迪士尼 (DIS) 2003 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the Pixar Animation Studios first quarter 2003 earnings conference call.

If you get disconnected at any time during this conference, please dial back at 888-428-4474.

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

Later, we will conduct a question and answer session.

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

As a reminder, today's conference is being recorded, Wednesday, May 7, 2003.

Your speakers for today's call are Steve 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 Ms. Ann Mather.

Please go ahead.

Thank you.

Welcome to Pixar's conference call for the first quarter of fiscal year 2003.

After reviewing our financial results, I will turn the call over to Steve Jobs, who will provide an update on Finding Nemo and other developments at Pixar.

We will then open the call for questions.

We are pleased to announce that revenues for the first quarter of 2003 were $18.7 million.

Net income was $8.2 million and diluted earnings per share were 15 cents.

This exceeded previous guidance of earnings per share of between 7 cents and 10 cents.

We will give a detailed breakdown of this positive variance later in the call.

Our first quarter 2003 results compared to revenues of $37.1 million, net income of $15.6 million, and diluted earnings per share of 30 cents reported in the first quarter of 2002.

The year over year decrease was largely due to the timing and success of Monsters, Inc.'s foreign theatrical performance in the first quarter of 2002, during which we generated approximately $200 million dollars of worldwide box office receipts.

Film revenues for the first quarter were $16.4 million, which included $8.6 million of Monsters, Inc. related revenues and $7.7 million from our library titles.

Monsters, Inc. revenues were derived primarily from domestic pay television licensing and, to a lesser extent, pay-per-view and merchandise sales.

Revenues from our library titles consisted of worldwide home video, merchandise sales, international television licensing, and ancillary royalties.

In addition to film, we recognized revenues from software licensing of approximately $2.3 million, which exceeded our expectations.

Operating expenses were $5.1 million for the first quarter of 2003, compared with $4.9 million for the same period in 2002.

The increase in operating expenses over the prior year period, though less than anticipated, reflects the growth experienced by the studio as we ramp up to meet the demands of multiple films in production.

Other income for the first quarter of 2003 was $2.9 million as compared to $2.5 million recognized in the first quarter of 2002, and can be attributed to an increase in our interest income.

Cash and investments increased to $453.9 million by the end of the first quarter, an increase of $114.8 million since December 28, 2002.

The increase was primarily due to cash received from Disney for our share of film revenues, particularly relating to Monsters, Inc. home video, along with software revenues, interest income, and proceeds from stock option exercises, offset by film production costs.

Capitalized film costs were $101.9 million, versus $92.1 million at the end of 2002, reflecting production spending on our current film projects offset by film amortization of $2.9 million.

Our balance sheet remains debt-free and our retained earnings at the end of the first quarter were $276.6 million.

Our first quarter diluted earnings per share of 15 cents exceeded our previous guidance of between 7 and 10 cents.

The variance between our actual earnings results and the guidance provided last quarter was primarily due to the following factors.

During the first quarter of 2003, we received additional information from Disney which decreased previously recorded home video expenses for all of our film titles on a cumulative basis and contributed approximately 3 cents to our fully diluted earnings per share.

Also contributing to the variance was higher than expected random and software licensing sales, which resulted in an incremental 1 cent to our fully diluted earnings per share.

And 1 cent of upside was due to lower than anticipated operating expenses, which resulted from a slower ramp-up of certain operating activities.

I would now like to begin a discussion of the upcoming events that could be reflected in results for the remainder of the second quarter, the 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.

We refer you to our 2003 Firm 10K, particularly the sections on risks, for important factors that could cause actual results to differ.

Our fifth animated film, Finding Nemo, will be released on May 30th.

Due to the heavy initial outlay of theatrical marketing and distribution costs, as well as the timing of Nemo's domestic box office release, only one month prior to the end of the quarter, we do not expect to see significant revenues, if any, in the second quarter.

Instead, we expect some revenues for the second quarter of 2003 to be derived primarily from continuing home video, television, and merchandise sales from Monsters, Inc. and our library titles.

As such, we are today introducing our second quarter 2003 earnings per share guidance of approximately 12 cents.

