迪士尼 (DIS) 2002 Q2 法說會逐字稿

Ladies and gentlemen, good afternoon and thank you for standing by.

Welcome to the Pixar Animation Studios second quarter 2002 earnings conference call.

If you should get disconnected at any time during this conference, please dial back at the following toll free number: 800-553-5260.

At this time, all participants are in a listen-only mode.

Later, we will conduct a question-and-answer session and certainly encourage participation at that time.

Should you have a question, simply press the 1 on your touchtone phone.

As a reminder, today's conference is being recorded Thursday, August 8, 2002.

Your speakers for today's call are Steve Jobs, chairman and chief executive officer, and Ann Mather, executive vice president and chief financial officer.

With that being said, I would like to turn the call over to Ann Mather.

Please go ahead.

Thank you.

Welcome to the Pixar conference call for fiscal 2002.

We are pleased to announce revenues for second quarter of 2002 were $22.8 million,net income $10.4 million, diluted earnings per share were 20 cents.

These results compare to revenues of 16.7 million, net income of 8.8 million, and diluted earnings per share of 17 cents reported in second quarter of 2001.

For the first six months of 2002, revenues were 59.9 million, net income 26.1 million and diluted earnings per share were 50 cents.

This compares to first six months of 2001 with revenue of 32.8 million, net income of 17 million and diluted earnings per share of 33 cents. Some revenue for the second quarter of 2002 were 19.2 million, which including 12 million of Monsters, Inc. related revenue, primarily from foreign books of the receipts, merchandise sales and royalties.

Offsetting some of the revenues were advertising expenses related to September 17th launch date of the Monsters, Inc. home video.

As of the end of the second quarter, we have recognized essentially all remaining worldwide theatrical revenues from Monsters, Inc. and the worldwide box office stands at 523 million.

Also included in film revenue was 5.1 million from our library titles and 2.1 million associated with Toy Story 2.

Our second quarter diluted earnings per share of 20 cents exceeded our previous guidance of between 6 cents and 8 cents. The variance between earnings results and guidance provided last quarter was due to combination of factors.

Two cents of upside was due to conservative forecasting.

As you know, predicting box office and related revenues is difficult.

We believe conservative forecasting is prudent. 2 cents was from higher software licensing sales.

We had exceptional quarter with strong international sales. 3 cents was from higher merchandise sales in the second quarter.

The merchandise forecast was based on the average of actual revenue from the last few quarters. 1 cent of EPS upside resulted from favorable adjustment made by Disney for merchandise sale in prior quarters. 2 cents was from Toy Story domestic television sales.

Original timing was for 2003, but brought it forward to this quarter. 1 and a half cents due to Monsters, Inc. home video expenses.

The worldwide upfront advertising cost for the Monsters, Inc. home video were less than originally forecast for the second quarter.

These expenses are expected to be recognized in the third quarter, however.

Lastly, the half cent of upside was due to lower operating expenses.

Some one-time savings give us this unexpected gain. Cash and short-term investments at end of second quarter were approximately 294.3 million, having increased 15.7 million since December 29th, 2001.

This increase was mainly attributable to cash received from Pixar film revenue, from the release of Monsters, Inc.

Software revenues and interest income offset by film production costs.

Capitalized film costs were 99.5 million versus 86.8 million at the end of 2001, reflecting amortization of 10.7 million associated with our films offset by production spending on current film projects.

Balance sheet remains debt free and retained earnings at end of second quarter were 204.5 million.

I would like to begin a discussion of upcoming significant event that could be reflected in results for the remainder of the third quarter, full year 2002 and beyond. Please note these statements, as well as others made in the course of this presentation are forward-looking and it is possible actual results will differ materially.

We refer you to our 2001 form 10-K and first quarter 2002 full 10-Q, particularly the sections on risks from factors that could cause actual results to differ.

In the third quarter of 2002, we expect majority of revenues to consist of Monsters, Inc. worldwide home video sales, merchandising revenues and royalties, as well as potential television, home video and merchandising revenues from our other three films.

