Disney Speakers: Bob Iger - The Walt Disney...

The Walt Disney Company Q1 FY10

Conference Call

F EBRUA RY 9 , 2010

Disney Speakers:

Bob Iger President and Chief Executive Officer

Jay Rasulo Senior Executive Vice President and Chief Financial Officer

Moderated by,

Lowell Singer

Senior Vice President, Investor Relations

P R E S E N T A T I O N

Operator

Good day, ladies and gentlemen. Welcome to the Q1 2010 Walt Disney earnings conference call. My name is Deanna and I'll be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. Lowell Singer, Senior Vice President, Investor Relations. Please proceed.

The Walt Disney Company Q1 FY10 Conference Call February 9, 2010

Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company

Okay, thanks. Good afternoon everyone. Welcome to The Walt Disney Company’s Q1 2010 earnings call. Our press release was issued a few minutes ago. It's now available on our website at www.Disney.com/investors. Today's call is being Webcast and that Webcast will also be available on our website. Following the call we will post a transcript of today's call and a replay to our website. Joining me in Burbank for today's call are Bob Iger, Disney's President and Chief Executive Officer, and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer. Bob's going to lead off, followed by Jay and then we will of course be happy to take your questions. With that let me turn the call over to Bob and we'll get started.

Bob Iger – President and Chief Executive Officer, The Walt Disney Company

Thank you, Lowell. Good Afternoon. We are pleased with our first quarter performance, which was better than last year’s due in part to improved affiliate and advertising revenues at our media networks and better attendance at our parks and resorts. At this point, we have limited visibility regarding the economy and its impact on our businesses and thus, we will continue to focus on controlling costs while creating great content and experiences and building our brands. We are also maintaining our focus on long-term growth strategies in a world of rapid technological change and evolving consumer behavior. Our movie studio, under its new leadership, is focused on improving its creative performance through high-quality branded films….Disney, Pixar and Marvel. The studio has also restructured its organization to produce, market and distribute movies more efficiently in light of the challenges the movie business is facing. This will help reduce costs and better position the studio with regard to the timing, pricing and distribution of its films. Through our long-term commitment to 3-D, we and others in the film industry have proved that a better experience can draw more people to the theater and increase box office. We are excited about our upcoming live-action slate, including Alice in Wonderland, Prince of Persia, Sorcerer’s Apprentice and Iron Man 2, the first Marvel film to be released since we completed our acquisition. Tron, our December live-action release is looking very promising, and we’re about to start production on Pirates 4, which will be released in May of 2011.

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On the animation side, we are thrilled with Toy Story 3, which is not only a terrific film from a creative perspective, but represents the essence of our franchise strategy. With a great new story filled with beloved characters, this highly-anticipated film has been embraced by the creative teams across Disney who have developed new merchandise, video games and experiences at our Parks and Resorts. The second installment of Cars, another strong franchise for the company, will hit theaters in the summer of 2011. Speaking of great Pixar animation, I’d like to congratulate Pete Docter and the team that created Up, which last week received five Oscar nominations, including Best Picture and Best Animated Picture. I’d also like to congratulate the animation team at Disney behind the The Princess and The Frog, which also received a Best Animated Picture nomination as well as two others. We wish them all our best for March 7th when the Academy Awards air on ABC. At Media Networks, we’ve been pleased with the success of our Wednesday night ABC comedy block of The Middle, Modern Family and Cougar Town and the strength shown by such returning dramas as Grey’s Anatomy, Castle and particularly, Lost, which delivered terrific ratings in its final season premiere last week. We also are benefiting from the growing international strength of Disney Channel and the record ratings performance of ESPN. It’s clear that ESPN’s investment in programming and production values is delivering great results while their innovative use of new technology platforms is allowing them to serve fans in new ways, to reach more people and to build their brand worldwide. At Parks and Resorts, we have continued to invest in enhancing the guest experience as well as increasing our scope of attractions and destinations. Over the last few weeks, we’ve started work on significant expansion projects at Hong Kong Disneyland and the Magic Kingdom at Disney World. Construction is also well underway at our Aulani resort in Hawaii, which will open late next year. This summer, our expansion and improvement of California Adventure begins to rollout with a magnificent new experience, World of Color, while next January, the Disney Dream, the first of our two new cruise ships, will set sail on its maiden voyage. It is now five weeks since we closed the Marvel deal and there’s a great deal of enthusiasm and a lot of work going on to pursue opportunities in the content development and licensing businesses worldwide. The prospect of growing the Marvel brand and expanding the presence of its characters and stories on our media platforms, at our Disney Stores, and through our worldwide retail presence, is really exciting. In closing, we believe our consistent strategic focus, our innovative use of technology and our growing range of high-quality branded content puts us in a good competitive position to deliver long-term growth.