We anticipate our earnings for the second half of 2003 to be driven by the worldwide box office performance of Finding Nemo as well as the film's domestic home video in the fourth quarter.

Our key international box office release dates include Mexico on July 4th, the United Kingdom on October 3rd, Germany on November 20th, France on November 26th, Spain on November 28th, and Japan and Italy on December 5th.

Given the timing of these release dates, we would expect to recognize the majority of our current year earnings relating to Finding Nemo in the fourth quarter of 2003.

We also continue to expect worldwide home video sales, merchandise revenues, and ancillary royalties relating to the sale of products from Monsters, Inc. and our other films to be recognized throughout the year.

As we mentioned during our fourth quarter 2002 earnings release conference call, our financial results for the remainder of 2003 will depend primarily on the success of Finding Nemo.

As a result, we expect to be able to give earnings guidance on the remaining quarters as well as the full year 2003, during our second quarter earnings call.

These statements are forward-looking statements 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 other titles in our film library; the timing, accuracy and sufficiency of the information we received from Disney to determine revenues and associated gross profits; the timing and amount of non-film-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 socioeconomic and political events that are beyond our control.

With the unmatched track record of our films, the depth of our financial resources, and the delivery of Nemo now behind us, we are strategically very well placed to leverage our strengths as we enter the next stage of our company's growth.

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

Thanks, Ann.

I'd like to begin by repeating something that Ann reported.

Pixar has $450 million dollars of cash.

In addition, we have an additional $200 million of assets invested in our future; $100 million in capitalized film costs for our future films, and another $100 million dollars in our Emoryville studios, which we own free and clear without a mortgage.

And, even after the $650 million dollars of cash and investments, our balance sheet remains debt free.

Wow.

Today, I'd like to talk about Finding Nemo, our studio's fifth feature film.

Finding Nemo is our first summer release and it opens on over 5,500 screens across the U.S. on May 30th, just 23 days from today.

Finding Nemo is superb.

Its characters are quite wonderful, and the story is exciting, funny, and very emotional.

The world that Pixar's creative and technical artists have built to tell the story in is nothing less than breathtaking.

Finding Nemo is clearly the most visually stunning animated film ever created, and we could not be happier with how it turned out.

It's definitely one of our studio's best films to date.

The marketing for Finding Nemo is in high gear.

Television advertising has been running for a few weeks now on top-rated shows on cable and broadcast networks, such as MTV, Fox, WB, Nickelodeon, The Cartoon Network, ABC Family, and Toon Disney, to target kids and teens; top-rated shows such as Friends, American Idol, The West Wing, CSI, Will And Grace, E.R. and The Bachelor to target general audiences.

And shows like Everyone Loves Raymond and The Wonderful World of Disney to target parents and families.

Key promotional partners are providing over $175 million dollars in promotional support, comprised of television, radio, print, in-store on and on-pack, resulting in over 10 billion impressions.

Promotional television support alone is over $40 million dollars.

Key promotional partners include Pepsi, Frito-Lay, McDonalds, Kellogg's, Orville Redenbacher, Airheads, Jel Sert, Ralph's and Dryers.

McDonald's alone will have over 14,000 participating restaurants, and will give away $87 million dollars Happy Meal Toys in the U.S.

Clearly, our marketing partner, Disney, is doing a great job.

Competitively, we're opening two weeks after The Matrix, which is R-rated, and one week after Jim Carey's Bruce Almighty.

Once we're open, there are no major family films that we're worried about through the entire month of June, so we may have a very good run.

This is also the first time that a Pixar film will have an attached trailer for an upcoming Pixar film.

In this case, Finding Nemo will have a teaser trailer for The Incredibles, our studio's next feature film to be released Holiday 2004.

This will help establish the concept of a continuous Pixar franchise, with each Pixar film helping to drive audiences to the next Pixar film.

It also shows how close we are getting to releasing a film a year.

Finding Nemo has turned out to be an extraordinary film in every respect – characters, story, and the amazing underwater world that's been created.

To quote one early reviewer, quote, "I saw it today and can confirm they are five for five," unquote.

Before long we'll know if audiences agree.

