Hello and welcome to the Q2 2014 Walt Disney Company Earnings Conference Call. My name is Eric. I'll be your operator for today's call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session.
Please note this conference is being recorded. I will now turn the call over to Lowell Singer, Senior Vice President of Investor Relations. Mr. Singer, you may begin.
Good Good afternoon and welcome to The Walt Disney Company's Q2 20 14 earnings call. Our press release was issued almost 45 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and the webcast and a transcript will be available on our website. Joining me in Burbank for today's call are Bob Tiger, Disney's Chairman and Chief Executive Officer and Jay Rasulo, Senior Executive Vice President and Chief Financial Officer. Bob will lead off followed by Jay and then of course we will be happy So with that, let me turn the call over to Bob and we will get started.
Thanks, Lowell, and good afternoon. We're extremely pleased with our performance in Q2 with revenues up 10%, net income up 27% and adjusted EPS up 41 percent to $1.11 the highest in the history of our company. And Once again, all of our business segments achieved double digit increases or more in operating income. Our continued strong performance reflects the strength of our brands and the quality of our content, our extraordinary creative success and our unique The unprecedented global success of Disney Animation's selling title ever released on Blu ray and digital. The demand for Frozen merchandise remains extremely high And the soundtrack was the number one album in the U.
S. Again last week. And as previously announced, Frozen is headed to Broadway. Captain America: The Winter Soldier has far surpassed the 1st Captain America in total global box office, which obviously bodes well for our Avengers Franchise. We've had enormous success releasing Marvel movies on the 1st weekend of May, including the 2 biggest domestic openings of all time and we'll continue this tradition with the Avengers: Age of Ultron next year and Captain America 3 in 20 the world to more fantastic Marvel storytelling with a great cast of new characters in Guardians of the Galaxy, which we screened last week.
We believe it has strong franchise potential. Also on the Marvel front, we just announced that Disney Interactive's Infinity Q2 will feature the Avengers as well as other Marvel and Disney characters when it's released in the fall. Since the first version of the game launched last August, more than 3,000,000 Disney Infinity Starter packs have been sold and it was Best selling interactive gaming toy of 2013 in the U. S. And we made some other news last week when we announced the cast for Star Wars Episode 7, which includes some very familiar faces as well as some exciting new talent and the reaction has been tremendous.
I I was at Pinewood Studios with J. J. Abrams a couple of weeks ago and left more confident than ever that Episode 7 will be the extraordinary movie Star Wars fans Our parks and resorts had another record quarter and we've completed the rollout of My iMagic plus to all guests, which Jay will get into in a few minutes. Guest reaction has been very positive and we believe The new program is delivering nicely on its promise of improving guest experience. Internationally, Hong Kong Disneyland set new attendance And occupancy records in Q2 and construction on Shanghai Disney Resort continues to go well.
There are an estimated 330,000,000 potential guests within a 3 hour travel radius of our Shanghai resort. And by the time we opened the gates in late 2015, China's travel market is expected to be 34% bigger than it was in 2012. And the number of upper middle class and affluent households is expected to grow by 18% Shanghai to accelerate expansion with an additional $800,000,000 investment. Turning to Media Networks. Both our cable and broadcast businesses had a solid quarter.
We showcased the strength and long term potential of at our Investor Day last month. It's an incredible brand that continues to drive tremendous value for us And we've got a lot of reasons to be excited about what's coming up, including a great NBA postseason, culminating with the finals on ABC, See, the World Cup from Brazil, a very promising Monday Night Football schedule and ESPN's first foray into the NFL postseason. Finally, I'd like to share a few thoughts about our acquisition of the top online video network Maker Studios. We're excited about entering the short form video in a much more assertive manner to boost the presence of our brands and franchises in this increasingly valuable and fast The ability to leverage content across the entire company to create maximum value, our unparalleled portfolio of incredibly strong Brands is a clear strategic advantage that we expect will be evident in our results for years to come. And now I'm I'll turn this call over to Jay, so he can walk you through the details of our results of the Q2.
Jay?
Thanks, Bob, and good afternoon, everyone. We had a great 1st half of fiscal twenty fourteen. In fact, it's the best first half in the company's history. Our second quarter results once again reflect 2nd quarter were up 41 percent to $1.11 Each segment delivered meaningful increase operating income and in the case of the studio, operating income was up over 300% to $475,000,000,000 representing one of the studio's best quarters ever. During the quarter, the growth in operating income at the studio was due primarily to the domestic home video release of Frozen and the film's strong theatrical performance overseas, where it has generated approximately $770,000,000 in international box office to date.
