The Walt Disney Company Reports Second Quarter Earnings
- EPS from continuing operations for the second quarter increased 35% to $0.58 compared to $0.43 in the prior-year quarter
- Net income for the quarter increased 22% to $1.1 billion
- Segment operating income for the quarter increased 21% to $2.1 billion, led by strong growth at Media Networks, Studio Entertainment and Parks and Resorts
BURBANK, Calif.--(BUSINESS WIRE)--The Walt Disney Company (NYSE:DIS) today reported earnings for the second fiscal quarter and six months ended March 29, 2008. Diluted earnings per share (EPS) for the second quarter increased to $0.58, compared to $0.44 in the prior-year quarter. Earnings per share from continuing operations in the prior-year quarter totaled $0.43.
For the six-month period, diluted EPS was $1.21. EPS for the prior-year six-month period, which included gains on sales of our interests in E! Entertainment and Us Weekly, income from the discontinued operations of the ABC Radio business, and an equity-based compensation plan modification charge, which were all recognized in the first quarter of fiscal 2007, were $1.24. Excluding these items, EPS for the six-month period increased 30% to $1.21 from $0.93 in the prior-year six months.
“We had an outstanding quarter financially and creatively at The Walt Disney Company,” said Robert A. Iger, president and chief executive officer. “This performance demonstrates how The Disney Difference gives us a critical and sustainable market advantage. That difference centers on our proven ability to create high-quality content across our wide-ranging distribution and promotional platforms, allowing us to leverage our hits and grow our company.”
The following table summarizes the second quarter and six-month results for fiscal 2008 and 2007 (in millions, except per share amounts):
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||
|
March 29, 2008 |
March 31,
2007 |
Change |
March 29,
2008 |
March 31,
2007 |
Change | |||||||||||||||||||
| Revenues | $ | 8,710 | $ | 7,954 | 10 | % | $ | 19,162 | $ | 17,535 | 9 | % | ||||||||||||
| Segment operating income (1) | $ | 2,140 | $ | 1,764 | 21 | % | $ | 4,389 | $ | 3,714 | 18 | % | ||||||||||||
| Income from continuing operations (2) | $ | 1,133 | $ | 919 | 23 | % | $ | 2,383 | $ | 2,595 | (8 | ) | % | |||||||||||
| Diluted EPS from continuing operations (2) | $ | 0.58 | $ | 0.43 | 35 | % | $ |
1.21 |
$ | 1.22 | (1 | ) | % | |||||||||||
| Diluted EPS (2) | $ | 0.58 | $ | 0.44 | 32 | % | $ | 1.21 | $ | 1.24 | (2 | ) | % | |||||||||||
| Cash provided by continuing operations | $ | 2,603 | $ | 2,206 | 18 | % | $ | 3,265 | $ | 2,698 | 21 | % | ||||||||||||
| Free cash flow (1) | $ | 2,256 | $ | 1,905 | 18 | % | $ | 2,669 | $ | 2,152 | 24 | % | ||||||||||||
(1) Aggregate segment operating income and free cash flow are non-GAAP financial measures. See the discussion of non-GAAP financial measures below.
(2) Results for the six months ended March 31, 2007 included gains on the sales of equity investments in E! Entertainment and Us Weekly, income from the discontinued ABC Radio business and a charge related to a modification of equity-based compensation plans in connection with the ABC Radio transaction. Diluted EPS for the six months ended March 31, 2007 excluding these items was $0.93. See the discussion of non-GAAP financial measures below.
SEGMENT RESULTS
The following table summarizes the second quarter and six-month segment operating results for fiscal 2008 and 2007 (in millions):
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||
|
March 29,
2008 |
March 31,
2007 |
Change |
March 29,
2008 |
March 31,
2007 |
Change | |||||||||||||||||||
|
Revenues (1)(2): |
||||||||||||||||||||||||
| Media Networks | $ | 3,612 | $ | 3,456 | 5 | % | $ | 7,781 | $ | 7,242 | 7 | % | ||||||||||||
| Parks and Resorts | 2,725 | 2,446 | 11 | % | 5,497 | 4,935 | 11 | % | ||||||||||||||||
| Studio Entertainment | 1,822 | 1,550 | 18 | % | 4,463 | 4,183 | 7 | % | ||||||||||||||||
| Consumer Products | 551 | 502 | 10 | % | 1,421 | 1,175 | 21 | % | ||||||||||||||||
| $ | 8,710 | $ | 7,954 | 10 | % | $ | 19,162 | $ | 17,535 | 9 | % | |||||||||||||
|
Segment operating income (1)(2): |
||||||||||||||||||||||||
| Media Networks | $ | 1,317 | $ | 1,152 | 14 | % | $ | 2,225 | $ | 1,860 | 20 | % | ||||||||||||
| Parks and Resorts | 339 | 254 | 33 | % | 844 | 659 | 28 | % | ||||||||||||||||
| Studio Entertainment | 377 | 234 | 61 | % | 891 | 837 | 6 | % | ||||||||||||||||
| Consumer Products | 107 | 124 | (14 | ) | % | 429 | 358 | 20 | % | |||||||||||||||
| $ | 2,140 | $ | 1,764 | 21 | % | $ | 4,389 | $ | 3,714 | 18 | % | |||||||||||||
(1) Beginning with the first quarter fiscal 2008 financial statements, the Company began reporting Hyperion Publishing in the Media Networks segment. Previously, Hyperion Publishing had been reported in the Consumer Products segment. Prior-period amounts (which are not material) have been reclassified to conform to the current year presentation.
