迪士尼 (DIS) 2002 Q4 法說會逐字稿

Thank you for standing by.

Welcome to the Pixar animation studios fourth quarter 2002 earnings conference call.

If you get disconnected at any time during this conference, please dial back at 888-423-3280.

At this time all participants in a listen-only mode, later we will conduct a question-and-answer session.

At that time, if you have a question, you'll need to press the 1 on your telephone.

As a reminder, today's conference is being recorded Thursday February 6, 2003.

Your speakers for today's call are Steven Jobs, chairman and Chief Executive Officer and Ann Mather, executive vice president and Chief Financial Officer.

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

Please go ahead.

Thank you.

Welcome to Pixar's fourth quarter and fiscal year 2002 conference call.

We are delighted to announce that revenues for the fourth quarter 2002 were $39.4 million, net income was $17 million and diluted earnings per share was 31 cents.

These results compare to revenues of $26.1 million, net income of $13 million, and diluted earnings per share of 25 cents achieved in the fourth quarter 2001.

Full year 2002 revenues were a record $201.7 million, net income was a record $90 million and diluted earnings per share were a record $1.68.

This exceeded previous guidance of between $1.50 and $1.55 for the year and compared to full year 2001 revenues of $70.2 million.

Net income of $36.2 million, and diluted earnings per share of 71 cents.

Revenues from film and animation services for the fourth quarter were $37.9 million, which included $25.1 million of Monsters, Inc. related revenues derived primarily from worldwide home video sales as along with some merchandise sales, domestic pay-per-view revenues and ancillary royalties.

As of the end of the fourth quarter we had recognized Monsters Inc. worldwide home video sales of approximately 34.4 million units; comprised of 8.6 million VHS, and 11.4 million in DVD’s in the U.S. and 6.7 million VHS units and 3.7 million DVDs internationally.

Also included in our film and animation services revenue for the fourth quarter were $12.6 million of revenues from our library titles.

These were derived from international television licensing, worldwide home video, merchandise sales and ancillary royalties.

Starting with the fourth quarter 2002, we have classified Toy Story 2-related revenues as part of our library titles in accordance with SOP-002.

In addition to film and animation services, we recognize revenues from software licensing of approximately $1.5 million, which was consistent with previous quarters as well as the prior year period.

For the full year 2002, our results can be attributed primarily to the extraordinary success of Monsters, Inc, which generated $141.5 million of revenues across all categories.

In addition, our library titles generated roughly $50.1 million from television licensing, home video sales, merchandise and ancillary royalties.

Our full year diluted earnings per share of $1.68 exceeded our previous guidance of between $1.50 and $1.55.

The majority of the variance between our actual earnings results and the guidance provided last quarter was due to greater than expected home video revenues from Monsters Inc., as well as our library titles.

Operating expenses were $5.7 million for the fourth quarter, and $19.5 million for the full year of 2002.

Compared with $4.1 million and $16.4 million respectively for the same periods in 2001.

The increase in operating expenses over the prior year period was due to increased employee related costs for both R&D and G&A, as well as certain one time settlement payments paid in the fourth quarter of 2002.

Other income for the fourth quarter and full year of 2002 was $2.7 million and $10.3 million respectively, as compared to $2.7 million and $14.7 million recognized in the fourth quarter and full year of 2001.

Our balance sheet continued to strengthen in 2002.

Cash and short-term investments stood at $339.1 million by the end of the fourth quarter, having increased $60.5 million since December 29th, 2001.

The increase was primarily due to cash received from Disney for our share of film revenues, higher than expected proceeds from stock option exercises, software revenues, and interest income offset by film production costs, tax payments and capital spending on our Emeryville property.

Capitalized film costs were $92.1 million versus $86.8 million at the end of 2001.

Reflecting amortization of $39.4 million associated with our films.

Offset by production spending on our current film projects.

Our current cash and short-term investments along with no long-term debt gives us tremendous flexibility in financing our future films.

I would now like to begin a discussion of the upcoming significant events that could be reflected in results for the remainder of the first quarter, as well as introduce our initial thoughts on full year 2003 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 from these statements.