Domestic home video release of Monsters, Inc. is scheduled for September 17th, 2002.

Our key international release dates include U.K. on September 7th;

Japan and France on September 20th;

Spain on September 4;

Germany on September 12th and Mexico on September 13th.

We expect to recognize revenues associated with initial shipment of the home video, less customer return reserves in the third quarter of 2002. The home video format being offered are vhs, at suggested price of $24.99 and two disk DVD priced at $29.99.

We expect net unit shipments of Monsters, Inc.

VHS and DVD in third quarter of 2002 to range between 20 to 22 million units with DVD expected to comprise half the number.

Over the film's lifetime, which we estimate approximately 10 years, we expect net unit shipments to potentially exceed 33 to 35 million units.

Given the growing popularity of the DVD format, sales projections of the upcoming Monsters, Inc. home video are expected to trend higher than those of the Toy Story 2 home video released in fall of 2000. However, we anticipate gains to be mitigated by increase in marketing cost.

Forecasting the video sales is not an exact science.

We currently maintain certain return reserves for home video and expense estimates for home video and merchandise that exceed those reported by Disney.

On quarterly basis, we evaluate estimates and adjust them if necessary.

We expect that we may be in a position to make favor believe adjustments to previous adjustments when we receive third quarter information from Disney.

Such, adjustments could contribute 8 to 10 cents per share to third quarter 2002 earnings. (inaudible) which we are today introducing in the range of 68 to 72 cents. Due to our better than expected second quarter results, we are raising our projections for 2002 EPS from previous range of $1.15 to $1.25 to new range of $1.25 to $1.35.

We anticipate our earnings for the second half to be driven by worldwide home video sales.

We expect merchandise revenues and royalties relating to sale of products from Monsters, Inc., as well as other three films to be recognized throughout the year.

Ongoing sales of home video and international rights from other films are expected to contribute to 2002 results.

This guidance is based on assumptions, which include continued software sales, interest income, increased operating expenses and effective tax rate of 40%.

These statements are forward-looking and actual results may differ materially.

Among the factors that could cause 2002 results to differ are the following: timing and amount of worldwide revenue from Monsters, Inc. and the titles in the film library, the timing accuracy and sufficient see of the information we use to determine gross profit, timing and amount of non-film related revenue and expenses, accuracy of assumptions and judgments use to (inaudible) gross profit, the market price of our common stock and related volatility and external economic and political events beyond our control. We are extremely pleased with our results for the second quarter of fiscal 2002 and projections for the year.

The success of Monsters, Inc. greatly compliments our library, strengthening earnings potential and builds upon the (inaudible) Pixar brand.

Now, I will turn over to Steve Jobs.

Thanks.

We are thrilled with the quarter.

I don't have very much to add to what Ann has said.

Pixar is firing on all cylinders right now.

I want to reiterate a few things I have said before.

Strange as it may seem, Pixar is now the most successful animation studio in the world.

The largest players in animation of Disney, DreamWorks and Pixar.

If we look at the most recent four films from each studio and compare their box offices, we find DreamWorks' last four films, Schrek, El Dorado and (inaudible) 0.94 billion dollars.

Disney films Atlantis, The Emporer's New Groove, and Tarzan had a box office of $1.11 billion.

Pixar's four films Monsters, Inc., Toy Story 2, A Bug's Life and Toy Story had $1.73 billion.

If we look at market share among these three biggest players using the cumulative box office from each studio's four most recent animated films so it is not based on one recent hit, Pixar has a 46% worldwide market share, with Disney at 29% and DreamWorks at 25%. Interestingly, DreamWorks and Disney's most recent animated releases will increase Pixar's market share.

DreamWorks's Spirit will gross less than Ants, which it will bump from the most recent four films.

Lilo and Stitch will gross more than Tarzan.

