MyMagic+ Continues to Drain Disney Income

[jcb]

Disney released its third quarter earnings report and while park revenue and operating income (essentially net) are up rather high (8 and 23 percent, respectively), the only mention of MyMagic+ in the report is to say it contributed to "higher costs" at the theme parks.

Investors frequently ask Disney executives when MM+ will show positive results so mentioning it only once in the entire quarterly earnings reports is tantamount to saying MM+ continues to lower park operating income. That and Disneyland Paris.

To be fair, the report shows pretty strong results for the parks (and all other segments). I just found it rather strange that Disney downplayed MM+ to the such an extent.

More to follow. Iger and Rasulo have a conference call with investors at 5 pm eastern.

 

[jcb]

When I connected to the earnings conference call (which plays Disney music before the actual call starts), the music being played is "Let it Go." Subtle, real subtle.

 

[jcb]

Disney's share price closed the day down by .49 per share. Investors are nervous (but then, they always are). Still, the price of shares has risen dramatically in the last year:

 

[gretchenohar@hotmail]

Thank you for pointing this out.
Can't wait to hear the rest after the conference call...

 

[jcb]

The earning call starts.

Iger: Highest quarter in history of WD Co. Remain committed to building strong brands and growing franchises.

Talks about gate from Guardians of the Galaxy (earnings from which don't show up in the third current quarter).

And, of course, a line of Frozen merchandise is coming for the holiday season.

Shanghai Disney making progressed. They are thrilled with progress and will set date for opening in the next 6 months.

 

[jcb]

MM+ now being used by half of all guests. 90 percent of guests say it is "excellent." Will contribute to parks earning growth in fourth quarter.

 

[jcb]

Mentions SEC network on ESPN - but says it won't be showing any Florida Gator football games.

Take that, Skippy.

 

[jcb]

Rasulo (numbers guy) -

Parks and Resorts segment was up. Without Easter (which fell in this quarter,) operating income would only have been up 17 percent.

Park spending is up 8 percent. Attendance was up 3 percent.

Per room guest spending is up 7 percent.

Occupancy rates are up 3 percent, to 82 percent occupancy.

This quarter, the book rate is up 3 percent.

 

[jcb]

BOA asks first question - Harry Potter is a game changer for universal. What can Disney do to match it.

Iger - lot of them. Cars, Princesses, Star Wars is going to be just that. Avatar, Monsters, Toy Story. Dozens of them. We have more than anyone. Except for Avatar, we own them all and don't have to license them.

MM+ revenue? Iger: Will contribute to growth in fourth quarter. Plan all along would be to enable Disney to grow revenue with guest satisfaction. Says there are other revenue opportunities from MM+ but won't go into details until later. Mentioned Photopass as one example of an opportunity.

 

[jcb]

Another parks question. Something about franchises driving park attendance.

Rasulo says Disney knows Cars and Toy Story are the kind of attractions that make guests say, "I want to go now" instead of "I want to go."

Again, says they expect MM+ to show revenue impact in current (4th) quarter. Current model (movie tie in to parks) has worked for 30 plus years now (implying that they aren't going to change it).

 

[jcb]

Another Parks question - JP Morgan -

Rasulo: we have been steadily adding to margins in the park operations. MM+ (which he doesn't mention by name) and other initiatives has been drag on the margins. Part of long term impact "on value." Not a straight line upwards but fundamentally strong. Price increases help margin.

Iger: when we spend money to add known brands (Toy Story, Frozen, and Star Wars, which will be coming to the parks) this is likely to pay off better than the bets made in the past (think the original California Adventure).

 

[jcb]

Lots of questions about TV and movies. Disney desires to grow "direct" to consumer content. Lots of questions about ESPN and SEC network. The world cup was great for the TV earnings segment.

One question relates to relationship between ESPN and the Parks, the limited relationship currently, and plans to expand the opportunity for a relationship.

Iger: Acknowledges limited relationship. Kicking around other locations for ESPN related markets but generally, people want story telling experience not really sports experience and the blend isn't that obvious. Don't see much opportunity to blend the two.

 

[jcb]

Question about Harrison Ford's accident and whether it will impact release date for Star Wars VII. Iger says no. Refuses to talk about accident.

 

[jcb]

Final question related to television. Thats all.

 

[jcb]

Some random thoughts about the earnings call. I wonder what you think.

90 percent guest satisfaction with MM+ doesn't seem all that high.

MM+ is for the long term. Disney really wants investors to think of MM+ as if it is Marvel or a big cruise ship. That's not easy, given how immediately successful both were. Perhaps sales of the Frozen magic bands will help turn MM+ around. I'm intrigued by the other revenue opportunities from MM+.

