Good day, ladies and gentlemen, and welcome to the Third Quarter 2012 Walt Disney Company Earnings Conference Call. My name is Anne, and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time, all participants are in listen only mode. We will be facilitating a question and answer session following the presentation.
I would now like to turn the presentation over to your host today's call, Mr. Lowell Singer, Senior Vice President, Investor Relations. Please proceed, sir.
Hi, thanks and good afternoon, everyone. Welcome to The Walt Disney Company's 3rd quarter 2012 earnings call. Our press release was issued about 45 minutes ago. It's now available on our website at www.disney. A webcast and a transcript of today's call will also be available on our website later today.
Joining me in Burbank for today's call are Bob Iger, 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'll be happy to take your questions. So with that, I will turn it over to Bob. Thank you, Paul and good afternoon. We had a phenomenal Q3 delivering the largest quarterly earnings in the history of our company.
Earnings per share were up 31% over last year, driven by growth in every one of our businesses. We also delivered record earnings per share for the 1st 9 months of our fiscal year And we believe our results clearly demonstrate Disney's unique value proposition and great potential to deliver long term growth. Before Jay gets into the specifics about our quarter, I'd like to spend a few minutes talking about the status of our capital spending in our parks and resorts as well as some of the acquisitions we've made in the last few years, especially Marvel. These things are relevant to our Q3 results and will factor into our future performance as well. As you know, we've made significant investments in Parks and Resorts over the past several years to create an even greater Disney experience for our guests and to drive long term growth.
These include completely transforming Disney California Adventure, expanding Disney's fleet of cruise ships and enhancing and increasing the California Adventure is now an exceptional park in its own right And the perfect neighbor to Disneyland. Since the June opening of the phenomenal Cars Land and the brand new Main Street, attendance has been up along with guest satisfaction. In fact Disneyland Resort set new Q3 attendance record and on most days since our reopening California Adventure has been drawing Nearly 50% of the total attendance to the overall Disneyland Resort and that's up from roughly 25% in the past. The successful launch of the Disney Fantasy in March and the Disney Dream the year before more than doubled the guest capacity of our cruise business. And these amazing new ships deliver an extraordinary cruise experience and they both began contributing to operating income their first full quarter of operation.
Our cruise ship bookings are currently at 94% occupancy for the year. Meanwhile, our multifaceted expansion of Fantasyland has begun in Orlando. It's the most popular land in our most popular park and this will The largest expansion of the Magic Kingdom since Walt Disney World opened more than 40 years ago. We'll complete this particular project in 2014. However, the bulk of our capital investment will be made by the end of the current fiscal year.
In fact, with these significant investments This will be the peak year for our capital expenditures in our domestic Parks and Resorts business. Going forward, we expect each one of these projects to deliver strong returns on invested capital that will exceed our hurdle rate and drive improvement in our overall returns. On the international front, we've also invested in expanding Hong Kong Disneyland. 2 of 3 new themed areas are already open And the 3rd will open next spring. Attendance, revenue and operating income for the park were all up again this quarter.
Mark actually set a new Q3 record for both attendance and revenue. And our investment in Shanghai Disneyland will continue to ramp up Through its opening. As I've said many times before, this is the most exciting international project in the history of our company It's certainly the biggest investment we've ever made outside the United States. Turning to our acquisitions. In Q3, We released 2 fantastic movies that demonstrate the incredible creativity and value of both Pixar and Marvel.
Brave is Disney Pixar's 13th consecutive movie to open at number 1 here in the U. S. It's grossed about $225,000,000 And is yet to open in some key international markets including the U. K. And Spain.
Ann Marvel's The Avengers has grossed almost 1 $5,000,000,000 in box office worldwide, making it the 3rd highest grossing movie of all time. It's also an important new franchise for us As Disney Interactive, Disney Channels Worldwide, ABC Studios and Disney Consumer Products are all working to leverage The power of the Avengers to create greater value. We acquired Marvel in 2009 and with its multitude of exciting characters And as with Pixar, we're confident that Marvel will be able to create original content and build franchises around these great characters to drive significant value across our company. The releases of Thor and Captain America last year Built on the momentum from the first two Iron Man movies. Combined, these two movies grossed more than $800,000,000 in global box office And led to the phenomenal success of Marvel's The Avengers.
When Marvel took the stage at Comic Con last month to announce a new slate of films That will keep the momentum going. The reaction was huge. Iron Man 3 opens on May 3, 2013 followed by Thor: The Dark World in November of next year. The Winter Soldier will be in theaters in April of 2014. And as I mentioned on our last call, there's a sequel to Marvel's The Avengers in the works.
In fact, Marvel has just signed Joss Whedon to an exclusive deal and he will write and direct Avengers 2 and help develop a Marvel based series for ABC. So as you can see, Disney has a unique ability to generate new opportunities and drive significant value from great creative content. Disney, Pixar and Marvel have the incredible characters and compelling stories that people connect to, the kind we've proven We can build strong long lasting franchises upon. Our acquisitions give us more than extraordinary creative content, The creative cultures, unique talents, new perspectives and commitment to excellence at Pixar and Marvel are now contributing to our company's strength And along with ESPN and ABC, they are creating new opportunities in numerous ways. With some of the world's strongest brands, brightest creative talent incredibly valuable asset, Disney has never been better positioned to create continued long term growth.