Higher in the Q2 due to growth at both cable and broadcasting. At cable, growth in operating income was driven by ESPN, domestic Disney channels and higher equity income from our investment in A and E Television Networks. Growth in ESPN's operating income was due to higher Cost at ESPN were lower than in the prior year as contractual rate increases for college basketball were more than offset by the absence of costs for U. K. Sports rights.
During the Q2, ESPN deferred $80,000,000 less in affiliate revenue than in Q2 of last year due primarily to the signing of a new affiliate contract. As we look to the 3rd quarter, we expect ESPN to Approximately $190,000,000 less than previously deferred affiliate revenue compared to the prior year. I'll remind you these Changes have no impact on full year results. Ad revenue at ESPN declined low single digits in 2nd quarter. So far this quarter ESPN ad sales are pacing up mid single digits driven by demand for the World Cup.
The broadcast of those Affiliate revenue growth was up low double digits in the quarter, which was aided by the timing of program covenants. Adjusted for the timing of deferred revenue at ESPN, growth in domestic cable affiliate revenue was up high single digits. Broadcasting operating income was up in the quarter driven by higher affiliate revenue and lower expenses, partially offset by lower advertising Revenue. Ad revenue at the ABC network was down in the quarter due to lower ratings, partially offset by higher rates. Quarter to date Two results reflect strong underlying trends in the business.
Total revenue was up 8% and operating income was up 19% as a result of continued at our domestic operations. Results at our international operations were comparable to the prior year as growth at Hong Kong Disneyland was offset by a decline at Disneyland Paris. Total segment margins were up 120 basis points in the 2nd quarter and were adversely impacted by about 200 basis points due to new initiatives. The Q2 also included 1 less week of the Easter holiday compared to last year. Adjusted for the timing of the Easter holiday, operating income would have been up an estimated 31%.
Growth in operating income at our domestic operations It was driven by higher guest spending at Walt Disney World and higher attendance at Disneyland Resort, partially offset by higher costs primarily to the continued rollout of My Magic plus We made My Magic plus available to all on property guests during the 1st fiscal quarter and to all other guests at the beginning of Q3. We are pleased with some of the changes in guest behavior and park dynamics we are already Guest adoption of our My Magic plus pre visit planning tools is encouraging. Roughly 3 quarters of Our resort guests are using them to plan their visit. And just 1 month after making pre arrival planning of FastPass Historically, guests who pre plan spend more time at our parks. So we like these early trends.
MyMagic plus has also increased the engagement with FastPass Plus by 40% relative to the legacy FastPass system and allowed us to increase the number Overall levels of guest satisfaction. During the Q2 per capita spending at our domestic parks was up 4% on Higher ticket prices, food and beverage and merchandise spending. Attendance at our domestic parks was up 3% 2nd quarter attendance record. Per room spending in our domestic hotels was up 3% and occupancy was up 6 percentage points to 86%. So far this quarter, domestic resort reservations up 3% compared to prior year levels, while book rates are up 6%.
At Consumer Products, operating income increased 37% and margins were higher by almost 500 basis reflecting continued strength in our merchandise licensing business and retail. Growth in licensing was driven by higher revenue for Disney Channel, Mickey and Minnie and Plains Properties. On a comparable basis, earned licensing revenue in the 2nd quarter was up 8% versus last year. That's 3 consecutive quarters of mid to high single digit growth in earned revenue, which is pretty impressive. Results at Disney Interactive were significantly better than we anticipated when we reported Q1 results due to the continued success of Disney We had another profitable quarter, which makes it 3 consecutive quarters of profitability, a first for the segment.
In addition to success of Disney Infinity, growth in our Japan mobile business also contributed to higher operating income, albeit to a lesser extent. We continue to repurchase our stock during the Q2 and we are still on pace to repurchase between $6,000,000,000 $8,000,000,000 for fiscal 20 15,900,000 shares for about $1,500,000,000 Fiscal year to date, we have repurchased 58,200,000 shares for 4.3 And with that, we are now ready to take your questions.
Okay. Thanks, Jay. Eric, we
are ready to open it up for questions. Thank
you.
And our first question comes from Michael Nathanson. Please go ahead.
Thanks. I have just one for Jay and Bob. Can you talk about consumer products for a second? You didn't call out Frozen in either the press release or comments. So can you talk a little bit about the impact Frozen had this quarter on consumer products?
