迪士尼 (DIS) 2003 Q4 法說會逐字稿

Welcome to the Pixar Animation Studios fourth-quarter and full-year 2003 earnings conference call. (OPERATOR INSTRUCTIONS)

As a reminder, today's conference is being recorded Wednesday, February 4th, 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 Ann Mather.

Please go ahead.

Thank you.

Welcome to Pixar's fourth-quarter and fiscal-year 2003 conference call.

I will begin with a discussion of our financial results followed by our outlook for 2004 and beyond.

I will then turn the call over to Steve Jobs, who will provide an update on other developments at Pixar.

We will then open the call for questions.

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

Fourth quarter revenues were 164.8 million, net income was 83.9 million, and diluted earnings per share were $1.44.

These results compared to revenues of 39.4 million, net income of 17 million, and diluted earnings per share of 31 cents reported in the fourth quarter of 2002.

Full-year 2003 revenues were 262.5 million, net income was 124.8 million, and diluted earnings per share were $2.17.

The exceeded previous guidance of $1.76 for the year, and compares to full-year 2002 revenues of 201.7 million, net income of 90 million, and diluted earnings per share of $1.68.

Film revenues for the fourth quarter were 161.3 million, which included 147.8 million of Finding Nemo related revenues, primarily from domestic home video sales and foreign box office revenues.

Also included in our revenues were 8.3 million from our library titles, 5.2 million associated with Monsters, Inc., and approximately 3.4 million from software licenses.

For the fourth quarter, we generated Finding Nemo domestic home video sales of approximately 24.8 million units, comprised of 5.6 million VHS units, and 19.2 million DVDs.

International releases of the home video were limited in the fourth quarter, with revenues almost entirely offset by upfront marketing and release costs.

The majority of the Nemo's international home video release dates are staggered throughout the first half of 2004, and we will provide further guidance on this subject during the discussion of our outlook for 2004 later in the call.

As of the closing day of our fourth quarter, Finding Nemo had generated approximately 792 million of worldwide box office receipts comprised of 340 million domestic and 452 million international.

Since that time, the film has been released in all of its scheduled international markets and has continued to climb to a worldwide box office of 850 million.

Operating expenses were 6.8 million for the fourth quarter and 30.5 million for the full year of 2003, compared with 5.7 million and 19.5 million, respectively, for the same period in 2002.

The increase in operating expenses over the prior year period was largely attributable to a one-time incentive compensation to our employees earlier in the year for their contribution to the extraordinary performance of Finding Nemo.

Cash, cash equivalents, and investments were approximately 521.9 million at the end of the fourth quarter, having increased 182.8 million since December 28, 2002.

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

Capitalized film costs were 107.7 million versus 92.1 million at the end of 2002, reflecting production spending on our current film projects, offset by film amortization of 37.6 million.

Our balance sheet remains debt free, and our retained earnings at the end of the fourth quarter were 393.2 million.

Our fiscal year 2003 diluted earnings per share of $2.17 exceeded our previous guidance of $1.76.

With the exception of 2 cents of our fourth quarter EPS upside, which was due to unanticipated software sales, the majority of our performance this quarter was attributable to Nemo's greater than expected worldwide box office and domestic home video revenues.

At the international box office, Nemo generated 452 million of foreign box office receipts by the end of fourth quarter, versus our previous estimate of 300 million.

On home video, we recognized 24.8 million home video units domestically versus our previous expectations of between 22 and 24 million units.

Please note that we maintain certain return reserves for the Finding Nemo home video, as we have for all of our previous titles, and that these reserves may differ from those estimated by Disney.

In addition, our reserve estimates may be adjusted periodically based on actual rates of returns, inventory levels in the distribution channel, as well as other business and industry information.

I would now like to address upcoming events that may affect results for the remainder of the first quarter as well as introduce our initial thoughts on fiscal year 2004.

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 third-quarter 2003 Form 10-Q,, particularly the 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 to reflect events or circumstances after the date they were made.

