迪士尼 (DIS) 2003 Q2 法說會逐字稿

Welcome to the Pixar Animation Studios' second quarter 2003 earnings conference call. (CALLER INSTRUCTIONS) As a reminder today's conference is being recorded, Thursday, August 7th of 2003.

Your speakers for today's call are Mr. Steve Jobs, Chairman and Chief Executive Officer, and Ms. Ann Mather, Executive Vice President and Chief Financial Officer.

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

Please go ahead.

Thank you.

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

I will begin with a discussion of our financial results followed by our outlook for the remainder of 2003.

I will then turn the call over to Steve Jobs who will provide an update on Finding Nemo and other developments in Pixar.

We will then open the call to questions.

We're very pleased to announce that our revenues for the second quarter of 2003 were 48.9 million.

Net income was 19.5 million and diluted earnings per share were 34 cents.

These results compared to revenues of 22.8 million, net income of 10.4 million, and diluted earnings per share of 20 cents reported in the second quarter of 2002.

The increase over the prior period was largely due to the tremendous success of Finding Nemo's domestic theatrical performance.

As of the closing day of our second quarter, Saturday, June 28th, 2003, Finding Nemo had generated approximately 260 million of worldwide box office receipts.

Since that time the film has continued to climb to a worldwide box office of 374 million, comprised of 322 million domestic and 52 million international.

Please note that Nemo has yet to be released in 33 out of a total of 68 international territories, including the largest European and Asian markets scheduled for release in late 2003.

Film revenues for the second quarter of 2003 were 45.2 million, which included 26.3 million of Nemo related revenues, primarily from domestic theatrical box office receipts and some (inaudible) royalties.

The remaining film revenues consisted of 14.9 million in revenues of our library titles, and 3.6 million from Monsters, Inc.

In addition to film, we recognized revenues from software licensing in the second quarter of 2003 of approximately 3.7 million, as compared to 3.5 million recognized in the prior year period.

The increase was primarily due to higher RenderMan software licensing sales.

Operating expenses were 11.8 million for the second quarter of 2003 compared with 4.2 million for the same period in 2002.

Although we experienced an expected increase to our operating expenses relating to the growth of the studio, as we ramp up to meet the demands of multiple films in productions, this quarter also included the following.

We recorded an accrual for an onetime incentive compensation to our employees in recognition of their contribution to the extraordinary performance of Finding Nemo.

We also included a write off related to previously capitalized cost for future film projects.

In reviewing our projects and developments, we determined that it is unlikely of these projects will be greenlighted for production within the three years following their initial cost capitalization.

Therefore, in accordance with SOP 002, these amounts were expensed in the current quarter.

Other income for the second quarter of 2003 was 3 million as compared to 2.6 million recognized in the second quarter of 2002.

The difference can be attributed primarily to an increase in interest income.

While cash and short-term investments at the end of the second quarter were approximately 502.5 million, having increased roughly 163.4 million since December 28, 2002.

This increase was mainly attributable to cash received from Disney for our share of film revenues, primarily from the home video release of Monsters, Inc., as well as proceeds from stock option exercises, software revenues and interest income, offset by some production costs.

Capitalized film costs were 110.4 million versus 92.1 million at the end of 2002, reflecting production spending on our current film projects, offset by film amortization of 10.3 million.

Our balance sheet remains debt free, and our retained earnings at the end of the second quarter were 296.1 million.

Our second quarter fully diluted earnings per share of 34 cents, which exceeded our previous guidance of 12 cents, were primarily driven by the enormous success of Finding Nemo at the U.S. box office.

The timing and amount of box office receipts, combined with higher-than-expected rental rates from theaters contributed approximately 20 cents of positive variance to our second quarter EPS.

Among the other factors that contributed to the remaining 2 cents of our EPS variance in the second quarter were the following.

We recognized upside of 8 cents to our second quarter EPS from our library of films.

This variance included certain onetime adjustments and settlements related to Monsters, Inc. and Toy Story 2 merchandise revenues, offset by a reduction for our Monsters, Inc. domestic home video revenue.

