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Business of Magic
A look at the business of Disney
|Alex Stroup, Editor|
Disney released its first- quarter (Q1) results for fiscal year 2001
(covering the period of October 1 through December 31, 2000), I made some
predictions about what I expected. Let's see how Disney -- and I -- did
last fall, then take a look at Q2, which just ended.
...or: I should know better than to try to write a column at 2 AM and trust my memory for facts. As soon as that piece went up on the site, I got a bunch of email.
The bad news: I made a number of mistakes. The good news: We have some pretty sharp readers who pay attention and keep me honest. For instance:
Anyway, the key point to all this is that I have learned my lesson. No more writing at 2:00 AM. And I will double-check my facts and not just go by memory. You smart readers out there deserve that much.
Now then, let's get on to the results. As you will see, there were a few surprises this time around.
Parks and Resorts:
My original prediction: 10% to 12% growth over last year, with strong Christmas crowds drawn by the new fireworks- and- snow show (remember, fiscal Q1 for Disney is from October through December), offset by the limitations of Disneyland's parking lots and cost of finishing up Disney's California Adventure.
Actual results: I got close here. Disney reported revenues up 9% (to $1.7 billion) with record attendance at both Disneyland and Walt Disney World, and continued growth at the Cruise Line thanks to new seven- day cruises that started last summer. Disney also reported increased costs due to DCA, causing operating income (AKA "profit") to be up only 6%, to $385 million.
My original prediction: I thought Media Networks (ABC-TV and Radio, ESPN, etc.) were going to see slowing growth. Although Regis Philbin's Who Wants to Be a Millionaire was weakening, it was still number one. And there was the end of all that 2000 election campaign advertising. On the other hand, the dot-com meltdown was starting to be felt, because the Internet startups had been spending a lot of money on advertising. So I figured a 5% increase in revenue and 10% increase in operating income.
Actual results: Well, I was half right. Revenue increased 6% to $2.9 billion, but operating income decreased 8% to $590 million. Ouch! Apparently, the advertising market was much softer than I anticipated. Also, startup costs for SoapNet and higher programming costs for ESPN (e.g., broadcasting rights for sporting events) hurt profitability as well, since Disney had to pay more for the broadcast rights of those sporting events.
On the other hand, some of the cable channels that Disney owns pieces of, such as the History Channel, Lifetime, and A & E, are doing better and getting more advertising sales even though the broader advertising market has weakened. This is an impressive achievement. Another positive factor, at least for shareholders, is that the Disney Channel is converting from a basic to a premium cable channel. This means that Disney can charge the cable systems more. It also means you may not see the Disney Channel for free much longer, unless your local cable operator eats the extra cost or raises your monthly fees. [By the way, didn't Disney try this once before years ago, only to move it back to basic cable to build a bigger audience?]
Movie and Studio Content:
My original prediction: I thought the studios' business didn't look good, since they only had a few moderate hit movies last fall with nothing to compare to the Toy Story 2 theatrical release the year before. I predicted a year- to- year drop in revenue of 20% to 30% and a small operating loss. I was, apparently, completely and utterly wrong.
Actual results: You see, I missed one thing: the huge success of the Toy Story / Toy Story 2 DVD and videotape packages. In my own defense, I have good data on movie box office results but haven't found good video sales figures. Still, I should have seen how the Toy Story 2 DVD sets were flying off the shelves. Anyway, revenue increased to $1.9 billion (that's up 15%, not down), and operating income was $152 million, as opposed to a $45 million loss in Q1 of last year. Even the live-action films apparently did better in the U.S. this year than last.
Alas, this was not one of my better predictions.
My original prediction: Again, I was half-right here. I forecast a drop in revenue of less than 5%, and with an actual drop of 6% to $828 million, I was essentially correct. However, I also predicted a big- time drop in operating income to $25 million or less because of store remodelings, and expenditures on all those TV ads we saw last fall.
Actual results: Operating income did decrease, but only by 13% to $177 million. What actually happened? While Disney Store sales declined, video game sales from Disney Interactive (based on Millionaire, Little Mermaid II, 102 Dalmatians, and Emperor's New Groove) helped offset those losses.
Walt Disney Internet Group:
My original prediction: I expected revenue to drop because many of Disney's Internet advertisers failed. I also expected operating losses to increase by up to 30%.
Actual results: Revenues indeed dropped 5% to $176 million but operating losses actually decreased (that is, the losses were smaller) by 9% to $101 million. This is because individual content sites such as Disney.com, ESPN.com, and ABC.com, brought in more money and reduced expenses, while the Go.com portal didn't. Not surprisingly, there are those pieces that Disney is keeping, as their performance is improving while the portal wasn't.
