迪士尼 (DIS) 2002 Q3 法說會逐字稿

Good afternoon and thank you for standing by.

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

If you should get disconnected at any time during this conference, please dial back at 800-230-1096.

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

Later we will conduct a question-and-answer session, and at that time if you have a question, you will need to press the one on your touch-tone phone.

As a reminder, today's conference is being recorded Monday, November 4, 2002.

With us today, ladies and gentlemen, are Mr. Steve Jobs, Chairman and Chief Executive Officer, as well as Miss Ann Mather, Executive Vice President and Chief Financial Officer.

With that, I would now like to turn the conference over to Ann Mather.

Please go ahead, ma'am.

Thank you.

Welcome to Pixar's conference call for the third quarter of fiscal year 2002.

We are extremely pleased to announce that revenues for the third quarter of 2002 were $102.5 million.

Net income was $46.9 million and diluted earnings per share were 87 cents.

These results compare to revenues of $11.3 million, net income of $6.2 million and diluted earnings per share of 12 cents, reported in the third quarter of 2001.

For the first nine months of 2002, revenues were $162.3 million, net income was $73 million and diluted earnings per share were $1.39.

This compares to the first nine months of 2001 with revenues of $44.1 million, net income of $23.2 million, and diluted earnings per share of 45 cents.

Revenues from film and animation services for the third quarter were $100.5 million which included $78.4 million of "Monster's Inc." related revenues, primarily from worldwide home video sales, merchandise sales and ancillary royalties.

As of the end of the third quarter, we recognized "Monster's Inc." worldwide home video sales of approximately 25.1 million units, as compared to our guidance last quarter of between 20 and 22 million units.

The 25.1 million units recognized this quarter were comprised of 6.2 million VHS units, 9.3 million DVDs in the U.S., and 6.3 million VHS units and 3.3 million DVDs internationally.

Also included in our film revenues were $10.5 million of revenues from our library titles and $11.3 million associated with "Toy Story 2".

As expected, we made certain favorable adjustments to previous reserve and expense estimates which contributed to the home video revenues associated with our film library.

We would like to reiterate that forecasting net video sales and expenses is not an exact science.

We maintain certain return reserves and expense estimates that differ from those reported to us by Disney.

On a quarterly basis we evaluate these estimates and adjust them as necessary.

During the current quarter, with such adjustments increased the net revenues for our library of films and contributed approximately 14 cents to our EPS.

In our last conference call we had estimated that these adjustments could contribute from 8 to 10 cents to EPS.

Our third quarter diluted earnings per share of 87 cents exceed our previous guidance of between 68 cents and 72 cents.

The majority of the variance between our actual earnings results and the guidance provided last quarter was due to the record-breaking launch of the "Monster's Inc." home video.

Also contributing to the variance was greater than expected home video and related merchandise revenues from "A Bug's Life" and "Toy Story 2".

In addition, we recognized software licensing revenues of approximately $2 million during the third quarter of 2002, as compared to $1.5 million recognized in the third quarter of 2001.

Our operating expenses in the third quarter were $4.8 million versus $4.5 in the corresponding period last year, and $13.8 million for the first nine months of 2002 compared with 12.3 million for the first nine months of 2001.

The increase in operating expenses from the previous nine month period primarily reflects higher employee-related expenses associated with additional staffing.

Other income for the third quarter of 2002 was $2.6 million versus $5.1 million in the corresponding prior year, and $7.7 million for the first nine months of 2002 compared with $12 million for the first nine months of 2001.

The decrease in other income was largely due to a one-time nonrecurring settlement of approximately 2 million recognized in the third quarter of 2001 which was unrelated to our core business.

After factoring out this one-time nonrecurring settlement, the remaining decrease in other income for 2002 relative to 2001 is due to declining interest rates in 2002.

Cash in short-term investments were approximately $339.2 million at the end of the third quarter, having increased $60.6 million since December 29, 2001.