Now, I’d like to introduce our new CFO Jay Rasulo. Jay has done a fantastic job for us at Parks and Resorts and has been with the company since the 1980s. He is committed to our focus on return on invested capital, strong free cash flow, improving economic profit and growing the company. I think you are all going to really enjoy getting to know him in the coming months. And here he is, Jay Rasulo.

Jay Rasulo – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company

Thanks, Bob and good afternoon everyone. I’m excited to be here. In my comments, I am going to address three important topics: first, the drivers of our Q1 results; second, some of the key swing factors that will influence our performance for the remainder of the year; and, last, though visibility remains limited across our businesses, I will talk about some of the trends we are currently seeing in the marketplace. I’ll begin with Studio Entertainment. Operating income improved over the prior year driven by domestic home entertainment. Lower marketing, distribution and packaging costs, in addition to decreased amortization expense, were the main reasons for this improvement. Results in the quarter were reduced somewhat by higher film write-downs and lower music album sales compared to the prior year. Bob talked about our important upcoming theatrical releases. I’m sure it’s obvious, but the performances of these films will be a key swing factor in our full year financial results. At our Media Networks, higher affiliate revenue at Disney Channel worldwide contributed to increased profits for the segment. Additionally, ESPN delivered higher affiliate and advertising revenue in Q1, which more than offset increases in programming costs due to college football, Premier League football in the UK and the NFL. Ad revenues for ESPN came in mid single-digit percentage points above the prior year Q1. Notably, ESPN enjoyed record ratings in Q1, up over 7% from prior year, driven by Monday Night Football and college football. We recorded lower income in Q1 from our equity networks due to higher programming expenses, in addition to restructuring costs. Broadcasting operating income was higher compared to prior year, largely as a result of the bad debt expense associated with the Tribune bankruptcy filing that was incurred in last year’s first quarter. ABC Studios enjoyed higher revenue from sales of its shows, particularly Criminal Minds. ABC network advertising revenue excluding sports declined in the quarter, due to lower primetime ratings and lower average pricing, even as scatter CPMs came in more than 20% above upfront levels. Advertising at our TV stations was 5% lower than last Q1, when there were strong political ad sales.


So far in Q2, scatter pricing for ABC network is running almost 30% above upfront levels. Ad sales pacings at ESPN are up mid single digits from prior year. However, advertisers continue to make their purchases very close to air dates, limiting our ability to read longer term trends. Our Interactive Media segment reported lower revenue because we released fewer video game titles in the quarter. Operating losses were trimmed through lower marketing and other costs at Disney Interactive Studios. At Disney Online, Club Penguin saw strong growth in paid subscriptions, contributing to better results. At Consumer Products, lower licensing revenue impacted our results. Earned revenue decreased by 18% compared to prior Q1, when we benefited from strong sales of Hannah Montana and High School Musical merchandise. For the remainder of the year, results at both Interactive Media and Consumer Products segments will be heavily influenced by the success of their respective initiatives tied to the theatrical release of Toy Story 3. At Parks and Resorts, domestic attendance came in 9% higher than prior year. These results benefited from the calendar shift of the New Year’s holiday into Q1 this year from the second quarter of the prior year. We estimate that without this shift, combined domestic attendance was up approximately 4%, with Disneyland up 15% and Walt Disney World down by one percentage point. Segment operating income came in 2% below prior Q1 as higher results at our domestic operations did not fully offset lower results at Disneyland Paris. Performance at Disneyland Paris decreased due to lower attendance and hotel occupancy. Domestically, our promotional activities helped to maintain high levels of attendance during the quarter but contributed to lower average guest spending and ticket pricing. Per capita guest spending decreased by 4%. Occupancy in Orlando came in 4 percentage points lower than in the prior year at 81%, while occupancy in Anaheim was down 7 percentage points at 78%. Average room spending at our hotels was up slightly, with strength at Walt Disney World resorts offsetting a decrease at our hotels at Disneyland. Costs at our domestic operations improved over the prior first quarter, when our results were impacted by roughly $40 million in mark-to-market adjustment for fuel hedges. Costs also benefited from lower volume-driven expenses as well as productivity savings. Together, these factors helped to offset higher pension, post retirement medical and labor inflation costs. More broadly, consumers remain tentative. Room reservations for Q2 are currently running 10% behind last year, while guests continue to book their vacations closer to their anticipated travel date.


There are several other swing factors that I would like to mention. I’ll remind you that we expect our pension and post retirement medical expenses to increase by approximately $270 million this fiscal year over last year’s level. Roughly half of this increase hits the Parks and Resorts segment. It’s also worth noting that our fiscal calendar makes quarterly year-over-year comparisons difficult. Let me go through the changes: unlike last year, Q2 results will not include the New Year’s holiday, which fell in Q1 this fiscal year; Q2 will include one week of the two-week Easter holiday, both weeks of which fell in Q3 last year. Additionally, results in fiscal 2009 benefited from a 53rd week, whereas our fiscal 2010 calendar has only 52 weeks. During Q1, we purchased only a moderate number of shares given the constraints imposed by our then pending acquisition of Marvel. We intend to buy back the shares we issued for the acquisition by the end of fiscal 2010. And we expect the deal to be dilutive to our reported EPS by mid-single digit percentages in fiscal 2010. While we’re pleased with our Q1 results, I’d again caution that both advertisers and consumers are making their buying decisions at the last minute and we expect the operating environment to remain challenging in the coming quarters. We’ve maintained financial discipline since the economic downturn began and we plan to continue that focus going forward. At the same time, we will build our business for the future by investing in high-quality branded content and experiences that we believe will allow us to drive long-term growth and value for our shareholders. With that, I’ll turn the call back to Lowell for Q&A.


