迪士尼 (DIS) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you very much for standing by, and good afternoon.

Welcome to Pixar Animation Studios' second quarter 2004 earnings conference call.

Now at this point, all of your phone lines are muted or in a listen-only mode.

However, later during the conference, there will be opportunity for questions and those instructions will be given at that time.

Just as a note, if you should require any assistance during the call, please press star and then zero to reach an AT&T operator.

As a reminder, today's conference is being recorded, today the 5th of August, 2004.

Ladies and gentlemen, should you get disconnected during the call, please feel free to dial back, using the toll free number, 888-428-4480.

Your speakers for today's conference are Mr. Simon Bax, Executive Vice President and Chief Financial Officer, and here with our opening remarks is the President of Pixar Animation Studios, Mr. Ed Catmull.

Please go ahead, sir.

Welcome to Pixar's conference call for the second quarter of fiscal year 2004.

In just a moment, Simon Bax, our new executive Vice President and Chief Financial Officer, will be providing you with an update on our results for the quarter.

After that, I will tell you about the status of The Incredibles and other developments at Pixar.

But first I would like to share with you an update on Steve Jobs recuperation from surgery, which I'm sure you've all heard about by now.

John Lasseter and I visited Steve, and I'm very happy to report that he is doing great.

His recovery is going very well.

And he expects to return to work in September.

He was cracking jokes, and he gave us the distinct impression that he would be firing off a lot of email from his PowerBook over the next month.

It was great to see him doing so well.

Now, before I start talking about The Incredibles and other developments, I would like to turn the call over to Simon for details about our quarterly results and our outlook for the remainder of the year.

Thank you, Ed.

We are delighted to report that our results for the second quarter of 2004 were well ahead of expectations.

Revenues for the quarter were 66.3 million.

Net income was 37.4 million.

And diluted earnings per share was 63 cents.

These results compare to revenues of 48.9 million, net income of 19.5 million and diluted earnings per share of 34 cents reported in the second quarter of 2003.

For the first six months ended July 3rd, 2004, earnings were 64.1 million compared to 27.7 million for the equivalent period in 2003.

A more than two-fold increase.

The main listen for this spectacular performance continues to be Finding Nemo.

But we are also seeing continued strength in our library titles as well as our software business.

Film revenues for the second quarter of 2004 were 63.7 million, of which 49.4 million related to Finding Nemo.

Primarily from worldwide home video, domestic pay TV and consumer licensing.

The rest of our film revenues consisted of 10.1 million from the library titles and 4.2 million from Monsters Inc.

Revenues from software licensing in the quarter amounted to 2.6 million.

Operating expenses in the quarter was 7.8 million compared with 11.8 million for the same period in 2003.

The year over year decrease was largely due to certain one-time expenses totaling 5.1 million in 2003.

Relative to our operating expense levels of more recent quarters, our second quarter results reflect the ongoing growth of the Studio as well as our increased proportion of operating expenses previously shared by Disney.

Other income for the second quarter of 2004 was 2.5 million.

That's compared to 3 million recognized in the second quarter of 2003.

The difference can be attributed primarily to lower interest rates.

Our second quarter fully diluted earnings per share of 63 cents greatly exceeded our previous guidance of 30 cents.

Primarily because of the continuing success of all of our films.

Finding Nemo accounted for 17 cents or around half of the upside due to better than anticipated revenues from worldwide home video and consumer product licensing.

Whereas we had previously expected to recognize worldwide home video net unit sales of 40 million by the end of the year, we have already reached this target by the end of the second quarter.

Seven cents of our EPS variance was due largely to higher than anticipated revenues from international home video sales of Monsters Inc. and our library titles.

In addition to contributions from film revenue, we recorded a significant decrease in our effective tax rate that contributed 7 cents to our second quarter 2004 earnings per share.

This decrease reflects the impact of utilizing certain tax credits related to foreign income for the years 2000 through 2003.

The timing and availability of this tax credit were uncertain.

And therefore not factored in our earlier guidance.

Lastly, 2 cents of our upside resulted from non-film related items, including higher than expected random software licensing sales and lower than anticipated operating expenses.

Cash and short-term investments at the end of the second quarter were approximately 755.2 million.

Having increased roughly 233 million since January 3rd, 2004.

The increase was primarily attributable to cash received from Disney through our share of film revenues.

Particularly from the worldwide home video release of Finding Nemo.

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 122.8 million versus 107.7 million at the end of 2003.

Reflecting production spending on our current film projects offset by film amortization of 12.2 million.

Our balance sheet remains debt-free and the returned earnings at the end of the second quarter were 457.3 million.

I would now like to begin a discussion of the upcoming events that might be reflected in the results for the remainder of the third quarter, the full year 2004 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's possible that actual results will different materially.