And with that, I will ask Jay to give you the details of our Q3 performance and then we'll be back to take your questions. Thanks, Bob, and good afternoon, everyone. We delivered an exceptional quarter with Siteman operating income up 18% and earnings per share of $1.01 up 31% There is a great momentum at our company as evidenced by these results, which I'm now going to spend a few minutes discussing in more detail. Then I'll highlight some factors that may influence our upcoming performance. In the Q3, the Studio segment was the largest contributor to growth operating income driven primarily by the tremendous worldwide box office results of Marvel's The Avengers.
Television distribution results were also higher, This was offset by a decrease in worldwide home entertainment. The success of Marvel's The Avengers speaks for itself. It's a phenomenal film that dominated the box office in every market in which it opened. So we look forward to the opening of the film next As we look to the balance of the year in fiscal 2013, we are excited about how robust release slate. On the animation side, Pixar will release 2 of its animated classics in 3 d for the first time, Finding Nemo in September and Monsters Incorporated in December, which Sets the stage for Pixar's next big film, Monsters University, which will be released next June.
We'll also release Tim Burton's Frank and Weenie in October and Disney Animation's Wreck It Ralph in November. On the live action front, we'll release a number of anticipated films in 2013 including Oz, The Great and Powerful in March, Iron Man 3 in May and The Lone Ranger in July. Results from television distribution were driven by higher sales of our films in international markets compared to the prior year. The decline in home entertainment results was due to lower unit sales in the Q3, including lower performance of key titles like John Carter and The Muppets Compared to Tron, Tangled and Nomeo and Juliet which were released in the prior year. Operating income growth For the Media Networks segment, it was driven by growth in both cable networks and broadcasting.
At cable networks, Disney Channel was the primary driver. Growth at the domestic Disney Channel was driven by higher affiliate revenue due to contractual rate increases. Disney Channel continues to build and enhance brand awareness for Disney around the world, so we could not be more pleased with its recent success. Disney Channel is stronger today than ever with strength across all of its networks. In Q3, Disney Channel With the number one network with kids 2 to 11 and tweens 9 to 14.
As of last week, Disney Channel had been number 1 With kids 2 to 11 for 9 consecutive weeks. Disney XD had its highest rated 3rd quarter ever with kids 6 to 11 and tweens 9 to 14. Our newest network Disney Junior, which we launched in March is already in 50 5,000,000 homes followed by our recent agreement that brought the network to DIRECTV's customers. In June of this year, We launched a suite of Disney Channel apps with Comcast Watch Disney Channel, Watch Disney XD and Watch Disney Junior, which gives their subscribers live linear feeds of those networks in addition to a host of on demand programming. This suite of services further strengthens our relationship with Consumers by enhancing the value of their multichannel subscriptions.
ESPN's operating income was down in the quarter due to lower recognition Deferred Affiliate Revenue Compared TO Prior Year. If you recall, ESPN did not defer any Comcast revenue during Q1 and Q2. So this quarter, ESPN recognized $139,000,000 less in deferred revenue related to its Comcast agreement than in the prior year. I'll remind you the deferral issue merely relates to timing of revenue recognition and has no impact on full year results. Excluding this impact, ESPN's growth in affiliate grades, subscribers and advertising revenue was more than offset an increase in programming and production Costs.
Programming and production costs were higher due to the airing of additional NBA games compared to Q3 last year as well as higher contractual rates for NBA and Major League Baseball programming. ESPN ad revenue was up mid teen percentage points compared to last year, Driven by higher rates, unit sales and ratings. Viewership of the ESPN network continued to grow during the quarter As ratings were up over 16% due to our coverage of the UEFA 2012 Championship, more NBA games and increased viewership of SportsCenter and U. S. Open Golf.
Reported cable margins excluding our equity investments We're down 70 basis points due primarily to lower affiliate revenue recognition from Comcast. This revenue recognition change Associated with Comcast affiliate revenue had an adverse impact on cable margins of approximately 2 20 basis At Broadcasting, the increase in operating income was the result of higher affiliate and royalty revenue and lower programming and production costs at our own stations, partially offset by a decrease in ad revenue at the ABC Network. Ad revenue at the ABC Network was down modestly as higher CPMs were more than offset by lower ratings in the quarter. Ad revenue at the stations was comparable to prior year. Quarter to date scatter pricing at the ABC Network is running mid teens above upfront levels.
At ESPN ad sales are pacing down modestly. Our advertising business has been impacted in the last couple of weeks by the Olympics. However, We're very pleased with the strong demand ABC and ESPN enjoyed in the upfront, which is evidence that advertiser demand for our networks remains strong. Our Parks and Resorts segment delivered another strong quarter with revenue up 9% and operating up 21%. The increase in operating income was due to growth at Tokyo Disney Resort, Disney Cruise Line and our domestic resorts.