We anticipate our earnings for the first quarter of 2004 to be driven by the continuing success of Finding Nemo.

Our projections assuming Nemo could eventually achieve a worldwide box office of roughly 855 million, with the remaining foreign box office receipts being recognized in the first quarter.

We also expect international home video revenues -- most notably from Australia and the United Kingdom, where the home video releases are scheduled for January and February, respectively.

In addition, we expect to recognize some domestic television revenues from pay-per-view, continuing worldwide merchandise revenues, and ancillary royalties.

As a result, we expect to report diluted earnings per share for the first quarter of 2004 of roughly 30 cents.

Beyond the first quarter, we expect continuing international home video revenues from Finding Nemo to drive our results for second quarter, particularly from its release in major European territories, such as France, Germany, Italy, and Spain in April, and Japan in May.

Revenues from the domestic pay-TV licensing of Nemo are expected in the second quarter, while worldwide merchandise revenues and ancillary royalties from all our films are anticipated throughout 2004.

Our financial results for the fourth quarter of 2004 will depend primarily on the success of our studio's sixth feature film, The Incredibles, and are therefore very difficult to estimate before its domestic theatrical release on November 5th.

As a result, we are not providing EPS guidance for the full year.

We expect that The Incredibles will be released in the majority of international territories throughout the fourth quarter.

This will give 2004 three major revenue drivers -- domestic and international theatrical for The Incredibles, and international home video for Finding Nemo.

Looking forward to 2005, this will be the first year in which Pixar experiences four major revenue drivers, with domestic and international home video for The Incredibles in the first half of the year and domestic and international theatrical for Cars in the second half.

2006 will also have four major revenue drivers, but for the first time, Pixar will be keeping 100 percent of the profits after distribution fees from two of those revenue streams -- domestic and international theatrical for film eight, our first release outside of our co-production agreement.

Throughout 2004, 2005, and 2006, we expect continued worldwide home video, television licensing, merchandise sales, and ancillary royalties from all our films released to date as well as continued software sales and interest income.

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

Among the factors that could cause projected 2004, 2005, and 2006 results to differ are the following -- the timing and amount of worldwide revenues and distribution costs from film eight, Cars, The Incredibles, Finding Nemo, and other titles in our film library; the timing accuracy and efficiency of the information we receive 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; potential delays in the release dates of our films; final terms of our future distribution deal; and external socioeconomic and political events that are beyond our control.

Finding Nemo's unprecedented performances at both the worldwide box office and on home video are landmark achievements in Pixar's history. 2003 stands out as our most successful year to date, and we expect this momentum to carry us into 2004 with Finding Nemo's fine (ph) home video release, and later, with the release of Pixar's next film, The Incredibles, slated for November 5th, 2004.

For more on Finding Nemo, The Incredibles, and beyond, I would now like to turn the discussion over to Steve Jobs.

Thanks, Ann.

As Ann said, we are thrilled to report the most profitable quarter and full year in Pixar's history.

Our 2003 revenues of 262 million, net income of 123.7 million, and diluted earnings per share of $2.15 show that the business model we put in place many years ago is working quite well.

We're very proud of these numbers, but we are even prouder of what generated them -- the phenomenal success of Finding Nemo, which became the highest grossing animated film of all time.

Finding Nemo's worldwide box office currently stands at 850 million, comprised of 340 million domestic and 510 international.

It is the highest grossing film of 2003, and the ninth highest grossing film worldwide of all time.

With Finding Nemo, the total worldwide box office for Pixar's five films has surpassed $2.58 billion.

Let me take a moment to highlight the outstanding international performance of Finding Nemo.

It is the first animated film to surpass $500 million in international markets.

The most significant territory released since the last earnings call, Japan, set a new opening weekend record and achieved $96 million of box office during its nine weeks in release.

Finding Nemo was also the highest grossing film during calendar 2003 in Argentina, Australia, Austria, Belgium, China, France, Germany, Hong Kong, Mexico, the Netherlands, Poland, Switzerland, the United Kingdom, and Ireland.

