Tag Archives: Disney

Disney’s 4Q10: a strong quarter Wall Street initially panned

November 12, 2010 By in earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas Tags: , , , , , , , 2 Comments

DIS reported fourth quarter fiscal 2010 (ended October 2nd) results yesterday.  The earnings release was supposed to be available only after the close.  DIS worried that the information was somehow leaking out into the market, however, and published the figures at 3:45pm, fifteen minutes early.  The stock dropped about 4% on the news, but recovered a bit before the close–and some more after.

the results

DIS earned $.45 per share, adjusted for writeoffs, on revenue of $9.74 billion for 4Q10.  This compares with eps of $.46 on revenue of $9.7 billion in the comparable period of fiscal 2009.  DIS doesn’t give detailed earnings guidance.  The reported results fell a penny shy of the Wall Street consensus, however, which covered an unusually large amount of territory for the quarter, ranging from $.39 to $.53.

the adjustments

Hang onto your hat.

1.  DIS’s financial reporting is based on weeks.  This has not-so-obvious accounting consequences.

Q:  How many weeks in a year?  A: 52.    But 52 x 7 = 364.    This means 52 weeks falls one day short of a full year, except in leap year, when it falls two days short.  Therefore, to keep its accounting year more or less anchored to the actual calendar, every six or seven years, DIS has to make a leap-year-like adjustment by having a 53 week year.

That happened in fiscal 2009.

Because of this, the fourth quarter of fiscal 2010 contains 13 weeks, but the fourth quarter of fiscal 2009 contained 14–meaning it had 7.7% more days in it.

There’s no easy way to make an accurate adjustment that will make the year on year comparison an apples-to-apples one.  The the thing any portfolio manager worth his/her salt will do is to make an easy adjustment that may not be accurate but will give a flavor of what the right number should be.  In this case, let’s assume the extra week has no operating leverage effects.  In other words, let’s just multiply the 4Q2010 eps by 1.077.  That yields eps of $.485, a $.035 gain.

2.  DIS’s cable deals are like oil and gas deals, insanely complex and no two alike.  One common feature, though, is minimum performance guarantees (of one sort or another).  In general, these contract clauses call for higher payments to DIS throughout the year if the product it sells exceeds the contractual guarantees (whatever they may be in a given contract).

How does DIS account for these contracts?  It starts out with the assumption that it will not meet the guarantee minimums (even though it may think it can do so in its sleep) and reports the only the amount it would earn if it didn’t.  Once it achieves the minimum, however, DIS does two things.   It begins to report the higher amount from that point onward; and, in the quarter it hits the minimum, it reports–in one big lump–all the extra money it has earned year-to-date at the higher meeting-the-minimum rate.

Normally, this is a bonanza for the fourth quarter.  Fiscal 2010 was so good, however, that the big payday came in the third.  Here are the figures:

deferred revenue recognized:

3Q2010     $344 million     vs.     3Q2009     -$37 million

3Q2010     $170 million     vs.     4Q2009     $524 million.

Net extra payments in the second half of 2010 were $27 million higher than in the second half of fiscal 2009.  But hitting the minimum performance levels earlier this year than last shifted $.09 in eps that would normally be shown in the fourth quarter into the third.

3.  Oh, yes.  DIS is exiting its image capture business, IMD, and wrote off $100 million ($.07 a share) that reduced operating income from the Media Networks segment.

Let’s add all this up.  $.45 reported + $.035 to correct for the extra week last year + $.09 for the cable contract timing shift  +  $.07 for IMD   =  $.595.  In other words, 4Q2010 was a really good quarter.

things I noticed in the report

From an investment point of view, the key positive is that the advertising market is growing very strongly, both for ESPN and for ABC.  But there are other positives that caught my eye as well, namely:

Writeoffs of older, unsuccessful movies appear to have stopped.  For the full fiscal year, DIS reported impairment charges of $132 million, the largest part of which was for writeoffs of abandoned/unsuccessful movie projects.  The fourth quarter number was only $3 million.  If I’m correct, this is a real positive.