This increase was primarily due to cash received from Disney for our share of film revenues, software revenues and interest income as well as proceeds from stock option exercises offset by film production costs.

Capitalized film costs were $88.3 million versus $86.8 million at the end of 2001.

This increase was due to production spending on our current film projects, offset by amortization associated with "Monster's Inc.", "Toy Story 2", and "A Bug's Life".

Our balance sheet remains debt free, and our retained earnings at the end of the third quarter were $251.5 million.

I would now like to begin a discussion of the upcoming significant events that could be reflected in results for the remainder of the full year 2002 and beyond.

Please note that these statements as well as others that may be made in the course of this presentation are forward-looking, and it is possible that actual results will differ materially.

We refer you to our 2001 Form 10-K and second quarter 2002 Form 10-Q, particularly the sections on risks, for important factors that could cause actual results to differ.

We anticipate our earnings for the fourth quarter of 2002 to be driven by worldwide home video sales, merchandise sales and ancillary revenues from all of our film titles, particularly "Monsters, Inc.".

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

As mentioned previously, we estimate worldwide net unit shipments of the "Monster's Inc." home video to potentially exceed 33 to 35 million units over the film's lifetime of approximately ten years.

We expect continued sales of the "Monster's Inc." home video to account for the majority of our revenues during the fourth quarter of 2002 as we enter the holiday shopping season.

Please note that we continue to maintain certain return reserves for "Monster's Inc." home video that may differ from those estimated by Disney.

As mentioned previously, we evaluate these projections on a quarterly basis and adjust them in future periods if necessary.

Given our better than anticipated third quarter performance, we now expect to report diluted earnings per share for 2002 of $1.50 to $1.55, which represents an increase from the guidance we gave last quarter of between $1.25 and $1.35.

Our new guidance reflects the variance to our third quarter earnings per share as well as our increased assumptions for the fourth quarter.

Our revised assumptions are based on the continued strength of worldwide home video and merchandise sales relating to all Pixar film products, particularly "Monster's Inc.".

Looking ahead, we estimate that our earnings for the first half of 2003 will be derived primarily from continued home video sales, merchandise revenues and worldwide television licensing from our film library, particularly from "Monster's Inc.".

For the later half of 2003, we expect our earnings per share will be driven by "Finding Nemo's" worldwide box office release.

We will provide EPS guidance for 2003 at next quarter's conference call.

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

Among the factors that could cause projected 2002 and 2003 results to differ are the following: the timing and amount of worldwide revenues and distribution costs from "Monsters, Inc.", "Finding Nemo", and other titles in our film library; the timing, accuracy and sufficiency of the information we receive from Disney to determine revenues and associated gross profits; the timing and amount of nonfilm related revenues and expenses; the accuracy of assumptions and judgments used to estimate certain revenues and associated gross profits; the market price of our common stock and related volatility; and external economic and political events that are beyond our control.

The third quarter of fiscal year 2002 reflects the strength of "Monster's Inc." home video sales supplemented by continuing healthy revenues from our previous titles.

We will continue to focus on producing exceptional films and look forward to "Finding Nemo" as a key revenue driver for 2002.

For more on "Finding Nemo" and other developments at Pixar, let me now turn the discussion over to Steve Jobs.

Thank you, Ann.

We are thrilled to report the most profitable quarter in Pixar's history.

While this is very satisfying financially, on a deeper level, it reflects something even more satisfying: that the business model we set in motion several years ago is working very, very well.

At the heart of this business model is a singular focus on creating extraordinary featured animated films that can capture the hearts of audiences, including kids, teens, parents and grandparents, around the world, generation after generation.

We have resisted many temptations to branch out into other businesses and remain focused on the core business we love, feature animated films.

As we have said many times in the past ,our first goal is to make the best films we know how to make, because if our films resonate with audience, they will renew themselves with each generation of viewers and, as a result, will maximize the revenues and profits for Pixar in the long run.

