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Business of Magic
A look at the business of Disney
|Alex Stroup, Editor|
Disney's Second and Third Quarter 2001 Results
ONE | TWO
On August 2, the Walt Disney Company released its third quarter financial results for the period from April 1 to June 30, 2001. This caught me unprepared, as I haven't even discussed Disney's second quarter results yet. In my own defense, I have been putting a lot of effort into the analysis of Disney's purchase of the Fox Family Channel, which you should see very soon.
Since I owe you some analysis of Disney's financial performance, this will be a two-for-one article: I will discuss both Q2 and Q3, and therefore cover the entire first six months of the calendar year in one shot.
Doing the opposite of the overall economy over the last year or so, Disney's Studio Entertainment business unit, responsible for movies and video sales, was weak last year but has stabilized so far this year. In Q2, revenue dropped 5 percent to $1.573 billion, down from $1.662 billion in Fiscal Year 2000. Operating income improved significantly however, going from $3 million last year to $164 million in 2001. Motion pictures revenues were still weak in Q2, with only Recess: School's Out and the opening weekend of Spy Kids bringing much of any money coming. However none of the movies in Q2 were particularly expensive to make, and hence Disney did not lose as much money on them as they did with some of the big money losers of Q2 2000, such as Mission to Mars. Video sales were strong, with continuing sales of Remember the Titans and Dinosaur along with the direct-to-video release of Lady and the Tramp II: Scamps Adventure.
Q3 is typically the year's weakest quarter for the Studios, and FY 2001 is no exception. However, revenue was up when compared to last year's Q3: $1.342 billion, up 8 percent from $1.243 billion in 2000. Operating income increased to $65 million, from a loss of $3 million last year. While $65 million may seem low, this is actually the best Q3 income for the Studio Entertainment unit in the past three years. Video sales remained strong with the release of Unbreakable, The Emperor's New Groove, and 102 Dalmatians. These results were also helped by Spy Kids and the surprise hit Bridget Jones' Diary.
Pearl Harbor, while not the great success that the company had hoped it would be, probably had very little impact in Q3. Its domestic theater sales in the quarter of just under $200 million probably covered most of its costs. Any profit will come from overseas tickets, video sales, and cable and broadcast TV rights, which will begin to show themselves in the next few quarters. It appears, however, that Atlantis has been a disappointment at the theaters; perhaps it will redeem itself in video rentals and sales.
A final interesting point about the Studios is that you may recall Michael Eisner promising to produce fewer films in order to cut costs. And true to his word, Disney and its associated labels, including Miramax and Dimension, released only 12 new movies in Q2 and Q3, down by a third from last year's 18. I guess the theory here is that most pictures lose money, so producing fewer movies leaves the company exposed to lower potential losses. The flip side, of course, is that it also gives you fewer chances to get a hit.
The economic slowdown has had a big effect on the Media Networks group. When the economy turns down, most companies try to cut back on their non- critical expenses. This means advertising budgets are one of the first things to get cut, and media companies that depend on advertising are hurt the most. Disney's suffering has been compounded by falling ratings for ABC-TV's savior program, Who Wants to be a Millionaire? Revenue for the Media Networks dropped 7 percent in Q2 to $2.211 billion, down from $2.380 billion in Q2 2000. Operating income fell 9 percent to $489 million, down from $537 million a year earlier. The downturn accelerated in the third quarter, with revenue dropping 6 percent, from $2.270 billion in Q3 2000 to $2.135 billion in 2001. Operating income plunging 29 percent, from $662 million in 2000 to $470 million.
In both Q2 and Q3, weak advertising sales and soft ratings were offset by improved cable performance. The cable channels, including The Disney Channel, ESPN, A&E, The History Channel, Lifetime, and SoapNet, are not as dependent on advertising and receive much of their revenue from fees paid by cable system operators. More subscribers and annual fee hikes built into cable system contracts mean more money for Disney. Also, changing The Disney Channel from an premium, extra-charge service to an basic channel on many systems also helped boost its number of subscribers in Q3.
Parks and Resorts
The Parks and Resorts business unit has remained fairly flat over the last two quarters. Revenue was $1.648 billion in Q2, up 5 percent from $1.571 billion in Q2 2000. Operating income was basically flat at $331 million, versus $330 million in 2000. Walt Disney World's attendance began to drop in Q2, while the Disneyland Resort's attendance and per-guest spending grew due to the opening of Disney's California Adventure. Unfortunately, any cost savings at parks were offset by the expenses of getting DCA ready, and the less-than-projected attendance gain from the new park. The Disney Cruise Line continued to be strong despite the downturn that the economy was taking.
Financial results for Q3 were even more flat than for Q2: revenue was $1.942 billion in Q3 2001, versus $1.940 billion a year earlier, with an operating income of $560 million, down about 1 percent from the $565 million recorded in 2000. This is the only time in my database, which goes back to 1994, that the profits for the Park and Resort groups have failed to increase. The sagging economy magnified the same forces that were in play in Q2. In other words, the Disneyland Resort attendance and guest spending improved somewhat over the year before, thanks to DCA and especially the Grand Californian Hotel. The cruise line continued to be strong (reaching 90% occupancy), but Walt Disney World attendance fell even further, dropping about 7 percent from a year earlier. The weak economy may not have been the only culprit here; the lack of a strong promotional draw, such as a new major attraction or last year's Millennium celebration, may have contributed to this slide as well.
The Consumer Products unit had already been struggling for the last year or two even before the economy began to slump. However, it appears that all the reorganizing and cost-cutting both at the Disney Stores and across the rest of the unit has finally started to pay off. For instance, in Q2 revenues dropped 5 percent to $568 million, from $599 million a year earlier, but operating income climbed nearly 6 percent to $90 million, up from $85 million in Q2 2000. Similarly, in Q3, revenues were nearly flat: up 1 percent to $518 million, from $511 million in 2000. But operating income rose again, climbing 32 percent to $58 million, up from $38 million last year.
An interesting side note: While Disney reported last year that Consumer Products' operating income for Q2 2000 was $59 million, they now say that the figure was $38 million. This is probably nothing untoward; Disney just rearranged parts of the different business units since last year. This actually is not unusual, and you will often see the previous year's results change by a few million from year to year. However, a change of $21 million in operating income is pretty large. My guess is that some pieces of the old Disney Internet Group were folded into Consumer Products. If those pieces were losing money (say, a loss of about $21 million), that would explain the difference. However, since what's in a business unit is arbitrary, Disney does not have to explain what changes it has made, if any.
Getting back to the results for the Consumer Products unit, both quarters' numbers appear to have been driven by the same factors: continued weak sales at the Disney Stores, offset by rising game software sales and lower costs. And while Disney has signed marketing deals with companies such as Coca-Cola, Gillette's Oral-B, J.C. Penney, K-Mart and Wal-Mart, the royalties from these deals won't be seen until FY 2002.