The theme parks are perking up.  Adjusting for the extra week last year, park attendance was up 1% and spending per person up 6% for the quarter.  Hotel occupancy was flat, with spending up about 5%.

Hotel reservations are up 5% year on year so far in 1Q11, with room rates also up by about 5%.  Unlike the case during the past couple of years, both metrics are moving in a positive direction.

what about the stock?

I like it.  It probably won’t be a rocket ship ride, but up 15% in eps is easily achievable in the current fiscal year, I think.  The company has also been buying back its own stock at around the $35.50 level recently–always a good sign.  I probably should mention, though, that I trimmed my DIS position a bit a couple of weeks ago, because I thought it had gotten too big.

 

 

 

Disney’s deal to distribute Marvel films “The Avengers” and “Iron Man 3”

October 22, 2010 By in Entertainment, Industry Analysis, Stock ideas Tags: , , Leave a comment

the new deal

It was widely reported (here’s a link to the story in the Washington Post) on Tuesday that DIS retrieved the worldwide rights to distribute upcoming Marvel movies The Avengers and IM 3 when they are released in 2012 and 2013 from Viacom’s subsidiary Paramount.  Paramount will still distribute Thor and Captain America.

I haven’t been able to find an official release either on the DIS or VIA websites, or on PR Newswire, for that matter, but the terms of the agreement seem to be as follows:

–DIS will assume responsibility for distribution of the two films

–DIS will pay VIA the 8% of box office it would have earned from distributing The Avengers and 9% (1% extra) of the box office from IM3.

—when the films are initially released, DIS will also pay VIA a total of $115 million as a non-returnable advance against its distribution percentage.  Further details on the timing of the payment (which I don’t think are that important) aren’t clear.

Why did DIS do this?

Is it a good move?

Yes, for several reasons:

–DIS has a stronger global distribution network than Paramount

–DIS will be able to create a total marketing plan, including merchandise and other extras, for the films,

–as I understand it, the existing arrangement calls for Paramount to collect the film’s share of box office, subtract its 8% fee, recover its costs, and return the rest to Marvel.  The only contractual constraint on Paramount’s spending is a guarantee that Marvel will get a minimum percentage of the box office.

Paramount’s goal is to maximize box office, not film profits.  So it will have a natural tendency to overspend to generate ticket sales.  In theory it would benefit the distributor to spend an extra $100 on promotion to generate even an extra $50 in box office, provided it didn’t violate the minimum return guarantee.

–the film industry is noted for its unusual ways of reckoning up revenues and costs.  Having everything in-house makes it simpler for DIS to see and control them.  It will also save on audit fees.

As for Paramount, it no longer is exposed to the risk that the two films will be flops.  It will collect an up-front fee set at the blockbuster level.  It will collect more money if the films are super-hits, all without having to do any work.

by itself this is a footnote, not a big story

Why write about it then?

I think this deal is an indicator of a healthy attitude of responsibility and attention to detail by DIS’s management.  It’s kind of like the story that the new head of Disney Films is willing to accept input from Pixar, which his predecessor refused to do.  Not it itself a big thing.  But it gives the shareholder (I own DIS) confidence that the company’s management has professional skill and is using it for the benefit of the company’s owners.  In the case of DIS, it’s another piece of evidence that the neglect that characterized the Eisner years is being systematically addressed.

DIS: strong fiscal third quarter (ended 3July10)

August 12, 2010 By in Current Market Thoughts, earnings conference calls, Entertainment, Industry Analysis, Lodging, Stock ideas, Uncategorized Tags: , , , , , Leave a comment

the results

DIS reported a very strong third fiscal quarter of 2010 (quarter ended 3 July) after the close on Tuesday.  EPS were $.67 for the three months vs.  $.51 in the comparable period of fiscal 2009.  Quarterly revenues grew to $10.0 billion, up by 16% from last year’s $8.6 billion.

details

One of the more interesting aspects of following DIS is the out-of-the-ordinary accounting (totally above-board, but quirky) that is customary for its collection of businesses to use.