And And then if you think about it more broadly given the shortages of inventory, how big can Frozen be? And what key benchmark it to some of the one of your franchises? And When's the timing of Frozen in terms of hitting, if there's a catch up trade on the inventory side? So let's talk about that for a second.
Hi, Michael. In terms of the impact of this Quarter frozen. We saw that impact much more heavily at the Disney store than we did broadly in the merchandise area. In fact, 9 out of the 10 highest selling items at the Disney store in the quarter were frozen merchandise. So It not only had great sales, but increased footfall at the store and at the stores and they had a very, very strong result.
With the release of the DVD, I think you'll see the impact the second part of your question, the impact On our license business, with the impact we see in general, high periods like back to school and obviously Christmas In Q4, Q1 of next year, you'll see the biggest impact. But whether it's Music, whether it's interest in the DVD or general interest in this franchise, it will continue to be a driver, we believe, for some time into the future. It was not in our licensing business as obviously one of the top 3 franchises in terms of driving as you mentioned.
Okay. And then I just wondered could Bob I know you spent time in the past sizing some of the franchises. How would this rank in terms of what you're Talking about compared to the Princess and some of the other things you've done on the Investor Days in the past. So how is this $1,000,000,000 franchise you think next couple of
This is definitely up there in terms of our top probably 5 franchises. So you can expect us to take full advantage of that over the next at least 5 years, I would guess. We're already taking a number of steps, for instance, to increase the characters' presence in our parks and developing some concepts around that. We're developing a Broadway show. We're talking about other forms of storytelling related to Frozen, Whether it's publishing or interactive or the like.
So I think this is going to be given the passion for this Film and these characters is so extraordinary, so well beyond what we ever even imagined that it would be hard to believe that It wouldn't sustain itself over a fairly long period of time.
Okay. Thanks, Bob.
Thank you, Michael. Operator, next question please.
Our next question comes from Alexia Quadrani. Please go ahead.
Hi. Thank you. Just a question on the parks. You've had such great success lately at And it looks like you have a few more tailwinds ahead going into the June quarter and beyond, a little bit of a benefit from the late Easter, the earlier pricing at Disney And then the opening, I think, of the final bit of San Juan reservation there. I guess, could you give us any color on how we should think about can that growth kind Can you and then any color maybe on the cost side with the launch cost if there is anything significant to this last phase of the opening?
And I guess additional cost of MyMagic plus or is most of that behind us?
Taking the back half of your question first Alexia, I don't think you should look for any Extraordinary costs as we continue to market the opening of Fantasyland with the Mine Coaster. I would say that and we've been saying that the only extraordinary cost, which of course we expect to taper over time is our launch of My Magic plus Which in Q3 we launched to all day guests, in fact all guests now who visit Walt Disney World and we're still very much in the process communicating its benefit and I think guests are picking up on that very quickly. In terms of the business overall, you mentioned In the 1 week of Easter that will give us about a $45,000,000 lift in Q3. And looking forward, it's very hard to look in a crystal ball, but we gave you the pacings on bookings and rates. You're right that we We have the price increase earlier at Walt Disney World that will continue to help us Year over year relative to when we took that price increase last year.
And we don't have any crystal ball that we haven't revealed to you that I want to talk about And
then just a follow-up staying on the parks and I don't know how much you can say on this front. But given your past Experiences, is there any sort of general commentary you can give us on how we should think about the profitability ramp when Shanghai opens?
I don't think it's prudent to talk in advance of an event that's over 2 year over a year and a half away. I think We are obviously very happy with the progress we're making in the construction of that project. We're very excited About the market trends that we see in terms of the general ability of the traveling And the increase in the ability of the traveling middle class in China, the approximate population that we feel we can market to, but I don't I want to make any predictions about what will happen post opening.
Okay. Thank you very much.
Thanks, Alexia. Operator, next question please.
And the next question comes from Jessica Rae Cohen with Bank of America. Please go ahead.
Thanks. The first one is for Bob. It's clear that this branded content strategy in the film division is unique and obviously it's a huge success. So I was just hoping you Give us some color or your views on where you think you are in this strategy? Is it fully rolled out?
And are you Comfortable now that are you confident that Marvel is at a new higher level? I mean, it seems like each division given the few films is very focused Are really working and working throughout the organization. So I'd love to get your views on kind of how far you are in that strategy. And then for Jay, you mentioned with The new FastPass part of the My Magic Plus rollout, the capacity that you can get more people in and out of the parks, how much is the capacity increase?