We have achieved this goal with each of our studio's first four films, "Toy Story", "A Bug's Life", "Toy Story 2", and "Monster's Inc.", and you can see the financial impact of this in our growing film library earnings.

Remember, it's been only 7 years since we released our first film, "Toy Story", in 1995.

Imagine what the earnings power of our library will be in another seven years.

Our second goal is to increase our output from today's rate of one picture every 18 months to one picture every year, while maintaining the quality of our films in every respect, and we are getting ready to make is jump soon.

We currently have three films in production and plan to release one each year during the next three years.

First up is "Finding Nemo", which will be released on May 30, 2003, our studio's first summer release. "Finding Nemo" is directed by Andrew Stanton, the co-director of "A Bug's Life" and co-directed by Lee Unkrich, the very talented co-directer of "Monsters, Inc.".

Andrew has worked with John Lasseter for over ten years, and "Finding Nemo" will join "Monster's Inc." in the growing number of Pixar films directed by John's proteges.

"Finding Nemo" is the most visually stunning film our studio has ever created.

The result of our superb research group working in conjunction with the production team, the underwater scenes are just breathtaking and will likely set the new high bar for computer animation for years to come, or at least until Pixar raises it again.

Rather than tell you about "Finding Nemo", you can see a bit of it for yourself.

We released our first trailer last Thursday, and you can see it in theaters or on the web at findingnemo.com, apple.com or several other Internet sites.

The early reviews of the trailer are very strong.

We recently had a test screening of "Finding Nemo", which of course is far from finished and therefore contains a lot of storyboards, scratch music and the like.

I'm pleased to report it tested the highest of any Pixar film to date.

Now, I don't put too much stock in these testing results.

It's the audiences watching the finished film that count, but these results tell us that we're on the right track and we don't have that long to wait. "Finding Nemo's" May 30 release department is less than seven months for today.

For 2004, we have "The Incredibles", directed by Brad Bird, the director of the acclaimed "Iron Giant".

As you may know, "The Incredibles" is our studio's first film with humans as main characters, not just one or two, but lots and lots of humans.

Our research group has been working overtime to come up with some amazing breakthroughs.

We think people will be impressed.

But beyond the amazing technology and animation, the story of "The Incredibles" is just flat-out terrific.

Brad and his team are charting some new territory for animation, and the recent stuff I've seen is off the charts.

I can't wait to show off some of this material, and we plan to do just that when we release a trailer for "The Incredibles" with "Finding Nemo" this coming May.

For 2005, we have "Cars", the fourth film directed by John Lasseter.

I have never seen John so excited about a film before, and he has good reason to be.

The story for "Cars" is possibly our best story to date.

But let's save more on "Cars" for 2003.

One last comment.

It appears that Pixar may join the NASDAQ 100, that is the 100 companies with the highest market caps on NASDAQ.

While the rules are a bit complicated, preliminary calculations show that Pixar has a decent chance of making it onto the list this year.

If we do, then a number of index funds will be buying Pixar stock, many for the first time.

If we make it, we look forward to welcoming some new shareholders into the Pixar family.

So, thank you.

And now Ann and I would like to answer any questions you may have for us.

Certainly.

Thank you, Mr. Jobs.

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

Just press the one on your phone keypad.

You will hear a tone indicating you have been placed in queue.

Just as a note, you may remove yourself from the queue by pressing the pound key.

Once again, to queue up for a question, press the one on your touch tone.

One moment please for the first question.

Representing Prudential Securities, our first question comes from the line of Kathy Styponias.

Please go ahead, ma'am.

Hi.

Thanks.

Great quarter, guys.

Regarding the home video release of Nemo, Ann, you said in the second half of '03, you expect the domestic video release of Nemo to basically help drive earnings.

Does that mean we can expect the international sales to basically go over into '04 in which case does that potentially create a tough comparison for you.

Second question with respect to reserves, given how incredibly successful your home video, DVD sales were for Monsters this quarter, I presume you took a reserve this quarter for sales you shipped out in the September quarter, how soon before you reverse those reserves, can we see them reverse as early as the fourth quarter or is that something thats going to be potentially a driver of earnings in '03?