Refer to our 2001 form 10-K, and 2002 third quarter form 10-Q, particularly the sections on risk for important factors that could cause actual results to differ.

We expect revenues in the first quarter of 2003 to primarily consist of worldwide television licensing, home video sales, merchandising revenues, and ancillary royalties from our four films.

In particular, Monsters Inc. should make its pay television debut on Starz Encore in March, marking the first time in history that a Pixar title will be licensed to a premium cable net network.

The pay TV window for Monsters Inc. will extend throughout 2003, therefore we would not anticipate any domestic network television revenues from Monsters, Inc. until 2004.

As a result, we expect to report diluted earnings per share of between 7 and 10 cents for the first quarter of 2003.

Our financial results for the remainder of 2003 will depend primarily on the success of our studios studio's fifth feature film, Finding Nemo, and are therefore very difficult to estimate before its release on May 30.

However, if the performance of Finding Nemo resembles that of Monsters, Inc., then financially, 2003 should be comparable to 2002 with a few adjustments.

First, in 2002, we benefited from 19 cents per share in one-time adjustments to a Bug's Life and Toy Story 2, home video reserves and margins, and merchandise revenues.

Which will not be repeated in 2003.

Second, current stock prices, we expect our fully diluted share count to increase in 2003.

With an estimated impact of 10 cents per diluted share.

Subtracting this 29 cents from the $1.68 earned in 2002, results in a 2003 estimate of $1.39 per share.

Assuming Finding Nemo’s performance resembles that of Monsters Inc.

I would remind you that Monsters, Inc. is the second most successful animated film of all time with a worldwide box office of $524 million.

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

Among the factors that could cause projected 2003 results to differ are the following; the timing and amount of worldwide revenues and distribution costs from Finding Nemo, Monsters, Inc. and the 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 profits, the timing and amount of non-film rated revenues and expenses, the accuracy of assumptions and judgments used to estimate certain reserves and associated gross profits, the market price of our common stock and related volatility, potential delays in the release dates of our films, and external economic and political events that are beyond our control.

2002 has been Pixar's most profitable year to date.

Demonstrating the earnings potential of the company with each successful film release in an ever growing library.

Moreover, these results reflect our current co-production agreement with Disney.

Under which Pixar pays a distribution fee and realizes only 50% of the remaining profits.

With our obligations under this arrangement set to expire on delivery of cause in 2005, we look forward to the significant positive impact on earnings that could result from Pixar retaining 100% ownership of its films in 2006 and beyond.

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

Steve?

Thank you, Ann.

We are thrilled to cap the most successful year in Pixar's history.

With revenues over $200 million and net income of $90 million.

This is entirely due to the talents, commitment, determination and hard work of the people at Pixar, all 700 of them.

And also, to the talents and hard work by the marketing and distribution teams at Disney.

These results demonstrate the power of the business model we set in motion several years ago, with its singular focus on creating extraordinary feature animated films.

We are also enjoying the benefits of being this era’s most successful animation studio, having a dramatically higher total worldwide box office for our last four films than either Disney or DreamWorks.

But as Walt Disney himself said many times, we're only as good as our next picture.

Which brings us to our studio's next and fifth feature film, Finding Nemo, directed by Andrew Stanton, the co-director of A Bug's Life, co-directed by Lee Unkridge, the talented co-director of Monsters, Inc. and produced by Gram Walters.

This will be the second film in a row, after Monsters Inc., directed by one of John Lasseter's protégés and executive produced by John.

Finding Nemo is due to hit theaters on May 30th, less than four months from today, and it is almost complete.

I will say that it may be the best film our studio has produced to date.

The story is funny and very heart warming, and it is clearly the most visually stunning animated film ever created.

It is jaw-dropping.

We have high hopes for Finding Nemo at the box office.

But, like Monsters, Inc., released shortly after September 11th, Finding Nemo may be released in a less than perfect environment.

Disney and Pixar have put together a fantastic marketing campaign for Finding Nemo, which will be larger and more comprehensive than for any Pixar film to date, and will be Disney's biggest release campaign ever.

And because Finding Nemo is a summer release domestically, a first for a Pixar film, it will be released in Europe this holiday season, which is far more favorable than the spring release dates which we have had with our films so far.