During this quarter we received additional information from Disney, which reflected higher returns of Monsters, Inc. domestic home video than had been originally anticipated.

Based on this information, we are now reducing our Monsters, Inc. worldwide home video net sales to approximately 30.2 million units from 30.4 million units as reported during our fourth quarter 2002 earnings call.

The updated worldwide unit sales figure is comprised of 8.3 million VHS units, and 10.8 million DVDs in the U.S., and 6.8 million VHS units and 4.3 million DVDs internationally.

Another factor that contributed to the EPS variance was approximately 6 cents in unanticipated operating expenses as mentioned previously.

I would now like to address upcoming events that may affect results for the remainder of the third quarter of 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 2002 Form 10-K and first quarter of 2003 Form 10-Q, particularly to sections on risks for important factors that could cause actual results to differ.

These forward-looking statements should not be relied upon as representing our views as of any subsequent date.

And we undertake no obligation to update these forward-looking statements reflect events or circumstances after the date they were made.

Our financial results for the next six months will depend primarily on the continued success of Finding Nemo in international theatrical markets, as well as its domestic home video release scheduled for November 4, 2003.

By the end of the third quarter, Nemo will have been released in nearly all Latin American territories and in many Asian territories, but not Japan.

Given Nemo's success in the territories already in release, we would expect the foreign box office results to be comparable to the rate of success experienced in the U.S.

Please note that although Finding Nemo will not be released in the United Kingdom, France, Italy, Germany, Spain and Japan until the fourth quarter of 2003, we will incur release costs in the third quarter for these larger international territories, as well as upfront marketing costs for Nemo's domestic home video release.

These marketing and release costs, which are anticipated to be significantly higher than any of our previous films, have been factored into our third quarter 2003 projections, which we are today introducing at 7 cents per fully diluted share.

During the fourth quarter, revenues will be largely comprised of Nemo's domestic home video sales, which we expect to meet or exceed those of Monsters, Inc. over the film's lifetime, and international box office receipts from the larger European territories and Japan.

There will also be merchandise revenues and ancillary royalties from Finding Nemo.

We expect merchandise revenues, ongoing home video sales, international television licensing, and ancillary royalties relating to be sale of products from our other four films to be recognized throughout the remainder of the year.

Our assumptions for the full year of 2003 also include continued software sales, interest income terms and an effective tax rate of approximately 40 percent.

On our fourth quarter 2002 earnings call we had stated that our full year 2003 earnings per share would depend primarily on the success of Finding Nemo.

And if the film's performance resembled that of Monsters, Inc. at the box office, then financially 2003 should be comparable to 2002 with a few adjustments.

In 2002, we benefited from home video reserves and margin adjustments and merchandise revenues, which were non-recurring and contributed 19 cents per share to our 2002 EPS.

Factoring in these adjustments and takings into account 10 cents of potential EPS dilution from an increase to our share count, yielded a 2003 fully diluted EPS estimate of $1.39.

Incorporating our assumptions for Finding Nemo's continued success at the domestic box office, our hopes for comparable performance in its international box office run, and a successful home domestic home video release, we have raised our projections for the full year and are today introducing fully diluted earnings per share guidance for 2003 of roughly $1.60.

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 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 profit; the market price of our common stock and related volatility; and external socioeconomic and political events that are beyond our control.

We are extremely pleased with Finding Nemo's box office performance so far.

In spite of the high marketing and release costs in the North American theatrical marketplace, making it very difficult for any film to turn profitable during its theatrical run, Nemo has contributed 26.3 million in revenues in its first quarter of release alone.

We look forward to the traditionally more profitable international theatrical and North American home video releases later in the year.

The success of Finding Nemo further solidifies Pixar's strong financial position, with over $500 million in the bank, no debt, and growing earnings power driven by a library of five of the most successful films in animation history, and an exciting slate of films in development and production.

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

Thanks, Ann.

The big news since last quarter's call is, of course, that Pixar it is now five for five.

Finding Nemo, our studio's fifth feature film, written and directed by Andrew Stanton, co-directed by Lee Unkrich and produced by Graham Walters has passed Monsters, Inc. to become Pixar's most successful film to date.

