Biggest upside to Disney (DIS) in Q3: unlike its media peers, the company only gets 20% of its revenue from advertising.
The company delivered in-line results thanks to a strong quarter from cable networks (ESPN) and the fact that the parks business, thought to be threatened by a weakening economy, held up well.
The businesses that you would expect to be troubled, such as broadcast TV, were troubled, with flat revenue in the quarter. The film business suffered from difficult comparisons to last year when the third instalment of “Pirates of the Caribbean” was in theatres. Overall, revenue and operating income were up just 2%, so while Disney is holding its own, these aren’t boom times in Burbank.
Though it’s less an issue for Disney than for, say, Viacom, CEO Bob Iger did say the company is seeing weakness in the ad market at ABC stations and at ESPN, particularly in automotive, consumer electronics and financial services.
Q3 call notes:
CEO Bob Iger: We’ve delivered another solid quarter. Like all companies we aren’t immune to the challenging economy… but our brands have never been stronger or relevant. Wall-E has generated $200 million at the box office; we believe Wall-E will provide substantial value over time, as one of our classic films.
Park performance was considerably noteworthy given the environment.
CFO Tom Staggs: ESPN led the way at cable networks with higher subscriber fees and ad revenue. Broadcasting revenue was flat due to softness in automotive and local stations.
At ABC, lower ratings were offset by lower programming costs (during the writers’ strike).
Slightly lower attendance at the parks, due to the timing of Easter, but higher per-visitor spending at Disneyland.
The flop of “Prince Caspian” had biggest impact on studio and games business. Wall-E, while strong, wasn’t strong enough to offset.
4:46 pm ET Q&A begins:
Do you expect CAPEX to ramp up in the second half?
Staggs: We had targeted capital spending for domestic parks below $1 billion. Over time, we will see years above $1 billion.
Are your interests aligned with Apple CEO Steve Jobs, your single largest shareholder? Does he influence how you distribute content digitally?
Iger: Decisions how to distribute content and what to charge for it are made entirely by the management of Disney. Steve is not involved. Decisions of how we distribute content digitally are made by us. I happen to believe that in a world where more and mroe people are migrating online that the Disney company would be served well be having a strong presence in that environment. Since we decided to put movies in the iTunes platform we have sold 5 million movies. We believe its incremental business.
Our ability to monetise will become more evident. You are seeing an expansion of the marketplace and an increase in consumption. We’ve seen that at ABC where access of to TV programs has never been greater and the amount of consumption has never been greater. I think we’ve been driving incremental revenue.
We have no conflict of interest at all. Our decisions are all made for the shareholders of Disney.
Do you think the parks and resorts will hold up in the current challenging environment?
Iger: I believe our brand has strengthened over time. Hannah Montana., High School Musical, Pixar presence in our parks will help. I also believe we have taken steps over time to make the parks more accessible and affordable.
What are some of the levers you have in managing costs at the parks? Can you adjust to compensate for a slowdown?
Staggs: We can change operating hours, show times, number of carts selling stuff. Big on yield management and monitoring the cost side and striking the right balance between maintaining guest experience and the cost base.
Will upfront commitments turn into orders at the cable networks, given the trouble in the auto industry?
Staggs: To date I haven’t heard anything that would suggest that the advertisers won’t follow through on their upfront commitments.
Can you give a sense of how much attendance has been booked for September and December? Planning to cut pricing to offset weak demand?
Iger: We typically in off-peak periods do some discounting. There isn’t any more discounting going on than in the previous year. You can expect that when we talk about a quarter (Q4) roughly on par with last year. We have a sophisticated yield management system–a software program that sells our rooms and makes millions of decisions in terms of rates based on demand. That system is designed to maximise revenue and I think it’s done a good job. We are experiencing growth in our average daily rate.
Concerns about cable network advertising: how much of the growth at ESPN was from big events like NBA Finals?
Staggs: Ad inventory for those events were sold in last year’s upfront. It didnt have a big impact economically for the quarter that we just reported.
Strategy to pass on higher food costs in hotels and parks?
Iger: The cost of commodities at the parks–under 4%–is a very small part of the cost of operating the parks. We’re seeing increases in the 7% to 10% range in food costs. We haven’t passed it on to consumers. Today we haven’t had to do that. Fuel? For the cruise line it’s a significant cost. We might be up $20 million in costs for fuel in the cruise line. We can change itineraries, reduce speed, take other steps to make the ships more efficient.
It sounds like advertising in the US has weakened in the last few weeks; comment on the ad climate?
Iger: We have detected weakness at the stations, ESPN, particularly autos, financials and consumer electronics. Advertising is only 20% of revenue so while we are exposed we’re not as exposed to the ad climate as our media peers. We have almost no ad exposure outside the US.
Staggs: We have yet to see any political ad money at local stations.
Concerned about decreased airline flights to Orlando?
Iger: It has not been a factor at all. Nor do we envision it will be a factor. Our guests represent about 30% of all seats going to Orlando
Broadcast audiences fell, so how do you manage costs?
Iger: The way we are managing the network–its a single revenue stream business. costs have to be managed. Costs haven’t been significantly reduced but they haven’t increased eiher. We are programming the network on 52-week basis. We believe we can still drive profitability in that business.
You cancelled writer-producer contracts during the writers strike. Are those costs permanently lower?
Staggs: On the margin, they are making sure they are being as efficient as they can be. Cost of programming hasn’t changed. It’s an ongoing process.
Iger: We definitely took costs out of the system due to the writers strike. And we are not going to put those back into the system–particularly long-term writer and talent deals.
Suprised that the actors negotiations have dragged on for so long. What progress have you made toward a resolution?
Iger: The industy has done deal with writers, directors and with AFTRA. All had elements of new media. We offered SAG the same new media deal and “SAG did not see fit to accept those terms which we found it unfortunate.” We can’t offer SAG better terms than we’ve given the other guilds. There has been no attempt at progress. I don’t have a prediction how the impasse will be broken. We are moving forward with our productions. I don’t think a work stoppage is imminent. Not a good environment for that–and it would be very unpopular.
Bunch of questions from Pali Capital’s Rich Greenfield on the theme parks… on ticket pricing, flights, and international attendance.
Iger: We have not announced a change in pricing. On vacation clubs, the focus is on selling the Animal Kingdom property, as well as additional vacation club units in a new building adjacent. We have put no other new properties online. Staggs: correcting for Easter, our attendance would have been up from last year.
Is there anything unusual in timing, programming production, that would benefit free cash flow?
Staggs: During the quarter there was higher net investment in live action films.
Q3 earnings summary:
Release out. Disney isn’t booming — revenues and operating income are up just 2% — but it’s Q3 is in line with Wall Street’s expectations. And it doesn’t appear to have had any “whoops-sorry-about-that” ad declines that plagued Viacom yesterday.
Revenue at Disney’s cable networks, including ESPN, were up 12%, but broadcasting revenue was flat. Revenue at the parks was up 5%, so that business has yet to collapse due to oil prices/recession/etc. Movie revenues were down 19%, because Disney didn’t have anything like last year’s “Pirates of the Carribbean.”
It appears that Disney’s businesses are holding up well in a tough environment. We’ll bring you more from the Q3 earnings call at 4:30 pm ET.
Revenue: $9.24 billion vs $9.14 billion average Wall Street estimate
EPS: $0.62 (excluding a $0.04 one-time gain) vs $0.61 estimate
Operating Income: $2.32 billion, up 2% from Q3 2007