Earning's Call - Are they projecting a big rebound for the parks???

[larworth]

Disney is confidently tossing out 20-30% earnings growth for each of the next couple of years. When asked how much of this projected growth was a result of lower losses at ABC, they commented this was modest. I don’t see anything in their announced slate of movie releases that would make them believe the Studios will drive this type of growth, nor Consumer Products. Sounds like it will mainly come from ESPN and the Parks.

If the Parks returned to their 2001 performance that alone would give them a 15% one-time earnings bump. Given the costs they have taken out over the last year this probably translates into closer to 17%. So, just getting back to normal isn’t enough. They must be projecting a return to normalcy, plus some bump for those people who have been deferring trips. Maybe as much as 10% higher attendance in 2004 as 2001???


Other Comments:

Obviously, there are done opening new parks for a couple years, so they said the shift will be from “Investment to Marketing”. Cited Customer Relationship Management Program as being a BIG emphasis going forward to draw guests and get them to stay longer.

Local attendance had been hurt by aggressive discounting by competitors, but still think they gained share overall. International business has started to pick up.

Capital spending was $700 million in 2002 and will be well under $800 million in 2003. If the bulk of the new park spend was in 2001, it should tell us how much budget there is for new things.


Some non-park things that got my attention:

“Princess” merchandise has grown 10 fold 01-03 (at $1.3B)

The 13 sequels have cost less than $200 million to make, but have sold more than $1B (with returns like that is there any wonder about the next comment)

“With or without Pixar sequels to Toy Story, Monsters will be made”

Want to sell the sports teams as soon as possible. We have accomplished what we wanted with them (to revitalize the Anaheim area).

 

[Bob O]

I think disney being very optimistic in regards to their future earnings. And i for one have little hope that if disney makes their own sequels of Toy Story/Monsters that the quality will match that of pixar.

 

[lrodk]

The problem with WDW this year is that guests are booking within a very narrow 15-30 day window. Historically guests would book between 45-60 days or more out, which would give them a better picture of revenue projections for the upcoming quarter. In the absence of advanced bookings as they've become occustomed to, they are cautiously optimistic and at the mercy of last minute travel planners. This is why they cannot accurately project anything at WDW at this time.

 

[raidermatt]

Thanks for the info Larworth. I haven't had a chance to listen to the replay yet, but will try to today.

BobO:

And i for one have little hope that if disney makes their own sequels of Toy Story/Monsters that the quality will match that of pixar.

I'm sure Disney has no intention of making sequals that match the quality of Pixar. Disney's sequals for their own animated films aren't made with the intent of matching (forget exceeding) the quality of the original. They are merely an attempt to cash-in on the franchise. (And its been a successful attempt from that point of view).

These sequels are one of those things that I think we are going to get as long as the franchises support them. I don't think shareholders will support Disney turning their backs on that kind of money.

 

[Bob O]

Irodk, i agree with your post!!! But isnt disney going out on the limb then when they make these predictions and will have egg on their faces if it doesnt pan out, which will also then hurt the stock price.

 

[Peter Pirate]

No limbs Bob, I'm sure that Disney has under-predicted just as they did this quarter to insure no negative surprises. Relative to the predictions, ABC is fairly easy as they have a pretty good trend going. The Resorts and Parks are looking good for the holidays (October was very big, I think). Of course there is uncertainty with this ridiculous war looming but I guess Disney has to forecast the best case scenerio.

Matt, we finally agree. Disney's sequel's won't match PIXAR's quality (won't even be close) because, first of all, sequel's rarely do (TS2 was an exception) and second, look at the profits from these turkey's... Disney would be absolutely foolish to turn their back on this venture with this type of return.

 

[KNWVIKING]

Part of an article that was talking about Dis stock returning 0.11 per share dealt with current ABC ratings. Apperantly ABC is winning several key time spots. While this won't have a direct effect on earnings yet as most of this seasons commercial time has already been sold at a discount, next year will be another story. Increased advert sales could kick them up into the 30% growth area.

 

[lrodk]

Bob, rest assured that these projections are conservative at best. Eisner cannot afford any further loss of investor confidence. If anything he's setting the stage up for a possible upside surprise. Attendance at the parks will be very important no doubt, but not as much as ABC(which has been the real killer on earnings, constantly draining millions each quarter) and live action film. The parks will do just fine if they give guests new and exciting reasons to come back(ie- ala Mission Space, Mickey's Philharmagic).

 

[hopemax]

The 13 sequels have cost less than $200 million to make, but have sold more than $1B (with returns like that is there any wonder about the next comment)

Okay...

Average cost = $15.4 million
Average sales(using $1B) = $76.9 million
Average profit = $61.5 million

And the "more than $1 Billion" that was a revenue number, not a profit number right? Monsters, Inc sold 5 million units in it's first week. At an average of $15/unit that's $75 million in one week! Almost as much as the average of one of those DTV's brings in, in total.

I may have some other points, but I want to know more about the non-DTV's, anyone know how much a "flop" like Atlantis would bring in in video/DVD sales? What about a more successful movie like Tarzan?

 

[raidermatt]

Nope, I've now listened to the whole thing, and Iger said "$1 billion in profit over their lifetime". So that means they haven't realized all of that yet, but probably most of it. So the return on investment is roughly 500%.

