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The Business of Magic
A look at the business of Disney
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Alex Stroup, Editor

Disney’s Financial Performance - How are they really doing?

Disney's Financial Performance

Last time, we started looking at The Walt Disney Company's performance for the 3rd quarter of 2000 and also their performance for the last few years. We defined the key terms that we'll be working with: business units, revenue and operating income. The general idea is that we look at each different group inside Disney (the business units) and see how much they sold (revenue) and how much profit they made (operating income).

Before we get going, I should make a small disclosure. Just so you don't think I'm doing this to manipulate Disney stock and make a small fortune, I need let you know that I do indeed own some Disney stock. But not very much - only 100 shares. So even if Disney's stock zooms upwards or crashes to zero, I don't personally stand to benefit or lose much. Remember, I'm attending graduate school at a prestigious private university - which means even if Disney's stock doubles in price, I'd only gain about enough to pay for only one month's tuition...

That having been said, let's get back to the matter at hand. Looking at Disney Company as a whole, we found an interesting contradiction. In the last quarter in which Disney reported results (Q3, the three months that ended last June), revenue was up about 10% and profit was up nearly 20%. But on average over the last few years, it's been the other way around - revenues up but profits pretty much flat. What's going on here? Why are Disney's profits flat? Why did last quarter buck the trend?

A good place to start looking is the individual business units. So let's get started:

The Good:

Theme Parks and Resorts

Let's start with my personal favorite business unit, and probably yours if you are a MousePlanet reader: the Theme Parks and Resorts unit. Nowadays this group consists of more than just Disneyland and Walt Disney World - there's also all the hotels, the cruise ships, regional entertainment (DisneyQuest and the ESPN Zone restaurants) and even Imagineering. And, of course, there are also payments from Disneylands Paris and Tokyo. Remember, the Walt Disney Company doesn't actually own those two parks directly, but they do get royalties (a cut of the revenues) from both and as well as a large share of the profits from Paris (since Disney does own a share of this resort).

Anyway, in Q3, the Parks and Resorts unit earned $1.940 billion in revenues and $565 million in operating income. This is up from up 12.8% from $1.720 billion in revenues and up 13.7% from $497 million in operating income in Q3 1999. Note quite at the targeted 20%, but still very respectable, especially considering there have been no major changes in this part of the business over the last year. That is, no new theme parks or major resort openings, and only few new attractions or additions: the new Disney Wonder cruise ship, the Rock'n'Roll Coaster at WDW and Disneyland's new 45th anniversary parade and fireworks show. While these are certainly nice additions, they are probably not enough to increase the theme park and resorts business by 15% by themselves. Which means this part of the Disney's business was simply getting more customers - or more dollars per customer. Or most likely, a bit of each.

How have the parks and resorts been doing over the longer term?  Here's a chart of their financial performance over the last few years:

Theme Park results

As you can see, the theme parks are a seasonal business, with a peak in the 3rd quarter - that is, the months of April, May and June. It shouldn't be surprising that the spring and early summer accounts for a large part of such a travel-related business. Also, the resort and theme park business has been growing very consistently, as each yearly peak is higher than the previous year's.  (While the growth in revenue is easy to see on the chart, the operating growth trend is harder to see due the scaling of the axes. In other words, to get both plots on the same chart, the detail in the income plot gets squashed down a bit. Still, if you look closely you can see the dotted trend line is indeed sloping upwards.) In fact, revenues have been growing at average of 12% per year and operating income at average of nearly 16% per year.

This brings to mind two points. First, maybe you've heard people say that the theme parks are  Disney's "cash cow." In this case, they mean it's a business unit that consistently grows and reliably brings in ever larger profits. Guess what? As we can now see, they're absolutely right! The parks and resorts have steadily grown and can be counted on to bring in profits. The second point is that this quarter's revenue growth rate of 13% and income growth rate of 14% is pretty in line with the unit's averages - in other words, this was a pretty typical quarter for the theme parks.

What will the next quarter look like for the Parks and Resorts unit? This would be Q4, which was from July 1st to September 30th. And even though that quarter is over, Disney hasn't released the results yet but it is scheduled to do so this Thursday. In the meantime, we can look back over the last few months and try to anticipate what the results will look like.  For the theme parks and resorts, I would expect to see nothing surprising.  Dollar amounts will drop off from the Q3 levels, but this is typical of the seasonal cycle that the theme parks go through. When compared to the 4th quarter of 1999, I would expect to see the usual 15% - 20% growth rate.  Why? Because nothing spectacular - either good or bad - happened during those three months. No new attractions or hotels opened up (even Disneyland's 45th anniversary celebration had already started before that) and I didn't hear any anecdotal reports of the parks being really crowded over the summer. So I don't see any reason to expect surprisingly high financial results for Q4.