We saw continued improvement in segment margins during the quarter, up more than 190 basis points compared to last year. Results from the Tokyo Disney Resort continue to improve, reflecting the negative impact of the Japan earthquake on last year's Q3 results And the related business interruption insurance proceeds we received in Q3 this year. I'd also note The Hong Kong Disneyland's operating income grew in the quarter due to increased guest spending and higher attendance. Disney Cruise Line results were higher due to the launch of Disney Fantasy in late March. At our domestic parks, the increase in operating income was due to increased Guest spending and attendance, partially offset by increased costs.
For the quarter, attendance at our domestic Parks was up 1% and per capita spending was up 8% on higher ticket prices and food and beverage spending. Average per room spending at our domestic hotels was up 6% driven by higher average daily rates. Occupancy decreased 1.5 points 79%. While occupied room nights were comparable to prior year, domestic inventory increased versus prior year due to the opening of Ohlani and Disney's Art of Animation Resorts. So far this quarter domestic Resort reservations are pacing up 1%, while book rates are up 4%.
Bookings at the Disney Cruise Line are 38 Higher than prior year with occupancy for the entire fleet at 94% for the year. At Consumer Products, operating income was up in the quarter due to an increase in merchandise licensing. Growth was due to lower revenue share with the studio compared to prior year and higher revenue in Japan. On a comparable basis, earned licensing revenue was down modestly. We were pleased with the sale of Avengers merchandise and the early sell in of Spider Man, but faced a difficult comparison given At the Interactive segment, we continue to make steady progress with lower operating costs in the quarter compared to year due to improved results in our games business.
Social games results continued to benefit from lower impact of acquisition accounting for Playdum as well as improved performance driven by the success of Gardens of Time. Results at our console games business were comparable to the prior year. During the quarter, A and E Television Networks agreed to redeem NBCUniversal's entire 15.8 percent interest in A and E for approximately $3,000,000,000 $2,500,000,000 of this purchase price represents the enterprise value of NBCU's equity In A&E and the balance represents the value of tax benefits expected to be generated as a result of the transaction. We are very pleased with the price A and E will pay to redeem this stake. We expect the transaction to close by the end of calendar 2012, At which point our ownership stake in A and E will increase to 50%.
Turning to the Q4, there are a couple of items I'd like to highlight that will impact Year over year comparisons. ESPN will incur more than $100,000,000 in incremental programming and production costs due primarily to contractual increases for college football and Major League Baseball as well as higher costs associated with our new contracts for the Pac-twelve And Wimbledon. At Disney Interactive, while year to date results have improved over prior year, we Expect Q4 results to be comparable to last year. Results in our console games business faced a difficult comparison given the performance of Cars 2 and Pirates Lego in the prior year and we have no comparable titles this year as our big next big title EPIC Nikki 2 will be released in the beginning of fiscal 2013. We continue to repurchase our stock during the Q3 with 8,600,000 shares repurchased for about $373,000,000 Fiscal year to date, We have repurchased 55,000,000 shares for $2,100,000,000 While our pace of repurchase in the 3rd quarter It's probably more useful to look at our buybacks over the longer term than in any individual quarter.
Returning capital to our shareholders through dividends and share repurchase continues to be a key component of our capital allocation strategy and we intend to continue We have not altered our thinking about the amount of capital allocated to share repurchase. We're very pleased with our Q3 results. We've made a number of investments in the last couple of years with an eye towards creating long term sustainable value for our shareholders. And We believe this quarter demonstrates the impact that these investments are having on the financial results of our company. And with that, I'll turn the call over to Lowell for your questions.
Thanks, Jay. Operator, we are ready to take the first question.
Okay. Thank And our first question comes from the line of Michael Nathanson with Nomura. Please proceed.
Thanks. I have 2 for Jay just on Parq's. Jay when you started the year, You guys said in rough numbers there would be about $500,000,000 of incremental revenues expenses related to the new attractions and chips. And I wonder Now you had 3 quarters of the way done through the year. Can you give us an update on where you're off to that $500,000,000 And is there any differences on the timing of revenues and expenses?
Thanks, Michael. We said last year that we would have $300,000,000 of incremental revenue matched with cost and then an incremental $500,000,000 this year and we are still very much on pace for that and it seems like it will be as we Pretty much match up with costs of launching, training, preopening and all of the things that go into launching these new initiatives. If you look at this quarter in particular, Michael, about we think about 50 basis points Of our parks margin, the change that you saw in the parks margin number that I gave you is the impact of these new initiatives on the margins for the quarter. That's the Disney Cruise Line California Adventure expansion and our Ohlani really Present the bulk of that 50 basis point impact. Okay.
And then can you just ask one follow-up on park trends? We're all excited about the new California Parks. Can you give us a sense of what the attendance trends look like through the quarter maybe next quarter California versus Is there anything you're seeing differently than previous years? No, not really a big difference between those two parks As we sort of get into the summer and look at what the rest of the summer is probably going to look like and into the fall, not a huge Okay. Thanks.