Finding Nemo also sold 24.8 million video units in North America in 2003, selling 8 million units the first day to become the fastest selling video ever, beating previous record holder Monsters, Inc., which sold 5 million units the first day.

In addition, the Finding Nemo DVD became the number-one selling DVD of all time, with 19.2 million DVDs sold in North America in 2003.

We've won lots of awards for this great DVD.

And speaking of awards, Finding Nemo has the been nominated for four Academy Awards -- Best Animated Feature Film, Best Original Screenplay, Best Musical Score, and Best Sound Editing.

Plus our new short film, Boundin', was also nominated for Best Animated Short Film.

It is incredibly important to everyone at Pixar to produce the highest quality products we can, and these nominations and the success of our films means a lot to us.

We couldn't be happier.

Now I'd like to talk about Disney.

As most of you know, the last week, we ended our talks with Disney to extend our relationship after negotiating with them for over ten months.

Let me explain why.

As you may recall, our first deal with Disney was a three-picture deal, with Toy Story being the first picture.

After the phenomenal success of Toy Story, we were able to negotiate our present deal, containing terms substantially more favorable to Pixar.

As part of this new second deal, the last two pictures of the first deal became the first two pictures of the second deal under its more favorable terms.

This is a common practice in Hollywood when a studio seeks to secure a new, longer-term deal with a valued partner.

Jumping ahead to 2003, let me quote an L.A.

Times article from earlier this week. "Several months before last summer's release of Finding Nemo, Walt Disney Company Chairman Michael Eisner told his board not to expect a blockbuster, and suggested that such a fate might not be all that bad.

Although Pixar Animation Studios was high on its film, Eisner said he was not impressed by early cuts he had seen according to people familiar with the matter.

Should the movie falter, Eisner said, Disney could gain negotiating leverage to extend its partnership with the high-flying animation company.

Pixar, Eisner concluded, may be headed for a reality check."

We've been told the same story by several folks at Disney.

As you know, things turned out a little different, and Finding Nemo would soon make more at the box office than any animated film in history.

We finally began negotiations with Disney on a third deal almost a year ago.

We had done our homework.

We talked with several of the other major studios, and we had a pretty clear idea of the deal we could get from them.

We offered a deal to Disney that was less favorable to us then we could get from several other studios -- for example, with much higher distribution fees, a much longer-term commitment, and free use of our characters in their theme parks.

But we held firm that the last two pictures of our current deal -- The Incredibles and Cars -- be folded into the new deal with its more favorable terms, just as we had done before, and just as almost any other studio in town would agree to if they were in Disney's shoes.

In the end, Disney chose not to agree to this.

So after ten frustrating months, we ended our talks with Disney.

It is not without some regret.

We will truly miss working with Dick Cook and his terrific distribution and marketing teams.

And you would be hard pressed to find anyone who loves the original spirit of Disney more than John Lasseter, Ed Catmull, or myself.

But after almost a year, it's time to move on.

Since announcing this, we have been fortunate to receive calls from the heads of every major studio in Hollywood.

It is clear that we are wanted by others, and we will begin discussions with these studios in March with the goal of striking a new deal with one of them by this fall.

As we look to the future, I thought it best to ask and then answer some of the questions that will likely be on your minds.

After this, we will open up for any remaining questions you may have.

So now I am going to ask Ann to ask me some of these questions, and I will try to answer them.

Okay.

Can anyone else distribute and market Pixar's films as well as Disney?

Yes.

We think so.

One needs to look no further than Harry Potter, Lord of the Rings, Spider-Man, or Ice Age to see examples of excellent marketing and distribution.

We think there are at least four other major studios that will do a great job marketing and distributing our films.

Are these studios interested in working with Pixar?

Yes.

I have personally received calls from the heads of each of these studios during the past five days, all expressing a very, very strong interest in working with Pixar.

Is Disney planning to make sequels of all the Pixar films released through them?