For example, if I were to ask you to guess where the largest dollar increase in operating income for the just ended quarter comes from, you’d probably say Studio Entertainment–thinking of the smash box office successes of Iron Man 2 and Toy Story 3, and the release of Alice in Wonderland to DVD. Good guess, but it would be wrong.  Net of writedowns of film clunkers, the increase here was $135 million.  The actual biggest jump comes in Media Networks, and derives from recognition of $381 million in previously deferred ESPN cable affiliate revenue.  What’s that?  Read on.

By segment, the 3Q10 results are as follows:

Media Networks          $1885 million, up $556 million

Parks and Resorts          $477 million, down $44 million

Studio Entertainment          $123 million, up $135 million

Consumer Products          $117 million, up 96 million

Interactive Media          -65 million, up $10 million

Total          $2, 537 million, up $688 million

Media Networks

ABC television was basically flat at $209 million in operating income, which I consider to be a good result.

Cable (ESPN + the Disney channel, but mostly ESPN) was up $561 million at $1,675 million.  That’s a 50% jump, year over year.  Of that, $381 million came from recognition of previously deferred revenue from ESPN.  Otherwise, operating income would have been up by 16%.

ESPN advertising revenues were up by 31%, mostly because its coverage of the FIFA World Cup was a fabulous success, but also because the NBA finals between the Lakers and Celtics was a compelling series and lasted seven games.  Ex these factors, ad revenue would have increased by a still healthy 17%.

Finally, to deferred revenues.  ESPN’s contracts with its cable customers provide for what are in effect bonus payments if the sports network exceeds specified levels of subscribership.  FIFA and the NBA meant that many of these levels were hit in the third quarter this fiscal year vs. the fourth quarter of last fiscal year.  DIS thinks it will collect $355 million less in these fees during the fourth quarter of this year than in the final three months of fiscal 2009.  IN other words, the big 3Q number represents a shift in the timing of ESPN earnings these payments, rather than a gigantic increase in the payments themselves.

The bottom line, though, is that ESPN continues to do extremely well, and the other, much smaller, parts of cable/broadcasting are managing to tread water in a tough environment.

Parks and Resorts

This business is basically flat.  The most important thing is that DIS is trying, successfully so far, to end the sharp discounts it was forced to give last year to lure patrons to its parks and resorts.  Per guest spending in Disney hotels was up by 4%, but occupancy was down by about 6%.  Similarly, guest spending in the parks was up by 5% and attendance down 3%.

The Easter holiday, and the accompanying spurt in park business, started in DIS’s second fiscal quarter this year instead of the third, where it usually is.  This means that the year on year comparisons in this business segment are actually slightly better–maybe a percentage point or two–on the occupancy and attendance side–than the reported numbers.

More accounting arcana:  Fourth quarter hotel reservations are down 9% year on year.  That’s about what DIS’s recent experience has been.  But the number is in fact much better than it seems.  Its hotel-theme park-resorts roots have led DIS to organize its books on a week-by-week basis.  Each “quarter” consists of 13 weeks.  But four periods like this add up to 364 days, meaning DIS has to periodically add an extra week to the fourth quarter of its fiscal year so that its accounting quarters and the calendar quarters match closely.  Last year was one of those 53 week years.

On an apples to apples basis, reservations are down about 1%, despite the lower discounts.  This won’t cause a big surge in income but it signals that this business is gradually improving.

Studio Entertainment

This segment needs little explanation.  Iron Man 2 took in about $600 million in worldwide box office in the third fiscal quarter.  Toy Story 3 has taken in almost $900 million, about half of that falling in this accounting period.  DIS also had unspecified, but “higher” film writedowns than last year.

Consumer Products

Cost-cutting at the Disney stores, plus Toy Story and Marvel merchandise.

Interactive Media

This is a catchall for DIS’s digital startups.  At least losses appear to be stabilizing.

what to make of this

This was a blowout quarter on an operating basis, that was generally aided by the quirks in DIS’s accounting–especially the ESPN results.  The company’s main businesses, ESPN, Pixar and Marvel, continue to perform very well.

The parks business is slowly turning itself around as the economy in the US improves.  The legacy DIS film business seems to be on a sounder footing.  And the company keeps on aggressively updating its structure–Miramax and Power Rangers out, Playdom (social gaming) in.

On a longer-term basis, then, so far so good.

DIS has been an outperformer so far this year, up about 10% relative to the S&P 500.  Continuing success at ESPN and films will probably translate into about 15% eps growth in the coming twelve months.  A rebound in the parks and resorts business would likely add a few percentage points to that.  With the stock trading at about a market multiple and the company buying back stock (it has already bought back all the shares issued to acquire Marvel Entertainment), my guess is that modest outperformance is likely to continue.  The obvious risk is that one business, ESPN, generates the bulk of the company’s earnings.


Disney’s movie business is doing (even) better than it seems

June 23, 2010 By in Current Market Thoughts, Entertainment, Stock ideas Tags: Leave a comment

five movies

DIS has had five major releases since its fiscal 2010 began in November: The Princess and the Frog, Alice in Wonderland, IronMan 2, Prince of Persia: The Sands of Time and Toy Story III.

ratings

According to Rotten Tomatoes, critical reviews have been mixed.  Out of a possible 100–based on the percentage of positive reviews, scores are as follows:

Toy Story 3 98

Princess 84

IM 2 75

Alice 51

Prince of Persia 38.

Prince of Persia turns out to have the second-highest score of any movie based on a video game.  Most in this genre are relatively low-budget films that hope for modest box office success.  As a big budget (an estimated $200 million–more than IM2, Prince breaks with this pattern in hopes of wider consumer acceptance than video game aficionados.

box office

————————–US————-foreign——–total

Alice $334.1 mill            $685.6           $1019.7

IM2 $304.6                    $300               $604.6

Prince $81.4                      $213.1             $294.5

Princess $104.4                   $162.6             $267

TS3 $125.9                    $44.8              $170.7   —in its first weekend, limited foreign release

note the strong foreign sales

Together Prince and Princess will probably break even, thanks to much stronger foreign box office than US receipts.  Alice was a mega-hit.  IM2 is inching toward total US box office for IM ($318.4 million) but has already blown by the original’s foreign take of $266.7 million.  In addition to its strong domestic start, TS3 has set records for an animated release in China and Latin America.  In addition to its extremely good critical reviews, the film is demonstrating unusually strong appeal to young adults–apparently because they grew up with the earlier TS movies.

Over and above box office, revenue for DIS will come from:

merchandise sales

DIS is estimating that TS3 will generate $2.4 billion in sales of licensed merchandise this year.  IM2 may not match that number but it will doubtless handily exceed the take from IM, where uncertainty as to the success of the film meant only small amounts of related merchandise were available on its release.

dvds

Several years ago, DVD sales made up over half of a typical movie’s revenue.  DVD purchases have been severely curtailed since the financial crisis hit, however.  The one exception:  blockbusters like the original IM. My guess is that the same will prove true for IM2 and TS3.  Alice is also one to watch carefully.  DIS has begun selling Alice DVDs much closer to the box office release date, in hopes of benefitting from the positive glow of the movie’s success, as well as from the promotional spending that accompanies a movie’s debut.  It will be interesting to see how well the experiment works.  In any event, for DIS’s strongest films, there’s a good chance that DVD sales will be better than expected.

conservative accounting?

Film companies write off production costs by estimating total film revenues, calculating the percentage of that estimate that is being recognized in a given accounting period, and subtracting the same percentage of costs.  In other words, they use project accounting.

Given the fact that DVD sales have been deteriorating over the past couple of years, I don’t see any reason for DIS’s accountants to make the aggressive assumption that the company’s films will counter that trend.  In the case of TS3 and IM2, and maybe for Alice, DVD sales will likely be very good.  But it’s much better to write off costs early and have a positive surprise than to be too optimistic and end up having to write off a bunch of costs at the end of a film’s earning life.  The latter is what DIS, ex Pixar and Marvel, was doing at the end of last fiscal year.

It seems to me that the result will be that the writeoff of costs will be aggressive in the beginning, with surprisingly high profits being recognized later on.



s

Inside info?–Is DIS selling ABC?

May 31, 2010 By in Current Market Thoughts, Entertainment, Industry Analysis, Recent Market Action Tags: , , , , , , Leave a comment

Offer one:  earnings data

Last week, authorities arrested the assistant to a high-ranking DIS communications official and her boyfriend.  The boyfriend allegedly sent a cold-call form letter to a large number of hedge funds earlier this year, offering to sell them advance copies of  DIS March quarter earnings information, which the girlfriend has presumably agreed to provide.

To even a criminally minded recipients of such an offer, several allied threads of reasoning must have gone through their minds:

–the writer wasn’t particularly bright to put the offer in writing and send it to a complete stranger,

–could this possibly be a pathetic attempt at a sting operation by the SEC?

–in the case of a mature, large-cap company like DIS, would any earnings surprise be large enough to move the stock a significant amount?

–who else got the letter?

–was this a colleague’s idea of a joke?

Having a strong sense of ethics, or maybe seeing nothing but downside from the offer, the recipients turned the boyfriend in to the SEC.

Offer two:  asset sales

The boyfriend also allegedly said he could provide details of advanced negotiations between DIS and private equity firms to sell them ABC television.  As the story came out, DIS denied it (which means nothing.  It could be there are “discussions” under way but no “negotiations,” in DIS’s mind, or that there are discussions, but they’re not “advanced,” or some other such equivocation).

The possible sale of ABC is much more interesting information than whether DIS will report eps of $.60 a share or $.61 in any given quarter.  And the fact that something is brewing, which was being offered for free (DIS stock temporarily rose by 5% on the announcement of the arrests and the reasons for them), is probably more significant than the names of the private equity firms.

Why would selling ABC be good news?

Traditional network broadcast TV is moving down the internet-created road to oblivion already trod by music sales, newspapers, books and magazines.  Content creation for viewing on home screens will doubtless survive, but it’s likely that over-the-air delivery won’t.  ABC has both.  It’s not clear what parts of ABC are supposed to be being sold; although my guess would be gaining the content creation business would be the inducement for someone to take the network.

DIS seems to me to be running ABC in a reasonable way, trying to maximize the cash flow it generates for investment elsewhere in DIS, while retaining some degree of profitability.  ABC is small in the scope of overall DIS, both in terms of contribution to operating income and in potential value as a sale at maybe $1 billion.

If ABC is so tiny a part of DIS, why should investors be interested one way or the other about what happens with ABC?  The answer is the real, and—I think—non-obvious, concern of investors about ABC.

The real investment issue is, to coin a phrase, the profit asymmetry of the ABC business.  Wall Street firmly believes that there’s a ceiling, and a gradually downward-sloping one at that, for the earning potential of ABC.  It’s not plausible that anything surprisingly good, and enough to move the DIS stock price up, is likely to emerge from normal ABC operations.  So there’s only downside.

One possibility is that profits continue a gentle decline to the point that one day ABC simply isn’t there anymore.  That’s the good case.  On the other hand, it’s possible that we wake up one day to find that ABC is spouting red ink like the BP well in the Gulf of Mexico is spouting oil, and that it will cost, say, $3 billion to shut it down.  Think: music, or newspapers.

I’m not saying that the second case is likely.  I have no opinion.  But it’s a common pattern with companies that an apparently insignificant business an investor decides to give little research effort to suddenly turns into a black hole of losses that begins devouring the profits of the rest of the company.

The good news for an analyst, then, would be the removal of uncertainty surrounding a complex business that adds little to DIS but could lose it a lot.