Thanks, Michael. Operator, next question please.
And our next question comes from the line of Ben Swinburne with Morgan Stanley. Please proceed.
Thanks. I have a question for Bob on Avengers and then a follow-up for Jay. Bob, last quarter you talked about being a little short on inventory At the Avengers and on the CP front and wanting to sort of get the company focused on fully monetizing that property. Looking at Q3, 3, how would you sort of judge the performance of the company overall across the segments particularly at CT and at film? And how do you think about Looking at this property from a licensing perspective relative to some of your other big hits like the cars where you really didn't see much of a fall On the licensing front as you moved out over the years beyond the initial release of the film.
We think Avengers is a strong property. It's not as strong as Cars from The CP front, but that's the strongest that we've ever had. I think it's important to note then that you can't look at one of these properties in terms of its Franchise quality or strength in 1 quarter. The Avengers is probably a good example of that because we have to look at it through the release of the DVD, which is late this September and obviously that takes us well into Christmas. And because the Avengers incorporates Iron Man, Thor, Captain America and the Hulk, we basically are selling product against all those characters and we'll be selling it when those other movies certainly Iron Man, Thor and Captain America come out.
So this is kind of a long term proposition. Avenger is not as strong as Cars, but Until the DVD comes out and we get into the Christmas season, it's way too early to assess this. And we have high hopes for Not only the films from the individual characters that appear in the movie, but then for the sequel, which will come out in at a time we haven't announced yet.
And then thank you for that. And Jay, just on ESPN, would you be willing to give us the affiliate revenue growth in the quarter if you exclude the deferral timing or if not For cable, which I think will be in the queue. And the $100,000,000 cost you called out for Q4, is that a change in the year over year Growth at ESPN from what we saw in Q3 because I know you've obviously every quarter you have increases in your licensees?
Sure. Let me take the first half of your question and then I'll talk about that So Ben relative to our affiliate growth rate, it was pretty much flat versus prior year On a reported basis due to the impact of that Comcast deferral. And we also had some unfavorable FX stuff in there, but the majority of it was the Deferral. If you adjust for that deferral and adjust for the FX rate as well, the Q3 cable affiliate rate growth was very similar to the first half of the year, which was high single digits. I think I gave that out on the last call.
So those two factors pretty much account for what looks like a slowdown in the reported number. Got it. Okay. On your second question about the $100,000,000 basically it really kind of Matches the kind of pace of cost growth that we've seen, which is the sort of lowtomidsingledigits In cost growth quarter to quarter at ESPN nothing really special there. And that's Q4 versus prior year Ben.
Yes, got it. Perfect. I just want to just provide some perspective on affiliate rate increases, because I know this has gotten some attention These last few weeks, not just for us, but across the media sector. When we give a figure of high single digits, which Jay just gave, You're looking at a blended rate of all of our networks, obviously, including ESPN. Because of the size of ESPN sub fees, as you know, We've been cautious about how we increase those rates in these new deals that we make given the fact that The fees for ESPN are as high as they are and we're increasing rates on such a high base.
The pricing that we're getting is probably the strongest in terms of a percentage increase It's from the other networks led by the Disney Channel. So we're getting tremendous price growth in some of the other Channels and decent growth in ESPN, but albeit on a very, very high base. Thank you. Okay. Thanks, Ben.
Operator, next question please.
Our next question comes from the line of Alexia Quadrani with JPMorgan. Please proceed.
Thank you. My question is on the parks Margin, should we assume when we look into the September quarter that we could see, I guess, more than the 50 basis points expansion And some of the newer investments given that a lot more of the cost are probably rolling off in this quarter?
Alex, yes, I really I don't feel comfortable sort of giving guidance on a specific quarter's margin. But obviously, As these projects roll off, they the revenue they produce, Which has pretty much been what we expected when we pro form a these projects. We'll not be we'll All of those sort of start up costs will drop off and we'll start producing OI against those and they won't be the margin drag that they have been. But I really don't want to talk specifically to timing. It just gets too close to guidance for my taste.
And then just a Follow-up question on the really impressive ratings momentum you've seen at the Disney Channel. I guess given that you don't sell advertising there, is there I guess ways you can really Translate that into more meaningful step ups, but it's just higher affiliate rates when contracts come up or is there other ways you can monetize that and impress the success you've had there?
Well, first of all, The Disney Channel programming appears on over 100 channels worldwide and many of those channels are advertiser supported. So the strength of these shows, while they only show up primarily in the U. S. On against the sub fees, They do drive advertising in other markets around the world. The other thing that's important is we manage these properties across businesses and we leverage their Success across businesses.
So if you look at Phineas and Ferb, which is a mammoth success on the Disney Channel in the U. S, That is being leveraged as a franchise across a variety of different company businesses. I would note the tremendous success of A recent mobile game for instance is one example, but consumer products being another one in publishing, the fact that it will show up in the parks and the fact that we have a movie in development Against Phineas and Ferb. So we're monetizing because of the Disney branded nature of these properties. We're managing these successful properties that we're able to manage successful properties out of Studio as franchises.
