see great success with some of our key shows.

And if you think about ABC and it's something that we'll talk about tomorrow. The collection of key shows there, I'm not sure I would trade with any of the networks. They have a very solid set of key shows. The name of the game is to continue to create great shows and to put them on the air but, I guess, Larry.

Unidentified Audience Member

And one of the nicer little businesses that you have in Florida here as to Cruise lines. And your competitors are adding ships they are sending there ships to different ports to consumer satisfaction has been I think pretty close to being off the charts. I wonder what you're looking at in terms of you'll getting capital to expand this business even at the same size eventually is not going to be a viable strategy?

Tom Staggs

I'm not sure -- is that microphone on? I'm going to repeat the question anyway. I'm not sure the microphone is on, so I'm not sure everybody was able to hear it. It was a question about the cruise business. The great results we've had to date and how we would feel about expanding it. Although, I brutally paraphrased what Larry said.

I'm not going to answer in great detail right now because later on this evening you're going to hear from Jay Rasulo. And he's going to talk a lot about our attitude towards growing the theme park business. So I want to leave the detailed comments to Jay for this evening. Having said that, we have had great results on cruise. We've got a very, very strong return business there, double-digit kind of return on invested capital.

To the extent that we feel there's an opportunity to earn attractive incremental returns on our capital by investing more, we'll look hard at that. But it has to be right circumstance and it's something that Jay will address himself later this evening. Dave?

Unidentified Audience Member

You mentioned that scatter premiums at this point up plus 10% above up front are putting you guys in a pretty good position with regard to going to the upfront season here in May and June. And yet media buyers already -- here it is February 7, media buyers already are basically saying they're not going to pay for anything this year except for live ratings.

Not live plus one or live plus two or live plus a week or anything like that. Last year, you guys changed your negotiating stance on that I think at the last minute. I think it was Mike Shaw that was directing that. Do you have any sense of how you'll prepare this time for that and what stance you'll take with regard live ratings? Thanks.

Tom Staggs

Well, I don't think it's appropriate for me to have the debate about live ratings in this forum. That's primarily for Mike Shaw to do with the buyers at the right point in time. The extended audience, that is the audience beyond live, live plus 24 hours, live plus 7 days; is becoming a more important part of the audience.

And it's something that overtime I think that we and our advertising partners have to address ourselves to because it's an important audience for us both to be capturing. If we're capturing it, we need to make sure that we're taking into account in terms of the advertising opportunities that we're selling. How that evolves, at what pace, I won't predict today but I think it's something that will continue to be a topic for discussion, Jessica.

Unidentified Audience Member

Can you discuss the impact of the weak dollar on your businesses? How much of your revenue is from international right now? And particularly in the theme parks, what percentage of visitors are now internationals?

Tom Staggs

Sure. As you all know, the change in the value of the dollar won't generally have an immediate impact from a foreign currency translation standpoint to any large extent because of this hedging activities that we do. So we try to make sure that that is sort of feathered in overtime. But having said that, clearly, broad fluctuations in the value of the dollar can impact the businesses.

Interestingly enough, though, I talked about theme park attendance this past quarter. The international was not the driver of growth at Walt Disney World. In fact, it was domestic and residence attendance was a stronger factor in growth than international. And I don't think there's anything much to read into that other than the fact that it doesn't look like the weak dollar suddenly spent us a flood of people over or an abnormally large number of people over to the theme park.

The mix of international versus domestic attendance has ticked up modestly over the last several years and it will probably continue to do so. But it's not dramatically different than we've seen in the last couple of years. I think that it will depend -- for example, at Disneyland last year, 50th Anniversary celebration had a huge impact. It had the biggest impact with domestic tourists.

And so, the slight decline we saw at Disneyland this year and mostly to do with not copying as strongly against the domestic tourists. I don't see a fundamental shift in sort of the baseline of attendance in those numbers. Who has a mic? All right.