Q1 2001 Summary and Totals:
I figured that total operating income in Q1 would be flat to slightly down. In fact, it was up - 12%, actually. The strong results from the movie and studio content group are responsible for most of this gain.
What to Expect from Q2:
First, let's talk about the layoffs announced last week. The idea behind them is to cut costs as the economy slows, and to hopefully keep profits up as much as possible. Unfortunately those gains won't be seen for a while. The voluntary layoffs, which reduce the need for forced layoffs, haven't started yet. In the short-term, the additional costs for things like severance packages will limit any immediate savings.
I figure it will be at least three months before the company begins to see any savings at all. So the layoffs probably won't help matters much until the fourth quarter, which starts in June. Still, it's an attempt to proactively weather the current economic environment, rather than waiting and hoping for things to get better.
Still, while I suspect things were bad enough in Q2 (January through April) to force the company to make this move, Disney didn't announce any change in "guidance" (what they tell the stock analysts to expect for earnings). So things aren't apparently really far off of what analysts are predicting.
That said, I'm going to jump out on a limb and try to guess what the Q2 results, which should be announced in about a month, will look like:
First, there's no separate Internet Group business unit anymore. The parts that were close to being profitable have been distributed into other business units. So I don't expect Disney's Internet operations to have much of an effect one way or another on business unit results.
I expect results for Consumer Products to continue to be weak. They were weak before the economy started slowing, and they're still in the middle of trying to remodel and restructure. Case in point: They were laying people off even before the big announcement. I'm guessing revenues will be down about 5% to 7%, and operating income down about 10% to around $75 million.
Media Networks will also have been hurt in Q2, as advertising spending has been plummeting (The Wall Street Journal's ad revenue dropped by more than 1/3rd in February over the previous year, and U.S. News & World Report had 48% less ad pages in its March 19th issue than a year ago - whack!). Disney won't fare as bad because ABC (like most TV networks) sells much of its ad time in advance. But they will still have taken a hit. My guess: revenue off around 10% and operating income down 15% to about $500 million.
Parks and Resorts:
I expect the Parks and Resorts to continue growing, just not as fast as before. DCA's opening costs and its below-estimate attendance will hurt here. Selling annual passes for DCA, however, has probably brought in some extra cash that they weren't planning for, but probably not enough to offset DCA's lower attendance. If you think about it, one $100 AP upgrade equals about two DCA admissions. That means an awful lot AP upgrades would have to be sold to make up for DCA's weak performance so far. Still, attendance at the other parks seems to have been strong, so I'll estimate growth (albeit slower) for both revenue and operating income, at about 3% to 5% for both. This means about $340 million in profit for Parks and Resorts.
Movie and Studio Content:
I expect the Movie and Studio Content unit to be the bright spot again. Disney released very few new movies (only five, by my count) during the quarter and of those, there were no big hits. Recess: School's Out was a moderate success, and while Spy Kids looks like a hit, it opened in the last weekend of the quarter so it won't add much to Q2. Chocolat was still raking in a few dollars, too, but not all that much. I still don't have video sales figures, but with Scary Movie, Gone in 60 Seconds and Remember the Titans out there, I would expect fairly strong sales, which should be a big help.
Look for flat revenues, since they didn't have a lot of ticket sales, but a big gain in operating income -- partly because by not making those extra movies they didn't spend a lot of money, and also because their operating income was so low in last year's Q2 (only $3 million). I'm guessing around $90 million in profit here.
I'm estimating just about $1 billion in operating income, which would be up about 5% over last year's Q2. Unless, of course, the economy slows a lot more; then all bets are off.
One Last Thing:
Before I finish up here, let me bring you another (and certainly more experienced) point of view on Disney's business condition. I recently asked a longtime entertainment industry analyst about what his thoughts on Disney were.
His opinion is that the company is certainly one of the four top-tier players in the entertainment industry. His firm believes in Disney's prospects enough to have a lot of money invested in Walt Disney Company stock. He also feels that Disney has most of the right pieces: They are "vertically integrated," owning all stages of production and distribution, from the creation of films and TV shows right down to the ABC network, cable channels and video discs that brings content into the home. They have an Internet presence, and yes, highly profitable theme parks as well.
However, he says, Disney is often fiscally conservative (which I would describe as "tight with the cash") and risk- averse (I‚ll say "slow on the trigger"). Because of this, they end up being the second or third company to jump on an opportunity.
For example, Disney has watched from the sidelines while both Time Warner (with AOL) and Viacom (with CBS) have merged. The analyst puts it another way: "Ten years ago if you wanted to invest in the top entertainment company in the world you would have without a doubt bought Disney's stock. Now, Disney is number 3, behind the Time Warner / AOL and Viacom / CBS."
Just a little something to think about...
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