As well as the domestic home video release this holiday season season.

It's going to be a jam-packed year and we're ready for it.

Nothing new to report for the Incredibles and Cars, both projects are coming along quite nicely with early animation on the Incredibles looking incredible.

Like nothing anyone has ever seen before.

You'll be able to see a glimpse of it yourself when we release a teaser trailer for the Incredibles, with Finding Nemo’s theatrical release on the 30th.

I guess the biggest news beyond Finding Nemo is we've recently green lighted our first film beyond our current Disney deal.

It's a wonderful story idea that is very Pixar and very exciting.

We expect to green light our second film beyond our current Disney deal sometime later this year.

So we're beginning to build our pipeline of films for 2006 and beyond.

It is also appropriate to mention that we are having discussions with several major studios about our future.

This is very interesting and we are learning a lot.

It is also very gratifying that all of them are interested in doing business with us.

While our first choice remains to continue our relationship with Disney, in a new form, this is far from certain at this point.

But whether we continue our relationship with Disney or not, our current seven-picture deal has been one of the most successful partnerships in Hollywood's history.

With $361 million of cash, no long-term debt, and the most talented team in animation, Pixar has tremendous flexibility, promise, and ambition as we look to our future.

Thank you, and now Ann and I would like to answer any questions that you may have.

Ladies and gentlemen, if you would like to ask a question, please press the 1 on your Touch-Tone phone.

Ms. Mather, did you have additional instructions?

No, I don't believe so.

That's fine.

Very good.

And ladies and gentlemen, as a reminder, you will hear a tone indicating you have been placed in queue.

You may remove yourself from the queue by pressing the pound key.

If you are using a speaker phone, please pick up your handset before pressing the numbers.

One moment please for our first question.

Our first question is from the line of Katherine Styponias (ph) with Prudential securities.

Please go ahead.

Hi, thanks.

A couple of questions for you, Ann.

With respect to the video units that you recognized for Monsters, $30.6 million, two questions there.

Did you recognize the first -- the full $30.6, or is there some reserve that's taken against those?

And then second, given the phenomenal success, the number of units you've sold, could we anticipate that the 35 million lifetime units that you expected for sale -- to sell for Monsters is actually a little bit light, thank you.

Yes, we do have a return reserve against those sales.

So there's certainly reserve against them.

You know, we may readdress our lifetime estimate of 35 million.

As you said, it's a very high sales volume.

We are going to see how numbers progress through the year, now that we've passed the initial release, and we will update you as we change any lifetime estimates.

Just one quick follow-up, Ann, given you've taken reserves against the units this year, does that $1.39 assume there's some reversal of those reserves next year?

Thanks.

There's no assumption of any reversal of reserves in the $1.39.

Thank you.

Thank you.

Thank you for your question.

Our next question comes from the line of Lowell Singer with SG Cowen.

Please go ahead.

Thanks, I have a question for Ann and then for Steve.

Ann, can you talk about -- you gave guidance for next year, and it's not really apples to apples with regard to the flow of events that you had in 2002 for Monsters.

You obviously have the domestic and international theatrical releases plus at least six weeks of home video next year.

So I wonder if you could talk about the deviation year on year and how that impacts the guidance.

And Steve, you started to address the discussions you're having.

What are the odds that something happens prior to Nemo’s release, and how do you think about the pros and cons of doing it before Nemo’s release as opposed to after?

Lowell, you're right, they're not apples to apples.

We feel that they're somewhat comparable in the 2002, not to have the domestic theatrical release of Monsters Inc. but did have much of the international theatrical release and much of the domestic and international home video release. 2003, while it will have the domestic theatrical release, and the domestic home video release, and the international theatrical release, it will not have the international home video release.

So sort of saying that to a certain extent as much as these things can be predicted, one could use the domestic theatrical to offset the international home video.

Does that make sense?

Yep.

Great.

And as far as any new deals go, you know, I think we have the luxury of taking our time and doing the right thing, the best thing for our company.

So we're in no rush to do anything.

And feel that we have the time it takes to do the right job.