Unidentified Audience Member One of the surprises I saw was the consumer products on the revenue side. Not the operating income but the revenue down 6%, particularly with the contributions of those -- the "Pirates" and the "Cars" merchandise. So the question is, if you strip out those two franchises, can you give a sense of what that did?

Can provide some color on "Princess", which is something you've talked about in the past? What's the outlook on the revenue side for consumer products, which you believe is sustainable?

Tom Staggs

Sure. In merchandise licensing, we saw a strength across both product categories, and that's Home, Hardlines, Toys, etc. We strength across all those categories. We also saw strength across each of our major properties. And with "Cars" and "Pirates" were clearly standouts but there was strength across the board.

The reason that you saw what you saw in the revenues is two-fold. One, $44million less in guaranteed revenue recognition in Q1 of 2007 versus Q1 of 2006. And the second is that "Narnia" and "Chicken Little" are self-published titles in home video that we released in Q1 of 2006.

There were not comparable releases in Q1 of 2007. That had a very big impact on the revenue side, because as you know, when you sell published, you're collecting the whole piece of wholesale revenue on the books.

And so those two things combined are really what drove the revenue decline in consumer products. And yet the underlying merchandise licensing business was quite strong, as I mentioned double-digit year-over-year growth in earned royalties in merchandising licensing.

So it's pretty much as we expected it to be. And I think underneath -- you'll hear more from Andy Mooney. But I'm pleased with the strength of business overall. Not a lot of growth in publishing but we had said before that that wasn't a segment that we expected to grow as quickly.

And thought the big potential was in licensing and that's turning out to be the case. In the second, turn on your mic here, okay. Try now.

Unidentified Audience Member

In the equity and income investors-wise does that include E! and Us for the quarter or was that taken out?

Tom Staggs

USS is not included in the quarter because it was closed right at the beginning of the quarter. E! is in the quarter, up until November 27. And so you've got a partial year of E! -- partial quarter of E! in there. And of course, E! will be gone altogether for the second quarter.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tom Staggs

So the question was what was the big driver in the improvement in the equity affiliates?

It was actually, we saw nice improvements across the different equity affiliates. They were all good performers, there was no standout, exceptional performers, so we had -- they all turned in a very nice quarter, actually, overall.

Unidentified Audience Member

[question inaudible - mic inaccessible]

Tom Staggs

The question is what are peak occupancy levels in Orlando?

A question I'm almost certain not to answer. But the -- we've changed really the dynamic here. As you know, we've built out a tremendous number of hotel rooms and vacation units and we're just a much big player -- much a bigger player in the resort segment. So if you go back 15 years or so, we had occupancy levels that far exceeded those that we're seeing today.

I think there's room for growth in occupancy levels. But if you take a look at the market as a whole, we're still leading the market. So I think bringing new individuals down to the Orlando area, bringing new individuals on property, which is a big part of the strategy that Jay and his team have been employing.

I think that's really key to pushing that number up. But I don't think that it's peaked out. But I think that it's not something that you just can grow overnight, either, given the sheer number of rooms we've got in market. Kathy?

Unidentified Audience Member

I have the mic. In light of Wal-Mart and Target's pretty public protests about you putting movies on iTunes, I was wondering if you saw less of a mix of DVD's sold through those channels this quarter and/or do you expect to see a change if subsequent quarters? Thanks.

Tom Staggs

I think that it's safe to assume that given the strong results we saw in DVD, we were selling through strong numbers through all of our major retail partners. And we're pleased and hopefully, they're pleased.

And we also feel they must see the same evidence we do of the lack of cannibalization. Yesterday we announced that we will participate in Wal-Mart's DVD -- their sort of movie download program.

And so we'll be there on Wal-Mart for downloads. So I'd say that we're pleased with where that relationship is and I think it's a great distribution partner to have. And with obviously the strong content that we've had, I think we made a difference in their quarters as well.

Unidentified Audience Member

Tom, two questions. First, is there a public position for Disney on gaining cash retransmission payment from cable industry?

Tom Staggs

I'm sorry. I couldn't understand you. Position for what?

