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Business of Magic
A look at the business of Disney
|Alex Stroup, Editor|
it been three months already since the last time I discussed The Walt
Disney Company’s quarterly earnings? Apparently so, because
today Disney is set to release the results for their 1st quarter of fiscal
2001 - that is, the three months consisting of October, November and
December. Since I never quite got around to looking at the actual results
for Q4 of 2000 (a.k.a. July, August and September), let’s start there
and then take an educated guess on what I expect Disney to say about Q1.
Theme Parks and Resorts
In my earlier article, I predicted the Theme Parks and Resorts business unit would see "the usual 15% - 20% growth rate." It turns out I was just a bit optimistic here, as both revenues (money coming in) and operating income (profit) grew 10%. Disneyland had higher attendance and Walt Disney World (WDW) set records for late summer park attendance and number of hotel room stays, but this appears to have been offset by costs from WDW’s Millennium Celebration and (probably more importantly) costs associated with finishing up Disney’s California Adventure.
Still, $1.7 billion in revenue and $362 million in profit isn’t shabby for three months of business.
In other words, this means ABC-TV and Radio, ESPN, the Disney Channel, and all the rest. For the 4th Quarter, I predicted that "the financial results should again be excellent", as Who Wants to Be a Millionaire was still on top of the ratings in the late summer and the election advertising was in full swing. And the actual results: revenues up 14% to $2.2 billion and operating income up a scorching 26% to $460 million.
Over half of this profit ($240 million to be precise) came from cable TV operations, helped by Disney’s investments in cable networks such as A&E Television, Lifetime Television, E!, and The History Channel. Yes, Disney owns a significant stake in each of those networks, along with complete ownership of the ESPN family and the Disney Channel.
Anyway, the key point here is the Media Networks did very, very well in Q4.
Movie and Studio Content
My prediction for Q4 was for flat revenues and "a small (under $100 million) profit". And reality was that the Movie and Studio Content group had revenues that were down 2% to $1.5 billion but made a profit (as opposed to loss in Q4 of 1999) with operating income of $87 million.
These results come mostly from the success of Scary Movie this year vs. The Sixth Sense last year, and Tarzan and the Gold Collection videos this year vs. Lion King II, Mulan and A Bug’s Life video releases in Q4 last year.
Last time, I said that all the changes and fixes taking place at the Disney Stores would cost a lot of money and would take at least a year to show up in the bottom line. So I figured "Q4 to be even worse than Q3 - lower revenues and significantly lower operating income. In fact, I wouldn’t be surprised if Consumer Products showed a small loss in this quarter."
And Disney reported that revenues for Q4 dropped 7% (to $628 million) but operating income increased 25% (to $100 million). Basically, merchandise licensing was down and advertising costs were up, but Disney Interactive sales were better than expected (thanks to Regis - the Who Want to Be a Millionaire computer games were hot) while the Disney Stores themselves didn’t do quite as bad - that is, they didn’t write-down as much in assets as they did in Q4 1999.
In other words, the Disney Stores didn’t discard as much un-sellable stuff (I’m guessing inventory) this year as as they did last.
Disney Internet Group
"But didn’t Eisner close the Go Portal portion of the Disney Internet Group down?," you say. Yes, he did - and I promise to write more about that in a week or so. I guessed that revenue would be up slightly for the Disney Internet Group and operating losses would probably flatten out as costs were being cut.
Again, I was off a bit: the actual Q4 results were revenues down 6% to $82.0 million and operating losses improved to $162 million. This looks fairly impressive: operating losses dropped almost in half - from $311 million this time last year to $162 million now - but this is only because Disney sold off the Ultraseek intranet search engine for nearly $153 million dollars. An extra $153 million is good (especially since we now know Disney has no use for this sort of thing), but without that sale the losses would have been about the same as last year.
In other words, the underlying business wasn’t getting any better over the past year. And remember that Disney only takes 71% of that loss ($111 million), since that is how much of the Disney Internet Group stock is owned by the parent company. The remainder is borne by the hapless DIG shareholders, whose shares will be converted back into shares of the parent company March 20.
