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Disney fiscal net income shoots up by 22 per cent to a record $7.5 billion

MUMBAI: US media conglomerate Disney has reported earnings for its fourth quarter and fiscal year ended 27 September 2014. Revenues for the year increased by eight per cent to a record $48.8 billion. Net income for the year increased by 22 per cent to a record $7.5 billion. EPS for the year increased by 26 per cent to a record $4.26 compared to $3.38 in the prior year.

Segment results were led by the studio division where operating income more than doubled, reflecting strong home entertainment and theatrical performance of ‘Frozen’.

Operating income growth at Media Networks was driven by higher cable and broadcasting affiliate fees, increased ad revenue at ESPN and growth at the A&E Television Networks, partially offset by an increase in programming and production costs at ESPN and ABC. At the Parks and Resorts segment, growth was due to higher average guest spending, attendance and occupancy at the domestic businesses, partially offset by higher costs driven by the continued roll-out of MyMagic+.

The consumer products segment operating income grew due to higher merchandise licensing revenue, resulting from the strength of Frozen and Disney Channel properties, and higher sales at the retail business. Interactive growth was driven by the success of the Disney Infinity console games and the mobile games, Tsum Tsum and Frozen Free Fall.

Disney chairman, CEO Robert A. Iger said, “Our results for Fiscal 2014 were the highest in the Company’s history, marking our fourth consecutive year of record performance. We’re obviously very pleased with this achievement and believe it reflects the extraordinary quality of our content and our unique ability to leverage success across the company to create significant value, as well as our focus on embracing and adapting to emerging consumer trends and technology.”

For the year, the increase in diluted EPS was due to improved performance at all of operating segments, a decrease in the weighted average shares outstanding as a result of the share repurchase programme, and higher investment gains.

Media Networks

Revenues for the fourth quarter increased by five per cent to $5.2 billion, and segment operating income was essentially flat at $1.4 billion. In a conference call, Iger noted that ABC is off to an excellent start this season. “And while other networks have seen ratings trend down significantly, ABC is holding strong and is number one in C3 ratings, excluding sports.

“We are especially pleased that the network’s performance is driven by the success of shows owned by ABC Studios. Once Upon a Time is up 22% year over year in C3 ratings for the key demo. And Scandal, one of the fastest-growing shows last year, is also up this season.

Additionally, ABC has the number one new comedy, Blackish, as well as the number one new drama, ‘How to Get Away with Murder’. At ABC News, ‘Good Morning America’ continues its reign as the number one morning show and ‘World News with David Muir’ is number one in the key news demo.

Cable Networks

Operating income decreased by $10 million to $1.3 billion for the quarter. Lower operating income was driven by a decrease at ESPN and the international Disney Channels, partially offset by an increase at the domestic Disney Channels.

The decrease at ESPN was due to higher programming costs, partially offset by higher affiliate and advertising revenue. The increase in programming costs was driven by contractual rate increases for Major League Baseball, NFL and college football rights, the airing of World Cup soccer and new college football rights.

Higher affiliate revenue reflected increased contractual rates and subscribers, taking into account subscribers for the new SEC Network, while the increase in advertising revenue was due to increased units delivered and higher rates, partially offset by lower ratings. The decrease at the international Disney Channels was driven by higher marketing and programming costs, partially offset by higher affiliate revenue driven by subscriber growth.

The increase in programming costs was driven by a new channel in Germany, which was launched in January 2014. Growth at the domestic Disney Channels was due to lower marketing and programming costs and higher affiliate revenue driven by contractual rate increases. Lower marketing costs reflected decreased affiliate marketing support including the absence of prior-year costs to launch the Watch Disney Channel apps. The decrease in programming costs reflected higher pilot write-offs in the prior-year quarter.

Iger noted that ESPN had locked down an extraordinary portfolio of sports rights well into the next decade, including deals with the NFL, NBA, and Major League Baseball as well as the SEC, ACC, Pac 12 and Big 12. “ESPN will also be home to the College Football Playoffs for the next dozen years, starting with the first ever playoff in January, which is already generating a lot of buzz.”

In terms of the evolving distribution landscape, he noted that the media environment is far too dynamic for anyone to expect the status quo to continue. “We have clearly demonstrated our willingness and ability to be at the forefront of change impacting our industry, driving technology and business models that enhance value to consumers. Given the quality of our content and the strength of our brands, Disney is in a great position to thrive in any distribution environment. The multichannel model provides compelling value to consumers relative to a collection of SVOD and over-the-top services, as evidenced by the fact that there are 101 million multi-channel subscribers in the US today, down only slightly from 101.5 million a year ago.

“Economic factors as well as technical advances and an explosion of entertainment choices drove this relatively small erosion. Consumers in most markets can get a multichannel subscription with more than 150 channels and a wide array of diverse and quality programming for around $65 a month, a much greater value than a do-it-yourself portfolio of standalone options.”

Broadcasting

Operating income at Broadcasting increased $5 million to $163 million for the quarter. The increase in operating income was due to affiliate revenue growth and higher income from programme sales, partially offset by higher primetime programming costs and lower advertising revenue.