We will refer you to our 2003 form 10 K and first quarter 2004 form 10 Q, particularly the sections on risk, for important factors that could cause actual results to differ.

Among the factors that could cause these forward looking statements to differ are the timing and amount of worldwide revenues and distribution costs from all of our films and the timing, accuracy and amount of information received from Disney to determine revenues and associated gross profits.

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 circumstance after the date they were made.

For the third quarter, revenues will consist primarily at worldwide home video, foreign television and consumer product licensing related to Finding Nemo and our other films, as you know.

As you know, we currently maintain certain return results for worldwide home video sales that may exceed those reported to us by Disney.

On a quarterly basis, we evaluate these estimates and adjust them when appropriate.

At this point in time, we are comfortable with the Street's mean estimate for the third quarter of 2004 of approximately 20 cents per fully diluted share.

Our fourth quarter 2004 earnings will depend primarily on the worldwide box office success of The Incredibles, which is very difficult to predict before its release on November 5th, 2004.

Our key international box office release dates include France, Italy, Germany, Spain, the United Kingdom and Japan in late November and early December.

Giving the timing of these release dates, we would expect to recognize the majority of our earnings relating to the theatrical release of The Incredibles in the fourth quarter of 2004.

We also expect our fourth quarter to include revenues from the U.S. network television debut of Monsters Inc.

Continued worldwide home video, television, and consumer licensing from Finding Nemo and our other films.

Because of the uncertainty of The Incredibles box office performance, however, we are not providing a full year earnings per share projection at this time.

The second quarter of fiscal year 2004 reflects the continuing strength of our film franchises.

Particularly across multiple revenue streams, including worldwide home video, television and consumer product licensing.

We continue to focus on producing exceptional films, and we're very excited about the upcoming release of The Incredibles.

For more on that, and other developments of Pixar, I would now like to turn the discussion over to Ed Catmull.

Thank you, Simon.

First, we are excited to announce today the signing of an exclusive multi-property publishing agreement with THQ.

This agreement grants THQ the rights to publish video games for Pixar's first fully-owned animated feature films.

We have enjoyed sharing in the success of THQ's games based on Finding Nemo which have sold over 6 million copies and ranked as the best selling children's game last year.

THQ is a great partner, and they have done an excellent job of capturing the creativity and heart of Pixar's films.

We look forward not only to the release of video games based on The Incredibles and Cars, but also to the continuation of our successful partnership to create great games for the future Pixar films.

Now I would like to update you on the production of our next two films, The Incredibles and Cars.

Cars, our Studio's seventh and final feature film under our co-production agreement with Disney, is looking spectacular.

John Lasseter is directing Cars in his first directorial role since Toy Story 2.

And you'll catch you first glimpse of the film in a teaser trailer that will be attached to The Incredibles this fall.

I'm pleased to report that production on The Incredibles is now complete and the film is scheduled to be released in the U.S. on November 5th.

The Incredibles will be our first theatrical release open both in the U.S. and internationally during the holiday season.

It's released across Europe and Asia will occur in late November and early December.

It is Pixar's first film from director Brad Bird, creator of the critically acclaimed The Iron Giant.

The film has received a PG rating from the Motion Picture Association of America.

And we believe it will have tremendous appeal across all audiences.

The Incredibles is a virtual roller coaster ride of action, humor and emotion.

The look and feel of this film is unlike any animation you've seen before, and it's the first Pixar film that features humans as the main characters.

The stylized world they inhabit is one that only Pixar animators can bring to life.

The film will be released in over 100 countries in 35 languages.

We will have 180 global licensees and 85 global promotional partners for the film.

Key promotional partners will include McDonald's, Kellogs, Proctor and Gamble, SBC, Toys R Us, Safeway and Oral B. The marketing for The Incredibles is just getting started, and it's likely to be the largest, most comprehensive global marketing campaign ever of for a Pixar film.

Be on the lookout for a new trailer to be appearing shortly.

With that, Simon and I would now like to answer any questions you may have for us.

Thank you. [OPERATOR INSTRUCTIONS] Representing Merrill Lynch, the first question comes from Jessica Reed-Cohen.

Two questions -- hi, Simon.

Hi, Jessica.

Did you reverse any reserves in the quarter -- you said you did 40 million units.

Second question, on the distribution agreement -- there's a lot of speculation that you just stopped talking to anybody.

What is the latest date that you are comfortable with signing somebody for Cars and is the company willing to do a single film at a time?

Actually, Jessica, you said Cars, but I think you mean the film --

I did.

I didn't mean to say that.

I meant after Cars.

There's been no change from what Steve has reported before.

We expect to -- you know, we're looking to have a distribution agreement well before the release of our first fully owned film.