Thanks, Jay. Operator, we are ready for our first question.


Q&A

Operator

[Operator Instructions] We have a question from the line of Ben Swinburne, Morgan Stanley. Please proceed.

Ben Swinburne – Analyst, Morgan Stanley

Thank you. Good afternoon, everyone. Jay, just following up on your comments on ESPN, you didn't mention any deferrals in the quarter, just wanted to check and see if there were anything meaningfully positive or negative year-on-year on the affiliate fee side. And then on the Parks, you took a lot of action last year in terms of headcount and rationalizing the cost structure, some of that seems to flow through this quarter. I wonder if you could help sort of size that up for us as we think about 2010 versus 2009. And then, just a big picture question, Bob, if you could talk about how you're thinking about ESPN, as you start to enter into some renegotiations on affiliate fees. I think from talking with investors, a lot of the concerns around Disney as a stock and ESPN as a business is whether there is significant upside to the affiliate fees you're currently generating in the US. Could you sort of talk philosophically about how you thing about approaching those negotiations and positioning the business as you look for potential increases on the fee front? Thank you.


Okay, Ben, thank you for the questions, this is Jay. Let me start with your first question about deferrals at ESPN. There's nothing material in the first quarter that we need to talk about. Relative to Parks costs, I talked about some specifics, the mark-to-market on the fuel hedge from last year is about $40 million of the savings, and then there's a group of savings that are simply related to the volume declines, particularly at Walt Disney World, where I mentioned a 1% volume decline, and of course there are direct costs that go directly with those. Coming to the last part of your question about pulling forward the cost savings from 2009, so far the team has done an excellent job at pulling those savings forward. So you know we took a restructuring charge last year, and we talked about the reduction in headcount that we did, and so far those costs seem to be well managed and continue to carry us forward for this year.



On the ESPN front, Ben, we're not engaged in what I call a major active negotiation right now. And as you would expect, I wouldn't attempt to in any way predict, certainly publicly, where future negotiations may go. I will say that as evidenced by the fantastic ratings performance of ESPN in the quarter that we just announced, clearly our investment in its programming and its brand are paying off. And with that, we're delivering more value to advertisers and more value to distributors, while the consumer is clearly paying heed as well as I said, as evidenced by the great ratings. So we think that our position for ESPN going into a new round of negotiations is actually quite solid because of the value that we're generating. I also want to point out that the distributors do quite well with ESPN, not just because of the overall value that we deliver, but the ads that they sell on a local basis are worth considerable amount to the local -- to the individual distributors and ESPN generates more advertising revenue than any other channel in the cable universe.

Ben Swinburne – Analyst, Morgan Stanley

That's helpful. Thank you.


Thank you, Ben. Operator, next question, please.

Operator

Our next question comes from the line of Michael Nathanson, Alliance Bernstein. Please proceed.

Michael Nathanson – Analyst, Sanford Bernstein

Thanks. I have one for Jay and one for Bob. Jay, you talked about the pull forward or the change in calendar of New Year's Day in this quarter. Could you talk a bit about what the impact on profitability was by shifting, by having the calendar shift, and is that weekend more profitable as people tend to probably book it without discounts. That's one, and then I have one for Bob.


Yes, that is a very profitable week for us. Round numbers, it's about a $60 million OI swing for us from that single week.



And lastly, that's going to come out of the next quarter on the profit side.


Yes, it comes out of the next quarter, although I'll hasten to add there is the add back from one week of Easter. I'm sorry to say that one week of Easter is not quite as profitable as one week of Christmas. So we won't add it all back to the second quarter. In fact, only a third or so will get added back.


Okay thanks, and then one for Bob. I wonder on the games side, the Interactive side, I wonder if you believe the game opportunity now is as big as you first thought it was when you started investing in the game side, and how much of the savings this quarter do you think is recurring?