On the other side of the coin, if things were going really badly, I would have expected to see a lot more marketing promotions and cost- cutting to attempt to make things better. Yes, there was quite a lot of cost- cutting going on at Disneyland during Q4 (as was documented in Al's D-I-G updates), but we didn't hear about this same level of belt-tightening at WDW or the Cruise Lines. So I suspect that any financial problems were limited to Disneyland, and are quite likely due to cost overruns in building Disney's California Adventure next door. So, in this case, I see no reason to expect this will be a horrible quarter for the theme parks unit either. Hence, if it isn't bad and isn't great, it must be just plain good.

As for the longer term, I suspect the outlook for Disney's theme park and resort business is quite good (baring a major economic downturn, of course). The parks have been on a consistently upward trend, plus with new parks (DCA and DisneySeas Tokyo) and new hotels in Florida coming on line, I expect this part of The Walt Disney company to grow comfortably for the next several years.

Media Networks

Actually, I have to admit the Media Networks business unit's financial performance was quite a surprise to me. You see, I'd heard all the horror stories in the press: how network television's audience was getting smaller as viewers went to cable channels and the Internet, how ABC (in the pre-Who Wants to be a Millionaire days) was third place in the TV ratings, and how much things like Monday Night Football was costing them even though the ratings were dropping. I had assumed that the Media Networks unit, which includes ABC Television, ABC Radio, ESPN, and Radio Disney, was going to be a bit of a loser.

Boy, was I wrong.

Let me show you why I changed my mind. First, for Q3, revenues climbed to $2.270 billion (up 20.4% from $1.886 billion in Q3 1999) and operating income went up to $662 million (up 36.5% from $485 million in 1999). Not only are those numbers above the corporate targets of 20% growth, the 36% growth in profit is extremely good.

What went so well? Well, Regis Philbin certainly has a lot to do with this. Who Wants to be a Millionaire hadn't premiered yet in Q3 1999 and ABC was struggling in the TV ratings, so the ratings improvements that came from it (and the accompanying increased advertising rates ABC can charge due to the higher ratings) show up in the year-to-year comparison. Another factor is the increased advertising that comes with this year's national elections.

But last quarter is only part of the picture. We can see more by taking a look at the chart:

Media results

Obviously, the results only go back to 1995 when Disney acquired ABC.  The financial results from the first few years were pretty much flat, but in the last two years (well before Regis) both revenue and operating income began risen substantially. In those two years, revenue growth has averaged 15.7% annually and income has grown twice as fast: 32.1% annual growth. This is very good financial performance, certainly not the dog I expected to find.

As for the future, I have a mixed opinion. For the 4th Quarter that ended in September, the financial results should again be excellent. Who Wants to be a Millionaire faced a challenge from CBS' Survivor but remained on top  - apparently the viewers didn't vote Regis off their TV sets. I also think we'll see a major boost from all the political advertising that has been leading up to the election.

Over the longer term, however, I see several potential "opportunities" (what non-MBA folk call "problems") on the horizon. First, ABC-TV's ratings are very dependent on Millionaire right now, and they need to develop other hits to take over if and when this show begins to falter in the ratings. Fortunately, they'll have at least a few months of cushion as advertising rates get locked-in after the "sweeps" periods as well as from large advertisers who buy time far in advance. Secondly, of course, all election advertising is pretty much over, and this source of revenue will go away for a while.

The third and final factor is the great "dot-com" shakeout that occurred this year. Over the past year or two, new Internet start-ups have been flush with investment cash and have spent tons of it on media advertising.  Remember last year how it seemed nearly every radio commercial was for some new "dot-com" company? Radio (and to a lesser extent, television) broadcasters were the beneficiaries of all that Internet cash, and I'm sure we see some of that in Disney's Media Network results. But then The Crash hit last spring, causing the Internet stocks to plummet in value. This in turn caused the Venture Capitalists (the people who give the initial investments to Internet and other start-up companies) to get nervous and pretty much stop investing.

Unfortunately, the Internet companies are now between a rock and a hard-place: they're losing money but they can't go public and sell stock to get more cash, and the Venture Capitalists won't give them any more. The point is that many Internet companies are going out of business and the rest are trying to conserve their cash. Which means less advertising money going to Disney and the other broadcasters. This, I feel, could in the next year bring the Media Networks financial growth to a grinding halt.

I think that's enough for today. We've seen the Good business units within Disney, so next time we'll look at the Bad ones. And yes, there is some Ugly out their as well. But don't let that scare you!

See you again very soon - and once we can more closely examine the soon to be released figures for this past quarter we'll have another follow-up on that for you.

Next: Part Three


Part One

Part Three


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