Thank you.
Okay. Thanks, Alexia. Next question please. Operator?
Next one comes from Jessica Reif Cohen with Bank of America Merrill Lynch. Please proceed. Thanks. Could you address the retrans and affiliate Where you are roughly where you are in fiscal 2012 and how will that ramp up over the next couple of years?
Hi, Jessica. We're going to stick with the total number that we gave. I really don't want to talk to sort of how that's going Blend in over time because we don't want to get into all the details of when deals come up for renegotiation, when we start, Whether we start early and so on and so forth, but so we're going to stick with that total $450,000,000 The $500,000,000 number that we gave in fiscal 2015 and sort of live with that. Thank you.
Okay. And then just on the buyback, I mean, you even mentioned Jay that it is there was quite a slowdown in the quarter. Can you just Give us your current views on capital allocation. If CapEx peaks this year, free cash flow growth should be at least for the domestic Should be fairly significant. Why was there a slowdown and how should we think about capital allocation in coming years?
Well, Let me take the bits of your statement in order. Certainly on an And even on a consolidated basis for the next couple of years, our CapEx will drop. In fact, 2012 At least into the foreseeable future on an equity basis because a lot of the big capital bumps you'll see in the future will be In Shanghai, only 43% of which is our money, you will see the reported number Start to look higher as we get into the opening preopening of that part. But on the equity basis, the actual cash outflow will not reach 2012 number. So you're right about that.
There will be more cash flow at least net the netting will be less. If you look at buyback in particular, I would say this, we haven't changed our point of view at all about buying back our stock. We still believe That we trade below our intrinsic value that it is a very useful and strategic way for us to return capital to Shareholders, so I just wouldn't read too much into what happened this quarter versus the same quarter last year, not important. We haven't changed our focus On this on the amount of capital or how we think about allocating capital to buybacks in the future.
Thank you.
Thanks, Jessica. Operator, next question please.
And it comes from the line of Spencer Wang with Credit Chris, please proceed.
Thanks. Good afternoon. Just a 2 part question on ESPN. First for Jay, I think you mentioned that ESPN pacing slightly down in the September quarter and you mentioned the Olympics. Is it all just a shift to the Olympics?
Or is there any sort of change And secondly for Bob, I know international growth has been a focus for you. So for ESPN now that The English Premier League rights will go to British Telecom in the fall 2013 and you've unwound the Star JV, can you just update us on your thoughts on the international strategy for ESPN? Thanks. Sure. I really wouldn't read too much into the ESPN pacings.
Other than, of course, the enormous focus that takes place around the summer games And the disruption or disequilibrium that creates in the market, we believe we have incredibly strong programming. Our upfront, which is You probably know for ESPN, one of a couple or a few upfronts that we do was incredibly strong demand for Our programming and our product incredibly strong. We're not looking too much further into it than that. And by the way, As it relates to the Olympics and ESPN, it made a decision at the upfront to sell deeply into this current quarter at the upfront, So that they would leave themselves less vulnerable to the competitive forces of the Olympics from an advertising So even though the Olympics are siphoning some money out of the marketplace particularly with strong ratings, ESPN was fully prepared For a quarter that would be impacted negatively by the Olympics by selling deeper into the upfront. I should also say that their sales for Their fall premier product notably college football and pro football are very, very strong and very, very encouraging.
On the international front, ESPN's track record internationally has not really delivered the kind of bottom line results That we would have liked or expected. And as we look forward, we did not see the kind of growth
engine
From ESPN internationally. And so we have approached it somewhat more The bid that we made for instance for Premier League was we consider to be a rational bid to try to turn ESPN's business in the U. K. Into a profitable business and we are outbid by a very, very powerful local distributor And it was really not only impossible to compete with them, but it made no sense for us to do so because it simply would not have benefited our bottom line. Asia, a different story.
Although as we look long term at that JV, we didn't think it would drive great growth for the company. It was also a partnership With News Corp and every once in a while with partnerships even though we had a good one with News Corp, you have a differing point of view about The future direction of the business and both entities felt that it would be better to go off individually. And so we decided Basically with News Corp being very interested to sell our interest back to them and to pursue other markets for ESPN internationally, Internationally, notably Latin America, where we do think that we have a path to well, we are profitable today and we have a path to growth long term. Great. Thank you.
Thanks, Ben. Operator, next question please.
And our next question comes from Anthony DiClemente Clemente with Barclays. Please proceed.
Thanks. Two questions for Bob, just a follow-up on your recent comments there. I appreciate your comments about ESPN and the presales for Cultivolt. But just wondering on just broader core advertising market trends, would love to hear Whether you think that there's a good amount of visibility in the marketplace as we look to the end of the year, whether or not you're seeing any sort of change in And then I have a follow-up.
I would express nothing but bullishness about ESPN's ad prospects For the next certainly number of months maybe for the next year, live sports is still very much in demand. I think the Olympics prove that high quality live sports events still attract large audiences and are of great interest to A variety of different advertisers, so you have sort of multiple sectors. They had a strong upfront. By the way, as did ABC, Selling roughly 80% of its inventory in the upfront at increased rates. So I think we feel generally speaking good about the ad market Not huge visibility, but what we're seeing and I think we're positive about particularly on the ESPN front.