Well, Disney is making noises that they will, but we really don't know.

Disney has the rights to make sequels of our first seven films if we decide we don't want to make them ourselves.

We have already decided that for Toy Story.

And it is likely that we won't want to make sequels to any of them ourselves, but we haven't decided that yet.

Our filmmakers are more interested in telling new, original stories.

And we have demonstrated that our original films like Monsters, Inc. and Finding Nemo can be even more successful than our sequels like Toy Story 2.

How does Pixar financially participate in the first seven films and any sequels?

Though Disney has publicly said that they own our films, this is not true.

Although Disney does own the original Toy Story because it is covered under our first deal with them, Pixar will continue to own 50 percent of A Bug's Life, Toy Story 2, Monsters, Inc., Finding Nemo, The Incredibles, and Cars, and will continue to earn its current share of the profits from these films and their videos, merchandise, etc. in perpetuity.

For example, when Pixar's films are released on high-definition DVDs later this decade, Pixar will continue to earn its current profit split from these DVDs.

If Pixar decides not do sequels and Disney solely finances and create sequels to Pixar's films, Pixar will earn a lower passive royalty on those sequels.

Will Pixar's future films suffer without Disney's creative collaboration?

The truth is that there has been little creative collaboration with Disney for years.

Pixar creates the original stories, then creates and produces the films with very little creative input from Disney.

You can compare the creative quality of Pixar's last three films, for example, with the creative quality of Disney's last three animated films, and gauge each company's creative abilities for yourself.

The collaboration we do have with Disney is centered around the marketing of the films, not the making of them.

Will Pixar's future films suffer without Disney's legendary marketing?

Marketing is important, and we have enjoyed working with Dick Cook and his talented marketing team at Disney.

But no amount of marketing will turn a dud into a hit.

Not even Disney's marketing and brand could turn Disney's last two animated films, Treasure Planet and Brother Bear, into successes.

Both bombed at the box office.

The thumbs-up or thumbs-down you hear from colleagues at the water cooler overshadows the most skillful marketing in the world.

The quality of the movie is far more important than the marketing of the movie.

And as I said, there are at least four other studios with strong marketing organizations that are very interested in working with us.

Will Pixar's future films suffer without the Disney brand?

Beginning with Monsters, Inc., the results of Disney own exit poll research showed that the Pixar brand had become more important than the Disney brand to draw moviegoers to see our films, both for parents with children and for adults without children.

We think the Pixar brand is now the most powerful and trusted brand in animation, and it gets even stronger with every successful film we release.

Is there still a chance that Disney and Pixar will get back to the bargaining table?

It's not very likely.

It's very unlikely.

After more than ten frustrating months of negotiations, we were unable to strike deal with Disney.

And now it's time for Pixar to move on.

Is Disney going to be less motivated to make The Incredibles and Cars as successful as prior Pixar films now that the marriage is coming to an end?

Disney needs these films to be successful as much as Pixar does.

Remember, a very significant percentage of Disney's studios profits over the last several years have come from Pixar films.

How good are The Incredibles and Cars going to be?

We think they're going to be outstanding.

The preview screenings for The Incredibles have been very positive -- more positive with teens than any prior Pixar film at this stage, for example.

But you never really know until the movie is released, which for The Incredibles is this November 5th -- and we couldn't be more excited about it.

Cars, John Lasseter's next movie and Pixar's seventh animated feature, is coming along quite nicely, and is on track for its holiday 2005 release.

We recently announced that the voice cast of Cars includes Paul Newman, Owen Wilson, Bonnie Hunt, and NASCAR legend Richard Petty.

We think it's going to be great.

What about 2006 and beyond?

We already have our 2006 film in production, and hope to greenlight our 2007 film before the end of this year.

Lots of excitement here, but we're going to save any announcements for another day.

Is it Pixar's plan to finance 100 percent of its new films after Cars?

And can Pixar afford to do this?

Yes.

It is Pixar's plan to finance 100 percent of our new films beyond Cars so that we can keep the largest possible share of the profits we are creating.