I'm obviously biased, Jessica, but I think the strategy of making Branded Movies is definitely working. And I think that we really are just seeing the beginnings of it in terms of their impact on the company, Particularly since we have a fair amount of visibility about the pipeline from all of these great brands. It's clear, for instance, that we've continued the great success of Pixar since that acquisition and that, that acquisition Has had a great impact on raising the quality level and the success of the films at Disney Animation, not just with Frozen but tangled before it and Wreck It Ralph and films coming up. Marvel, as far as we're concerned, is just getting started. The results of Captain America, Though I think are very, very telling because when you look at a film that is approaching almost $700,000,000 in global box office, I think 680, And you compare that to Captain America 1, which did under $400,000,000 worldwide and you even look at it versus Thor movies, a few of the Iron Man movies, you're looking at a film that has actually done substantially better than a lot of the Marvel films that we put out.
Now it was a great film, but it's clear that momentum is building for that franchise. And with Avengers 2 in production and coming up And characters from Avengers still very much in favor with audiences. I think there's huge potential there. In addition to that, we've got a new film, Guardians of the Galaxy, coming out on August 1 in the United States this summer, which we've seen. I mentioned it in my comments.
We feel quite good about that too. That's a whole other Marvel realm or universe in terms of where it takes place, The characters that populated and the stories that you can tell for those characters. I think I'm not going to predict that we've got Another Avengers on our hands, but that's certainly the goal. And then, of course, you layer into all of this, Disney other Disney Live Movie motion pictures like Maleficent coming up, Cinderella, which is in Final stages of production, Tomorrowland, another film we feel quite good about. The pipeline is rich there and the brand is strong.
And then, obviously, I won't Forget Star Wars. We would have be the first to admit that even we're surprised that the fervor and the level of interest, the passion For this property, we knew that it was strong when we made the acquisition. But as we've gotten into it more and we've gotten closer to it, As the film essentially starts filming, it's just amazing to us just What kind of pent up demand there is, and we feel great about where it is creatively. We feel good about the script. We feel great about Director, we feel really good about the cast, and we couldn't be more excited about it.
And as we've mentioned on earlier calls, we intend to make at least 3 of the Star Wars August 7, 8 9 at a cadence that should be roughly every other year. And then we're in development on spin off films, which we've not gotten specific about, But we feel that we've got at least 3 that we're targeting to go into production. So that pipeline is going to be rich Certainly, through the end of this decade. And then lastly, I know I'm getting wordy, but when you look at the world today, we actually see growth in the motion picture business. That is largely due to huge growth in international markets, China being probably the biggest one.
The Chinese movie market has tripled in the last 4 years. It's the number 2 market in the world. We think it's going to become the number 1 market by 2020, and our films are doing very well In those markets, Captain America, the most recent example. So there's also so there's great opportunity. There's also a lot of competition globally.
And we think that when you've got these brands that are well known And in demand, you are in a much better position competitively than you would be without them.
In terms of your second question on FastPass Plus and MyMagic Plus in general, In my opening remarks, I talked about what's happening. I want to emphasize that whatever I say about both of these New products that we are in very, very early days and we have to sort of calibrate what our findings have been by the The fact that we're only a few months in, but what we have found and of course capacity increases only really matter in our peak days weeks, But because of FastPass Plus, the ability to basically plan your day as it relates to top attractions In the park in advance has had huge pickup by our guests. It allows a better distribution of guests around the park and quite often the amount of capacity we can let into the park Highly driven by pinch points in particular areas of the park that we don't want to get too overcrowded. So when Guests are better distributed around the park. We can often allow more in.
And I don't want to get into Specific numbers, it is in the thousands, but I don't want to get into the details about what that might ultimately mean financially. But we know that from a guest experience, When you're down in at Walt Disney World on peak days for Easter, Christmas typically, some weeks in the summer, It is a huge enhancement in your experience when you can go to the park you want to go to on the day you want to And not fear that it's going to be closed out. So we see this as all great stuff. Again, very early in the process, but We're very, very encouraged across all the variables that we had hoped to achieve with MyMagic plus and FastPass plus
Thank you.
Thanks, Jessica. Operator, next question please.
The next question comes from David Bank with RBC Capital Markets. Please go ahead.
Thanks very much. Question, I guess, on Maker Studios. And your successful acquisitions of scale, I think, historically, Certainly since Bob you've been running the company have tended to focus on brands that you simply can't build right there. They had to be bought. They had incredible value and most of them have turned out pretty successfully.