(2) Operating results of the ABC Radio business are reported as discontinued operations for the prior-year quarter and six months and therefore have been excluded from the prior-year quarter and six-month segment results.
Media Networks
Media Networks revenues for the quarter increased 5% to $3.6 billion and segment operating income increased 14% to $1.3 billion. The following table provides further detail of the Media Networks results (in millions):
| Quarter Ended | Six Months Ended | |||||||||||||||||||||||
|
March 29,
2008 |
March 31,
2007 |
Change |
March 29,
2008 |
March 31,
2007 |
Change | |||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Cable Networks | $ | 2,110 | $ | 1,931 | 9 | % | $ | 4,522 | $ | 4,067 | 11 | % | ||||||||||||
| Broadcasting | 1,502 | 1,525 | (2 | ) | % | 3,259 | 3,175 | 3 | % | |||||||||||||||
| $ | 3,612 | $ | 3,456 | 5 | % | $ | 7,781 | $ | 7,242 | 7 | % | |||||||||||||
| Segment operating income: | ||||||||||||||||||||||||
| Cable Networks | $ | 1,094 | $ | 961 | 14 | % | $ | 1,680 | $ | 1,422 | 18 | % | ||||||||||||
| Broadcasting | 223 | 191 | 17 | % | 545 | 438 | 24 | % | ||||||||||||||||
| $ | 1,317 | $ | 1,152 | 14 | % | $ | 2,225 | $ | 1,860 | 20 | % | |||||||||||||
Cable Networks
Operating income at Cable Networks increased 14% to $1.1 billion for the quarter primarily due to growth at ESPN and, to a lesser extent, higher income from our cable equity investments. The growth at ESPN was driven by higher affiliate revenue primarily due to contractual rate increases and subscriber growth, and advertising revenues driven by higher rates, partially offset by higher programming, administrative and marketing costs. Higher programming costs were driven by increased rights costs arising from college basketball contract renewals. Growth from our cable equity investments was primarily due to higher affiliate and advertising revenue at Lifetime and A&E.
Broadcasting
Operating income at Broadcasting increased 17% to $223 million for the quarter primarily due to the strong performance of ABC Studios productions in international markets, led by Grey’s Anatomy and Lost. This growth was partially offset by the impact of the Writer’s Guild of America strike which limited the airing of original scripted programming in primetime on the ABC Television Network resulting in lower ratings and advertising revenues. The negative impact of the strike on advertising revenue was partially offset by higher advertising rates and lower programming costs due to the reduction in hours of original scripted programming.
Parks and Resorts
Parks and Resorts revenues for the quarter increased 11% to $2.7 billion and segment operating income increased 33% to $339 million. Operating income growth was due to improved results in our domestic businesses and at Disneyland Resort Paris, both of which were favorably impacted by the shift of the Easter holiday from the third quarter in fiscal 2007 to the second quarter in fiscal 2008.
Domestic Resorts
Operating income growth at the domestic businesses was primarily due to increased guest spending and theme park attendance at the Walt Disney World Resort and higher revenues at Disney Vacation Club, partially offset by higher operating costs at the Walt Disney World Resort. Increased guest spending was due to higher average daily hotel room rates, higher average ticket prices and increased food and beverage spending. Higher attendance was primarily driven by the benefit of the shift of the Easter holiday. The increase in operating costs was driven by labor cost inflation, new guest offerings and volume-related expenses. The benefit from higher revenues at Disney Vacation Club reflected extensions of the term of ownership on certain existing vacation home properties and higher rentals of vacation club units.