Okay. Fair enough. And then second question Bob On the performance of Brave, which it was impressive in its own right, maybe not as impressive as some of your Existing franchises like thinking back towards Toy Story 3. I'm wondering if the performance of Brave does anything to inform your strategy at Pixar for Introducing new brand new brands and franchises from here, particularly looking at how the Avengers did and whether or not the Marvel characters Franchise has become more prominent in your overall strategy.
Well, we feel to the point you made, we feel good about Brave. It's just a hair under 2 $25,000,000 domestically and we put a character in the marketplace that is clearly very, very popular and has long legs, no pun intended, in terms of We've instructed Pixar to make great movies. That's their primary priority, Tell great stories. If we get good franchises out of them that's great for the company. But we're not taking a check the boxes approach to how they develop.
That said, they do have properties In the marketplace that we really believe in, the sequel to Monsters, which comes out in 2013 would be one very good example of that. It's also kind of tough to compare things to Toy Story since that was the number one grossing animated film box office ever. Yes. But what we've instructed Pixar to do is to continue doing what they've been doing all along and doing quite well, Which is find great characters tell great stories. And when we've got one that can be mined the way Toy Story was or Cards was or some of the other Properties, certainly, Nemo would fall into that category of monsters then we should make the film.
I mean, and then we should sorry, then we should leverage it. But by and large, we want to make good movies, tell great stories first.
Okay. Thank you very much.
Okay. Thank you, Anthony. Operator, next question please.
Our next is from Todd Jankar with Stanford Bernstein. Please proceed.
Hi. Thanks for taking the question. Quick one on the TV Everywhere apps. I guess especially the new kids channel apps you were talking about with Comcast. My question would be, how do you see that expanding out to other distributors?
I'm sure we'd love to offer that to their Subscribers and I'm sure there's various barriers to that. If you could comment on the timing or the barriers that are standing in the way of maybe getting more deals done like that? And then anything you can say on the way that you economically participate or benefit from deals like that? Sure. We're very encouraged By the apps that were launched through Comcast and the app, the ESPN app that was launched by Time Warner about a year earlier, The take up rate in terms of downloading the app and ultimately authenticating has been impressive.
And what's really impressive particularly from the Disney Channel side is the number of shows that have This proves a number of things to us. 1, the power of mobile media. Clearly, the device, Mostly the tablet to some extent the smartphone is a device that people are willing to watch a long form video on particularly kids and that's very encouraging. What we've got here is a model that benefits the consumer because it gives the consumer more ways to access the programs conveniently. It benefits the distributor Because we're protecting the business model, because of the need to be a multichannel subscriber and it certainly benefits us.
So I think we will Do more deals like the one that we did with Comcast, there is a veritable queue of distributors that would like to launch these apps, But we are willing to launch them as part of overall extensions of the omnibus deals that we've done with them with the deals that we've done for the channels and not just allow distributors to launch them basically outside of the format of an extension of our deal. On the monetization front, we're working on technology that we expect to implement probably this fall for ESPN and for The Disney branded apps to embed advertising that is discrete to these apps both on the VOD front so that when they watch an episode, But also in terms of streaming of the channel. And so we have an opportunity we believe not just to use these apps to The value of the multichannel ecosystem, but ultimately to drive greater revenue through advertising. Very helpful. If I could ask one quick follow-up, I know that took a lot of time, so I'll try and make this real quick.
Just your comments on the ESPN upfront were very helpful. I wonder if you might Share some similar comments on the kids upfront. Especially it might some of
us might draw a conclusion that
a lot of GRPs have gone out of the market. The demand seems fairly Wrong. So one might suspect that pricing might be way up and your share is way up. So any comments on your price or volume You got out of kids upfront would be greatly appreciated. Sure.
Todd, yes, I mean, you're right. We had a very strong kids upfront Driven by Disney XD primarily because we've got real growth in ratings and the strength of the programming in that channel As well as Disney Junior is enabling us to monetize at a faster pace and at a robust pace And to take market share. That said, our position in the marketplace is relatively small, because as we said earlier in this call, we don't sell advertising on the Disney channel. So we're driving advertising in fewer and relatively smaller channels, but we've definitely seen strength there and real growth And we look forward to continuing to grow these channels both in terms of subscription fees from increased distribution, But also from increased advertising, which is due to the popularity of the programs and the channels themselves. Thanks a lot.
Thank you, Todd. Operator, next question please.
And our next is from David Bank with RBC Capital Markets. Please proceed.
Thank you. So first, Bob, Given your opening comments, the quality and the visibility on the studio slate is really actually pretty staggering. I guess in that context, if you look over the past decade, the studio kind of hit peak EBIT north of $1,000,000,000 margins in the mid teens. Do you guys Do you think you're on a trajectory over the next couple of years to get back to those kinds of earnings power numbers at the studio given the slate you outlined? And just a second completely unrelated question.