Even more astonishing, it has surpassed The Lion King's initial domestic run of 312 million to become the most successful animated film ever released in North America.

The Lion King had been in theaters for 31 weeks when it reached 312.9 million in 1994.

Finding Nemo hit the $313 million mark in just eight weeks.

We expect that next week Nemo will also pass the $328 million all in total take of The Lion King, which was re-released last year.

Breaking this record, held for almost a decade, is an amazing triumph.

Finding Nemo's domestic box office stands at $322 million as of yesterday.

And it looks like the final domestic box office will fall somewhere between 330 and 340 million, making it the eighth highest grossing film of all time in North America.

Internationally, Nemo has already earned 52 million, breaking records in many of the territories it has been released in so far.

With our major international markets yet to open, in particular the UK in October and Japan in December, it looks like Nemo's international box office will top 400 million.

I need to emphasize the fact that Nemo's performance is a once-in-a-lifetime experience.

So please don't expect it again.

And it is most certainly not the yardstick by which we will measure our future successes.

So let's all avoid the big mistake of applying Nemo's level of success to forecasts for our future films.

But it is great to take a moment and enjoy Nemo's success.

With Nemo's contributions to date, Pixar's five films have grossed over 2.1 billion in worldwide box office receipts.

And that is before Nemo's release in our major international territories.

And our five films make up half of the top 10 grossing animated films of all time.

To quote Forbes Magazine this week, "Pixar is on one of the great rolls in entertainment history".

So let's bask in the sun while it lasts.

Because as Walt Disney himself said, we are only as good as our next picture.

Which brings us to our upcoming films.

Things are proceeding very well on our three next films, The Incredibles, Cars, and the still secret film that Pixar has greenlit for release in 2006.

For 2004, we have The Incredibles, directed by Brad Bird.

You may seem the teaser trailer for The Incredibles that we released with Finding Nemo.

This was a very small glimpse of what is coming, and is indeed turning out to be incredible.

The Incredibles as our first -- is our studio's first film with humans as the main characters.

As I mentioned before, not just one or two, but dozens of them.

Our R&D group has made some amazing breakthroughs in human movement, hair and clothing.

And we think audiences are going to be very impressed.

The story of The Incredibles is just flat-out terrific.

I saw the latest version of the reels just yesterday, and I was on the edge of my seat the entire time.

For 2005, we have Cars, directed by John Lasseter.

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

All I can say is, buckle up.

Cars is going to be very special.

We are working a teaser trailer for Cars that we will release with The Incredibles next year.

Now I would like to talk a little bit about competition.

As I have said many times before, our business is not a zero sum game.

Meaning that as long as we don't overlap release windows, if our competitors film does well, it doesn't necessarily hurt us, it may even help us.

And if our competitor's film fails, it doesn't necessarily help us either.

But even so, we do like to keep score.

So let's again look at the total worldwide box office for the most recent four films from the three biggest players in the animation business, Pixar, Disney and DreamWorks.

Disney's last four films, Treasure Planet, Lilo and Stitch, Atlantis and the Emperor's New Groove have a total worldwide box office of $661 million, or an average per film of 165 million.

DreamWorks' last four films Sinbad;

Spirit, Stallion of the Cimmaron;

Shrek; and the Road to El Dorado have a worldwide box office total of 694 million, or an average per film of $173 million.

For Pixar, Finding Nemo is still in release, so we're going to assume for purposes of this discussion that $330 million domestic total and a $400 million international total.

And if we realize these numbers with Finding Nemo, Monsters, Inc., Toy Story 2 and A Bug's Life, Pixar's total worldwide box office for its most recent four films is $2.1 billion or an average of $526 million per film.

Now if we look at the market share among the three biggest players based upon these worldwide box office totals for the four most recent films, they are Disney, with 19 percent market share, DreamWorks with 20 percent market share, and Pixar with 61 percent market share.

So if Finding Nemo reaches $400 million internationally, Pixar's market share will be three times greater than its closest competitor.