Fortunately, we can easily do this.

Pixar had over $520 million of cash in the bank at the end of 2003, and we expect to have over $650 million of cash in the bank by this summer.

If our next two films do as well at the box office as we hope, we project that Pixar will have between 800 million and $1 billion of cash in the bank in 2006, and that's net of funding 100 percent of our future productions.

How will a new deal affect Pixar's financial results in 2006 and beyond?

While we cannot predict the success of our future films, we can say that had Finding Nemo been a film under the terms of the new deal we hope to make, our 2003 revenues of 262 million and net income of 123.7 million would have more than doubled.

I will leave it to you to calculate what our stock price might be with $250 million in earnings using Disney's P/E ratio of 35.

How does the senior management team at Pixar feel about splitting with Disney?

Honestly, we're sad about it.

You cannot find anyone who loves the original spirit of Disney more than John, Ed, and myself, as I said.

But after ten months of trying to strike a deal with Disney, we felt it was time to move on.

So we're focused entirely on three things now -- one, making sure our movies are the best we can make them; two, ensuring that we get to one picture a year without sacrificing our quality; and three, finding a new studio partner to distribute our pictures beginning in 2006, just two years away.

I am confident that we will succeed at all three of these, and that Pixar's golden age will continue to evolve without missing a beat.

And now, Ann and I would like to open it up for any remaining questions that we haven't answered.

Thank you. (OPERATOR INSTRUCTIONS) Kathy Styponias, Prudential Equity Group.

Question for -- a couple of questions, actually, for both of you, Steve as well as Ann.

A little bit more insight into the process that you went through with Disney in terms of what ultimately led you to walk away?

I know that you said you feel that you think there are stronger or strong -- or just a strong distribution partners.

But it seems to me that Disney has the platforms that appeal the most to your core demographic, and that's families.

And given -- based on the deal terms that Disney suggested that you were offering -- what was out there that was being suggested that you were offering Disney -- and it sounds like, Steve, from your commentary, you were suggesting that the last two movies become part of a straight distribution deal, it would seem to me that Disney was in the position where they almost had to say no, given how lucrative the deal with Pixar has been thus far.

So I guess my question is -- was it a straight distribution deal or nothing else as far as your discussions with Disney?

Would you have not been happier -- or would you have been willing to take a higher amount on the split instead of going 50-50 -- say, going to 80-20, or even 90-10 -- as opposed to just a straight distribution deal?

Because I'm having a hard time figuring out how the numbers -- how you're going to be able to get a distribution deal that's more favorable -- and by the way, we had heard that the offer to Disney was 10 percent distribution on the next two movies, relinquishing of all the rights that they have thus far in the existing library, and then after their current deal is done, that you'd pay them a 7 percent distribution fee.

And unless you're assuming you're going to get much, much better than a 7 percent distribution fee, that your future films are going to do Nemo-like numbers, and that Disney will do a halfway decent job on the sequels and do many of them, it's hard to me to see how the numbers balance out.

So that the first question.

The second question (multiple speakers)

Let me go ahead and answer that one. (multiple speakers) I think your data is just wrong.

And I'm not going to go into what the negotiations were specifically.

But we were offering Disney much higher distribution fees than you said, both for the next two films and for films beyond that.

But the line in the sand that we drew was that we want to own our films going forward.

And we wanted to own The Incredibles and Cars.

And in the end, Disney wasn't willing to agree to that.

So we thought we were willing to accept a quite reasonable deal, but Disney felt differently.

And that's their right and privilege.

Okay, and then just two just quick follow-up questions then.

With the sequels, how does John Lasseter feel about Disney doing the sequels is question number two.

And question number three -- if you do invoke your right of first -- if Disney comes to you -- and can you confirm, actually, that basically you have officially said no to doing a Toy Story 3 sequel?

We have said no to doing Toy Story 3.

We have not said no to anything else yet, and we will be discussing that amongst ourselves and with Disney over the next several months.