And I think Steve has said before that -- you know, probably for around 18 months before that release would be optimal.

But there's no specific deadline.

In terms of video for Nemo, there's nothing unusual in the quarter other than the fact that we had anticipated sales of 40 million net units by the end of the year.

And we've already reached that target or that estimate by the end of the second quarter.

Just wanted to follow up on that distribution agreement.

Is it possible that you would be willing to go -- you know, do one film at a time?

I don't think that's ever been talked about.

I don't think that makes a lot of sense, because you're looking to have a long-term partnership.

I was thinking more in context of Disney -- but what ever, thank you.

Thanks.

Thank you, Mrs. Reed-Cohen.

Next to go to the line of Lowell Singer with SG Cowen.

Go ahead.

Thanks.

A couple of questions.

Since you've hit the 40 million number already.

Are you going to update your guidance on what you think Finding Nemo lifetime sales will be.

Second, Simon, are there any remaining tax benefits for the rest of the year, or do you expect your tax rate to return to 40%.

Finally, will I know you guys have talked in the past about your facility and your headquarters in Emeryville and your potential need to build out.

I'm wonder wondering where that is in the decision process.

Is there any timing associated with that or any dollars with what you would need to invest in order to do that?

Three questions at a time.

The first two were easy.

Let me deal with the tax question first.

We have -- the 7 cents that we booked in the second quarter was an estimate for 2000 through 2003.

Tax years.

So we will have a further amount which we expect in relation to 2004.

Any estimated tax rate in 2004, we think will be approximately 36%, but that doesn't take into account the 2004 benefits that we may get.

So that's the tax question.

On the Emeryville facilities question, where we are with that is we have obviously been prudent in terms of planning ahead, and we're insuring that we will have the ability to build additional office space on our campus here.

And that's where we have been with that.

And the third question -- I forgot --

Home video units, lifetime.

Home video units.

We are not making any further projections on ultimate home video units for Nemo.

The number that you guys gave, the 40 million.

Is that a number that is your projection or is that a projection that comes from Disney?

That is net units that we actually recognized through the end of our second quarter.

That's what I was asking the forecast.

Before it became an actual number.

Your goal of getting a 40 by year end, was that your projection or Disney's projection?

That was our projection.

Thanks a lot.

Thank you very much, Mr. Singer.

And next presenting Prudential Equity Group, we go to the line of Kathy Styponias.

Please go ahead.

Thanks.

Hello, Simon and Ed.

Two questions as well.

First, with respect to initiatives going on at Pixar right now, I know there's an efficiency initiative whereby you're looking to make basically the same quality of films with the same people, given that you have six directors and 700 people.

That would be 115 per direct if you wanted to do it simply.

What are your goals?

What are you looking to take that number down to, and did the cost drop commensurately.

And with the THQ deal.

How does it compare to your existing deal, is it the same or better.

And do you have to add in the head count as a result of it?

On the first question about our efficiency goals.

It's clear to us that it's important for us to have smaller film crews working.

The thing that works against that, of course, is the directors like to put more visual quality up on the film.

So that's an internal challenge that we continue to have.

We have been able to hold things such that the total man power has actually been stable over the last few films.

But our goal is to head down by significant margin.

But we don't have a real number on that yet.

Should I do the THQ?

The question?

I forgot the question.

I'm sorry.

What I was asking was how does it compare to your existing deal with THQ?

Was it the same, better or worse.

And do you have to add any head count as a result of it?

The is second part is easy.

No, we don't really have to add any head count.

The first part, would I rather not comment on the details of that deal at the moment.

Okay.

Thanks.

Our next question comes from the line of Anthony DeClementi, representing Lehman Brothers.

Please go ahead.

Hi, Ed.

Hi Simon.

First of all, best wishes to Steve.

Glad to hear he is doing well.

Actually I have a follow-up on Kathy's two questions.

First with respect to cost.

For the' 06 film, can you give us the ballpark of what portion of the costs for the first film after Cars will fall into 2005 and what portion of it falls into 2006, and I guess, if any, what portion falls in '04.

And then I just have a follow-up about the THQ deal.

I'd rather not answer any questions about the 2006 film at the moment.

I think we will be covering that in a later call.

So I'd rather deal with this follow-up question.

What is the structure of the THQ deal?

Is it an up front licensing fee with the royalty?

Or is it simply a royalty?

We are not going to go into any details on the THQ deal.

I'm afraid I can't go into that today.

The announcement has just gone out.

And that's something for us and THQ to deal with.

Okay.

Thank you.

Next we go to the line of David Miller with Sanders Morris Harris.

Please go ahead.

First of all, congratulations on what looks for a stellar earnings release.

Ed, just your current negotiations on a new output deal.