Until then, we're sitting at the edge of our chairs, waiting.

With the completion of Finding Nemo, our studio now has a library of five finished films.

Beyond Finding Nemo, we have three more films in production.

The Incredibles for Holiday 2004, Cars for Holiday 2005, and a still-secret film for Holiday 2006.

And with over $450 million dollars of cash, an additional $200 million dollars invested in our future films and studio facilities, and zero debt, we are in a very strong position as we negotiate a new distribution deal with Disney or another studio partner during the coming year.

It also emphasizes how strong our current business model is, even operating under our current Disney deal.

As we negotiate a new deal, Pixar can look forward to doubling its profits in a few years by doing the same work we are doing today.

Doubling our profits without additional work or investment – how many companies can look forward to that?

Thank you, Steve.

We're now ready for any questions.

And once again, ladies and gentlemen, if you would like to ask a question, please press the 1 on your touchtone phone.

Our first question is from the line of [Kathy Siponius] [phonetic] with Prudential.

Please go ahead.

Thanks.

Two questions for you.

Steve, there is an article in today's L.A.

Times that suggests that Disney and Pixar are going to spend the month of June figuring out how to basically continue on the existing relationship as well as potentially alter the existing one, i.e., with more profitability to you.

Would you care to comment on the article?

And then second question I had was, in connection with creative control and what that means for Disney, in your 10-K you suggested that Disney has co-creative control on the movie, The Incredibles.

That seems to be a different disclosure than for the other movies that you have out there;

I'm wondering what that means.

Does that mean that Disney can potentially slow the process down, make the process faster?

And the reason that I'm asking is, there are some websites that are suggesting Disney's Home On The Range is going to be released in Holiday 2004, and you just said that that's the time that The Incredibles are slated for.

I'm just wondering if Disney shoots to get Home On The Range out in Holiday 2004, whether they can use creative control to alter the time frame for when The Incredibles is released.

Thanks.

Sure.

As far as the L.A.

Times article – again, we didn't talk to them; the first we heard of it was when we saw it today.

All I can say to that is that we've said that we're going to be negotiating a new distribution deal in the coming year, and that's what we're planning on doing.

I think that's all we're really going to say about that at this time.

And as far as creative control, the current Disney agreement gives us creative control when the director of the film has directed a previous Pixar film that has achieved a box office over a certain amount.

And so we have directors now that have creative control of their films, when they direct films at Pixar.

But Brad Burt being a director directing his first Pixar film, did not qualify for that.

So we have joint creative control with Disney.

And that has not been a problem;

John Lassiter is executive producing the movie and there have been zero issues from Disney about it;

I think they're really in love with the movie.

So as far as Holiday 2004, we are targeted for a Holiday 2004 release;

Disney is fully on board with that.

You might want to check with them for the release of Home On The Range, but I think you will find that Holiday 2004 is wide open for The Incredibles.

And in actual fact it's on The Incredibles teaser trailer that's attached to Finding Nemo.

Yes.

So I think there's no issue there.

Great.

Just a quick follow-up with respect to the negotiations.

You said that you want to do it sometime this year.

Is it reasonable to expect you want to see what foreign box office looks like before you make a final decision on who you end up going with after your current deal with Disney is done?

Thanks.

You know, I think what we said on this is that we are in a very strong negotiation position, and we are going to most likely negotiate a new distribution deal with Disney or another studio sometime in the coming year, and I think we'll just stick with that.

Thank you.

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

Please go ahead.

Good afternoon, and congratulations once again.

Ann, a question on the guidance.

For 12 cents a share in the current quarter, just looking at past first weekend grosses, specifically for Monsters, I believe the first weekend gross was around the $62, $63 million dollar mark.

If you tack on 3 percent inflation over the last year and a half, you come out around a $65 million dollar opening for the first weekend for Nemo.

You know, mathematically, it just seems like the guidance is very conservative here, given the ongoing residual sales for the Toy Story 3 pack and Monsters.

I wondered if you could comment on that.

Thanks very much.

Yes.

Thanks, David.

Of course, as you're aware, we can't recognize any revenues from Finding Nemo unless they exceed expenses from all revenue streams.