So How do you put Maker in that context? What couldn't you build? What is the world class brand that you've acquired here? And how does The Disney difference kind of make it a more powerful platform?
Well, I think Maker has established itself as a bit of a brand in what is clearly a fast growing space of short form video on Online or on mobile platforms. But as we look at Maker, we see it 1st and foremost as a distribution platform And a very successful one, one that not only can command more eyeballs, more consumption, but with that more advertising revenue, Or revenue in general. We did not believe that we had the ability in the company near term to distribute as effectively and to sell as effectively. We also thought they had an expertise from a production and a creative perspective on creating short form video That we didn't think was as deep as it could have been at Disney. So we bought a lot of different capabilities, but mostly distribution.
As we look at it, we believe that by creating access for the maker people to some of our big brands and characters in Storytelling, Star Wars would be a perfect example of that, Marvel another one, that we can actually Allow the maker people to substantially improve the distribution or the reach of shorter form video using these characters and stories, but also add their expertise on the production side. They also have great Access to data and algorithms that you wouldn't have unless you had volume. It would take a long time to build the kind of Technological expertise in that regard to essentially maximize the potential of a video online, they've got all that. So we look at this as a great opportunity both for Maker and for Disney. Maker using our IP, Disney using their expertise to distribute our product much more effectively.
The other thing I want to add is this is also potentially a great marketing opportunity for the company. More and more we're taking advantage of short form video and distribution for marketing messages for our movies, our theme parks and our television shows. And it's you can see the marketplace with a fair amount of it, but getting maximum traction from a distribution perspective Takes a lot of expertise and a lot of experience and they've got that. So we think there's a huge marketing opportunity for this
Can you give us any detail in terms of impact on the income statement just as a quick follow-up?
It will be dilutive David for a couple of years, a couple of cents.
Thank you very much.
You're welcome. Thanks, David. Operator, next question please.
The next question comes from Ben Swinburne with Morgan Stanley. Please go ahead.
Thanks. Jay, I just wanted to confirm that you're still expecting cable expense growth, I think in the high singles on programming this year. That's still the expectation. I know first half was Quite a bit lower.
Yes. We've said from the outset and I said to many of you at the Investor Day that We always expected those programming costs to be backloaded in the second half of the year and it is simply related To the calendar of sports rights as they roll in, I ticked a couple of them off. I guess I'll do it again. Major League Baseball being 1, the new NFL contract, which kicks in, In Q4 of 2014 and we've got the World Cup this year in the 3rd and 4th quarters. Those are the biggest drivers.
There's also Some college football in there. And lastly, as I had mentioned before the launch of the SEC network, so that is What is driving the somewhat back loaded nature of our increase in costs for the year?
And this might be a bit of a stretch tying these together, Bob. But when you look at the bet you've made with Maker and The bet on online video and maybe the agreement you've made with DISH, which at least it seems that allows them to move towards an Online streaming bundle, it seems like the company is taking a view that they want to be you want to have Disney Present for the future of television or future of streaming. And I'm wondering if you look at that as a hedge against pay TV and What will be happening in pay TV, do you view them as complementary? I know this is probably a 10 year view than a 6 month view, but how are you looking at Those decisions in the context of your business, which as you outlined a few weeks ago in ESPN, the media networks throw off a lot of cash flow for the company and the Pay TV What drives that? So any color there would be helpful.
Well, I view them as complementary. I mean, you're throwing A lot of different concepts into the mix there maker versus the maker and the Streaming video that's possible through the new DISH deal. Now on the maker front, we think short form is a frontier opportunity for us, Meaning huge growth in consumption. We'd like to take advantage of that growth by essentially generating More consumption of our product, more not just for marketing messages I mentioned a few minutes ago. So We really believe in essentially growth in entertainment on new media platforms, Short form and long form too.
If you look at what we did with Disney movies, the DMA product, Disney Movies Anywhere That we launched recently is another example of that. We think that you're going to see continued growth Consumption of media, entertainment in particular on mobile platforms, smartphones and tablets. And we feel we need to be present in that space. On the DISH side, I mean that's a completely different story. The bet that's being made there by us and by DISH is that, that product Has the ability to attract people who may not have already signed up for multichannel service.
And getting them to sign up for something instead of nothing, we believe would be of real value to us. And there is, I guess, an example of something that is very complementary to what you call the pay TV model. The same as we've been doing with the watch apps that we've been pretty aggressive with, a complementary product to make the pay TV model More attractive for subscribers.
