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November 22, 2005

Disney Reports Mixed Quarterly Earnings

Disney (DIS) reported mixed 4Q05 results, slightly worse than analyst estimates on a segment basis. Analysts didn't seem too concerned about the quarter on the conference call, however, as there were very few questions about the details. Rather the focus was on long-term issues and the forecast for 2006. I think the questions on long-term issues may have been heightened by the fact that this was Bob Iger's first call where he was the whole show. On that front, I think he did quite well. He came across as very sincere and accepted the challenges facing traditional media companies. But he was equally strong in discussing how DIS is not afraid to confront the new environment and has lots of significant projects going in wireless and broadband distribution....

Regarding 2006, management stuck to its forecast for double digit growth although noted that it would be a back end loaded due to the timing of theatrical releases. In particular, the release of the next Pixar film, Cars next June, followed by the Pirates of the Caribbean next July will have a big impact. Management seemed confident in near –term trends at ESPN, ABC, and the theme parks. 2006 will also benefit from an easy comparison against $100 million in pre-opening expenses incurred at Hong Kong Disneyland in 2005. I don’t think that 2006 analyst EPS estimates, currently $1.47, will change at all as a result of the latest quarter or the conference call. That said the next quarter or two may see numbers fall a penny or two only to have those pennies added to the last two fiscal quarters.

To me, the quarter and the outlook is a bit disappointing as I was hoping for a much more clearly positive picture and estimates trending upward. Coming off the nice bounce in the stock over the past month, these results are likely to fall short from an investor's perspective. On the other hand, when I listen to Iger discuss long-term issues and look at what DIS is already doing and its current asset base, I think it is well positioned relative to the other media conglomerates. The question becomes whether you want to own a media conglomerate at all. I am not sure and I am less optimistic about DIS now in terms of year ahead stock price performance than I was 24 hours ago.

Looking at the quarter on a segment basis, Theme Parks and Consumer Products closely tracked estimates. Theme Parks saw 9% revenue growth translate into 14% operating income growth. Margin expansion is the key story here so this is a good sign. On the call, management called for further margin expansion in 2006 and beyond even after the company absorbs some employee benefit increases in 2006. Consumer Products comparisons were down year-over-year due to the sale of the Disney Stores in North America. This is a small division but could hold back corporate results somewhat in 2006 as it contains the company's video games efforts which are undergoing a major investment cycle.

Results at Broadcast and Cable Networks came in slightly short of optimistic expectations. Broadcast was actually pretty much on target as the turnaround at ABC and the syndication profits I outlined in the preview at Touchstone drove results. Management was quite optimistic about syndication over the next few years and if ABC ratings and the ad market hold, the Broadcast turnaround should extend several more years. I found Cable Networks results to be short of analyst expectations on both revenue and operating income. Unfortunately, there were o questions about this on the call so I can't add much. The press release did note higher programming expenses at ABC Family. Management was very firm about forecasting double digit annual growth at ESPN through 2009 based on locked in affiliate fees and programming expenses. This is a positive.

Finally, the Studio lost a little over $300 million, at the high end of guidance. This suggests that my preview thoughts that DIS productions performed poorly enough for write-offs was accurate. Management seemed to suggest about 2/3rds of the loss was Miramax related. Most of the discussion on the conference call concerned the 2006 movie slate and current forecasts for a modest up year seem appropriate although recent flops will negatively impact the next quarter or two as they move through home video windows.

On other topics, there was no mention of the radio sale and Iger said he wouldn’t add to Steve Jobs recent comments on Pixar negotiations. There was a lot of discussion of home video trends. Iger noted that top theatrical titles continue to perform well but that lesser theatrical titles, library, and direct to video releases are struggling. He noted that there were 10,000 DVD releases in the last year including 1,500 TV shows and just 354 recent theatrical releases. This shows how congested the DVD market is and why sell through of many titles is moderating. It doesn't sound like DIS expects much improvement in 2006 but expectations are now in check so a flat market won’t hurt estimates.

Posted by Steve Birenberg at November 22, 2005 09:41 AM in DIS