So we will have the marketing and release costs from the domestic revenue stream, as well as some release costs from the international revenue stream, which is why we're being particularly conservative about how much we can take in.

I want to jump in for a minute here, too.

Of course what matters to us is the eventual total box office of the film, not the opening weekend.

Now, the opening weekend is important; it can have some predictive value, but not always.

So just to calibrate us all - I mean, we have no idea what the opening weekend will be, and we would be thrilled if it was in the $30's.

We would be ecstatic if it was in the $40's.

We would be dancing on the ceiling if it was in the $50's.

So let's not get too carried away here.

And we'll soon know what's it's going to be.

Thanks.

Our next question is from Lowell Singer with SG Cowen.

Please go ahead.

Thanks.

Are you going to be selling downloads of your dancing on the ceiling?

A couple questions.

First, on the distribution deal, Steve, you made the comment a couple times that you would hope to negotiate a distribution deal.

Should we infer that there's really going to be one distribution deal?

Or is it out of the question that you would consider a deal with Disney on sequels and a separate deal with another studio on new productions?

And if Disney is the ultimate partner here, and you reach some deal that makes sequels attractive to you, should we think about sequels in '06, '07 and '08 to some of the earlier films as additive, or in lieu of the other films that are currently in the pipeline?

And then a final question, Steve, for you, is just if you have any intention to sell any stock in the near term, or if you plan on just holding where you are.

Thanks.

The first part of the question, the way I interpreted that is, why don't we negotiate two deals in the next year instead of one?

And all I can say is, our plan is to negotiate one deal with one partner, and that's kind of the path we're on.

As far as sequels go, our studio is, again, building up the capacity to release one really great feature animated film per year.

I do not see us having the capacity to release more than that, and therefore, if we did a sequel, if we were able to work something out with Disney and we did a sequel, that would be the film for that year, and would not be additive.

As far as my own personal stock sales go, I don't really comment on that.

The only thing I will say is to date I have sold a share of Pixar stock.

Okay, thanks.

Our next question is from the line of Richard [Biloty] [phonetic] with Morgan Stanley.

Please go ahead.

Good afternoon.

Given the relatively strong – not even relatively – extremely strong – cash position that you hold, and given the fact that Disney is obviously searching for ways to monotize their film base, especially their children's film base, more aggressively, to protect their earnings stream, and you've been in the press as having at least rumored interest in other entertainment assets – would you consider using Pixar to buy either part or all of Disney's animated production assets, and in return let them hold a large interest, say 40 or 50 percent?

In other words, make it into one mega-animation studio.

In other words, instead of doing a distribution deal, which is really complicated, wouldn't it just be easier to say, "These are the two best animation companies, let's put 'em together and create the 1998 Yankees?"

Well, I'm not aware that Disney is interested in selling their feature animation division or business.

They certainly haven't intimated that to us.

No, they've never said that, but I'm wondering if, given your cash position, and specifically, given their debt load, if that kind of a structure makes sense as an alternative to doing a distribution deal.

It would be a lot cleaner.

You know, you wouldn't have to worry about who gets what split.

Well, it maybe would be cleaner still if we just acquired all of Disney.

Oh, that would be very interesting.

[Laughing] I'll just leave that one alone.

Thanks very much.

Our next question is from the line of Andrew [Slavin] [phonetic] with Merrill Lynch.

Please go ahead.

Thanks very much.

Two very quick ones.

Could you just talk a little bit about what impact, if any, the moratorium on Toy Story 1 and 2 going into the home video vaults – what impact that might have had or will have on home video sales?

I guess we'll know on May 1st what [indiscernible] it already had.

And secondly, albeit, I know it's very small – the software revenue, or the profit margins on software were extremely high, with only $20,000 of cost.

Can you just explain – is that something we should expect going forward, or is that sort of a one-time thing?

Appreciate it.

I'll take up the software question first.

We continue to be surprised, frankly, each quarter, on software sales.

We also generally say it's not something that we're necessarily going to expect to continue.

But we do say in our 10-K to not expect to continue to see sales like this at all.