Toy Story was mentioned a lot (in connection with park attraction tie-ins to movie franchises). I'm not dissing Toy Story, I just found it odd that it was mentioned so much at this point in time.

I found the response to the (now routinely asked) "Harry Potter is at Universal, the sky is falling on Disney, so what are you going to to about it" question well thought out (Iger listed all the Disney movie tie-ins already in the parks and two (Avatar and Star Wars) that are coming). Iger was prepared and is not going to apologize or say Disney "settled" for Avatar.

No mention of Maleficent in the earnings call. The report mentioned it but only twice. The point being Disney didn't trumpet it as a big financial success. I guess Craig and Shaun were right.

 

[AndyPok1]

I find your topic name massively misleading. Sure, it's a talking point but, "This quarter we
delivered the highest EPS in the company’s history, and we’ve now generated greater EPS in the first three quarters of FY 2014 than we have in any previous full fiscal year."

For anyone to think that you are going to reap a billion (or two) dollar investment overnight is insane (and part of the reason I can't stand the stock market).

 

[OKW Lover]

Some random thoughts about the earnings call. I wonder what you think.

90 percent guest satisfaction with MM+ doesn't seem all that high.

With all due respect to Andy Pok, I'm surprised at the 90% number. It sounds high to me, but perhaps thats a reflection of the general negative reaction I see on the boards here?

 

[AndyPok1]

With all due respect to Andy Pok, I'm surprised at the 90% number. It sounds high to me, but perhaps thats a reflection of the general negative reaction I see on the boards here?

When I read the 90% number earlier, my first thought was, "wow, that's about as good as they could hope for." I honestly think most people don't even think about it. There's just SO many first-time visitors.

 

[GAN]

I find your topic name massively misleading. Sure, it's a talking point but, "This quarter we
delivered the highest EPS in the company’s history, and we’ve now generated greater EPS in the first three quarters of FY 2014 than we have in any previous full fiscal year."

For anyone to think that you are going to reap a billion (or two) dollar investment overnight is insane (and part of the reason I can't stand the stock market).

It's far from a billion(or two), but over the last couple years I can promise you it's a damn nice number!

 

[jcb]

I find your topic name massively misleading. Sure, it's a talking point but, "This quarter we
delivered the highest EPS in the company’s history, and we’ve now generated greater EPS in the first three quarters of FY 2014 than we have in any previous full fiscal year."

For anyone to think that you are going to reap a billion (or two) dollar investment overnight is insane (and part of the reason I can't stand the stock market).

To be honest, I was paraphrasing something Rasulo said in May 2013, though he said MM+ was a "drag" (not drain) on Disney earnings.

I think MM+ still costing Disney money is a lot more than a "talking point." As you point out, financially, Disney is doing extremely well. I made that point in the first post. And for Disboards visitors, MM+ is a major topic of interest. So when, three quarters into FY 2014, MM+ is still costing Disney money, that is rather significant for this venue.

I didn't say Disney should be able to reap any investment overnight, much less one that has reportedly run over $2 billion. To be clear, Disney distinguishes between CapEx and operating expenses. In the February 2013 earnings call, Iger was asked how much more would b spent on MM+. He started his answer by saying, "The majority of the capital expense to create [MM+] this initiative has already been spent." So since February 2013, Disney has been putting mostly operational costs, not CapEx into MM+. I agree is rather stupid to expect an immediate ROI but that isn't what I was saying.

One of the problems investors have with MM+ is that is a "virtual" capitol investment, not a cruise ship or theme park. It's revenue impact isn't going to be obvious. (Disney's return on investments with cruise ships and DCA overhaul has spoiled investors who have a bias toward expecting immediate returns anyway.) I don't think even veteran Disney analysts really grasp what Disney is trying to do with MM+ but then I don't have a high opinion of investment bankers, either. It also doesn't help that investors knew much each cruise ship cost but Iger and Rasulo will not say how much Disney has sunk into MM+.

I am rather concerned about MM+ being over budget and still not showing any positive revenue result. If in fact Disney has invested $2 billion in MM+, that makes it one of THE major parks investment at present, rivaling what Disney has put into building Shanghai Disneyland. For Disney to release an earnings report which mentions MM+ only once, and at that saying it continues to cost Disney earnings, is not a good sign.

I think MM+ is a rather neat idea, in theory. I even think I understand the point about it being a long term investment (i.e., it isn't a cruise ship) and why Disney thinks it will eventually generate revenue.

But right now, it is a drag/drain on Disney earnings.