In evaluating the opportunities we're going to have.

Okay, thanks.

Our next question is from the line of David Miller with Sanders Morris Harris, please go ahead.

Yes, thanks.

Congratulations, guys.

Ann, on the actual diluted per share earnings number of 31 cents, how much of that would you say is attributable to just conservative forecasting versus, you know, actual, real merchandise sales of Monsters that you realize in the DVD sale through window during the quarter and then I have a follow-up.

Thanks.

Yeah, I'd say that there really isn't conservative forecasting in there.

We did experience in the quarter an adjustment from Disney of 3 cents to Toy Story 2 and A Bug's Life home video.

That had nothing to do with our forecasting.

That was really just a readjustment of Disney on the numbers that they had previously accounted to us for.

So there's zero from any change in reserves or forecasts this quarter.

Okay.

Okay.

And then also, it just looking at the model here, roughly, in 2002, it looks like operating margins were around, you know, obviously a pretty stellar 79.4%, in `01 they were 82.5%.

Would you say the basis points difference is just what you talked about with regard to higher SG&A or was it more attributable to your share of, you know, the what you put into P and A cost?

Because 2001, the bulk of the revenues came from Toy Story 2 and A Bug's Life, which because they're further along in the release cycle than Monsters Inc., they generally have more favorable profit margins.

Monsters, Inc. 2002 being the first year of Monsters Inc. has higher cost, higher rate of amortization.

Right, right.

Okay, great, thanks very much.

Okay, thank you, David.

Our next question is from the line of Andrew Slavin (ph) from Merrill Lynch.

Please go ahead.

Hi, thanks very much.

I had a quick question on sequels, and correct me if I'm wrong but it's our understanding that Disney controls the rights to the sequels of movies on your output deal.

Assuming they were to make or decide to make a movie either Monsters 2 or Toy Story 3 or A Bug's Life 2, et cetera, who has the control of the technology?

Does Disney have to start from scratch or do they have access to your software, and animation, thanks.

Disney has the right to decide to make a sequel to the films under our current deal and if they choose to, they have to come to us and give us the first right to make a sequel.

But if we decline they can make it on their own.

Under our agreements with Disney they have no rights to any of our technology and no rights to any of our data.

And so they would, if they chose to make a sequel and if we chose to pass, they would have to start from scratch.

And create or acquire the software necessary to make these kinds of films, and build the models and pretty much do everything we do.

Great, thanks.

Uh-huh.

Ladies and gentlemen, as a reminder, if you do have a question, you may press the 1 on your Touch-Tone phone.

If you're using a speaker phone, please pick up your handset before pressing the numbers.

Our next question is from the line of Jeff Logsdon with Gerard Klauer Mattison; please go ahead.

Great quarter, Steve.

Ann, you bring a whole new dimension to results may differ materially.

It's always on the upside.

Relative to, you know, in the fourth quarter home video sales of some of your library product, those numbers would not have been recognized in you're fourth quarter earnings, would they?

Home video sales of our library products, where there are home video sales of our library product they would be recognized in our fourth quarter earnings, yes.

So Disney’s already given you sales figures for what may have been done on DVD and some of your previous titles and that was included in your numbers?

Yes, absolutely, yeah.

Okay.

Then in the fourth quarter, your higher G&A number, does that relate to stock option expenses?

A small part of it, does yes, a portion of it does.

And for modeling purposes going forward, should we assume we're going to be on a $3 million a quarter run rate?

You know, I wouldn't draw any assumptions from this quarter.

Okay.

Great, thank you.

Thank you.

Our next question is from the line of Dennis McAlpine with McAlpine associates.

Please go ahead.

Yes, thank you.

Ann, could you talk about the relationship of the increase in number of shares versus the stock price, what the variable is on that?

And then in regard to Finding Nemo, can you discuss when that is officially delivered and what you feel at this point about a window of working with Disney on doing the deal either before or after Nemo as opposed to waiting for the end of the fourth picture?

With respect to the first part of the question, the impacts of share price on the earnings per share number, we do compute the Black-Scholl’s model with respect to forecasting our diluted -- with respect to calculating our diluted per share number and there's more information on that in our 10-K, and I can't go into more detail here.