Q4 2000 Summary:
Once again, the Theme Parks and the Media Networks were making the bulk of Disney’s profit. These two units provided nearly $800 million in profits, while the Studios and Consumer Products made less than $200 million. The Internet Group, thanks to the Ultraseek sale, only dragged $100 million or so out of the other unit’s profits.
Although there are still three weak business units, Disney’s Q4 2000 results were a significant improvement over the very weak Q4 of 1999.
Q1 2001 Predictions
Okay, with Q4 out of the way, now it’s time to guess what Disney is going to tell us today about the first quarter of the 2001 fiscal year. Here are my estimates (which sounds much scientific than "educated guesses"):
Another strong quarter here, with growth similar to last quarter’s 10% numbers. Why? The Christmas season was very successful at Disneyland and Walt Disney World and both parks probably drew record-breaking crowds for the season. However, I think this will be offset by the parking situation in Anaheim (where full parking lots limited the attendance on several days during Christmas) and, more importantly, the last-minute expenses of finishing up and staffing DCA, the Grand Californian Hotel and Downtown Disney. Still, a 10% to 12% growth in both revenue and operating income seems likely here.
I think this unit will show growth, but not nearly as strong as in previous quarters. There are several reasons: the end of the 2000 political campaigns and the continuing ".com" meltdown likely cut into advertising revenue in a big way, and Monday Night Football (even with the much-hyped changes) had lower ratings than even last year. On the other hand, although Regis’ hold on the Nielsen ratings is weakening, Millionaire was still the top TV show. I’m guessing about a 5% increase in revenue and 10% increase in operating income, which are respectable but not stellar numbers.
Movie and Studio Content:
This area doesn’t look good to me. Last year’s Q1 had the smash hit Toy Story 2. This year, the biggest Q4 hits for Disney were the moderate successes of Unbreakable, The Emperor’s New Groove, and the tailing end of Remember the Titans. These three combined barely equal Toy Story 2’s box office haul. My guess is that revenue for the Movie and Studio Content group will be significantly down (maybe by as much as 20% to 30%) with a small operating loss.
I think we’ll see pretty much flat revenues here (I’ll guess a drop of less than 5%) and a significant drop in operating income. I’m estimating that operating profits will drop to around the $25 million or less. The store revamps and all those TV ads last Christmas probably cost quite a bit, and I don’t think either one has made a big impact of Disney Stores sales so far.
The Disney Internet Group:
I expect the usual bad news here. Revenues likely dropped in the quarter, as many of their Internet advertisers went to the big web browser in the sky. And as this unit was spending a lot of money on TV ads, I expect operating losses to increase over Q1 1999 - by perhaps as much as 30%. After all, Michael Eisner didn’t kill the Go Portal off because business was starting to get better.
Q1 2001 Estimate Summary:
Overall, total operating income will probably be flat to slightly down when compared to Q1 2000. Movies, Consumer Products and the Internet Group are still weak, while the Media Networks and the Theme Parks will grow just about enough to cancel the other losses. The Walt Disney Company’s promised return to high growth has definitely not yet started.
One More Bit of Investor News:
The time and place of the company’s annual shareholders’ meeting has been announced. In the past, this meeting used to be held in Southern California, since this is where the corporate headquarters is located. Two years ago, this meeting was held in Kansas City, Missouri, to honor where Walt Disney grew up. Last year, the meeting was held in Seattle to, uh, showcase Disney’s commitment to the Internet. This year’s shareholders’ meeting is being held in... Fort Worth, Texas. Why? Beats me. I do have one guess though.
Here are the details: Tuesday, March 6, 2001, at the Bass Performance Hall, located at 330 East 4th Street, Fort Worth, TX 76102.
Does that name Bass seems to ring a bell? This wouldn’t happen to be named after Sid Bass, the Texas tycoon who owns a large chunk of Disney stock and helped put Eisner in as Chairman? Actually, it isn’t - it’s named after Sid’s parents, and was built with money donated by Sid’s younger brother, Edward. Still, you don’t think Michael Eisner would stoop to kissing up to one of the company’s biggest shareholder after two disappointing years, would you?
There must be some other explanation...