Hello, Kathy.

We monitor our reserves on a quarter by quarter basis so we will make changes to reserves whenever we think it's appropriate.

We -- at the moment we are not anticipating making any reversals, but we'll just monitor depending on sales sold through versus sales shipped, but we look always at our historical rates and really move forward with them using those as our guide.

But I can't predict when we change reserves.

If I could do that, we'd probably have changed reserves already.

It's an unusual situation.

As far as the home video release of "Finding Nemo", it's true we will be expecting that to be internationally in 2004, but for the third and fourth quarters of 2003, we will be expecting to see the international results of "Finding Nemo".

Theatrically.

Sorry, the international theatrical results.

Historically we've had those in the January, February, March time frame.

With "Finding Nemo" we are happy to have them in what is usually a stronger playing period overseas, particularly in Europe of October, November, December.

Thanks.

Thanks.

Thank you, Miss Styponias.

Next we go to the line of Andrew Slavin with Merrill Lynch.

Please go ahead.

Thanks very much.

Quick question.

In the past few quarters, you have talked about a movie you have green lit beyond "Cars", which is I believe you said the first movie it's been 100% financed by Pixar.

Assuming that you don't distribute that by yourself, or at least all windows by yourself, at what point do you need to bring in a partner or give a partner enough lead time so they'd be capable of working with you for a distribution following "Cars"?

Let me take that one.

We have actually said we will be green lighting the first film beyond the current Disney deal soon.

We haven't green lit it yet, but we'll let you know when we do.

In general, we would certainly, if we were going to distribute that film with a partner, which is very likely, we would want to have the partner identified and on board with such a film at least 18 months before the film was scheduled to be released.

Thanks very much.

Thank you, Mr. Slavin.

Next we go to the line of Jeff Logsdon with Gerard Klauer, please go ahead.

Great quarter.

Ann, on the balance sheet, cash ran up to $339 million and receivables jumped fairly significantly.

Can you give us some guidance on how much of the receivables could theoretically be turned into cash by year end?

We would hope that a large part of the receivables would be turned into cash by year end.

It's obviously reflects the strength of our home video sales.

We do have this pesky little thing called taxes.

A nice position to be in for most entertainment companies?

Yeah.

But, yeah, no, we certainly hope with the exception of -- yeah.

It's obviously dependent on the timing of our revenue flows from Disney as well.

That said, we would hope a reasonable portion would come by year end.

Secondly, could you all discuss any of the television deals that have been signed this past quarter that will generate revenue over the past few quarters?

Nothing of any great substance, Jeff.

There might have been a couple of small territories, but nothing material.

Great, thank you.

Terrific quarter.

Thank you.

And thank you, Mr. Logsdon.

Representing Sanders Morris, Harrison, lets go to David Miller for our next question.

Please go ahead.

Guys, congratulations.

Couple questions.

Ann, was wondering if you could break out sales on Monster's on DVD by country if you have it.

I know it hit the retail channel in all the obvious European counties as well as Japan throughout September, and also I'm sure both Steve and Ann, I'm sure you read the article in yesterday's "Los Angeles Times" concerning your relationship with Disney.

One aspect of your relationship which was not mentioned was the fact that Disney is the only vertically integrated company with a branded store operation.

Wouldn't it be fair to say Disney stores provide a viable outlet for Pixar merchandise and the potential loss of that enters into your thinking when you guys decide to sit down for possible renegotiation next spring?

Thanks a lot.

As far as the country breakdown goes, it's -- I'm afraid I can't go into a lot of detail, but we can certainly point you in the right direction to find the data that's available.

No problem.

And let me take the second half of your question.

There's been a lot of articles lately about Disney and some mentioning us.

My favorite was actually one today by Laura Olson of the "New York Times" who mentioned, " Pixar Animation Studios, a film company in Silicon Valley which has a partnership with Disney to make and market movies, has become the preeminent animator in the industry, with hits like "Monsters, Inc.", "Toy Story", and "A Bug's Life".