And we feel sick about Disney doing sequels, because if you look at the quality of their sequels, like the Lion King one-and-a-half and their Peter Pan sequels and stuff, it's pretty embarrassing.

Okay, well, just a quick follow-up then on your refusal rights.

If Disney comes you and says we want -- let's say that you hadn't said no to Toy Story 3 and you had said yes.

Is there a limited amount of time in which you have to make those movies?

Could you have said yes and made the movies four years from now?

You know what, Kathy?

We need to move on, I think.

I think we've discussed that as much as we think is appropriate about sequels.

We have tried to share as much as we can.

If we could take the next question, that would be great.

Richard Bilotti, Morgan Stanley.

I have a relatively simple question.

With the amount of cash that you have on the balance sheet, whether you choose to make sequels or whether you choose to make all-new films, what's the constraint limiting you from making multiple pictures a year? (multiple speakers) There's consumer demand, and certainly you've got the capital, so --

Rich, if it were only financial capital that was required to make successful animated features, we would be seeing a lot more successful animated features.

It is the talent that is the limiting factor.

We have spent the last ten years at Pixar growing our creative talent base and our technical talent base.

These are skills that you cannot go acquire on the outside.

There are not people out there that know how to do these things that you can go hire.

So you have to grow them.

And that is what Disney did in their golden age of animation a decade ago.

That's what Pixar has done.

And we think that's what anyone has to do.

So talent is the limiting factor.

And I think -- you know, Disney tried to ramp up from a picture a year to two pictures a year, and that may have been one of the contributing factors that got them to where they are today in animation.

Just out of curiosity, do any of the joint venture partners bring development prospects that could help ease that constraint?

There's nothing on the radar screen to that effect, no.

Okay, thank you.

Anthony Valencia, TCW.

A couple of quick questions.

Thanks for the Q&A with Steve.

That was helpful.

But I've seem a number of things in the press lately which appear to be inaccurate or misleading.

If you could just clarify these real quickly?

With respect to library, can Disney go out and do output deals by themselves, or does Pixar need to sign off on that?

Secondly, Pixar has the right to co-produce sequels with Disney under existing terms in perpetuity?

Thirdly -- and this is somewhat of a hypothetical, of course, but is there any sort of time where if Disney does not produce a sequel or sequels, can Pixar greenlight a sequel with Disney only getting the royalty fees (ph), should they decide not participate?

And then real quickly, can you just comment if there was any foreign currency exchange effect on quarter?

Sure.

The library output deals, you -- with respect to television, I assume.

Right.

Yes.

We are consulted on all TV deals.

There's an obligation to make sure that they're good third-party relationship deals, that there's no -- you know, because of that (ph) Disney owns so many television assets, there is an obligation under the contract to make sure that there is a fair third-party price, and Disney has been very good about involving us in those discussions.

As far as sequels go, we have the right to elect to co-produce sequels.

If we decide not to do that for a film, we lose that right for future films.

The way to understand our thinking on this is that if we have the talent to produce one animated film per year, and our creative talent has demonstrated that it can produce original films that actually do better at the box office than our sequels -- as Monsters, Inc. and Finding Nemo have done, compared to Toy Story 2 -- then those slots might get filled up with original films and not leave any remaining room for sequels.

So if you care about quality, which we do, it's hard to see how we could turn out high-quality sequels if we don't have any slots left.

As far as the foreign exchange impact -- we clearly benefited this quarter from the weakness of the dollar in some markets.

It's reflected in our very strong foreign box office.

The results have been strong on a territory-by-territory basis in local currency anyway.

But it is true -- because of the weaker dollar, it has translated into even stronger dollar revenues for Pixar.

Do you have an overall order of magnitude on that?

No, we haven't.

We haven't actually culled it out.

Andrew Slabin, Merrill Lynch.

Just a quick question.

As you guys look to potential future deals with other distribution partners, other studios, can you just discuss your level of interest in potentially retaining full distribution rights in certain windows, be it home video or merchandise or video games, taking full control of that stuff?