Strange as it seems Pixar is the most successful animation studio in the world, based on the total worldwide box office of each of the three largest studios last four biggest films. Our most recent film, Monsters, Inc., directed by Pete (inaudible) has become the second highest grossing film (inaudible) that stands at 523 million dollars.

Only Disney and Pixar have achieved a $500 million plus box office from animated release.

As Ann said, we are positioned well for the worldwide release of Monsters, Inc. on video this quarter.

DVDs are transforming the video business, providing incremental volume beyond just vhs replacement.

We think Monsters, Inc. video sales will participate in this trend. Also, the Monsters, Inc. video release will be accompanied by the biggest marketing campaign for any Pixar video release to date.

We are thrilled with the marketing campaign around the video.

Now, looking forward to the next three years, Pixar is releasing one film per calendar year.

In 2003, next summer, we have Finding Nemo.

Again, directed by Andrew Stanton and co-directed by Lee Unger.

In 2002, we have The Incredibles, directed by Brad Bird.

In 2005, we have Cars, directed by John Lasseter and Lee Unger.

All three films look to be strong.

We recently completed the first batch of the final footage from Finding Nemo and it looks better than we ever hoped it would.

It is breath taking. Finding Nemo will take viewers into underwater world they have never seen before.

We think they will love it.

We have the first two acts of The Incredibles up on reels and it is off the charts.

I am almost ready to sell them now, it is that good.

Car system coming along nicely.

We are making great progress and our early tests look terrific.

So, we are thrilled with our last three remaining films under our current Disney deal.

As I have said in the past, we will be green lighting the first film beyond our current Disney deal probably before the end of the year. One last note.

The entertainment industry is not immune from the turmoil in American business.

During the past few weeks Bartlesmen have changed CEOs and AOL Time Warner changed their coo.

You have invested in the leader in one of the most lucrative segments of the entertainment industry and invested in a company with the purest and most transparent business.

Pixar is a pure play in just one business, animated feature films and their associated revenue streams with extraordinary simple and transparent business model.

We aim to keep it that way. We have no off-balance sheet entities.

We have prestine capital structure with no debt and $300 million in cash.

We own our facilities free and clear without mortgages.

We have a clean business model in a proven and established industry.

Very conservative accounting practices.

So, I think you can sleep well at night in these areas.

Robber With that, Ann and I will open up for questions. 00:27:23

Thank you.

Ladies and gentlemen, as you just heard, if you have any questions or comments we ask that you queue up at this time.

Press the 1 on your touchtone phone.

Now, you will hear a tone indicating that you have been placed in queue and as a note, remove yourself from the queue by pressing the pound key. Once again, to queue up for a question press the 1 on your touchtone phone and representing Prudential Securities, our first question comes from the line of Cathy Stevonius.

Go ahead.

Ann with respect to variance between actual and guidance, thank you for laying that out for us.

It is very helpful.

I just want to make sure I understand what is not going to be coming back.

Is the favorable expense adjustment which I think you talked about, is that a one quarter event or cycle through several quarters?

And what is your outlook for software licensing sales?

Second question is to the extent that maybe you can talk about qualitatively, can you talk about your expectations for the drivers for '03.

Finding Nemo, release, but talk about your new THQ deal and some of the guidance that company has given with respect to what they think Finding Nemo and other films can do?

Thanks.

Let me answer the first part of the question.

The expense adjustment with respect to Monsters, Inc. (inaudible), those expenses we would expect will be recognized in the third quarter that didn't come through in second quarter. As far as software sales, we do not expect to continue at the rate we saw this quarter.

It was highly exception quarter, as we mentioned.

Strong international sales and we have no indication that is likely to continue.

Both of those points of in guidance for the future year.

Cathy, in terms of next year, clearly next year is about Finding Nemo.

With the release in summer and in terms of theatrical releases and more likely than not, a U.S. video release for the holiday season next year, which will be a first for us in terms of releasing the video in the same year as the film. We also have pay T.V. for Monsters, Inc..

The pay T.V. is opening next year.

Of course, as you mentioned, revenues from other ancillary products, from Finding Nemo in particular in games and toy merchandise.