As far as the impact of Toy Story 1 and 2 going into moratorium, we'll be able to say more on this the next quarter.

We've not fully seen it through March 31st.

We obviously felt that it made business sense for us to do this.

We think that there should be a slight upswing in sales as a result of the titles going moratorium, but more importantly, when they come out of moratorium, we think we should see a reasonable boost in what we had been expecting, and it should allow us to maintain the price levels.

We felt if we didn't do this, there was a danger of us having to reduce prices.

Thank you.

Our next question is from the line of [Jeff Lasbin] [phonetic] with Gerard Klauer.

Please go ahead.

Thank you.

Ann, you were very nice to kind of lay out where we would see Nemo revenues coming, let's say, in the theatrical ran and to a certain extent in home video.

Can you give us some direction on the interactive game side?

In which quarter we might see revenues?

Yes, I think again, we expect most of our revenues to come in the fourth quarter.

I think that depending on the levels of spending, across all revenue steams, the amount is going to vary, but we should start seeing some coming in, depending on the box office, potentially next quarter, some in the third quarter, but we would expect the fourth quarter to be important for those as well as the rest of our revenues.

Also, you've probably already seen them, but there are some early reviews out on THQ's Nemo game which are very favorable.

And we haven't seen the game yet, but we're very excited from what we've read.

Yes, Play Station Extreme magazine is giving Nemo an 87 percent in its review.

That compares to 88 percent for Harry Potter and the Chamber of Secrets, and 85 for Spiderman.

So we feel very good about that.

Secondly, Steve, just on the off-chance that the movie does open in the $60 million-plus range, can you give us some kind of indication of your behavior there?

It probably will not be suitable for framing, so . . .

Well, we wish you well, and you'll probably be up at that level.

Thank you.

Our next question is from the line of Robert Ralph, with Natexis Bleischroeder.

Please go ahead.

Yes, good afternoon.

Some quick ones.

First, considering this is the first summer release you guys are going to have as Pixar, can you kind of go over what the advantages are of that time frame as opposed to the holiday window, given the length of time that school is out and such, and how you think that could change your economics going forward?

And also, a lot of talk has always been about your creative team, especially John Lassiter, and whether or not – how long will this guy stay with Pixar, will he leave or not?

And upon reading the 10-K, it seems as though his contract has him very incentivized to stay with you guys for a very long period of time.

I'm wondering if you could comment a little bit on that.

Sure.

The summer versus holiday time slot – there's a lot of theories on this.

You know, one theory is that summer is longer; kids are out of school for a longer period of time.

Then again, summer is a more competitive slot.

I can also say that the holiday slot has been very good to us in the past.

So this is our first summer film, and we're going to find out how we do.

But I think we're going to find that maybe both slots are good for us.

We are releasing Finding Nemo in the summer because we are on a schedule right now to complete a film about every eighteen months.

The last one was in the holiday season; this one fell into the summer.

Our next one will be in the holiday season, and then I think we'll be at one a year.

So that's why we're in the summer, and it's going to give us an opportunity to see how we do in a more competitive environment, but then again, having a lot of days when kids are out of school, to come see our movie.

It does give us, for the moment, a better international release date, being in the holiday period internationally.

However, we will also have that better holiday period with The Incredibles, as we're [indiscernible] towards a day and date release structure.

The other thing it gives us, of course, is that we'll be releasing the Finding Nemo video in the United States this calendar year, in time for the holidays.

So there are some real benefits to the summer; there are some benefits to the holiday season, and we'll know a lot more after this experience of the summer release.

Okay, great.

And then any comments on the Lassiter contract?

Any risk of losing any of your top creative talent, at least that you see?

Well, you know, we do have a contract with John which goes for many, many years.

It was a ten-year contract which probably has --

Through 2011.

Through 2011.

But to be very honest, we don't really think about that very much.

What we think about is, how do we make Pixar the best place in the world to work so nobody will ever want to leave?

And we think about that every day and every week and every month.

And try to make the opportunities available for employees, the compensation through stock options and the like, so attractive that no one would ever want to leave.

And indeed, our turnover is extremely small.

So I think what we're doing is working so far, and I think we will continue on that path.

Great.