Well, I think that there's still a huge opportunity on the games front, but I think it probably will be derived from a slightly changed strategy than the one that we began a few years ago. It's pretty clear that the higher end console games are a little bit more challenged in a world where not only are they more costly to produce and market, but there's just much more competition from casual games and games on platforms like the iPhone, iTouch platform. We also learned that the typical game that we set out to make, which I'll call it Disney-branded game, seems to perform better on the Nintendo Wii and DS platforms and on the platforms basically that are not to the high end console games, and so while we're going to continue to make games for the high end, we'll be very judicious in how many and which ones we choose. We're looking forward to our Toy Story 3 game, which will come out basically on all platforms. We're looking forward to the one that we're in development on, for Mickey Mouse. We're looking forward to Tron, and then we have another really, really interesting racing game that also comes out relatively soon, called Split/Second, by the way, which got some fair amount of attention when it was first brought out at E3. But I'd say that our focus is going to be a little bit more diverse and a little bit less reliant on the highest end console games. We'll still maintain a similar mix of roughly 80% that would be Disney-branded. I want to also mention by the way that we think we have some interesting opportunities with Marvel, and that would be a brand that we think would do extremely well on the higher end consoles.


And at the same time that we're looking to be a little bit more judicious in that area, we are looking to step up our efforts on the casual games front and on the Apple platforms, including the iPad where, since this might come up later, we're already talking about and in fact developing a product for ABC, for Disney, including a pretty cool digital books product, for ESPN which would probably be an even better version of their ScoreCenter app and also for Marvel.


Thanks.


Thank you, Michael. Operator, next question, please.

Operator

You have a question from the line of Spencer Wang, Credit Suisse. Please proceed.

Spencer Wang – Analyst, Credit Suisse

Good afternoon, thanks. One for Bob and one for Jay. First for Bob, some of your peers have been pretty aggressive in negotiating cash for retrans fees. Was wondering if you could just speak philosophically about how aggressive you would be trying to be to get cash for retrans. And then for Jay, just a housekeeping question. Did the $66 million in restructuring charges include the restructuring at the minority-owned channels like A&E and Lifetime? Thank you.


Well as you know, Spencer, we run some of the best stations in the country. They're market leaders in the markets that they operate in. And we think that it's time to recognize the value that they provide to distributors, and their importance to local communities as well as their importance to our viewers in those communities. And so we believe that it would be appropriate for us to seek cash for retransmission consent, and we believe that the same would be the case for our affiliates. I won't say how much, and I won't describe any discussions we're having with the distribution community, but clearly there's a trend that we're observing that we fully intend to participate in.



Great.


I appreciate the confusion on this. I did use the word restructuring charges relative to A&E, but those are not included in the below the line restructuring costs. They're up in expenses.


How big were they, Jay?


They weren't material. They were on the order of $10 million.


Great. Thank you.

Operator

We have a question from Imran Khan, JPMorgan. Please proceed.

Imran Khan – Analyst, JP Morgan

Yes, hi. Thank you so much for taking my questions. One question is on Cable, and another question is on Studio. On Cable, can you please give us some idea of how much in the quarter you expensed for UK soccer rights and how much for marketing for the new channel launch in the international market, and how should we think about the cost going forward? And on the film side, were you making big changes at the film studio? What areas of the film operation do you think you need to most change now, and how long do you think it will take to see some of the benefits from that? Thank you.



I'll answer the second part of the question. I'll have Jay address the first part on the film side. We have restructured virtually all areas of our studio business, except for animation, which we had restructured when we acquired Pixar back in 2006. I would say that the primary, well, as I said, we restructured all areas but if you were to look at one that I would consider the most important, it would be on the creative front, and that starts really with the change that was made at the top with Rich Ross, because the number one priority of the studio is to improve the quality of their output. And I would say that you really won't see real results of that until 2011. Although I will say that Rich is applying his considerable creative talent to making sure that the films that he inherited that were not finished are finished to a quality level that we're really excited about. And we are in fact quite excited about the films that are coming up, Alice in Wonderland, which is our March title, Toy Story 3, of course this summer, Prince of Persia, Sorcerer's Apprentice, and Tron. On the other side of the reorganization we've also consolidated a fair amount in terms of our approach to distributing and marketing our product. We had separate groups that were doing those things for theatrical window and then for the home video window, and we thought that it would be really wise, and everything really is kind of related, that we put them together. And in doing so we believe not only will that enable us to save cost, but we think we'll operate much more effectively in the marketplace.


Relative to ESPN and the UK Premier League, this is a business and venture that's very much in start-up, and although the increased programming of course was a driver, I don't think it's useful to go into the details of what the additional programming costs were there.

Imran Khan – Analyst, JP Morgan

Got it. Thank you very much.


Thanks Imran. Operator, next question, please.

Operator

We have a question from the line of Doug Mitchelson, Deutsche Bank. Please proceed.


Doug Mitchelson – Analyst, Deutsche Bank

Thanks very much. Good afternoon. So Bob, a clarification and a question. Clarification on ABC retransmission negotiations, are you prepared to pull your broadcast signal if needed? I know you hope that's not the outcome but to get a fair value for the ABC network? The reason I ask is through your focus on brands and the impact the publicity battle could have on brand perception, and thus your resolve to see negotiations through the bitter end, so-to-speak. And then separately, I'm always interested to hear your update on evolving digital business models, as your iPad comments are interesting. You said ABC content, I guess if you could give us more details on what you think ABC might be offering on the iPad, and is this a step in the direction of retailing or wholesaling your cable and broadcast networks online. That would be helpful. Thanks.