And you're right that Monsters made everyone involved a lot of money. But eventually Monsters will go into that sequel pipeline and bring another 500% return (probably more).

There's really no argument against it if we are only looking at those raw numbers. The sequels are an almost guaranteed profit source. I believe it was Eisner who stated it would be irresponsible to the shareholders to leave these films in the vault and not make sequels.

The argument against doing these types of things involves brand degradation, which Disney clearly doesn't think has an impact, or doesn't think the impact will be felt anytime soon.

Your point about Tarzan vs. Atlantis is a good one, however. A popular movie like Tarzan will not only make more at the box office, but it will make more in video sales, and later have more potential for sequels.

Note that I don't necessarily agree with how Disney is doing this, or their philosophy behind it, but I do see it as inevitable. I'd like to see them view this the way Walt viewed merchandising, or his "compilation" animated films...as a means to allow more investment in truly creative ventures that are in the best Disney tradition (which will consequently truly advance and build the brand, rather than merely capitalize on it).

 

[lrodk]

Hope, I've read that, by and large, theatrical releases account for an estimated 1/3 of the total take. In other words, DVD/Video sales make up the lions share of most films' actual take. This is why disney is so focused on the direct-to-video market. It's an area that was un-tapped by the company until just recently, and will continue to be exploited for all it's worth.

 

[raidermatt]

Larworth, with regard to your original question...

During the Q&A session, one of the analysts essentially asked your question. They asked what assumptions they were making that would lead to the 20-30% growth. The response was very vague.

They said they expected growth from all units. With respect to the parks, here's what they said in response to that question and various others:

1. Attendance at WDW from locals was down, as you noted. I thought it strange that they think they have gained share, even though they say this downturn was due to heavy discounting from the competition. However, they did say that:

2. Domestic attendance from non-locals was actually up a little. Maybe that's why they think they gained share? But, they also said:

3. Attendance from international guests is down by 20%, though they say it was 35% last quarter. Regardless, still down significantly, and they are more reliant on this than the competition they are referring to.

4. They were asked if bookings were still down by the 10% number they gave in Q3. They would not provide a number, but would only say they that the window has shrunk from 60 days to 14-30 days. They essentially said its difficult to say.

5. The only specific positive trend they would say they have seen at WDW is an "increase in call volume, which is good, but we haven't seen that bear out in bookings". (The quote might not be exact, but its close)

They feel there are three variables that cast some uncertainty on the parks performance:

A- Economy
B- Potential Terrorist Attacks (I'm sure they didn't mean necessarily on Disney itself)
C- War with Iraq, which could range from virtually no impact to significant impact

Still, barring an unexpected hit from one of those things, they are expecting significantly improved performance from the parks, particularly towards the end of the fiscal year.

Despite being directly asked, they gave no info on expected pent up demand, or anything like that.

My guess is they are banking on at least a somewhat improved economy and an increase in tourism as we get further from 9/11.

Regardless, its clear that if they hadn't been positive about the outlook, the stock probably would have been hit even harder than it was.

I'm reminded of a line in the movie White Christmas, spoken by General Waverly:
"If there's one thing I learned in the Army, its always be positive. Especially when you don't know what you're talking about".

That line COULD apply in this case.

 

[larworth]

I'm sure they are conscious of the dangers of promising and not delivering. The street can be very harsh on any percepton of underperformance. So, Eisner either has a "get the stock to 20 by the end of the year" mandate and will promise anything, or they really think this is doable??

When asked how much of the 20-30% growth would come from better performance at ABC (smaller losses) their answer was "modest". While they will talk in optimistic terms about the future of the studios, they aren't likely to make bold earning's projections about movies that haven't yet been made.

The first 20% can be gotten if the parks return to 2001 levels. A chunk of the next 20% can come from some resumption of postponed trips and some stabalization at DCA and DSP. I don't remember if they mentioned "pent up" demand in the conference call, but I have seen a few analysts use this term and they must be getting this from Disney.

The problem is 20% growth might look like everything has been fixed, when all they would be doing is getting back to where they were.

 

[Galahad]

The problem is 20% growth might look like everything has been fixed, when all they would be doing is getting back to where they were.

Most industries and corporations have experience very low growth numbers. Does this mean that any company that returns now to double digit growth after this recent period of slow growth can ony be considered "getting back to where they were"? It seems to me that under the circumstances, getting to 20% growth from the stagnation they've had is a major deal.

Also, how long can a company like Disney maintain a 20% growth rate ("where they were") year over year without a compromise in quality over quantity? What is the measure for success. Is is the return of the Magic and quality or 20% growth? Seems to me that 20% growth isn't sustainable over the long term. (JMO)

 

[larworth]

I agree that is probably isn't possible for Disney to grow at this level for an extended period of time. However, getting back to where you were is not really growth it is just recovery.

At one point Disney had a host of latent growth opportunities to exploit which allowed them to grow at these levels (20% used to be their stated growth target). Many of these naturally and managerially have run their course.

When you promise growth that the underlying assets can no longer delivery, you sometimes do things to try to meet these targets that may not be in your longterm best interest.