And if so, what kind of staffing requirements would you need, and sort of how much leadtime would you need to build up a presence or an infrastructure to do some of that stuff?

Yes, we have thought about that.

And I think there will be areas of merchandising and things like video games, as you have said, where Pixar will play a much more active role that we have the past.

Our first film under such a deal will be in 2006, so we think we have adequate time to staff up for that.

And the staffing requirements for that I don't think will be terribly large.

Was that all, Mr. Slabin?

That is it.

Thank you.

David Miller, Sanders Morris Harris.

Good afternoon and congratulations.

Steve, as you look towards the future in terms of deciding a new distribution partner beyond Cars, I'm going to go ahead and assume that you are thinking that distribution domestically is largely a commodity service.

There's really no one here in town who does it better than anyone else.

But internationally, clearly there are those studios whose distribute more effectively than other studios.

And there are actually other studios that don't distribute internationally at all -- MGM comes to mind, of course.

Given that, is MGM out of the running?

And do you think there are other studios here in town that distribute internationally better than others?

And what do you look for in making that decision?

Thanks very much.

Well, we have absolutely already looked at that question very intimately, examined cases of films that have been distributed domestically and internationally and looked at them in great detail.

So we are very on top of that.

And I'm not going to go into any of our thoughts on that right now, except to say that we are very on top of that issue, and international distribution is very important to us.

Okay.

Thank you.

Robert Routh, Natexis.

Good afternoon, and congratulations again.

A few quick questions.

First, if you could comment on any future deal that you may sign -- obviously now, Disney picks up 100 percent of the P&A (ph), and then they recoup it, so none of it flows through your P&L, which definitely helps your earnings.

Going forward, in any deal that you would sign with another partner, would you look to sign a similar type of deal?

Or would Pixar actually look to pick up some of that P&A spending and have that flow through your P&L?

Second, I am wondering if -- out of the four studio heads that you have talked to or that you consider to be quality studio heads that can distribute your productions in the same manner as Disney, I'm wondering whether or not any of them have made, or you would -- obviously, you'd have to consider -- but if any of them made any overtures regarding something a little bit deeper than just a distribution agreement, along the lines of -- has the topic of acquisition or merger even come up, or has not even been addressed?

And finally, I'm curious whether you think Michael Eisner still likes his iPod?

We've talked to more than four studio heads, and I'm not going to get into those discussions at this point in time.

In terms of running the P&A through a studio partner or through Pixar, that actually wouldn't affect the earnings.

It would affect the cash flow requirement.

We're looking at ways -- Steve's right.

It's an issue, I think, of timing of recognition of the expenses that you're probably interested in, Robert.

But we're looking at some ways of structuring the deal so that there would be no impact on Pixar's financial results.

It depends on the structure of the deal, but --

So you would look for a deal that would make it consistent from the existing deal for us to look at?

I've said as much as I can.

If we could move onto the next question, that would be great.

Michael Savner, Banc of America Securities.

I will switch gears for a minute.

But I do have two specific questions.

Going back to the balance sheet, given your cash flow on hand today and your projections that you talked about or the rough projections you talked about, certainly you have enough to fully fund your films going forward.

You had said in the past that you like having strong cash balance sheet position, because it will help with the negotiating for a future deal.

But beyond that, can you see a change in your plans in terms of distributing some of that cash?

Or do you see yourselves holding on to $1 billion worth of cash in a year from now or a year-and-a-half from now?

And then the second question -- and I apologize if you don't want to go down the sequel route again -- but is there any scenario where you could envision working with Disney on the production of a sequel, whether it be under the current terms, which I would think is unlikely?

Or could you possibly negotiate specifically a new deal that would address only sequels?

Thanks very much.

Why don't we wait to get $1 billion cash in the bank, and then we can discuss what to do with it.

But let's not get too far ahead of ourselves.

And for right now, I think we want as much cash as we can, because that gives us as many options as we can going forward.