Got it. Thank you.
Thank you, Ben. Operator, next question please.
The next question comes from Todd Juenger with Sanford Bernstein. Please go ahead.
Hi, thank you. I got a question on ABC and then a follow-up on the parks. So on ABC, according to our numbers, it looks like prime time ratings were down, I don't know, maybe double digits year over year, which by the way was not Unique among broadcast networks. And yet you had total revenue that was flattish and profitability was up. So my question is, as you think about that business going forward, How do you think about I'm sure your plan is not to continue to have ratings erosion of that degree, but how do you think about putting capital at risk pursuing Higher audiences versus the reality perhaps that there might be some audience erosion that's inevitable and the new economic formula that might suggest you focus more on profitability.
Well, first of all, ABC is still profitable. And as we look at the year that they've had, we look at, 1st of all, the C3 rating, 18% to 49% because That's the primary driver of revenue. Because the network we ABC has very little sports, Some of it provided by ESPN, but less than certainly some of the other networks. We tend to look at non sports programming. And as we see it, We're down high single digits in the C3 18 to 49 number exports for the season, a little bit more than that for the quarter that we just reported.
The name of the game obviously is strengthening our programming, which is what ABC is just in the middle of with a lineup of pilots that have just been screened and decisions that are being made this week To populate the schedule for the fall, it is our hope that we will reverse the tide of some of that ratings erosion It better shows on the air, quite frankly, and that's what the mission is. In addition to Strengthening programming and raising ratings and hopefully revenue as the marketplace cooperates, the goal is also to own Substantial amount of that programming. And in today's world, that can create huge value for the owner of that property, As we've seen in many, many different cases, both with our programming and programming that is created by others, Thanks to obviously many new entrants in the marketplace, Netflix and Hulu among them. So we're still viewing this Business as a profit generating business and a business that can generate Substantially or acceptable returns on invested capital for the company.
Hey, that's a perfect segue into the follow-up I wanted to ask on parks. And Jay, I don't know if you or Bob want to take this, but let me take another run at the parks, Because return on invested capital is a metric that in the early days of the latest cruise ships is a metric you actually I think shared with us a couple of times. If I recall correctly, you talked about ROICs in the mid to high teens for the new cruise ship operations. I would think that at least for Disney California Venture, you'd have enough time now to have measured that. In fact, I'm quite sure you measured it.
I wondered if you'd share with us What you think the returns on that capital deployment have been? And then put that in the context now of the future To come, openings including of course Shanghai and the new capital you decided to put on top of that and sort of what your hurdle rate and thoughts around ROIC and that is? Thanks. Sure.
You may remember, I don't know actually Todd, I'm not sure you were following our company then, But when we announced the expansion of Disney California Adventure, we said that we believed That the returns would be attractive, I. E, above our cost of capital at that time. In fact, So far, and of course, returns in the parks business are based over long term, but so far we have been Absolutely thrilled with the results of that investment that we put in place. And To a large extent, on some variables meeting and others exceeding our expectations For what that investment could bring. So we still are very, very bullish that the returns that you and we We're both going to feel very good about those returns, although I'm sorry I'm not going to share the explicit numbers with you.
But When I say pleased, I certainly mean above our cost of capital. Similarly, for Walt Disney World, we don't the expansion there, we don't take on that we don't believe will exceed our hurdle rate and the signs are absolutely go forward great on Walt Disney World. Bob talked earlier about the world's interest in Frozen that is very focused on Anna And Elsa, you remember that the expansion of Fantasyland was very focused around Princess Meet and Greets and we can only expect great things there. And you've seen the numbers quarter after quarter at Walt Disney World, including the last quarter where we've been able to price behind these And still feel very strong about our volume going forward. So we feel very good about it.
I wish I could be more forth Coming with the numbers, but as I say, they will work themselves out or pay back over time. All signals so far are very strong.
If I could just thanks Jay. Just a very quick follow-up. When you think about China, I think I understand your cost of capital philosophy. Is there An extra hurdle rate sort of a risk factor that you throw in on top there that makes your expected returns need to be higher. Is that a fair statement?
And Any color you put on the way you think about it would be great. Thanks.
Well, the China situation because it's a Shared investment is a little more complicated situation. First, we don't like to take on projects that on a total ownership basis Don't have returns that we would like to see for our investors. But remember, we have a much more limited investment and the flows are complicated between our partners and ourselves. So we also look at the return to Disney's investment in that. And in both cases, We feel very good about it.