I'm sure many of you have questions about the current state of our thinking and possible negotiations concerning a new distribution deal.

While we can't comment on any details at this time, I do want to make a few points.

One, we are very clear on what a new deal for Pixar will look like.

We have talked to lot of senior people in the industry and know what can be done.

Two, we would prefer to continue our relationship with Disney, if we can strike such a deal with them.

Three, if we can't reach a deal with Disney, there are several other major studios that are anxious to market and distribute our films, and are quite capable of doing so.

One needs to look no further than Warner Bros. success with Harry Potter and Lord of the Rings, or Fox's success with Star Wars and Ice Age, or Sony's success with Spiderman, to be reassured that Pixar has several other viable options if we cannot reach a new agreement with Disney.

We have talked to many of these studios and we know we can get the deal we want.

Four, we have the time to take our time and do it right.

The right deal is more important than the quick deal.

And five, as Anne mentioned, Pixar's cash reserves have topped $500 million.

Plus we have another 100 million invested in capitalized film costs for our future films.

And our balance sheet remains debt free.

This all gives us an enormous flexibility and leverage as we move forward.

So the bottom line is that we prefer to continue our relationship with Disney if we can strike the right deal with them.

But in the balance of negotiations, we're also very that there are a handful of other studios that can successfully market and distribute major films like ours.

But that there is only one Pixar.

So with that, let's turn it over to questions.

(CALLER INSTRUCTIONS) David Miller with Sanders Morris and Harris.

Steve or Ann, given that Finding Nemo was released in the summer frame, and that this is the first time you, in tandem with Disney, has released a film in the summer frame, and just given the just outstanding response from the public towards the film, are there any thoughts up there at Emeryville with regard to possibly releasing Cars in the summer frame?

Which would mean that you would have to move up that release date six months.

And if so, given it is a film about cars and would probably play well towards the summer crowd, would that affect -- if the answer to that question is yes, would that affect your negotiations with Disney with regard to getting a distribution partner in place 18 months before that release?

Thanks very much.

I will go ahead and take that.

Thank you.

You know, you can never run the experiment twice.

We released Finding Nemo in the summer, and we can't really know what it would have done if we had released in the holiday season.

The other thing I would say is every summer is different based on the competitive environment, and so is every holiday season.

So is very difficult to imagine and compare different scenarios here.

Having said that, as you know, we're moving to a picture a year.

After The Incredibles, Cars will come out a year after The Incredibles.

But The Incredibles will come out 18 months after Finding Nemo, so The Incredibles is a holiday 2004 release.

And I don't think there is really much of a chance that we could get Cars done earlier than a holiday 2005 release.

Kathy Styponias with Prudential Equity Group.

A couple of questions.

Ann, could you give us a sense of what a good run rate is for your operating expenses, given the fact that you had what seemed to be somewhat off expenses in the quarter?

And then second, Steve, you sound -- you said that your, I guess, your guesstimate right now for international box office release for Nemo is for 400 million, which is 25 percent higher roughly than what it will probably do domestically.

And that just strikes me as extremely conservative, given the fact if you look at Disney's other pictures that were released in the summer and how they have done internationally, they have averaged 30 to 70 percent higher than domestic box office gross.

So why so conservative?

Thanks.

Okay.

Hi, Kathy.

I can give you a little bit more information than within the script about the unusual items in operating expenses.

The development costs write off was 1.9 million.

And the amount expensed for incentive compensation was 3.2 million.

So I think if you can -- that helps.

There was also a couple of other things that were a little unusual but those are the size of the biggest two unusual items this quarter.

I suppose we should X those amounts.

That is a good run rate for the rest of year?

Yes.

In answer to your other question about international, I would just say that Finding Nemo has not been released in any of the major international territories yet.

And so you know we are having to use our best guess as to what it will be.

And I guess we would rather be a little conservative than the other way around.

Andrew Slaven with Merrill Lynch.

My question has been answered.

Thank you.

Lowell Singer with SG Cowen.

Two questions.

First, Ann, could you talk a little but about the accrued liabilities line in the quarter?

It was up significantly, I think, and I was wondering what the inputs are there?