Could you remind us of when the Castle syndication money is going to hit? And is it Comping up against any other major syndication or any other the timing of any other digital syndication dollars? Thank you. David, no real guidance on the studio side. We feel good about the slate too.
With anchors from Pixar, Disney And Marvel, we like our positioning and we're confident in the slate coming up. We do believe we're going to continue to improve returns On that business led by the franchises and the big grand power of our films, but No guidance in terms of what level of profitability we achieve or what we return to in terms Jay, you want to take the Castle question? Yes. On the Castle revenue recognition, David, We did recognize some in Q3 and we'll recognize even more in Q4 as There is both we're monetizing both seasons 3 and 4 in Q4, but there's also a bump Due to the fact that we'll hit the Magic 88 episodes in which there's a lift To the entire list the entire pricing of what we sold prior and we'll recognize that in Q4 as well. And that's at the 3 yard media nets.
I'm sorry for asking. That's at the MediaNet's. Okay. Thank you so much. Thank you, David.
Operator, next question please.
And our next is from Doug Mitchelson with Deutsche Bank.
Thanks so much. Two questions if I could. So Bob mentioned both cruise ships were profitable in the June quarter. Were Cruise ship margins still held back by marketing and launch costs? And if so, how long does it take to reach steady state margins for those cruise That's the first one.
Yes. And they're behind us. So we should start to see where it's normalized margins from this point forward. And the second question because of some of the currency shifts, I think it's a little bit more extensive for international visitors to come into the U. S.
I think in the At least over the past year or so, it seems like international attendance growth has helped drive increases in attendance at the parks. So should we have any Regarding currency swings impacting the parks? Interestingly, the Q3 percent international where it really matters most is that which is at Walt Disney World was Identical to the prior Q3 a year ago, Doug. And I will tell you there's been a bit of a mix shift where Europe, which for us is primarily U. K.
And Canada were down a little bit, but that slack was completely picked up by Brazil and Argentina. So Yes, there is always the possibility for currency swings to affect our business. We actually haven't seen that much of it over the last couple of years. Of course, the euro and the pound have been relatively strong for most of that period. Well, you've got a lot of experience with this.
Is there any kind of lag given that people Plan their trips in advance. What point would you expect to see it if we're going to see anything? Would you have seen it already? Generally not. I think that for the most part, particularly Starting with Europe, flights from the U.
K. And a long holiday in Orlando tend to be a A lot better economic more economic an economical decision for people from the U. K. Than going elsewhere in Europe. And the growth of interest in Latin America for the Disney franchise and particularly visitation to Walt Disney World It's probably going to mask any relative currency swings there.
We're really the only thing we're held back by from South America It's actually believe it or not our Visa policy and the ability of people to get access to the market not the desire or the demand to come up to Walter 0. I'll end before we go into politics. Thank you. Thank you. Thanks, Doug.
Operator, next question please.
Our next is from Marci Ryvicker with Wells Fargo. Please proceed. Thanks. Two questions. The first, DreamWorks has recently announced plans to build the theme park in Shanghai and potentially start a Kids Network.
Any thoughts on these announcements, particularly given that this would be new competition for Disney.
To my knowledge, they're not building a theme park in Shanghai. They're building Some form and entertainment center. It was described in the release as more of a theater district. But I guess this is supposed to include Practical theater as well as movie theater and some other forms of tourist attractions, but it is not being characterized as a theme park And is not being capitalized meaning the investment is nothing close to what it would take to build a theme park. This is more I think theater venues and retail that is entertainment based than theme park.
Okay. And then, A&E, it said in your last filing that you most likely will not be consolidating that. So just want to And then also related to this, any thoughts about doing a swap with Hearst in terms of your interest in Amy for their interest in
You are right on your first assertion, which we do not have plans to consolidate it. And I don't really want to comment on anything regarding our relationship with our partners at Hearst.
Thank you. Okay.
Thanks, Mark. Operator, next question please.
And it comes from the line of Jason Bazinet with Citi. Please proceed.
Just a question for Mr. Iger.
The Street seems to have soured On social gaming or the prospects of social gaming, I was just wondering does it alter your view at all in terms of the importance of that division to Disney? Do you still see value there? We do. Our strategy on the games front is to diversify modest investment in console, investment Mobile and Investment in Social. We've actually grown share a bit on the social front.
Lately, our exposure is less Some of the big competitors in that space, namely one big competitor in the space. And we've actually seen some interesting growth, thanks to the new Facebook App Center that was Launched recently where we're gaining access to customers Facebook users of Facebook for marketing purposes that we didn't have before. If you check the app center out, if you play social games, you'll note that you'll be marketed to by friends or through friends who are playing social games And you'll be marketed to from companies that create games because of the games you may have already played. And so we're gaining access to a marketing platform That we actually believe is encouraging. The other things to note is there is still growth in Facebook in terms of number of users.
And the numbers in terms of how much time Facebook users spend playing games are staggering. And so we still believe in that business, but Okay. Our investment is relatively modest in the space. I think we'll launch about 10 games this year. A lot of them are based on Disney owned IP, which we believe gives us not necessarily a great advantage, but an interesting way in To that space.
