The Walt Disney Company (DIS) F3Q 2013 Earnings Conference Call August 6, 2013 5:00 PM ET
Lowell Singer - Senior Vice President, Investor Relations
Bob Iger - Chairman and Chief Executive Officer
Jay Rasulo - Senior Executive Vice President and Chief Financial Officer
Doug Mitchelson - Deutsche Bank
Jessica Reif-Cohen - Bank of America Merrill Lynch
Alexia Quadrani - JP Morgan
Ben Swinburne - Morgan Stanley
Anthony DiClemente – Barclays
Todd Juenger - Sanford Bernstein
David Bank - RBC Capital Markets
Marci Ryvicker - Wells Fargo
David Miller - B. Riley & Company
Barton Crockett - Lazard Capital Markets
Welcome to the Q3 2013 Walt Disney Company Earnings Conference Call. My name is Leslie, and I will be your operator for today. 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.
Okay, thanks Leslie. Good afternoon, everyone, and welcome to the Walt Disney Company’s third quarter 2013 earnings call. We issued our press release about 45 minutes ago. It’s available on our website at www.disney.com/investors. Today’s call is also being webcast. And after the call, we will post a transcript of the call to the website.
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. Jay is going to lead off today. He will be followed by Bob and then we will be happy to take your questions. So, with that, let me turn it over to Jay, and we’ll get going.
Thank you, Lowell, and good afternoon everyone. Earnings per share in the third quarter, excluding items affecting comparability were $1.03. Given the number of headwinds we faced in the quarter, we are very pleased with the financial results we delivered. In the third quarter media networks was once again the largest contributor to our performance. Operating income at cable networks was up a healthy 12% in the quarter, while operating income at broadcasting was down compared to last year. Our strong cable performance was due to continued growth at ESPN and higher equity income from our investment in A&E Television Networks.
ESPN’s growth was driven by increased affiliate revenue and to a lesser extent higher advertising revenue. ESPN’s programming and production costs were higher in the quarter, which relates contractual rate increases for Major League Baseball rights and our expansion of the X Games. I mentioned affiliate revenue was the driver of growth at ESPN in the third quarter. If you call, last quarter, we told you we are expecting ESPN to recognize $73 million less in previously deferred revenue in Q3 compared to last year. As it turned out, ESPN actually recognized $64 million more in previously deferred affiliate revenue in Q3 compared to last year. The $137 million swing was the result of ESPN meeting certain programming commitments in the third quarter, which were met in the fourth quarter last year. ESPN was able to meet those programming commitments in Q3 due to the airing of incremental hours of Wimbledon programming. As a result of this shift, ESPN has now recognized all previously deferred affiliate revenue for the year. As such, ESPN will recognize no deferred affiliate revenue in the fourth quarter, which is $172 million less than last year.
ESPN cash ad sales were up 9% in the quarter, which is roughly in line with the ad sales pacing we discussed on our Q2 call. ESPN’s reported ad revenue was up 3% as a result as the increase in cash ad sales was partially offset by lower ratings. The decline in ratings during the quarter was primarily related to NBA comparability issues. During the quarter, ESPN aired fewer NBA regular season games compared to last year when the lockout created a more back-end loaded schedule. Also, ESPN air fewer play-off games and those match-ups delivered lower ratings in last year’s playoff games. So far this quarter, ESPN’s cash ad sales are pacing up 11%.
At Broadcasting, lower operating income in the quarter was primarily due to three factors. First, higher prime-time programming cost as a result of airing more hours of acquired programming, which was more expensive on a per hour basis. Second, lower program sales compared to last year. If you recall, we sold Grey’s Anatomy and Castle in the third quarter last year and had no comparable sales this year. And third, lower advertising revenue as a 7% decrease in station ad revenue offset a modest increase in ad revenue at the ABC Network.
Affiliate revenue at the ABC Network was up nicely in the quarter, but the increase wasn’t sufficient to offset these three items. Quarter-to-date scatter pricing at the ABC Network is running mid-teens above upfront levels. ABC and ESPN recently completed their respective upfronts and we feel great about the pricing increases achieved and the amount of inventory each network was able to sell.
We continue to be very pleased with the performance of our parks and resorts business. The segment delivered another quarter of solid growth as our recent investments at Walt Disney World and the Disneyland Resort continue to payoff. Revenue was up 7% and operating income was up 9% in the quarter due to growth at our domestic parks and resorts. As we noted during last year quarter’s call, Q3 segment operating income was adversely impacted by an estimated $35 million as a week of the Easter holiday shifted into Q2 this year. Adjusting for this shift, segment operating income growth in Q3 would have been up 15%. Higher operating income at our domestic parks and resorts was primarily due to increased guest spending, occupied room nights, and attendance partially offset by higher costs including ongoing spending for growth initiatives.
During the quarter, attendance at our domestic parks was up 3% with Walt Disney World and the Disneyland Resort each setting new Q3 attendance records. Per capita spending was up 7% on higher ticket prices and food and beverage spending.