And, Steve, I want to go back to this international performance issue.

I mean clearly your films have underperformed the Disney films internationally on a relative basis at the domestic box office.

It strikes me that has been an issue that clearly (inaudible) talked about with Disney.

How important is it to wait and see how Nemo does internationally, and had Disney executes against its international box office before committing to a longer-term deal with those guys?

Let me take care of the question first off.

As far as the accrued liability increase, that is primarily due to the accrual for the onetime compensation to our employees.

As far as the international performance relative to the domestic performance of Disney, relative to some of its studio competitors, we have talked to Disney about that.

And I think it is safe to say that they are really trying to show us how well they can do internationally with Finding Nemo.

And they got a great plan.

And they are really fired up.

So I think they're going to do their best.

Can I just add a point as well, Lowell.

The difference between the amount that I just called out and operating expenses and the size of the accrual relates to the portion that will be capitalized in film costs and amortized in future periods.

Robert Routh with Natexis Bleichroeder.

A couple of quick questions.

First, I'm curious if you can give us an update as to what your fully diluted share count would be if we were to include in that number all options including those that are not vested, and what the average exercise price of those options would be?

And second, I know you can't comment too much on the negotiations that you're currently having with Disney, but just out of curiosity, if Disney was to approach you and out and out make a bid for the Company, is it something that the Board would consider?

Taking your question on the options, all discussions on options will be in the Q, which will be released next week.

Taking your other question on an acquisition offer from Disney or anybody else, you know I think our Board would consider anything, but we like being an independent Company.

(CALLER INSTRUCTIONS) Dennis McAlpine with McAlpine Associates.

Ann, on the capitalized film production costs, that didn't seem to -- it actually went up in the second quarter versus the end of the first quarter.

Can you talk about whether that is all Incredibles going in, and how much of Nemo came out?

And then second, with the problems that Sinbad had how do you feel about the likelihood of 2-D coming back surviving, or is the entire world going to go to 3-D at this point?

I will answer the first part of your question.

As far as detailed amortization information, you know we did say that we charge 10.3 million in amortization over the quarter.

We have spent money on The Incredibles and on Cars.

And as Steve mentioned, we have this film set for release in 2006, which is also incurring production money right now.

As far as the second part of your question, I think when trying to explain less than expected performance of some recent animated films, everybody has jumped to the medium instead of the stories, and has declared the medium of 2-D animation to be at fault.

I think in general, the people I have talked to at Pixar about this, it is pretty unanimous that maybe the story has a little more to do with it than the medium.

Then lastly, can you comment at all on film 7, as to whether that is greenlit, or when you expect to do that?

We have greenlit no additional films since our last conference call.

And timing for when you would need to?

We will let you know when we do.

Peter Mursky with Oppenheimer.

Could you talk about -- I thought the library sales were actually a little better than we had anticipated.

Could you talk about what films were contributing there, specifically?

Also any merchandise sales, if you can give any color on that?

And I have a quick follow-up on that.

Yes, we did mention, Peter, in the analysis of the EPS variance from guidance that we had 8 cents in unanticipated upside on our library titles.

And that included certain onetime adjustments in settlements for Monsters, Inc. and Toy Story 2 merchandise revenues.

So I would say that there are unusual events relating to settlements that came up filed as a review by Disney of information over the past few years.

I thought Monsters is not included in library titles?

That's true.

Toy Story 2 is.

You're right.

But the merchandise settlement for Toy Story 2 was fairly significant.

And regarding merchandise sales for Finding Nemo, can you give any color on that?

You know, we would rather not comment on that at this stage.

We think it might be interesting to see as we go through the rest of the year and move to the holiday period, how sales have done.

THQ did make a public comment about the number of games they had sold.

Right, THQ was very happy with their numbers.

Okay.

And just a quick follow-up.

Can you talk a little bit about what could possibly derail you from getting to film a year between Incredibles and Cars?

An earthquake.

Okay.

Anything short of that?

So far things look pretty doggone good.

Alan Kassan with Katsten Associates.

Yes, I have a question on the home video for Nemo.