So, next year is clearly a Finding Nemo year for us.

We are very bullish on that.

Just as a quick follow-up, Steve, THQ thought they could do 80 to 100 million on the deal they had struck with you.

Could you give us a sense whether you are comfortable with that range?

We don't forecast those things.

We will report as we see the results, but it is really - we are not going to be forecasting on that.

Thank you.

And thank you.

Next, to the line of scott babcock from the line of Morgan Stanley.

Hi, Rich Polatty from Morgan Stanley.

Given the build-up in cash, the 294 at the end of the quarter, probably going to get higher.

You are coming to the end where the end is in sight of the deal with Disney.

Could you talk philosophically about a, how much cash needs to sit on the balance sheet to finance full-time doing the films 100% yourself?

What you might think about doing with the remainder of the cash?

I am assuming it doesn't take $300 million in cash reserves to fund a cycle of one film a year.

Yeah, that is a good question.

As you know, we are currently in some stage of production on four films right now.

And so, as you know, these films take approximately four years to make, therefore, if we want to release one a year, we are overlapping these productions.

So, the capital requirements to keep that sort of machine going is more than just one film at a time in a serial fashion.

Secondly, there is marketing of the films.

We don't know what kind of deal we will strike with Disney or someone else to distribute our films.

But, such a deal could involve us funding some or all of the marketing expenses, as well as some or all of the production expenses. I have said many time necessary negotiating a new deal with Disney or someone else, I would like to have a very large bank account behind us with the ability to fund the production and the marketing, if necessary, so that we can strike the best deal for Pixar.

I think having the funds to do both gives us leverage in the negotiations we are going to have.

Okay.

Thanks very much.

Thank you.

Ladies and gentlemen , once again, to ask a question press the 1 on your touchtone phone.

Next, to Jeff Longston with Gerard Klauer Mattison.

Please go ahead.

Thank you.

Terrific quarter.

Ann, congratulations on your addition.

Thank you, Jeff.

Ann, I got cut off, if you could run through the (inaudible) this quarter, I am sure I will get quizzed on it.

You want me to repeat.

It will be in the playback, Jeff, as well.

I will run through it quickly, as well.

I did say 2 cents was due to conservative forecasting and predicting box office and film revenue system difficult.

We believe conservative forecasting is prudent. 2 cents was higher in software licensing sales.

We had exceptional quarter with strong international sales. 3 cents was higher merchandise sales, the merchandise forecast was based on actual revenues from the last four quarters.

It was high this quarter. 1 cent was from favorable expense adjustment made by Disney relating to merchandise sale in prior quarters. 2 cents from Toy Story domestic television sales.

The original timing was for 2003, but it was brought forward this quarter by Disney. 1 and a half cents due to lower home video expenses.

The worldwide up-front advertising costs were less than originally forecast for the second quarter, but expect to recognize those in third quarter.

Half a cent of upside due to lower operating expenses from one-time savings.

That is an unexpected gain.

Thanks.

Steve, give Disney hell, okay.

Thank you for your question.

Next to the line of Robert Ralph with Arnhold (inaudible).

Few quick questions.

Can you give us an update on the status with respect to your negotiations if there are any (inaudible) with the Disney, given after the third film is released, you can discuss with other parties potential opportunities and that may not be that far away.

Second, could you give us a sense of exactly how many home video units were sold for each of the other Pixar films?

I think people would be interested in that given with Monsters, Inc. coming out and how fast sales of that genre are going?

Finally, with respect to Monsters, Inc., how soon do you think it will be before we see a U.S. broadcast deal signed for that and basic cable deal?

What do you think you could get in such transactions?

Take the latter two.

And I will come back.

(inaudible) starting with Toy Story that occurred when home video was at its peak.

It has seen a downturn since 1995.

We sold (inaudible) units.

That is a failed number.

A Bug's Life, we sold 24.3 million units worldwide.

Toy Story 2 we sold total of 23 million units worldwide.

