Movie Turnaround Helps the Mouse House

Disney beat Wall Street expectations, posting higher-than-expected revenue and earnings on strength at its media networks and a turnaround at its movie studio. The mouse house's fiscal third quarter earnings grew to 67 cents per share, up from 52 cents per share a year ago, while revenue grew 16 percent to $10 billion. CEO Bob Iger told analysts on the earnings call that the company "aggressively sought growth opportunities in emerging platforms and International markets, while divesting non-core businesses." (He's referring to the acquisition of Playdom and Tapulous and the planned sale of Miramax.)

Disney's real stars are its cable channels and ESPN in particular, which drove media networks' revenues up 19 percent and operating income 43 percent higher. On the earnings call CFO Jay Rasulo said the ad market is "quite strong" though visibility remains quite limited. Ad sales at ESPN and its TV stations are up by double digits. The TV stations, which struggled during the economic downturn, posted 32 percent ad revenue gains, led by auto ads, as well as other categories.

The NBA Finals and the World Cup drove ESPN ad revenues 31 percent higher, but even with exclusive special events like the World Cup, ad revenue grew 17 percent. A sign of ESPN's multi-platform growth: a quarter of its World Cup revenue came from what they call 'non-linear' platforms -- ESPN3, ESPN Mobile TV, and Radio. This quarter ESPN recognized previously deferred revenues from annual programming commitments earlier than expected, on strong ratings for NBA finals and the World Cup.

The big question: How's the phasing out of theme park discounts affecting attendance? Revenues at the parks and resorts grew 3 percent while operating income dropped 8%-- a sign of slightly lower attendance and higher guest spending. On the call Disney explained that when adjusting for the calendar shift this year, combined attendance at the parks dropped just 1 percent. (That's less than the 5 percent decline JP Morgan's Imran Khan and others projected). Per-room spending at the domestic parks grew 4 percent. Iger didn't answer questions about what it'll take for Disney to grow margins, but said that the fact that bookings are down just 1 percent is a positive thing, and that visibility is still limited.

"Toy Story 3" and "Iron Man 2" turned the movie studio around. The division reported 30 percent higher revenue, and swung from a $12 million loss in the year-ago quarter to a $123 million operating gain. Iger pointed out that the investment in branded entertainment — i.e. franchises — as paid off. Disney has three of the top five global and US films this year — "Alice in Wonderland," "Iron Man 2," and "Toy Story 3." And "Toy Story 3" gave a huge boost to the consumer products division, sending licensing revenue up 18 percent.

Iger stressed the importance of the company's acquisition of social game maker Playdom and mobile app maker Tapulous. "We expect social gaming to grow at a compound rate of more than 30% annually... we feel it's essential for us to have a robust presence in social networks," he said. Disney will remain invested in console games while devoting more resources to mobile games, social games, and apps. As to questions of whether the role of Facebook as a gatekeeper is a source of concern, Iger says not at all, Facebook wins when their games win. He says there's no reason not to expand Facebook-oriented games to traditional dotcom sites and mobile devices.

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