The Walt Disney Company (DIS) CEO Bob Iger on Q3 2014 Results – Earnings Call Transcript

As evidenced by these results, we remain committed to building strong brands and growing franchises, a strategy that is creating value across the Company.

On top of this earnings report this week, we’re especially excited about the fantastic debut of Marvel’s Guardians of the Galaxy with $181 million in global box office so far. Domestically Guardians delivered the biggest August opening weekend ever and with Monday added in, it did over $106 million. This result reinforces what we’ve known for a while and that is that we have incredibly talented people making films for and with Marvel. Combined with a very strong brand and a rich array of characters and stories, the future for Marvel is incredibly exciting.

We’re looking forward to Avengers 2 next May. The footage we shared at Comic-Con was a huge hit with fans. We’ll follow Avengers with Ant-Man in July, then Captain America 3 in May of ’16, and last week we announced we are going to make a sequel to Guardians. We see great promise in Guardians as another fantastic Marvel franchise.

We also have strong franchises from Pixar and Walt Disney Studios, Disney Animation and Lucasfilm, truly an unprecedented collection and we’re seeing the impact across the Company. For example Disney Consumer Products just delivered its fourth consecutive quarter of double-digit growth in both revenue and operating income and we have multiple franchises that have already generated more than $1 billion each in retail sales so far this year and we’re very excited about our new line Frozen merchandise coming this holiday season.

This quarter also marked Disney Interactive’s fourth straight quarter of profitability. Disney Infinity continues to be a key driver and will add Marvel characters including Guardians of the Galaxy to the Infinity Universe when Disney Infinity 2 launches next month.

Turning to theme parks, progress continues on Shanghai Disney Resort. This our most ambitious project ever and we’re thrilled with the way this spectacular destination is coming along. We hope to set an official date for our grand opening sometime within the next six months or so.

At Walt Disney World, this was the first full quarter in MyMagic+ was available to all guests. About half of the guests now use MagicBands and 90% of them rate the experience as excellent or very good. We’re very pleased with the growing popularity of MyMagic+ and expect it to contribute to parks earnings growth starting in the fourth quarter.

We’re also developing ideas and designs for a far greater Star Wars presence in our parks. We expect to provide details about this sometime next year. Production on Star Wars Episode 7 is on track and the footage we have seen so far is spectacular, certainly worthy for the fan frenzy and excitement this movie is generating around the world.

Episode 7 will open on December 18, 2015. So Star Wars fans who have been waiting a decade for a new movie only have about another 500 days to go. Until then they can enjoy Star Wars Rebels, a new series launching on Disney XD this fall.

Turning to ESPN, this spectacular 2014 World Cup once again demonstrated the value of having the number one sports brand covering the world’s biggest sporting events. With its unprecedented reach across all platforms, ESPN delivered the most watched World Cup ever on English language TV here in the U.S. and with almost 44 million hours of live viewing on WatchESPN, this year’s World Cup was the most streamed sporting event in history.

In the month of June alone, an astounding 80 million people connected to ESPN via computers and mobile devices to keep up with the World Cup and other sporting events such as the NBA Finals, the NBA Drafts, the US Open, Wimbledon and major league baseball games.

ESPN’s new SEC network will debut in almost 60 million homes nationwide on August 14th making it one of the most successful launches in cable TV history, making a lot of sports fans extremely happy. We’re obviously very proud of our performance this quarter. It’s satisfying to see the growing impact of our strategic focus on building strong sustainable franchises across all of our brands and businesses, as also long term growth opportunity that is unique to Disney and one that we’ll continue leveraging to deliver results and create greater value for our company and our shareholders.

Now I am going to turn the call over to Jay to talk about the details of our Q3 performance. Jay?

Jay Rasulo

Thanks Bob and good afternoon everyone. We delivered yet another strong quarter of financial performance with record third quarter earnings per share of $1.28. The strong performance in the quarter was broad based with operating income growth and margin expansion at studio entertainment, parks and resorts, broadcasting, consumer products and interactive media. As expected, our cable business was adversely impacted by higher programming costs at ESPN.

Let’s start with studio entertainment. Our operating income doubled in the third quarter compared to last year. For the second quarter in a row, Frozen was the biggest contributor to growth in segment operating income at the studio due to its performance at the international box office and at worldwide home entertainment, where it drove higher profits per unit as well as an increase in unit sales.