The second question on Monsters, Inc. television, Steve did mention in his response to the driver for next year, we expect a pay cable deal for - we have announced a pay cable deal for Monsters, Inc. already to Star Encore, which is part of the company that did the (inaudible).

We haven't disclosed the amount.

It is in line with industry norms. And for network T.V., we anticipate that we will be hitting the domestic network T.V. window around about November 2004.

That will be through the Disney output deal with ABC.

Again, we will be happy with the revenues that we are getting from that, but have not disclosed them separately.

As far as the Disney relationship goes, let me just say our relationship with Disney remains good.

We have a very strong working relationship with a lot of folks at Disney.

Dick Cook in particular, who is now chairman of the studios, is someone we work closely with and enjoy thoroughly working with.

So, we have a good relationship with Disney and I think we are working productively towards our mutual interest in terms of hopefully seeing a strong Monsters, Inc. video release and of course, we have three more movies after that.

We have the library, as well.

So, there is a lot of projects underway.

I think the relationship is quite constructive. In terms of new agreements, our agreement with Disney says that we have agreed not to enter into any new agreements until Finding Nemo is delivered to Disney, which will be roughly February timeframe next year.

But, I will just say we certainly have received a lot of phone calls from folks wanting to get to know us.

We are happy to learn about other companies and other businesses out there and educate ourselves, but our relationship with Disney does remain good.

So, we have a lot of options.

As I tell our folks all the time, let's just focus on making the best films we can and if we continue to do that, we will have a whole lot of options available when the time comes to make that decision.

Great.

Two follow-ups.

Could you tell us exactly how much of the stock in your company Disney currently owns, including options and the price on those?

And could you give us any sense as to what your estimated internally budgeting in terms of production costs for the remaining films under that agreement?

Repeat again, the last question was production cost.

The budget for production costs excluding pna for remaining films.

We don't disclose amounts.

We have given ranges of 75 to 100 (inaudible) per film.

As far as the Disney ownership, according to 13-D filed October 25th, 2001, Disney owns 1 million 640, 751 shares of Pixar common stock, approximately 3.4% of our outstanding shares.

That was the filing was 2001, October 25th.

We don't have more current information than that.

During the full quarter, Disney surrendered two from 750,000 each by cash exercise in exchange for (inaudible) shares of common stock.

Okay.

Does Disney have any additional warrants to purchase more stocks?

No more additional warrants, no.

Thank you.

Our final question today comes from Allen Casaun with (inaudible) Associates.

Two questions.

First of all, could you discuss the competitive landscape in the animation film market that you see for 2003 against Finding Nemo?

Secondly, are there any new developments in negotiations with Disney for sequels to Toy Story 2 or any of the other pictures under the current Disney agreement?

We are currently - under the current Disney agreement, we have three additional films to deliver.

Those films are all green lit and in production and they are Finding Nemo, The Incredible s and Cars.

None of them is a sequel.

We are not in discussions with Disney to do any sequels to any of our films at this time. In terms of the landscape for 2003, the first thing I would like to say is that 2001 was the strongest year for animation in history at the box office.

It was animation's most successful year to date.

So, the market is very healthy.

And customer demand for animated films is at an all-time high.

There are right now, as you know, three primary studios producing animated releases, Disney, DreamWorks and Pixar.

Fox produced Ice Age, of course, which has been a tremendous success this year.

But, their production output is probably not at the level where they will have a film again for a few more years.

In addition to our films, our film coming out, Finding Nemo, DreamWorks has got a 2-D cell animated film, Sinbad, coming out next year.

Disney has - not in our window.

DreamWorks' Sinbad is in our window for Finding Nemo and that is about it that we know of at this time.

Congratulations on the quarter.

Thank you very much.

With that, I will turn the call back to you for closing remarks.

Thank you very much.

Glad to have you all on the call.

We look forward talking to you again next quarter, when we should have initial early data on the Monsters, Inc. video release sell-through.

Thanks.

Thanks, beg your pardon.

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