Two easy ones. On the retrans front, we're pretty resolute because we know the value of these stations and the importance of these stations in their local markets, and we know that there are stations, some cases our affiliates, who have been compensated for retransmission consent, and we feel that we should be compensated as well. It clearly would not be our preference to see that our signal was taken down, and we'll do whatever we possibly can through negotiation to avoid that. But we also believe that we have an obligation to derive value from the great investment that we make in these programs, whether they're local in nature or whether they're national in nature. We have every intention of doing just that. On the digital front, clearly it's still evolving. Although I took note that our digital revenues as a company had nicely exceeded $2 billion in 2009, some of that is commerce and some of that comes from the distribution of what I'll call filmed entertainment. We find that the iPad has a lot of potential. We think it's a really compelling device. We think it could be a game changer, in terms of enabling us to create, essentially, new forms of content. Obviously it will be a great device to play games on and to watch videos because of the quality of the screen, but the interactivity that it will allow on a portable device with such a high quality screen is going to enable us to really start developing product that is different than the product that you typically see on an Internet-connected computer or on a television set. And a digital reader that we're talking about, we've put it in the marketplace a Digibooks product through our Disney Publishing Group just recently. We haven't really marketed it in earnest, because while it's not really in beta, we're still working through some of the issues that you deal with when you launch a new product like that. And we were developing it primarily for the computer screen, and we started developing it for the iTunes, I should say for the iPhone, iTouch platform and suddenly this device comes along


and provides us with an even more robust technological platform that makes the interactivity that we were going to provide, things like read-alongs, simple animation, music to just sort of come to life and that's just one example. When you think about ABC, you think about a program like Lost and not just being able to watch the program, but all the other things that viewers like to do with that program, ABC News, another great example. ESPN ScoreCenter, which is a great app on the iPhone and provides relatively rudimentary information, scores, basically, suddenly we have an opportunity with a platform where you can really make the scores come to life. So we're thinking about it in those terms, and we think that digital media, while clearly it's significant, it is still evolving. I'm fond of saying it's still the beginning of the beginning and that's how we look at it.

Doug Mitchelson – Analyst, Deutsche Bank

Right. Thank you.


Thanks. Operator, next question.

Operator

Question from the line of Jessica Reif Cohen, Banc of America-Merrill Lynch. Please proceed.

Jessica Reif-Cohen – Analyst, Bank of America-Merrill Lynch

Thank you. I have a couple questions. One on the theme parks. It looks like hotel discounting is coming down to the 30% to 40% range versus maybe 40% to 45% a year ago. I was just hoping you could give us your current thoughts on what you need to do to bring consumers in, and are you planning to just gradually decrease the amount of discounting? And then on retail, I think it just came across a day or so ago that you're buying your Japanese stores. Is this a country specific strategy, or is it more of a global trend? And then finally, Jay, you mentioned pacings at the network and ESPN, but you didn't mention anything about the TV stations.



Okay. Jessica, let me start with your question about theme parks. By the way, I don't think that the discounting ever got up as high as what you mentioned, 45%. I think it never, in my recollection, got above the 30s. But anyway, you could already see this year, it's both reflected in the numbers, as well as in what is offered in the market. On about half of the room inventory at Walt Disney World, we went from a four plus three, “Buy Four, Get Three,” to “Buy Five and Get Two free,” and we also reduced the Free Dining option for value rooms. And at Disneyland we saw similar decrease in gift cards and whatnot. So they are clearly starting to moderate discounts already, but I will tell you that it's not crystal clear, looking forward, what the best tactics will be to eventually make our way out of discounting, which I think is not only probable and possible, but we will see in the coming quarters. So we look at every quarter as we can and gauge response from consumers, and act accordingly. So yes, it probably won't be flipping the switch off. It will be a gradual build-up out of it.


Do you want to comment on station pacings or - - ?


I wanted to talk to the station pacing. I mentioned ESPN was plus 5% and the TV stations are nearly double that. So they're pacing well also. And lastly, the Disney Stores.


I'll take that. On the Disney Stores front, we took back the stores in the United States a year ago from Children's Place. We own our stores in Europe. We had owned our stores in Japan, and we sold them to Oriental Land Company, which is the owner of Tokyo Disneyland, Tokyo Disney Sea, and they decided that it wasn't a core strategy of theirs to own those stores in Japan, and we recently decided that we would take them back and that's just become official. And there really isn't a trend, because at this point we own now the global Disney Store chain. And on that note we did speak about a new store model, a new physical store space, and I would also like to say in that regard that we're looking at opportunities to upgrade our locations, either within malls or in different malls around the world, and we're going to roll the new model out, conservatively, probably somewhere around 10 total globally within the next


year, and roughly half in the US and half outside the United States. But only in locations that we feel represent a real upgrade from the location that we might be in in that environment.

