Source: Seeking Alpha
The Walt Disney Company (NYSE:DIS)
Q3 2014 Earnings Conference Call
August 5, 2014 05:00 PM ET
Lowell Singer – SVP, IR
Bob Iger – CEO
Jay Rasulo – SEVP and CFO
Jessica Reif Cohen – Bank of America
Michael Nathanson – MoffettNathanson
Alexia Quadrani – JPMorgan
Todd Juenger – Sanford Bernstein
David Bank – RBC Capital Markets
Benjamin Swinburne – Morgan Stanley
Anthony DiClemente – Nomura
Jason Bazinet – Citi
Michael Morris – Guggenheim Securities
Alan Gould – Evercore
David Miller – Topeka Capital Markets
Vasily Karasyov – Sterne Agee
Marci Ryvicker – Wells Fargo
Welcome to the Third Quarter 2014 Walt Disney Company Earnings Conference Call. My name is Ellen, and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Lowell Singer, Senior Vice President of Investor Relations. Mr. Singer, you may begin.
Thanks, and good afternoon everybody. Welcome to the Walt Disney Company’s third quarter 2014 earnings call. Our press release was issued about 45 minutes ago and is available on our Web site at www.disney.com/investors. Today’s call is also being webcast and a recording and a transcript of the webcast will also be available on our Web site. Joining me for today’s call are Bob Iger, Disney’s Chairman and Chief Executive Officer; and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer. Bob is going to lead off followed by Jay, and then of course we will be happy to take some of your questions.
So with that, let me turn the call over to Bob, and we will begin.
Thanks Lowell and good afternoon everyone. We delivered the highest quarter in the history of the Walt Disney Company with adjusted EPS of $1.28 and we’ve generated greater EPS in the first three quarters of fiscal 2014 than we have in any previous full fiscal year. 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?
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.