So we feel relatively good about it. It's not a huge business for us, but it's one that we're going to continue Good to be Ann. Thank you very much. Thanks, Jason. Operator, next question please.
And the
next one comes from Tuna Amobee with S&P Poll IQ. Please proceed.
Thank you so much. I've got 2 as well. So first for Jay, in the context of capital return and specifically share buybacks, So I'm wondering given the average price that you've bought back your shares so far And the current trading price of your shares by my calculation is probably like 38%, 39% above your share buyback average Repurchase price. So I'm wondering kind of if you can educate us on your parameters For kind of these open market purchases and at what point do you kind of feel that some of this capital may be Better put to use somewhere else potentially M and A opportunities and stuff like that. So I'm just trying to understand Where do you kind of draw the line and say that it doesn't seem like the best use of capital?
Thanks, Junot.
Obviously, we want to Be cognizant of our intrinsic value and be sure that we believe that it's far in excess of the market price. And we think we've got a lot of room. We're not worried about bumping up against that. If you look at The history of this, it's probably wise for a company to leave a little gap between their intrinsic value and the price at which they're willing It's a purchase because of inefficiencies in the market, but we're not up against that. We're not bumping against it.
We're very happy with The concept and allocation of capital to this activity and we don't think It eclipses other fantastic growth opportunities for the company. If you look over the last 5 years, we have allocated 60% to 65% Of the cash generated by the company to the incredible products that you see coming forth. And whether it's Avengers, whether it's Theme park product, cruise ships, these are the kinds of things that we know we can get high returns on and we'll continue to seek those out. History of our company Has been growth through acquisitions. If you look at the acquisitions we've made from Marvel and Bakkt, Platinum and the others, we feel very, very strong about the returns in We allocate we think enough the right amount of money to invest in our television networks.
The Disney Channel is proof of that. The great some of the great series you see coming out of ABC last year and I hope again this year We'll show that this is the 1st and foremost what we want to do, but it does Leave us the opportunity to return capital to shareholders and we are determined to allocate a sizable portion of the cash we generate to that. If you look Over the last few years, it's been 20% to 25%. No reason to think differently about that.
Okay. That's helpful. Separately, Seems like this year has been off to a great start, given the stats that Bob had given earlier. I'm just kind of trying to reconcile that to the forward pacings that Jay provided. I know it's kind of not the main driver, but I was hoping I was expecting that maybe that could have started to have a little bit more Impact overall on the attendance and the bookings and whatnot.
So if you can maybe break that out a little bit further for us in
terms of How much of
that those forward pacing has actually been driven by this year, which I would expect would be above average in terms of
the numbers you gave? Thanks. Jay gave forward facing on our bookings, which is hotel bookings. As you know, we have 3 hotels at Disneyland Resort I'll compare with many, many more, many, many more rooms in Orlando. So it's relatively small in the scheme of things.
The pacing of bookings For the California Resorts substantially ahead of the pacing for the Florida Resorts, they have substantially more volume. And it's being driven we believe Completely by the investment we made in California Venture. Not that Disneyland isn't still driving attendance, still a very, very high quality experience. And the numbers that we see at California Adventure are extremely impressive. I mentioned 1, which is about 50% of the tenants at Total Resort Is now going to California Adventure up from 25%.
The guest satisfaction level is huge particularly on the major attraction Where I think the people who are riding the primary attraction are 100% intent on riding it again. We have huge satisfaction and higher on merchandise and food and beverage as well and we raised our ticket prices. So it all is very, very good news and bodes well for the future. Thank you. Thanks, Keisha.
And operator, we have time for one more question.
Okay. And our last question comes from the line of John Jannidis with UBS. Please proceed.
Thank you. Bob, you've been a little bit more aggressive on YouTube relative to some of your peers. How do you view that platform over the Over the longer term, is it more of a branding opportunity for you? Or do you see that as having maybe the potential to be a meaningful And if so, how big is that investment over time? We definitely see it as more than a branding opportunity.
So the agreement that we have With them for basically the Disney branded or kids oriented channel is the following. We put Basically YouTube curated by Disney on disney.com that will be even more evident when we relaunch disney.com later this year. And we sell that advertising and then we curate the channel on the YouTube platform And we share that revenue with YouTube. So we think given some of the numbers that we've seen really through The beta that we've launched already that there's an opportunity to increase consumption, increase revenue from that And also use it to drive more users to disney.com and to increase the value as a marketing platform. So It has multiple effects and we have not been specific about the nature of the investment, but it is modest.
Okay. Thanks. And then maybe one for Jay quickly. Jay you talked South America and Europe, has there been a change in length of stay from your international guests? Not appreciable, no.
Thank you. Okay. Okay, thanks John. And thanks again everyone for joining us today. Please note that a reconciliation of non GAAP measures that we're referring 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 conference 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 ks and our other filings with with the Securities and Exchange Commission. This concludes today's call. Thanks everyone for joining us.
Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.