Unidentified Audience Member

Getting cash, retransmission payments from the cable industry and was that an issue of contention with Comcast, if you can just address that?

And second question is my thinking was that the net difference between amortization of TV and film investments related to the amortization would be a negative number in free cash flow. This quarter it seemed to be positive. Talk if that was a trend that is going to happen now, sir.

Tom Staggs

Sure. Cash retransmission consent, the answer is we haven't taken a public position on it. The -- and as we discussed before, when it comes to the Comcast negotiation, that's a negotiation that revolved for a long period of time around new platforms, new opportunities to be on those platforms, et cetera.

And the rates, cable rates and the retransmission consent part hadn't been an issue for quite some time there. So that wasn't a hang-up in that negotiation.

The -- what was the second question? Sorry.

Unidentified Audience Member

TV investment amortization…

Tom Staggs

The investment amortization in the television business. That number is going to fluctuate from quarter-to-quarter. I think that the -- you should expect that given what I have said about investment in Disney-branded programming, we're looking for opportunities to invest profitably. And we'll ramp up programming spending.

So -- and I said last year that we would expect to increase our overall investment in programming this year versus the prior year. So what you're looking at is really a quarterly timing issue as opposed to a change in that trend.

Unidentified Audience Member

Yes, good afternoon. You mentioned you have about $1 billion dollar pipeline of syndication ahead of you here on the TV side. I'm just curious if you could give us a sense of the timing of the shows you could expect this year or next year and [question inaudible - mic inaccessible]

Tom Staggs

The -- when I think about the timing of the syndication, a lot will depend on what could be a changing market in terms of when shows are made available, when is the right time to go to market, et cetera. But having said that, I would expect that 2007 would be slightly lower than what we saw in 2006, but not dramatically lower.

I think right now, 2008, depending on what happens with some of our new shows, 2008 is likely to be meaningfully lower than 2007. And then 2009 actually is an uptick to back up closer to these levels. So it really is something that can fluctuate.

Now, what I did, the timing I just gave you, I just have to emphasize, it can change, because our folks go to market and make shows available based on a whole bunch of different factors.

But I do think 2007 will be slightly lower than 2006 in terms of the operating income impact from those shows in syndication. All right. One more.

Unidentified Audience Member

Just one follow-up. Previously, that $700 million target revenue number for digital, could you talk about what that was in the quarter and how it's pacing towards that number?

Tom Staggs

The 700 -- we're targeting north of $700 million in terms of the digital-based initiatives including Internet, et cetera, for the year as a whole. We expect that number to be ramping up throughout the year. And obviously, it implies its last year was a little over $500 million, you get a sense for the growth rate.

And the first quarter was on track with that anticipated growth rate. With one -- the one piece that we'll look to see ramping up a little more in the middle of the year as we really get our legs in MVNO. So the only one that sort of was a little behind that growth rate expectation was MVNO.

But it is, I shouldn't say expectation, that growth rate, because it's very consistent with our expectations. We're just ramping up that effort, should be selling more later in the year. So we're on track to hit the numbers that we talked about.

Okay. We've got -- Terry, I think, has got announcements on where we are, what we're doing next. Thank you very much and we obviously have a day-and-a-half we're going to spend some time. And I think a lot of -- any of the remaining questions you have will be answered throughout the day. And we'll be back tomorrow night. Bob and I'd answer them some more.

Terry Klein

Tom, I just have a few housekeeping items to take care of. But before we get to those, I have been asked to read the following statement, of course.

Certain statements in these presentations may constitute forward-looking statements under the securities Laws. These statements are subject to a number of risks and uncertainties, and actual results may differ materially from those expressed or implied as a result of a variety of factors, including those identified in the annual report on Form 10-K and other filings of the SEC.

Reconciliations of non-GAAP measures are available at Disney's Investor Relations website. And please be advised that this language covers not only this portion of our program, but the entire investor conference through the end of the day tomorrow.


This concludes the Walt Disney Company's quarter one fiscal year 2007 earnings commentary presentation. Thank you.


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