Higher affiliate revenues were driven by contractual rate increases and new contractual provisions. Increased operating income from programme sales was due to current year sales of ‘Shark Tank’, ‘America’s Funniest Home Videos’, ‘My Wife and Kids’ and lower costs due to the cancellation of ‘Katie’, partially offset by higher sales of Home Improvement and Grey’s Anatomy in the prior-year quarter. The increase in primetime programming costs was driven by higher programming write-offs and higher cost programming including a contractual rate increase for Modern Family. Lower advertising revenue was due to fewer units sold at ABC.

Studio Entertainment: Revenues for the quarter increased by 18 per cent to $1.8 billion, and segment operating income increased $146 million to $254 million. Higher operating income was driven by increases in worldwide theatrical distribution and worldwide home entertainment. Higher worldwide theatrical distribution results were due to the success of ‘Guardians of the Galaxy’ and ‘Maleficent’ in the current quarter compared to ‘Monsters University’ and ‘The Lone Ranger’ in the prior- year quarter. The increase in worldwide home entertainment was due to higher unit sales, lower per unit costs and higher net effective price resulting from the success of Frozen. Other significant titles included ‘Captain America 2: The Winter Soldier’ in the current quarter and ‘Iron Man 3’ in the prior-year quarter.

Consumer Products

Revenues for the quarter increased by seven per cent to $1.1 billion, and segment operating income increased nine per cent to $379 million. Higher operating income was due to an increase at the merchandise licensing business driven by the performance of ‘Frozen’ and ‘Spider-Man’ merchandise partially offset by lower revenues from Monsters and Iron Man merchandise.

At a conference call Iger said, “Our Studio business has been a tremendous content engine, driving opportunity across the Company. In fiscal 2014, the Studio achieved record operating income and also released four the year’s biggest movies, Frozen, ‘Guardians of the Galaxy’, ‘Maleficent’ and ‘Captain America 2’. Most are franchise drivers and this focus on creating and growing franchises is even more pronounced in our slate of future releases.

“The most obvious example of this strategy is Marvel, which has become a strong brand since our 2009 acquisition. The five Marvel movies we have distributed to date have averaged almost $1 billion in global box office and established two new franchises, The Avengers and Guardians of the Galaxy.

“Marvel has a brilliant team of storytellers with an incredible slate of upcoming movies that create unbelievable potential for our entire Company, starting with the long-awaited Avengers sequel, Age of Ultron, which will be in theaters next May. Ant-Man will open in July, followed by Captain America 3 and Dr. Strange in 2016. And then Guardians of the Galaxy 2, Thor, Ragnarok, and Black Panther in 2017.

“There will also be three Marvel releases the following year — The Avengers, Infinity War Part One as well as Captain Marvel and Inhumans. And in 2019, we will release the second part of The Avengers, Infinity War.

“And on the Star Wars front we announced the name of Episode VII, which is The Force Awakens. And we are looking forward to its release on December 18 of next year. I was on the set in London just before filming wrapped and saw some exciting footage. And so far, everything suggests this will be the movie Star Wars fans around the world have been waiting and hoping for.

“We will follow The Force Awakens with the release of our first of three standalone movies in 2016. Episode VIII will be in theaters the following year and we’ll complete the trilogy with Episode IX in 2019.

“We’ve got a strong slate of upcoming Disney branded movies, including our very first live-action Cinderella, which brings one of our most beloved heritage characters to life in a whole new way for a new generation. We are also looking forward to Into the Woods, Tomorrowland, the Jungle Book, and Alice in Wonderland 2, as well as a new movie from our Pirates of the Caribbean franchise.

“And our animation is stronger than ever as well. In the last four years, we have released seven major animated movies under the Disney and Pixar brands to an average global box office of $750 million, including Frozen, which became the most successful animated movie of all time and a tremendous franchise.

“Our creative momentum continues with Disney Animation’s Big Hero 6. It’s a great movie. Next June, we will release ‘Inside Out’, a truly innovative original movie from Pixar, and we will follow that with three animated features in fiscal 2016 — Pixar’s ‘The Good Dinosaur’ and ‘Finding Dory’, the sequel to Finding Nemo, and Zootopia, from Disney Animation.

“I’m thrilled to announce that John Lasseter will direct another fantastically original Toy Story movie. ‘Toy Story 4’ will be in theaters in June 2017. John created Toy Story and directed its first two films and it’s great to have him back directing one of our most valuable properties.

“As you know, ‘Toy Story 3’ was a tremendous success, generating wide critical acclaim as well as more than $1 billion in global box office and almost $10 billion in retail sales, demonstrating that these wonderful characters are clearly just as relevant and beloved as ever.

“In fiscal 2014, we had 11 franchises drive more than $1 billion each in retail sales and more than half of them originated from our Studio. We are releasing a total of 21 tentpole movies under our great banner brands over the next three years, compared to only 13 in the last three.

“While there is no sure thing in a creative business, we believe the proven appeal of our brands and franchises reduces risk and maximizes our unique ability to create significant long-term value by leveraging successful content across our diverse array of businesses.”

Interactive

Revenues for the quarter decreased by $34 million to $362 million, and segment operating income increased to $18 million driven by the success of the mobile game Tsum Tsum and recognition of a minimum guarantee for a games licensing contract. These increases were partially offset by lower Disney Infinity performance due to the timing of the launch of Disney Infinity 2.0, which was launched on 23 September 2014, compared to Disney Infinity 1.0, which was launched on 18 August 2013.