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Disney's Parks Are Packed, Earnings Beat Expectations

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Cost cutting and strong brands helped Disney moderate the effects of the downturn and beat analyst expectations.

The weak ad market and slower consumer spending on everything from theme park extras to DVDs took their toll.

But the draw of Disney brands remains strong as theme park attendance attendance stayed steady, with reservations up "slightly" and cable subscriptions remain strong.

CEO Bob Iger said on the earnings call that Disney's business reveals signs the economy is stabilizing, though it's unclear what the recovery looks like. And CFO Tom Staggs said advertising sales "appear to have stabilized." But, as we've heard at Time Warner and Viacom visibility is tough because ad buyers are more and more, waiting to buy commercial time closer to an ads airdate.

Earnings from recurring operations came in at 52 cents per share, beating the 51 cents-per-share analyst forecast. This is down 15 percent from the 62 cent-per share earnings from recurring operations in the year ago quarter. Why did the stock trade down in after hours? Revenue for the company's fiscal third quarter came in at $8.596 billion, down from $9.236 billion in the year-ago quarter. While this is less than analysts projected, it's actually not as bad as it looks, muddled by the timing of ESPN's affiliate revenue recognition. Thanks to a complicated deferral issue the company's revenue looked like $116 million less than it really was, which will be made up in the fourth quarter. (In the prior-year quarter it recognized $79 million of previously deferred revenue, this quarter it had a net deferral of $37 million of revenue). It's worth noting that excluding this deferral issue, the cable networks would have showed revenue growth.

Including that revenue deferral the media networks revenue dropped 2 percent while operating income fell 13 percent. Just like at the other media conglomerates and in quarters past, cable networks are faring far better than broadcasting. ABC's broadcasting division suffered a 34 percent drop in operating income, thanks to a combination of lower ad revenues (of course) and higher costs compared to the period last year which was quiet thanks to the Writers' strike. Meanwhile the cable networks offset lower advertising with higher affiliate rates. On the earnings call there was lots of talk about what huge returns ESPN continues to yield -- CEO Bob Iger described the results as "stunning." It may look like a mature asset but the company continues to squeeze new digital and local revenue streams from the brand.

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The performance at the parks -- revenue down 9 percent while operating income fell 19 percent, and a three percent INCREASE in attendance at the domestic parks -- says a lot about the effectiveness of the company's promotions. Thanks largely to cost cuts, this is a significant sequential improvement -- in the prior quarter operating income was down 50 percent. Even acknowledging that the shift of the Easter holiday into the quarter added about three percent to attendance numbers, it's pretty impressive that tourists didn't hunker down at home because of the economic downturn. Iger points out that people who would never have gone to the parks took advantage of this promotion, which should mean that the company's adding to its core audience.

The studio division continues to struggle with lower DVD sales, a topic Iger touched on in the conference call. Revenues fell 12 percent in the quarter and operating income swing to a $12 million loss. While the box office did just fine this past quarter, the DVDs just didn't deliver. But Iger's still optimistic about Disney's advantage in this space as people transition from buying to renting DVDs. To put it simply, kids want to watch the same Disney movies over and over, so it makes more sense for parents to buy. Not every movie Disney makes will be a franchise-building must-buy DVD like Toy Story. But the more of those the studio can churn out, the better all its divisions will fare.

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