Jessica Reif-Cohen – Analyst, Bank of America-Merrill Lynch

Thank you.


Thank you, Jessica. Operator, next question, please.

Operator

We have a question from the line of Jason Helfstein, Oppenheimer and Company. Please proceed.

Jason Helfstein – Analyst, Oppenheimer & Co.

Yes, hi, thanks. Bob, can you comment on your view on the state of the DVD business when you factor in this quarter's results? And then also if you guys have any comments on expectations for capex for this year. Thanks.


Well, I can comment on DVD business. I don't like to look at the DVD business on a quarter-to-quarter basis, because it often is an apples-to-oranges comparison given the nature of the releases. What we're generally seeing in the DVD market is continued pressure, and that's due to a number of factors. Clearly, the economy is one factor. Another factor is more secular in nature. There's more competition in the marketplace for people's time, particularly time spent on entertainment. And I think that piracy, at least in some markets, not necessarily just the United States, but some markets internationally, is also taking its toll. And so we really feel that we need to be cautious in terms of the movie business overall, because of the pressure on that very, very important window. And that's why, by the way, we've been in discussions about windowing with the exhibitors, because we feel that it's really important for us to maintain a very healthy business on the exhibition side, and 3-D is definitely contributing to that, and a very healthy business on the home video side, which we think is actually in the best interest of the theater owners.


A healthy movie business is good for them. They want us investing in innovation, investing in higher quality content. And so mindful of what's going on on the home video side, we feel that it's time, on a case-by-case basis, movie-by-movie, to really take a look at how we're windowing the home video product into the marketplace.


And then on capex?


Relative to your question on capex, broadly across the company there are not huge swings in capital expenditures, other than those projects which I think you're all aware of in Parks and Resorts, but to reprise them just because I love them: the cruise ships are under construction and we are moving into spending real money on those, obviously, as the first one has its maiden voyage in 2011. The DCA project, Disney California Adventure, that Bob has talked about in the past, is in full swing, and the resort in Hawaii is beginning - actually, I think it gets topped off in April, so that's pretty much in full swing as well. So those projects will affect not only this year, but next year as well. Next year happens to be, 40% of the total spending on our two cruise ships will occur in 2011, and a significant piece of DCA. So those are projects that we feel have great rates of return, will build shareholder value, and that's where you see most of the swing in capital expenditures.


Thank you.


Thank you, Jason. Operator, next question, please.

Operator

We have a question from the line of Anthony DiClemente, Barclays Capital. Please proceed.


Anthony DiClemente – Analyst, Barclays Capital

Hi. Thank you. A couple for Jay, and then one for Bob. Jay, I'm just wondering, what were the share buybacks in the current quarter, so in the last five weeks? And then I caught the plus 5% on ESPN pacings, but was wondering what ESPN advertising was year-over-year in the reported quarter? And then I have one for Bob.


On your first question, relative to share buybacks, the share buybacks were minimal in Q1, mostly because we were blocked out due to the then pending Marvel acquisition, so we did not make significant purchases. But I'll simply repeat what I said in the comments, that we do intend by the end of the fiscal year to buy back the 58.5 million shares that we issued as part of the Marvel transaction.


I know, but what about in the current quarter, not the first quarter, like the last five weeks, can you help us with that or?


I don't think I'll make that obvious, but as I said, we're going to be on pace to buy back by the end of the fiscal year.


Anthony, you had a second question…


Yes, it was the ESPN advertising in the first quarter?


ESPN advertising in the second quarter was, as I mentioned, up single digits.



Okay. In the first quarter it was up mid single digits and is pacing up 5, is that right? I'm sorry, I just want to get it straight.


Yes, I'm sorry, first quarter, yes.


Thanks, Jay. And then Bob, I was just wondering, with one of your partners in the A&E television networks, your equity cable networks, with one of your partners being acquired, just wondering what your strategy is for that group of cable networks. How core are those to your media networks strategy? Thank you.


Well, a number of months ago with our partners NBC Universal and Hearst, we consolidated operations at A&E, History and Lifetime, because we felt that it would better position those assets in the marketplace. Those have been great investments for us, and we look forward to many years of solid returns from those businesses, returns that should be improved by the fact that we have put the units together. In terms of core assets, they're core in the sense that we really believe in cable television programming, and they certainly have been leaders in that space for a long time and we hope that will continue.


Thanks, Anthony. Operator, next question, please.

Operator

We have a question from the line of Michael Morris, UBS. Please proceed.