Average per room spending at our domestic hotels was comparable to prior year and even though available room nights increased in the quarter occupancy was comparable to prior year. So far this quarter domestic reservations are pacing up 3% compared to prior year levels while book rates are up 4% versus prior year. Total parks and resort segment margins were up 40 basis points in the third quarter compared to prior year. The year-over-year change in Q3 margins was adversely impacted by an estimated 140 basis points due to the timing of the Easter Holiday and spending on growth initiatives.
At the studio we released two films in the third quarter Iron Man 3 and Monsters University both of which performed exceptionally well at the box office. Iron Man 3 generated $1.2 billion in global box office revenue however it faced a difficult comparison with the Avengers which generated $1.5 billion in global box office last year and this is the third highest grossing film of all time.
Monsters University box office performance compared favorably to that of Brave last year, however operating income at the studio declined year-over-year. This decline was due to pre-released marketing expenses for the Lone Ranger and the aforementioned Avengers, Iron Man theatrical comparison. The Avengers also had a strong DVD sales in Q4 last year so the DVD release of Iron Man 3 in Q4 this year faces a difficult comparison which we expect to result in a headwind to the studios Q4 results of about $45 million.
Needless to say we’re disappointed with the performance of the Lone Ranger and in light of the film’s box office results we expect to incur loss on the film in Q4 of between $160 million and $190 million. Consumer’s products growth and operating income resulted from increases in merchandise licensing and retail. The increase in licensing was primarily due to the inclusion of Star Wars in this quarter’s results. Also earned licensing revenue was up 3% versus last year and that growth is on a comparable basis which excludes any revenue from the newly acquired Star Wars property. The performance of our retail business was driven by higher comp store sales in North America and Japan and higher online sales in North America.
We continue to return capital to shareholders by repurchasing our stock during the third quarter; we repurchased 12.6 million shares for about $800 million. Fiscal year-to-date we repurchased 57 million shares for $3.2 billion and with that I’ll now turn the call over to Bob.
Thank you Jay and good afternoon. We’re pleased with our performance in Q3 and we believe we’re well positioned going forward. I would like to address a couple of specifics about our businesses starting with ESPN which was one again a key driver in Q3, Jay commented about ESPN’s ratings in the quarter and I would like to add some perspective. In an average week more than 113 million Americans tune in or log on to access ESPN content with the average person spending almost 7 hours a week engaged with ESPN Media on a variety of platforms.
In Q3 nearly 9 out of 10 homes with access to ESPN tuned in to at least one of the ESPN networks. Since 96% of sporting events are watched live, sports are virtually DVR-proof making ESPN incredibly valuable to advertisers as well as cable operators. We have ranked the ESPN the number one network in perceived value for 13 years in a row and the most important network for nine straight years. Even though ESPN is a clear market leader, it continues to refine its sports portfolio, expand original programming, invest in new technology, and innovate to enhance the fan experience.
ESPN’s recent acquisition of the exclusive rights for U.S. Open tennis is growing array of digital services including WatchESPN and the new SEC Network next summer are a few recent examples of ESPN’s constant innovation that will deliver even greater value to consumers, operators, and advertisers. And with so many of the major sports rights locked up for the next 10 years, given ESPN’s brand strength and its continued focus on investment and innovation, we remain confident in ESPN’s value and its position as the number one brand in sports over the long-term.
Our acquisition of Marvel also continues to drive real value for us across the company. Following the record setting performance of The Avengers last year, the huge success of Iron Man 3 this summer continue the Marvel momentum, which bodes incredibly well for upcoming Marvel releases including Thor: The Dark World, Captain America: The Winter Soldier, Guardians of the Galaxy, and of course, Avengers 2. We previewed this late at Comic-Con a couple of weeks ago and the phenomenal audience reaction is anything to go by, there is huge appetite for more great Marvel content. There is also a great deal of excitement around ABC’s new series and Avengers spin-off called Agents of S.H.I.E.L.D. The first episode got a standing ovation at Comic-Con along with rave reviews. And this month Disney XD premieres its third animated Marvel series.
We continue to be extremely pleased with the creative success of our Animation Studios, Monsters University opened in June to become the latest in Pixar’s unbroken string of hits, Planes from Disneytoon Studios opened this Friday, and Frozen, another great movie from Disney Animation will introduce two new Disney princesses when it opens in theatres at Thanksgiving.
We are also looking forward to the launch of Disney Infinity on August 18. We have showcased Infinity to a number of audiences and we are very encouraged by the overwhelmingly positive response we are getting across the board from retailers, reviewers, and consumers alike. And we are also very proud of the several best of awards that Disney Infinity earned at this year’s E3. So, given what’s ahead for Disney, ABC, ESPN, Pixar, and Marvel as well as the upcoming Star Wars Episode 7, we are incredibly well-positioned for growth and expect solid results in 2014, ‘15, and beyond.
I am going to turn this call back over to Lowell, so that we can take your questions.
Thanks Bob. Leslie, we are ready for the first question.
Earnings Call Part 2: