Disney's Finances No Walk in the Park
LOS ANGELES (The Hollywood Reporter) -- Rather than mark the last in a series of disappointing quarters, the Walt Disney Co.'s fiscal third-quarter results Thursday set the stage for more bad news as executives warned that US theme park attendance has not rebounded as expected and will continue to plague earnings. The Burbank conglomerate, which had hoped to see a return to growth by now, is already projecting that fourth-quarter income will be worse than that of a year ago, which was an inherently weak period given the travel and advertising losses caused by the Sept. 11 attacks. Third-quarter net income fell 7% to $364 million on a decline in operating income across all divisions. Total revenue fell 3% to $5.8 billion. "We knew it would be weak but just not this weak," Kaufman & Co. analyst Paul Kim said. "It's going to be a substantial negative that the theme park business will not post positive returns (in the fourth quarter) despite easy comparisons to last year." Given the guidance warning, blamed largely on current US park reservations running 10% below those of a year ago, analysts are bracing for further erosion today in Disney's share price, down 21% year-to-date to a close Thursday of 16.83 before earnings were released. Shares fell further in after-hours trading. "None of the challenges Disney faces are ingrained or endemic," chairman and CEO Michael Eisner told ana-lysts and investors in a conference call. "We intend to emerge by making sure that every one of our busi-nesses is running right by focusing on the fundamentals, providing great content and growing in a measured and smart way." One area in which Disney remains confident is corporate governance, with Eisner pledging to take such steps in coming weeks as reducing the size of Disney's 16-member board of directors and reconfig-uring and cutting the size of major board committees. While Disney's board has been criticized for being too closely aligned with Eisner, the goal of these changes is to "apply a more stringent definition and application of independent standards," he said. Disney also plans to start expensing stock options, but not before there are standard rules that apply consistently to all companies, Eisner said. Controlling costs is still the preferred way of dealing with the challenges, Eisner said, adding that $850 million has been trimmed over the past few years. Disney's debt also has been reduced to $13.1 billion from $14.9 billion in the past six months.
· Executives are excited about the prospects of revitalizing ABC, a key component of Disney's other trou-bled division, media networks. While make-goods from weak ratings limited ABC's ability to profit from an improved scatter market, the network sold 85% of its advertising inventory in the upfront at 5% higher rates, reflecting a stronger ad market and confidence in the fall primetime schedule, president and chief operating officer Robert Iger said. "We know this is still going to take time, so to be fair, it's guarded opti-mism," Iger said. "We have a lot of bouncing back to do -- we've had two bad years." Low ratings and re-sulting low ad revenue coupled with higher programming costs at ABC contributed to a 10% decline in media networks revenue to $2.1 billion. Operating income fell 40% to $288 million.
· Cable revenue suffered from the bankruptcy filings of cable provider Adelphia Communications Corp. in the United States and German group KirchMedia overseas, as well as ad weakness at ESPN and other cable investments.
· The studios had the only positive revenue results, up 3% to $1.4 billion, though operating income fell 66% to $22 million because of decreases in domestic film distribution and international home video. "Lilo & Stitch" performed well, earning more than $130 million domestically to date, but was released late in the quarter and only partially offset the poor showing of "Bad Company" compared with last year's "Pearl Har-bor." Studio results were also affected by higher marketing and distribution costs for films not yet released, and some direct-to-video releases, like "Cinderella II: Dreams Come True," did not do well in international markets.
· The consumer products division also posted weaker results, with revenue down 13% to $457 million and operating income off 16% to $51 million. Worldwide merchandise licensing was hampered by sales declines of Disney Interactive's computer and video game titles, offset by higher Disney Stores sales in North America.
Still, the prime issue remains the parks, which saw revenue decrease 5% to $1.8 billion and operating income fall 17% to $467 million. Of the overseas parks, which only marginally contribute to earnings because they are not owned outright by Disney, Tokyo Disneyland is a "smashing success," while the second park in Paris is off to a slower-than-expected start, finance chief Tom Staggs said. The chief problem Stateside is that interna-tional visitors are reluctant to return after Sept. 11, even with significant discounts from the airlines, Staggs said. International figures are off by 30% compared with a year ago, and total US attendance was down 6% in the quarter. "They're trying to make the best of a difficult environment, and some problems are in their control, like ABC, and some are not," Gerard Klauer Mattison & Co. analyst Jeff Logsdon said. "They're working hard to improve the networks where they can and be patient at the parks. You can keep the costs under control, but ultimately this is a business that grows when the top line grows."
LOS ANGELES (The Hollywood Reporter) -- Rather than mark the last in a series of disappointing quarters, the Walt Disney Co.'s fiscal third-quarter results Thursday set the stage for more bad news as executives warned that US theme park attendance has not rebounded as expected and will continue to plague earnings. The Burbank conglomerate, which had hoped to see a return to growth by now, is already projecting that fourth-quarter income will be worse than that of a year ago, which was an inherently weak period given the travel and advertising losses caused by the Sept. 11 attacks. Third-quarter net income fell 7% to $364 million on a decline in operating income across all divisions. Total revenue fell 3% to $5.8 billion. "We knew it would be weak but just not this weak," Kaufman & Co. analyst Paul Kim said. "It's going to be a substantial negative that the theme park business will not post positive returns (in the fourth quarter) despite easy comparisons to last year." Given the guidance warning, blamed largely on current US park reservations running 10% below those of a year ago, analysts are bracing for further erosion today in Disney's share price, down 21% year-to-date to a close Thursday of 16.83 before earnings were released. Shares fell further in after-hours trading. "None of the challenges Disney faces are ingrained or endemic," chairman and CEO Michael Eisner told ana-lysts and investors in a conference call. "We intend to emerge by making sure that every one of our busi-nesses is running right by focusing on the fundamentals, providing great content and growing in a measured and smart way." One area in which Disney remains confident is corporate governance, with Eisner pledging to take such steps in coming weeks as reducing the size of Disney's 16-member board of directors and reconfig-uring and cutting the size of major board committees. While Disney's board has been criticized for being too closely aligned with Eisner, the goal of these changes is to "apply a more stringent definition and application of independent standards," he said. Disney also plans to start expensing stock options, but not before there are standard rules that apply consistently to all companies, Eisner said. Controlling costs is still the preferred way of dealing with the challenges, Eisner said, adding that $850 million has been trimmed over the past few years. Disney's debt also has been reduced to $13.1 billion from $14.9 billion in the past six months.
· Executives are excited about the prospects of revitalizing ABC, a key component of Disney's other trou-bled division, media networks. While make-goods from weak ratings limited ABC's ability to profit from an improved scatter market, the network sold 85% of its advertising inventory in the upfront at 5% higher rates, reflecting a stronger ad market and confidence in the fall primetime schedule, president and chief operating officer Robert Iger said. "We know this is still going to take time, so to be fair, it's guarded opti-mism," Iger said. "We have a lot of bouncing back to do -- we've had two bad years." Low ratings and re-sulting low ad revenue coupled with higher programming costs at ABC contributed to a 10% decline in media networks revenue to $2.1 billion. Operating income fell 40% to $288 million.
· Cable revenue suffered from the bankruptcy filings of cable provider Adelphia Communications Corp. in the United States and German group KirchMedia overseas, as well as ad weakness at ESPN and other cable investments.
· The studios had the only positive revenue results, up 3% to $1.4 billion, though operating income fell 66% to $22 million because of decreases in domestic film distribution and international home video. "Lilo & Stitch" performed well, earning more than $130 million domestically to date, but was released late in the quarter and only partially offset the poor showing of "Bad Company" compared with last year's "Pearl Har-bor." Studio results were also affected by higher marketing and distribution costs for films not yet released, and some direct-to-video releases, like "Cinderella II: Dreams Come True," did not do well in international markets.
· The consumer products division also posted weaker results, with revenue down 13% to $457 million and operating income off 16% to $51 million. Worldwide merchandise licensing was hampered by sales declines of Disney Interactive's computer and video game titles, offset by higher Disney Stores sales in North America.
Still, the prime issue remains the parks, which saw revenue decrease 5% to $1.8 billion and operating income fall 17% to $467 million. Of the overseas parks, which only marginally contribute to earnings because they are not owned outright by Disney, Tokyo Disneyland is a "smashing success," while the second park in Paris is off to a slower-than-expected start, finance chief Tom Staggs said. The chief problem Stateside is that interna-tional visitors are reluctant to return after Sept. 11, even with significant discounts from the airlines, Staggs said. International figures are off by 30% compared with a year ago, and total US attendance was down 6% in the quarter. "They're trying to make the best of a difficult environment, and some problems are in their control, like ABC, and some are not," Gerard Klauer Mattison & Co. analyst Jeff Logsdon said. "They're working hard to improve the networks where they can and be patient at the parks. You can keep the costs under control, but ultimately this is a business that grows when the top line grows."