Michael Morris – Analyst, UBS

Hi, thank you, good afternoon. Couple of items. First, on the Parks, Jay, you mentioned that room reservations are running about 10% behind last year at this point. Can you help just give a little more context on that? That sounds like a weak number; it sounds like it's trending worse sequentially, but at the same time it also sounds like you said that promotions are rolling


back, at least modestly. So can you kind of reconcile those two things? What is room reservations running 10% behind last year mean, and is it apples-to-apples? And then, over at the networks, on a couple of occasions you’ve mentioned the international strength of the Disney Channel, and I'm looking for just any more color you can give there on why? Is it getting sequentially stronger in terms of what you're seeing demand for the Disney Channel, and how much of that is fx, how much of it is really core and why now? Thanks.


Well, let me take the Disney Channel side and then Jay can answer the first question about reservations on the books, trends in reservations. The Disney Channel strength internationally is coming from a few directions, one, rolling out in new markets which we continue to do. Two, increasing our subscriber base. Some markets we actually have only moved fairly recently from more of a premium service to a basic service, and then we also are overall, because of a number of factors, increasing the rates that we're getting from our Disney Channels internationally. Also, the ratings of the Disney Channel domestically have been up nicely, and the strength of its programming is essentially felt on a worldwide basis. The other thing that we've been doing quite successfully is converting our former Fox Family and Jetix and Toon Disney channels to Disney XD, and the ratings there where we have converted have also been up nicely, and those channels are largely advertiser supported, and so stronger ratings should result over time and stronger revenue. And not only are we improving revenue prospects but also strengthening the brand.


Relative to rooms on the books, I don't have and I'm not going to give you sort of a crystal clear picture here, but I will say that when Tom talked about, last quarter at this time, our rooms on the books for the first quarter they were down 5% and we finished the quarter down 2%. It's just another indication that there are late bookings, and the 10% that we are down today for me is not fully indicative of where the quarter is going to wind up, but the number speaks for itself. We are down as to what's on the books as of right now.


Okay. All right. So I mean, maybe if I looked year-over-year, do you know - - it's really tough. I'm trying to figure out sequentially whether we're actually still in the downward part of the cycle and whether you might have to be more promotional. Anything else clarifying we can get there?



You know, the only thing I can add to what I said was that we do have the holiday week flip-flop in the quarter, and that might help you think about it.


Okay. Great. Thank you.


Thanks, Mike. Operator, next question, please.

Operator

We have a question from the line of Richard Greenfield, Pali Capital. Please proceed.

Rich Greenfield – Analyst, Pali Capital

Hi, maybe just to follow up on that last question, because the issue a year ago, you all seemed very focused, and Jay you obviously were running the Parks, were very focused on making sure that you maintained attendance at the utmost level and basically used discounting as a lever to make sure that attendance stayed as flat as possible. I'm just curious essentially why are you not being more promotional this year? You've clearly dialed it back, so you've obviously or probably were expecting, without a significant rebound in the economy, were expecting some attendance to drop. And I'm just curious what's changed year-over-year? Is it simply that you can't discount for that long, or how is that dynamic between price and volume and your approach to it different this year than a year ago today? Thanks.


Not different. Strategically not different. Obviously, when you run promotions in the marketplace, you switch them. You change them out. We've been pretty demonstrative about our desire to start to pull out of the level of discounting we were at. We're doing that. I think that Q1, I would call our volume - our total volume domestically was up. I would call our volume at [Walt Disney] World flat, and so I don't think there's either any change in the


strategy and tactics that we're using. Frankly there isn't any change in the results either, other than the fact that Disneyland attendance was much higher for the quarter.


The other thing I think that we should note is what we do is we test the marketplace. So we maintain pricing, meaning higher pricing, to a point and if the marketplace doesn't respond to that, then that's when you judiciously roll out your promotional strategy, and some of that by the way is just a matter of timing. I'm pretty confident that we're going to be able to deliver as Jay said, the volume that we need over the course of this year. The question is how much will we have to discount to get it, and with visibility being relatively limited, it's difficult for us to predict exactly what that will be. Our goal of course is to slowly wean our guests of discounting, because we don't believe that we're dealing with an economy right now that enables us to shut off the discounting immediately.


Thanks, Rich. Operator, next question, please.

Operator

We have a question from the line of David Miller, Caris & Company.

Dave Miller – Analyst, Caris & Company

Yes, hi. Bob, good afternoon. Just a question on Miramax, assuming you're willing to talk about it. I know you haven't made any sort of formal announcement about the sale of the library and the brand name. But assuming the reports in the financial press are true, why put this library up for sale now? Why not wait until the MGM library is sold, so you're sort of affecting supply/demand dynamics here by putting the library up for sale at the same time as MGM. Why not wait a year or so for both the market to improve, and to create better supply/demand dynamics just by having a constriction situation on library sales. Appreciate your comments, thanks.


Well you're presuming that MGM is going to be sold. I don't know what the timing on that is going to be. You probably know a lot more than we do. Look, we determined that continuing to invest in new Miramax movies wasn't necessarily a core strategy of ours, and the investment in production and distribution is - the only investment that remains is to cover the movies that


are being made or have been made and have yet been distributed or released. And with that, we believe that it would be prudent for us to explore all of our options. We're also intent on deriving as much value as we possibly can from an asset, and to some extent that will affect the timing of what we do next with Miramax, and I don't think that getting any more detailed would necessarily be either wise or consistent with our approach. But the goal here for the company is to continue to focus on our core strategies, and to derive as much value from all of our assets as we possibly can.