We do risk adjust our hurdle rates in general. I don't want to get into the details of that, but I think you'll you know that most companies based on relative inflation rates and other risk factors Adjust international hurdle rates appropriately and we do as well. Thank you, Todd. Operator, next question please.
The next question comes from Anthony DiClemente with Nomura. Please go ahead.
Hi, thanks. A couple of questions. First, Jay, I think On ESPN, on the last quarterly call, you had said pacing was up. You mentioned in your prepared remarks that just the ad market has been soft. I mean, we've Seeing that in the other media company's earnings reports.
I mean, how would you really explain the slowdown in the market since your comment? I mean, does it seem like something Temporary that happened towards the latter part of the quarter? Or is it something that's perhaps a little bit more Ongoing or permanent be it budget shifts to digital or anything any other call out in terms of the ad market more broadly? And then second question for Bob. Just a question about Shanghai in terms of your decision to accelerate CapEx, should we think of that as more of an acceleration or an addition to the existing plan?
And then just wondering if you can give us some more color on the updated cadence of CapEx for Shanghai as we get closer to the opening, I'm just wondering if that acceleration or addition has Any impact on potential capital returns in 2015? I know that you've not given guidance on that, but would love to hear any incremental color given your
Okay. Anthony, let me take the first half of that, which was the ESPN ad sales. Obviously, when we spoke to you all last quarter, we gave you what our pacings were that that was a fact. I think that what happened in the quarter is there are a couple of complicating factors that are not typical of any quarter for ESPN. First, Every 4 years, we have the perturbation in the sports market of the Winter Olympics or the Summer Olympics in the other years.
It's very hard to predict what the impact of that is going to be. We took a guess at it. The impact turned out to be a little more than we thought. We also when you're broadcasting live sports, the matchups and the cities involved in the matchups And now I'm speaking specifically about the NBA, have something to do with the ads you sell behind them and whether it's Los Angeles, New York or Boston, three Very big markets for basketball are not involved in the NBA post season. And so They affect our ratings.
We already mentioned that we thought the ad market was a little bit soft. And look, I don't think this is a permanent situation. We've seen it this quarter. I don't expect it to be a long term phenomenon.
Question about Shanghai and CapEx. We always anticipated expanding that park. In fact, the property That we've allocated been allocated for the project provides ample opportunity for expansion. As I said last week and Early this week and as we indicated earlier today, what we're doing here after basically seeing some rather dramatic Changes in the marketplace that we believe were positive is that we're accelerating investment. The $800,000,000 which is what we announced we were accelerating it by It's obviously shared with our partners, the Shanghai government.
So its impact from a capital expense perspective is relatively modest for us. It is our hope that with this expansion, which increases capacity, that most of it will be available to us at opening, Puts a little more pressure on us because we're essentially building something that is bigger, but that is certainly the goal. And then you can expect that in success, Which we have every reason to believe will occur that there will be continued investment in this park because of the size of the property And the size of the market, most populous city in the most populous country in the world, which as we've said a few times, 330,000,000 People that we believe are potential park guests living within 3.5 hour trip, It's pretty compelling circumstance or opportunity for us and our partners and probably will reserve an infusion of more capital investment because we think the returns are going to be rather significant for us from this project.
Anything you can tell
from the buyback? Okay. Thanks.
On your question on the CapEx, So I want to 1st of all what Bob just talked about what you asked about is really a 2015 and event, it won't affect our capital expenditures in 2014. And in fact, previously, what I had told all of you was that We expected our CapEx in 2014 to be $1,000,000,000 higher than it was in 2013 and when adjusted for the Shanghai Hi partners contribution, it would be $600,000,000 higher. In fact, I want to update that. I think Our CapEx in 2014 will actually be $800,000,000 higher, not $1,000,000,000 $400,000,000 not $600,000,000 on an adjusted basis After the contribution from Shanghai. And that simply has to do with the timing.
Obviously, when you put a big project in place, You have all kinds of planning and you map against how that money will be spent. It's slightly different. In fact, Slower. It's a little bit slower, which means that spending will be out in 2015 2016.
Thanks, Anthony. Operator, next question please.
The next question comes from Jason Bazinet with Citibank. Please go ahead.
Just a question for Mr. Rizzolo. I think in the past you mentioned that for the total CapEx outlays for Shanghai, you'd see it come out of the investing activities and then you'd See an add back under the financing side for the portion that is not yours. Are we already seeing those add backs under the financing line of the cash flow statement?