Operating income at media networks was comparable to the prior year as an increase in broadcasting was offset by a decrease of cable. Operating income at broadcasting was up nicely due to higher affiliate revenue and increased operating income and program sales due to lower amortization expense and higher revenue from Marvel’s Agents of S.H.I.E.L.D. Ad revenue at the network was up in the third quarter. So far this quarter scatter pricing at the network is running mid-single digits above upfront levels.

Turning to cable, operating income was lower in the quarter as a result of higher programming and production cost at ESPN, lower recognition of previously deferred affiliate revenue and the absence of contribution from ESPN UK which as you know we sold in the fourth quarter last year. The impact of these factors was partially offset by higher affiliate rates and advertising revenue. Higher programming and production costs were driven by increases from Major League Baseball due to first year of our new contract and the World Cup. These higher costs were partially offset by the absence of both ESPN UK rights and production cost for the global X Games.

Domestic cable affiliate revenue in the third quarter was comparable to the prior year due primarily to the adverse impact of the timing of program covenants. At the time of our Q2 earnings call, we expected ESPN to recognize $190 million less in previously deferred affiliate revenue for the third quarter. As it turned out, ESPN recognized only $98 million less, as ESPN met certain program commitments during Q3. As a result of this shift, ESPN has now recognized all previously deferred affiliate revenue for the year. So like last year, ESPN will not recognize any deferred affiliate revenue in the fourth quarter.

Adjusted for the timing of deferred revenue at ESPN, domestic cable affiliate revenue was up mid-single digits in Q3. We expect domestic cable affiliate revenue to return to high-single digit growth in the fourth quarter and expect high-single digit growth for the full fiscal year. We also remain confident in our ability to drive high-single digit growth in domestic cable affiliate revenue through 2016 as we discussed at our recent ESPN Investor Day.

Ad revenue at ESPN was up 10% in the quarter due to the strength of the World Cup, partially offset by lower ad revenue for the NBA finals as the series went five games this year compared to seven games last year. Adjusting for the World Cup and the absence of games six and seven of the NBA finals, ESPN ad revenue was up an estimated 5%. So far this quarter ESPN ad sales are pacing up.

At parks and resorts, total revenue was up 8% and operating income was up 23% due to continued strength at our domestic operations partially offset by lower performance at our international resorts. The results this quarter include the benefit of one week of the Easter holiday compared to third quarter last year. Adjusted for the timing of the Easter holiday, operating income would have been up an estimated 17%.

Growth in operating income at our domestic operations was driven by increased guest spending, higher attendance at our parks and higher ticket prices at Disney Cruise Line, partially offset by higher cost primarily related to the continued rollout of My Magic+. Operating income at our international operations was lower in the quarter as a result of lower performance at Disneyland Paris.

Total segment margins were up 260 basis points in the third quarter and were adversely impacted by about 60 basis points due to new initiatives. We continue to see positive trends in the business with third quarter for capital spending in our domestic parks up 8% on higher ticket prices, food and beverage and merchandise spending. Attendance at our domestic parks was up 3%. Per room spending at our domestic hotels was up 7% and occupancy was up 3 percentage points to 82%. So far this quarter domestic resorts reservations are pacing up 5% compared to prior year levels, while book rates are up 3%.

At consumer products, growth in operating income in the quarter was led by our retail business and merchandize licensing. Disney stores continue to be a positive story with double digit growth in comp store sales in North America, Europe and Japan. Growth in licensing was driven by the performance of Frozen, Disney Channel, Spider Man and Planes properties, partially offset by lower revenues from Monsters.

On a comparable basis earned licensing revenue in the third quarter was up an impressive 13% versus last year and that’s following 8% growth in earned revenues in Q2. We are very happy with the performance of this business as it continues to consistently deliver strong results quarter-after-quarter.

Results at Interactive Media continue to improve. We had yet another profitable quarter swinging from an operating loss of almost $60 million in the third quarter last year to almost $30 million in operating income in the third quarter.

We saw improvement in our core games business, due primarily to the success of Disney Infinity, which was released in the fourth quarter last year and in addition this quarter we also saw a nice uplift from our mobile games business. During Q3, we repurchased 22.8 million shares for about $1.8 billion. Fiscal year-to-date we have repurchased 74.3 million shares for $5.6 billion.

And with that we are now ready to take your questions.

Question-and-Answer Session

 

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