And just one final question.

Since you beat your previous guidance for 2003 first quarter, can we look back at your initial guidance for full year '03, assuming that Nemo does as well as Monsters, Inc., of $1.39 – and we can just now bump that up to $1.43?

I wouldn't necessarily call it guidance.

We just said at that time, if Nemo did as well as Monsters, Inc., that we could expect something in the range of $1.39.

It is true that this incremental as we've called out, the posted variance, is all incremental.

So if one is choosing to anticipate that level of performance, but Monsters, Inc. was the second most successful animated film ever – then it would be reasonable to add this positive variance onto it.

But it's a big assumption.

Great.

Thank you very much.

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

Please go ahead.

Yes, thank you.

Going back to your comment – I think you said you expect that you could double your profit without any added investment.

Should we take that to mean that in any new deal, you do not want to put in a higher percentage of the funding for a film?

Or is that just in reference to the distribution fee going down?

And then would you also talk a little bit more about sequels?

It would appear that there is a built-in market for the sequels, which certainly is not going to be tapped if you're going to do one film a year.

Would you just relegate that to Disney and let them do the entire production on it, with your supervision?

Or how do you see that playing at as you go forward?

Great.

Let me take the first part of your question.

In terms of doubling our profits, what I mean by that is that a film that performs at a certain level, we believe we can keep approximately double the percentage of profits that we keep today.

With doing no additional work, and with no major investment.

And I do want to clarify that.

We are assuming that in a new deal, we will probably fund a higher percentage, if not all, of the production costs of our films.

So maybe you've uncovered an inaccuracy in one of my statements, that maybe it will require more investment in the production of the film.

I was really referring to more of an investment in the business in total.

But yes, we may and will likely fund a higher in potentially all of the production budgets of our films going forward.

And will hopefully keep double the percentage of the profits that we have today.

And sequels?

And on sequels, as we have said many times, our goal is to get to a film a year and we are on the horizon of potentially achieving that.

But the most important thing to us is to turn out as high a quality films as we can, because it's only when a film is received very well by audiences that it not only has a chance to earn a lot of money today, but has a chance to renew itself with each generation of children down the road.

So we believe that it will not be possible for us – at this time we don't see how – to go beyond a film a year.

Now, as far as sequels go, the traditional reason for doing sequels is that they are more likely to be successful than original new films.

However, with Monsters, Inc., and hopefully with Finding Nemo, I believe we will demonstrate that Pixar is capable of achieving success with new films, original stories.

And therefore, going forward in a new deal, we certainly want to own our films going forward, and things like that.

And so a lot of it will depend on the deal we strike, and with whom we strike it with.

But if sequels are attractive, then we are very excited about doing them.

We've got a great idea for Toy Story 3; we've got some ideas for a Monster sequel.

There's a lot of things that we could do, and we'll just have to wait and see what the next number of months bring us.

Just for detail – do you have a tentative release date for the home video of Nemo?

We do, but I think it's probably better for that to be part of Buena Vista Home Entertainment -- you know, the Disney distribution arm's – launch plans for the film.

I don't think it's really appropriate to disclose it on this call.

We have said the fourth quarter, but we haven't set a specific date.

And I wouldn't want to preclude any announcement they would like to make to their own trade press.

Okay.

And do you know how many theaters you'll be opening in?

I believe it will be at least 5,500.

Oh, I'm sorry – that's screens.

Theaters, I don't know, off the top of my head.

We could get back to you on that, if you'd like.

That's fine.

Thank you.

Thank you.

And I'd like to turn the call back over to the presenters for any closing comments.

Okay, thank you everybody, for being on this call.

Thank you for the questions.

Thank you very much.

And wish us – wish your company -- luck, on May 30th.

Goodbye.

Thank you very much.

Ladies and gentlemen, this conference is available for replay.

It starts today, May 7th, at 8:30 PM Eastern, and will last until May 12th at midnight.

You may access the AT&T executive playback service at any time by dialing 800-475-6701; international participants, please dial 320-365-3844.

And the access code for both numbers is 681975.

That does conclude your conference for today, and we do thank you for your participation, and you may now disconnect.