Given that the domestic and international box office is expected to be about 30 percent higher than for Monsters, would the estimated home video sales be commensurate with that same ratio?

Sadly, we don't expect so.

You know people may go to the theater three or four times to see Finding Nemo, but they're likely only going to buy one big DVD or VHS cassette.

So there is a plateauing off.

Unfortunately, you can't just apply the incremental box office to home video sales.

Is that fine?

Well, I guess the other issue is the question then becomes, I think Lion King did 50 million units.

That was in a very different home video marketplace.

With a lot less competition.

Anthony DiClemente with Lehman Brothers.

I was wondering if you could just elaborate on your current philosophy on producing sequels, and if that has changed at all?

And then secondly, Ann, could you just tell us what depreciation and amortization was in the quarter?

Thanks.

Sure.

Oftentimes studios choose to produce sequels because they believe they are safer bets than new original productions.

And I hope that we have some degree of confidence now with the number of original productions we have come out with that have done even better than our sequel, Toy Story 2, that Pixar doesn't have to rely on sequels, but indeed can keep generating successful original story ideas.

Everyone of our films has been an original Pixar story generated in the halls of Pixar.

So when we look at sequels, we look at sequels as an opportunity to make a great film, not as an opportunity to generate a safer film, or a higher box office than an original idea.

And, therefore, the choice to do sequels is really based on, do we have a great idea for sequel?

Could it make a great film?

And do our filmmakers want to make the sequel?

And to the extent that those things are true, we will make sequels.

To the extent that they are not, we will not make them just to try to get a safer bet.

And with respect to the question on depreciation and amortization, we will have more detail on that in the 10-Q that we file next week.

Kathy Styponias with Prudential Equity Group.

Ann or Steve actually, I was wondering if you could comment on your RenderMan sales.

They have been very robust above expectations.

How much of that do you think comes from indirectly from your own success, i.e., it seems like there is a new studio cropping up every day that is putting out a Cg animation shingle.

I would imagine a lot of them are using your technology.

So on a go forward basis, at least in the near-term, should we expect that your software sales are going to be at the 3 million or so level on a per quarter basis?

And then second, sort of following off of the merchandising question, I think that Peter asked, with Disney potentially selling the stores, or rather if they are unsuccessful in selling the stores, and they decide to shut them down, what is your level of concern, if any, that you will continue to be able to sell merchandising at the same rate that you have before.

I guess, indirectly the question is, what percent of your merchandise sales are coming directly from the Disney stores?

Thanks.

On the first question, on RenderMan sales, we sold RenderMan to a lot of different folks.

Certainly people that want to do Cg animated films look to RenderMan, because RenderMan is something that you can produce a whole film on.

People know that it works.

There's some other rendering products out there that can handle less complexity.

And you would hate to get stuck in the middle of your film having to change your rendering software.

So people know that since Pixar pushes the limits on RenderMan, they know they can too, and it is going to make their film for them.

So clearly we have some people doing Cg computer animated films, but I think the bulk of the sales are still to people doing special effects in live-action films.

And that is, as you know, proliferated to a very wide degree.

We continue to be concerned that the market is already maxed out, and that it is not going to be an area of growth for us and may well continue -- it may well start to decline.

So I would repeat that.

I know it hasn't done to date, but we sort of keep expecting that sort of event.

As far as the impact of the sale of Disney stores on our merchandise revenues, I would say we're not concerned, Kathy.

It is not incredibly material to us.

And it is not something that should have any impact on the full costs I have given for this financial year, for example.

Thank you very much.

And with that, Mr. Job and Ms. Mather, I will turn the call back to you.

Thank you very much everyone for being on the call.

I appreciate it.

Talk to you next quarter.

Bye.

And, ladies and gentlemen, your host is making today's conference available for digitized replay for four days that starts at 8:30 pm Eastern daylight time August 7th, all the way through 11:59 pm August 11th.

Please access AT&T's Executive Replay Service by dialing 800-475-6701.

At the voice prompt, enter today's conference ID of 691231.

And that does conclude our 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.

(CONFERENCE CALL CONCLUDED)