Dave Miller – Analyst, Caris & Company

Thank you.


Okay. Thank you, David. Operator, next question, please.

Operator

We have a question from the line of John Janedis, Wells Fargo. Please proceed.

John Janedis – Analyst, Wells Fargo

Hi, thank you. Earlier you referenced lower rates for both Cable and Broadcast. I'm just wondering, where do you think we are in the recovery in terms of demand? What needs to happen from here to see rates move higher on a year-over-year basis, understanding the upfront pricing was soft, and how far is sell-out from historical levels? Thanks.


Well, what needs to happen is you obviously need an economy that is stronger than the economy that we're in. We're seeing some really robust sales in certain sectors. Jay mentioned that scatter is running at ABC almost 30% above upfront this quarter. That's obviously a result of some sector strength. We're seeing for instance a lot of activity among Telcos and technology companies. On the local side, we're seeing some renewed activity among autos, both domestic and foreign autos. But in general, there's still a marketplace that is not as strong as certainly the marketplace that we saw back before the market fell apart in the latter part of 2008. I think maybe that's - - was there a second part to that question?



On sell-out, are you..?


Yes, you asked about sell-out. We, at the upfront, sold considerably less than we had sold in the years prior. That was due to not that much pricing pressure back then, and we didn't want to sell into our inventory any deeper at the prices that we were getting at the time. Interestingly enough, we still have units to sell in the April, May, June period. Actually, I think we still have units to sell this quarter as well, less so this quarter. We have a relatively decent mix of inventory to go. There is not that much inventory left in the primetime marketplace, though. Our information suggests that our competitors are extremely well sold. I'm not going to compare how much is left to go in scatter in terms of amount of inventory, but there's still a fair amount to sell, and as I said, we've got a good mix. And with scatter pricing the way it is, we feel pretty good about it. I should also add that scatter had been strong earlier in the quarter that we're currently in, and then it slowed slightly, and then we've just seen a fairly new and robust wave of spending again, which is actually a good indication. I think in general you're looking at a marketplace that is not as strong as it was 18 months ago.


Thanks and one quick follow-up. I appreciate the color there. Is the Toyota issue having an impact at all in terms of demand broadly?


No, I called our owned stations, and I spoke with our network, and I spoke with ESPN, all within the last 24 hours, and they had not seen any impact whatsoever due to the Toyota issues.


Thanks a lot.


Operator, I think we have time for one more question.


Operator

We have a question from the line of Tony Wible, Janney Montgomery Scott. Please proceed.

Tony Wible – Analyst, Janney Montgomery

Thank you. I was hoping you could provide a little bit more clarity on the premium SKU that you have within the DVD market. I think with Up, you guys were selling digital copy, as well as Blu-ray and DVD all in one SKU. Just curious to see what kind of uptake you're seeing with that, and if that's something you're going to look to do for more titles going forward.


Well we've definitely seen some decent premium pricing from Blu-ray, and then from a three-pack, which is the Blu-ray and the standard def, and then another file that enables you to download the file onto a computer hard drive, which is a nice product. I'm not going to give percentages of sales, but they're relatively decent. On the Blu-ray side, and not just another anecdote, we went out in the marketplace with Snow White with a Blu-ray and a Blu-ray plus standard def exclusive window for six weeks, and sales of Snow White were 68% Blu-ray, which is just a huge number. And actually, Snow White, we're told, was the number one Blu-ray title in calendar 2009. So clearly there's been some continued growth of Blu-ray in the marketplace. It's definitely a product that consumers seem to like, and we are getting the pricing premium that we hoped to get and have not seen signs of that falling even in a difficult economy. So we remain believers, and we're going to continue to experiment with different packaging and different windowing, timing to market, primarily because of the success of the exclusive window for Snow White.


Thanks, Tony. Thanks again everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website. Lets me also remind you that certain statements on this call may constitute forward-looking statements under the Securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements


are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission. This concludes today's first quarter call. Have a great day, everybody.

###

Forward-Looking Statements: Management believes certain statements in this call may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:

- adverse weather conditions or natural disasters; - health concerns; - international, political, or military developments; - technological developments; and - changes in domestic and global economic conditions, competitive conditions and consumer preferences.

Such developments may affect travel and leisure businesses generally and may, among other things, affect: - the performance of the Company’s theatrical and home entertainment releases; - the advertising market for broadcast and cable television programming; - expenses of providing medical and pension benefits;

- demand for our products; and - performance of some or all company businesses either directly or through their impact on those who distribute our products.

Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended October 3, 2009 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”. Reconciliations of non-GAAP measures to closest equivalent GAAP measures can be found at www.disney.com/investors.

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