International Resorts
Operating income growth at Disneyland Resort Paris was primarily due to increased attendance and higher guest spending, partially offset by higher operating costs. Increased guest spending was driven by higher average daily hotel room rates. Higher operating costs were driven by volume-related expenses and labor cost inflation.
Studio Entertainment
Studio Entertainment revenues for the quarter increased 18% to $1.8 billion and segment operating income increased 61% to $377 million. Segment operating income growth was primarily due to increases in domestic home entertainment and worldwide theatrical distribution.
The growth in domestic home entertainment was driven by higher unit sales reflecting the performance of current quarter titles, which included Enchanted, Game Plan and No Country for Old Men as compared to Peter Pan Platinum Release, The Guardian and The Prestige in the prior-year quarter.
The increase in worldwide theatrical distribution was driven by lower distribution expenses due to significant marketing costs in the prior-year quarter for Meet the Robinsons, which was released at the end of March 2007, and the domestic performance of current quarter titles led by the continued success of National Treasure 2: Book of Secrets and the release of Hannah Montana/Miley Cyrus: Best of Both Worlds. In international markets, the improvement was primarily due to the strong performance of Enchanted and National Treasure 2: Book of Secrets.
Consumer Products
Consumer Products revenues for the quarter increased 10% to $551 million and segment operating income decreased 14% to $107 million. Lower segment operating income for the quarter was primarily due to lower recognition of minimum guarantee revenues at Merchandise Licensing and decreased revenue from licensed product at Disney Interactive Studios reflecting our continuing transition towards self-published titles. These decreases were partially offset by higher earned royalties at Merchandise Licensing and higher sales of self-published titles at Disney Interactive Studios. Higher earned royalties were driven by sales of Hannah Montana and High School Musical merchandise and increased sales at Disney Interactive Studios reflected the performance of Turok and High School Musical in the current quarter compared to Meet the Robinsons and Spectrobes in the prior-year quarter.
OTHER FINANCIAL INFORMATION
Corporate and Unallocated Shared Expenses
Corporate and unallocated shared expenses decreased from $130 million to $98 million for the quarter driven by an increase in the allocation of costs to the business segments and the timing of expenses in various corporate departments.
Net Interest Expense
Net interest expense was as follows (in millions):
| Quarter Ended | |||||||||
|
March 29,
2008 |
March 31,
2007 |
||||||||
| Interest expense | $ | (186 | ) | $ | (167 | ) | |||
| Interest and investment income | 39 | 37 | |||||||
| Net interest expense | $ | (147 | ) | $ | (130 | ) | |||
The increase in interest expense for the quarter was primarily due to higher average debt balances.
Minority Interests
Minority interest expense increased from $3 million to $50 million for the quarter due to the impacts of decreased losses at Hong Kong Disneyland and Disneyland Resort Paris and increased profits at ESPN. The minority interest is determined on income after royalties, financing costs and income taxes.
Cash Flow
Cash provided by continuing operations and free cash flow were as follows (in millions):
| Six Months Ended | ||||||||||||
|
March 29,
2008 |
March 31,
2007 |
Change | ||||||||||
| Cash provided by continuing operations | $ | 3,265 | $ | 2,698 | $ | 567 | ||||||
|
Investments in parks, resorts and other property |
(596 | ) | (546 | ) | (50 | ) | ||||||
|
Free cash flow (1) |
$ | 2,669 | $ | 2,152 | $ | 517 | ||||||
(1) Free cash flow is not a financial measure defined by GAAP. See the discussion of non-GAAP financial measures that follows below.
Cash provided by operations increased by $567 million to $3.3 billion primarily due to higher segment operating income and the timing of payments for accounts payable and accrued expenses, partially offset by the timing of accounts receivable collections and higher investments in Disney Vacation Club properties.
Capital Expenditures and Depreciation Expense
Investments in parks, resorts and other property by segment were as follows (in millions):
| Six Months Ended | ||||||
|
March 29,
2008 |
March 31,
2007 |
|||||
| Media Networks | $ | 98 | $ | 73 | ||
| Parks and Resorts: | ||||||
| Domestic | 305 | 269 | ||||
| International | 73 | 127 | ||||
| Total Parks and Resorts | 378 | 396 | ||||
| Studio Entertainment | 60 | 34 | ||||
| Consumer Products | 19 | 11 | ||||
| Corporate | 41 | 32 | ||||
| Total investments in parks, resorts and other property | $ | 596 | $ | 546 | ||
Depreciation expense by segment was as follows (in millions):
| Six Months Ended | ||||||
| March 29, | ||||||