That's my favorite one.

The "L.A.

Times" article, we have seen that, again we have a good relationship with Disney.

We work with Tom Schumacher who runs feature animation, Dick Cook who is the chairman of Walt Disney studios, and we have a very good working relationship with these folks, so I don't exactly know what comment to make.

As far as the stores go, the Disney stores are not a particularly material percentage of our revenues, so that would not factor into our thinking process very much.

The kinds of things that will factor into our thinking process are the fact we do have a solid relationship with Disney and enjoy working with the folks I mentioned very much, and we think Disney is a strong company with a lot of assets, so...

That's what we would look at.

Fair enough.

Thanks very much.

Thank you, Mr. Miller.

Ladies and gentlemen, once again to ask a question, just press the one on your touch tone phone and now a question from Robert Ralph with Arnhold and S. Bleichroeder.

Please go ahead.

Yes, good afternoon.

A few quick questions.

First, I was wondering if you could comment on Disney's decision to form this Vanguard entity that's going to release an animated product.

It seems is as though you'll make a decision regarding a partner before they're ever going to get a movie out under that banner.

I'm curious as to how you view that, if you stay with Disney or choose not to, given if you stay with them, they're going with another animation-type house that could compete and cannibalize your product.

Second, I'm wondering if given where your stock has gone, whether you'd consider splitting to it increase the liquidity in the name and have you done any calculations to determine if it is added to the NASDAQ 100, how many shares at this price would need to be bought?

We haven't done any calculations, and we look at our stock price today and compare it with Warren Buffet's Berkshire Hathaway and think it's plenty low enough.

We don't have any plans to split our stock.

And the first question about Vanguard, Disney, we're not -- we haven't been fully briefed on that deal.

What we have read is what you have read.

They've entered into a deal with a person that in title was one of the producers of Shrek but in practice was maybe a little different, and they're hoping to produce some computer animated films.

To the best of our knowledge the principals have never produced a film before, but we wish them all the luck in the world.

As you may know, in our business, it's not a zero sum game.

If Shrek did well as it did last year, we don't think it hurt "Monster's Inc.".

Some would say it helped "Monster's Inc.", and if "Monster's Inc." -- if Shrek did poorly, had done poorly, we don't think it would have helped "Monster's Inc.".

Unless these films come out on top of each other, it's not a zero sum game.

Our real competition is can we make a film that audiences want to go see, hopefully more than once.

And you unfortunately or fortunately that's probably not going to be too influenced by what our competitors do.

We wish them all the luck in the world in making their films and we doubt if that will impact us too much.

Great.

And one follow-up, you mentioned that in '03 revenues will be driven by not only Nemo, but home video.

Were you implying that Nemo will be released in time for the holiday season on home video in 2003 or speaking more about the library product?

We are expecting to it be released in time -- I'm sorry.

Thank you very much.

Domestically, I must stress that.

Domestically in time for the holiday season.

Thank you.

Thank you.

Thank you, Mr. Ralph.

S.G.

Cowen's Lowell Singer has the next question.

Please go ahead.

Steve, question on the whole Disney partnership.

One of the issues I'm sure you think through is the fact that they do control the sequel rights on all the films made on the original deal.

How do you think through that issue when you contemplate the scenario of potentially going with another partner?

I must stress for you and all of you again what I tell all the folks at Pixar is that we have plenty of time to worry about future deals.

We got three more films to deliver.

While they are all green lit and in production, we still have a little bit of time.

The most important thing we need to do is focus on our films and make sure they're the best we can possibly make them.

If our films continue to do anywhere near as well as our first four have, we'll be in a pretty strong bargaining position.

So that said, Disney does have the rights to make sequels from our first films or films under this agreement if we choose not to, but we think that that would prove technically difficult and would also signal a pretty embarrassing situation for them creatively to have to be making sequels to Pixar movies rather than coming up with their own original ideas.