I forgot the second question, what was it again?

Can you ask the second question again?

I'm sorry.

Sure, yes, no problem.

Is there any scenario under the current terms -- (multiple speakers)

Ah, right.

You know, again, as I mentioned, our limiting factor is producing a film a year, which we will get to shortly.

And think of it as so many -- we have a slot a year to fill.

And if our incredibly talented creative team can fill each of those slots with original pictures, which we have already demonstrated can be quite successful, even relative to successful sequels, then we don't have any slots left to do sequels.

So that's the kind of decision-making process we'll be going through in the next several months.

Dennis McAlpine, McAlpine Associates LLC.

Thank you.

Sort of following up on that -- given the amount of cash that you have and the lack of need for it for a couple of years, anyway, it would seem that you could get a much better return on that cash if you did put money into a sequel and maybe had some overview as to what Disney was doing.

Why wouldn't that work out?

And then, would you address the question of -- supposedly, John Lassiter has a Toy Story 3 script that he thought was better than anything they had.

Why couldn't you work out a deal to give them that in return for something or other, whatever that might be?

I think we have probably said about as much as we're going to say today on the sequel matter.

So --

Next question.

Gordon Hodge, Thomas Weisel Partners.

Just curious if we should expect any TV-related revenues from Monsters, Inc. in 2004, or have we already enjoyed most of that?

And then I think you'd referred to having spent the bulk the P&A related to Nemo in 2003 on your last call.

I'm just curious if we should, in looking at your Q1 guidance and formulating our own thoughts, if we should be anticipating much P&A (technical difficulty) on a go-forward basis for either international video or from any (ph) international theatrical?

Thanks.

Sure.

As far as TV on Monsters, Inc. -- we're expecting some revenues in the fourth quarter.

And as far as P&A on Finding Nemo, you're quite right.

Most of it's already been spent in 2003, and there will be minimal impact in 2004.

Terrific.

Thanks.

Doug Mitchelson, Deutsche Bank.

If we take a step back -- post-Lion King, Hollywood jumped through (ph) the animation business, and many (ph) lost money while driving up animators' salaries.

Are we at risk of a similar gold rush mentality in the next few years?

You know, what could -- could we be seeing your cost rise as others try to access your talent?

And then also, I guess, following up on that, what kind of protections do you have from Disney on a noncompete basis?

Well, I think we are seeing everybody try to get into 3-D computer animation, thinking that the medium is the most important thing.

It's an opinion we don't share.

And -- but we have not seen the industry go through the cost escalation that we did during the last time this happened in 2-D animation, as you pointed out.

As far as Disney, we have an agreement in place where neither company hires people who have worked at the other company during the prior six months.

And I believe when the deal ends, it expands to two years?

I'd need to --

Yes, we need to check that, but it (multiple speakers)

We need to check that, but I believe at the end of the deal, it actually becomes even more significant.

Or it may survive the deal for two years. (multiple speakers) But -- so Disney and Pixar have had a very mature relationship in terms of not hiring people from the other company.

And we have that in the agreement.

And I don't think there will be any problems there.

So as we try to model out your cost for your film productions then going forward, we should keep using about the same level of cost that you're currently incurring?

Well, our employees do appreciate raises now and then.

And there is the rate of inflation.

Beyond that -- okay, thank you very much.

Thank you, and please go ahead with your closing remarks.

Thank you for joining us for this call.

We know there is clearly change in the air.

And some people are disquieted by change.

But we feel very, very strongly that Pixar is on the right track and the best days are yet to come.

Thank you.

Thank you.

Ladies and gentlemen, this conference will be available for replay after 8:30 PM tonight through midnight Wednesday, February 11th.

You may access the AT&T Executive playback service at any time by dialing 1-800-475-6701 and entering the access code 719023.

International callers dial 320-365-3844 using the same access code, 719023.

That does conclude our conference for today.

Thank you for your participation and for using AT&T Executive Teleconference.

You may now disconnect.