You might want to have a look at the 10-K when it's released.

As far as the delivery date on Finding Nemo, we're getting very close to completing the film now and post production is under way, and we will deliver the final master prints probably in early April.

And as far as again negotiating new deals with Disney or? somebody else, we're very fortunate in that we have the time it takes to learn what we need to learn and take our time and do it right.

Mr. McAlpine, does that conclude your question?

Yes, I'm sorry.

Thank you.

The next question is from the line of Robert Routh (ph)with Bly Schroeder (ph).

Go ahead.

First question is regarding the current relationship you have with Disney, it would seem as though your distribution fee is probably in the 12% to 15% range, and I'm wondering whether or not any -- a new deal with another party you would be able to secure a significantly lower distribution deal given the current successes of your theatrical releases which could materially impact your financial performance going forward were you to leave Disney.

Second I'm wondering if Disney does -- if you and Disney do come to some kind of an agreement to extend the existing relationship, is there any chance that we see that extension go into effect prior to the expiration of the existing agreement similar to what we saw when you renegotiated the first deal, i.e., your economics could materially change sooner than 2006 and actually with the film following Finding Nemo?

And finally, I'm wondering if Disney was to consider tendering for the company as a whole what's management's thoughts with respect to that?

That's a big question.

You know, it would be, I think, reckless of us to speculate on what kind of a new deal we can strike, and the timing of such a deal.

I think, you know, we are in discussions with, as I mentioned, several major studios, learning a lot, and I think we're in a pretty good negotiating position.

So you can look at what kinds of deals have been struck by others, and draw your own conclusions as to the negotiating position we might be in.

But I think it's -- it would be better for us to continue learning, continue discussing and we have a lot of work to do.

As far as the timing goes, again, I think we're going it take our time and do it right.

Okay, great.

Thank you.

Thank you.

Our next question is from the line of Alan Kasan (ph), with Katz and Associates.

Your line is open.

Thank you.

Ann, getting back to the apples to apples comparison for 2003, does that include anything comparable in 2002 to the Monsters pay TV release, and also on the video game licensing, is the current deal with HQ comparable to what you've had in the past?

Right.

With respect to television, yes, it does include 2002 did have some fairly significant sales, television sales of A Bug's Life and Toy Story 2, and there was also internationally, there was also domestic licensing of Toy Story 1 in 2002, that were comparable to Monsters, Inc. in 2003.

So we do feel it's apples to apples from that perspective.

And I believe the second -- could you just repeat the second part of your question.

On the video game licensing --.

The video game licensing, you know, at this stage we feel that, apples to apples, with respect to what we've received from Monsters, it is probably going to be similar to what we see from THQ.

Thank you.

Thank you.

Our final question comes from the line of Katherine Styponias with prudential securities.

Please go ahead.

Hi, just had a quick follow-up.

Ann, I was wondering if you can help us with cap ex for next year.

Especially in light of the fact that you might be breaking ground on a second building by the end of '03.

What do you expect it to cost?

And maybe Steve, for you, if you're significantly expanding your space out in Richmond, is that indicative of you planning to staff up and/or at what point do you expect to do more than one movie per year?

Thanks.

You know what, Kathy, we'd really rather not go into that yet.

We're still in the throes of finalizing our budgets for 2003, so I think it might be a more appropriate to address capital expenditure at future conference calls.

As far as the building goes, again, we're still looking at the planning for such a building, and frankly looking at whether we need it right now.

You know, our current building we've been able to pack a few more people in than we expected.

We've rented some space nearby, and so timing of that second building we're not sure of and we're evaluating that right now.

As you know, building a building is an awful lot of work, and we're ramping up to a film a year right now, so it's -- we want to make sure that we keep our eyes focused on the right things, and don't build a building until probably a little bit past when we need it.

Which is sort of the way we've done it so far.

Thank you.

Ms. Mather, I will turn the call over to you.

Thank you everyone for calling in, thank you for the questions, I look forward to speaking to you at our next quarter call.

Goodbye.

Thank you.

Ladies and gentlemen, that concludes our conference for today.

You may now disconnect.