That might be a very sad day for the Walt Disney company.

I doubt -- who knows what they'll do?

But we're really focused on our own films.

We have certainly demonstrated the ability to come up with original new films like "Monster's Inc." that have even surpassed sequels like "Toy Story 2" at the box office.

So we are not terribly concerned about that, and when we begin a new deal with Disney or somebody else, we will very likely own our own films and will be more concerned about making sequels to those films that we own completely.

Thanks.

And thank you, Mr. Singer.

Next we'll go to the line of Alan Kasan with Kexton and Associates, please go ahead.

Two questions if I may.

One is for Ann.

Could you go over capitalized film costs, exactly what that entails and when -- when you amortize as opposed capitalize.

Is it on release of the theatrical film or whatever.

Second question is in terms of the DVD market, what is the upside potential, if we look out two or three years when DVD is more fully penetrated, what do you think the unit sales of a comparable box office film to Monster's could be?

Okay.

Hi, Alan.

I'll address, first of all, your questions on capitalized film costs.

We capitalize all of our expenditure on films as we go through the production process.

We don't amortize until the film is released.

We then amortize in proportion to the revenues that we are earning as a percentage of the total lifetime revenues that we estimate the film will make.

So when you have a film like Monster's, which is I guess in some respects, exceeded expectations, have you basically now fully amortized all the costs off, or are there --?

No, we change our estimates each quarter so although it's exceeded all expectations, as we go along quarter by quarter, we adjust our lifetime revenue projections.

Right so are the margins on the remaining home video sales going to be higher than the ones thus far?

That's the point I'm trying to make?

Our margins, yes, should be slowly improving, assuming that we exceed in a way that we have been doing so far, yes.

The goal is to try to be accurate at every step of the way.

We do the best we can.

As far as --

The last part of the question was home video -- DVD sales in a couple years time.

We have no way of projecting this.

Right now, of course, Hollywood is benefitting from people when they buy their DVD player, many of them don't toss their VHS player, they move it to another room in the house, so the DVD market is not 100% replacement market for VHS and Hollywood is enjoying the total of both of those, and as that second -- as that VHS unit is replaced with a second DVD player or third DVD player, we don't yet know what the buying patterns for DVDs will be.

However, as we see more and more portable computers capable of playing DVDs and more and more portable DVDs players of all kinds on the market, we are encouraged.

So we'll have to wait and see what the buying patterns are when the DVD penetration gets even higher and gets into the second and possibly greater number of DVD players per household.

Did you have any follow-ups?

Sure.

Just out of curiosity, on your screen -- research screening of "Finding Nemo", was that internal or --

No, that was with an audience externally.

Recruited audience.

Thank you.

Thanks.

Thank you, sir.

Ladies and gentlemen, our final question today is a follow-up question once again, Jeff Logsdon with Gerard Klauer, please go ahead.

At the risk of taking my life into my hands again, if I could ask a question about Disney.

There's been press reports that perhaps Tom Schumacher would be leaving, some affirmation of discussions of him perhaps going -- going to their Broadway show business.

How might that change your relationship with Disney, if at all?

Well, we love working with Tom Schumacher, and we don't know anything beyond what you've read in the press.

All we can say is Pixar will be fine if Tom moves on, but we certainly love working with him and certainly hope we get a chance to do that as long as possible.

Great, thank you.

Thank you, Mr. Logsdon.

With that, Mr. Jobs and Miss Mather, I'll turn the call back to you.

Thank you for being on the call.

We'll see you next quarter.

Ladies and gentlemen, your host is making today's conference available for digitized replay for three days starting at 8:30 p.m.

Eastern Standard Time November 4 through 11:59 p.m.

November 7.

Please access AT&T's executive replay service by dialing 800-475-6701.

At the voice prompt enter today's conference ID of 658042 and that does conclude this earnings release for this quarter.

Thank you very much for your participation as well as for using AT&T's executive teleconference service.

You may now disconnect.