Yes, we are, Jason. Those are being added in. Look, they're not day for day, obviously. We expend the capital. There's a Process by which our partner reimburses the share of the spending, but it is lockstep if not delayed.
Okay. And that's just under financing In other in the numbers that you give us?
Yes. That's correct, Jason. Thank you. Thanks, Jason. Operator, next question please.
The next question comes from David Miller with Topeka Capital Markets. Please go ahead.
Yes. Hey, guys. Congratulations on the stellar results. Just another question on Chang, hi. Bob or Jay, just correct me if I'm wrong.
I remember maybe 5 years ago, 4 years ago, 5 years ago or so when Hong Kong opened, The kind of the core criticism if you will against the park at the time was just that it was too small. And indeed I think crowds just Overwhelmed that property for the 1st 6 or 9 months or so. Is that is the residue left over from that memory part of the reason why You guys accelerated this investment in Shanghai because you just want to be sure that it's not too small? Or what led to this Specifically, was there another market study done or another sort of demographic study done to make you determine that the Eligible patrons as you alluded to are
will get into
the park quicker. I mean, how did if you could To answer that, I'd appreciate it. Thanks very much.
Well, we've learned a lot from Hong Kong. Actually, the problem that we had was a good problem to have And that demand was greater than we had expected initially. This is a different circumstance in many respects, but That doesn't mean that some of the learnings that we gleaned from Hong Kong can't be applied and we are doing that and have every reason We're going to continue to do that. So I guess that's a way of my saying that we have as we've looked at this market since we made the decision to build, since we broke ground And then we've seen further development, more development than we expected. We clearly are reacting to what we believe will be greater demand And that we initially anticipated for the park in its first year of operation or its early years of operation.
And we want to make sure that we build enough capacity to meet that demand. There are other things we're going to resort to, to manage expectations in terms of Visitation, for instance, it's likely that when we go to the market It's selling tickets. There will be tickets that are date specific tickets so that We can manage, in effect, traffic or visitation much more carefully than you would if you sold tickets and didn't have a date and had no idea when the people who bought the tickets were going to show up. So there we're going to apply a number of things that we've learned over the years, Both from Hong Kong and other parks in how we what we build, how much we build and how we operate.
Okay. Thank you very much.
Thanks, David. Operator, we have time for one more question.
Okay. And the last question comes from Michael Morris with Guggenheim Securities. Please go ahead.
Thank you. Good afternoon, guys. 1 on the DISH personal subscription over the top service. What is how important is it to you that they reach the critical mass needed for that service to take off? And is it a situation where the ball is really in their core to go out and get partners?
Is it something that you can actively support in some way in support in some way in bringing other content companies on board. And are you looking at a similar service with any of your other distribution partners? And then I have one on parts. Thanks.
It's DISH's responsibility to get critical mass from a program perspective. I saw Charlie Ergen Last week and he's doing just that. I'm not going to give you an update on how he's doing, but it's their responsibility. We don't intend to participate in that pursuit at all. We'd like to see this product rolled into the marketplace because we think it's a smart thing for us to do, something that we should certainly try It's a critical no, but it's certainly critical that he gets critical mass from a programmer's perspective in order to Bring it to market.
And the second part of your question
Second part on DISH.
On DISH was?
Other distribution partners whether you're
You're going to sell it to others.
Oh, I'm sorry. Yes, yes, yes. We're open to selling it to others, But we have not engaged in any of those discussions yet.
Okay, great. And then at Parks, Comcast is committed to investing in both the park and the resorts, the hotels down in Orlando. And I'm curious what have you seen in the past When competitors have invested locally, is it a drag? Or does it actually Generate more traffic in the region, how does that usually shake out? Thanks.
What we've typically seen is it drives more traffic to the region. Basically, business goes up in Orlando or Central Florida. And so And we don't necessarily view it as negative for us because it drives more people to the area. And we not only have Great product, but we have new product too. Fantasyland is the most recent example of that.
We're as you know, we're developing Avatar For that, Mark, looking at a variety of other things to add in Orlando, opening up a hotel, Four Seasons is opening up this summer, for instance. So there'll be plenty more that we put into the marketplace that will take advantage of any growth the marketplace has.
Great. Thank you.
Okay. Thanks, Mike, and thanks again everyone for joining us today. Note that a reconciliation of non GAAP measures that we'll refer to on this call to equivalent GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call may 2 forward looking statements under 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 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 ks and in our other filings with the Securities and Exchange Commission. This concludes today's call. Have a good afternoon everyone.
Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.