There's an overall impression swimming out there that the reason you haven't announced any kind of new output deal yet with, say, either Fox or Time Warner or Sony or what have you is because you're waiting for Disney to cave.

That you're actually -- you're desire is to go back to Disney and -- you know, in some way, shape or form but that you're waiting for Disney to cave in some way or economics for Incredibles and Cars and backloaded economics for Nemo.

And I was wondering if you could issue any kind of comment on that.

Thanks.

It's nice to know that people care enough to speculate a lot.

The fact is -- we're being very thorough to prepare for our new partnership and there's a lot of focus on the distribution.

But, in fact, there are other building blocks that are important in our future.

All of which are taking our attention.

Among other things, there's games and merchandising and other partnerships.

And as evidenced by today's announcement, we are putting these pieces in place.

They are all important, and they're all taking our attention.

It isn't just about distribution.

Okay.

Thank you very much.

Thank you, Mr. Miller.

And our next question comes from the line of Michael Savener, representing the Bank of America Securities.

Please go ahead.

Thanks very much.

Just two quick questions.

First, when you mentioned this would be the biggest marketing ramp for any previous Pixar film.

I know you're not going to give specifics, but could you ballpark for us what kind of percentage increase over I guess a previously undisclosed number as well, the increase of P&A spending for Incredibles versus for Nemo.

And the second is an easy one.

Should we put any P&A in the third quarter?

You said you were already ramping up some marking.

Will that be hitting the P&L in the third quarter?

Overall, would that be expensed in the fourth quarter?

Thanks.

I'll take that one.

The level of marketing expenditure for The Incredibles will be sort of in line with that for Nemo and Monsters.

Although, we do believe that the promotional support from other parts would be bigger than we have probably had in the past.

So overall, it would be a much bigger event marketing campaign.

I don't expect any marketing revenues in the third quarter.

For the Incredibles.

Thanks very much.

Thanks.

Ladies and gentlemen, if there are any additional questions and comments, queue up by pressing star one on your touch-tone.

Next we go to Peter Mursky representing Oppenheimer.

Please go ahead.

Thanks, I just want to try to figure out.

This is not directly on the THQ deal.

But if you were to sign a long-term deal whether with Disney or anyone else, would you expect to carve video games out so it's separate from the deal?

Yes.

The deal with THQ is a multi-picture deal.

Any profit-sharing would exclude video games?

Any profit sharing?

Any potential profit sharing on a partnership deal on the films.

It's just not linked to any theatrical or video distribution deal.

It's totally separate.

Thanks.

Representing Credit Suisse First Boston.

A question now from William Drury.

Please go ahead, sir.

It's Deborah Schwartz on for Bill.

When you say you're comfortable with Q3 Street consensus, I'm just wondering if you could go into more detail on what your underlying assumptions are for video sales as well as costs.

No, I don't feel comfortable going into the detail of what your projections are for the third quarter.

Okay.

And then what about cost trends for Q4?

You mentioned --

Cost trends for Q4?

Or what are all the cost drivers for the fourth quarter?

You mentioned marketing costs.

I mean, the main cost drive will be linked to the revenues on a performance of The Incredibles.

Because it's how much film amortization The Incredibles will have.

That's the primary cost driver.

Otherwise, the marking costs are born by Disney, and, there was, we are taking our share after they recoup those costs.

Operating expenses, I think, are pretty much growing in line with what you have seen over the last couple of quarters.

So I don't expect that could be anything significant on the operating expense line.

Great, thanks.

Thank you very much, ma'am.

Next we go to the line of Jeff Logston with Harris Nesbitt.

Please go ahead.

Thank you, great quarter.

A couple of questions.

Number one.

With cash accumulating, what are you guys doing to maximize the returns on that cash?

Because it seems that the return is awfully low, and if I kind of calculate interest rates, kind have done better in the last quarter than I would have done a year ago.

Well, in the first -- if you're just comparing with a prior course, where we had realized gains in the first quarter --

Okay.

That weren't reflected, obviously be in the second quarter.

And the second quarter, just the markets in April and May were really horrendous.

So we are -- you know, we're very conservative, obviously, in the cash management.

The bad part of that is we do suffer from extremely low interest rates at the moment.

So -- you know, we expect, if interest rates will rise, we will benefit from that.

Excuse me, can you give us the average yield on the portfolio?

Should we just divide what your interest income is by the cash and that's it?

Are there other things going on in there is this.

No, that's one way of looking at it.

Obviously we didn't have the full cash balance that we had at the end of that quarter.

For the full fourth quarter.

But you could -- you know, we're getting a low rate of return at the moment.

But rest assured, it's something we're looking at and something we are focused on and want to improve those returns.

I want to follow up on Lowell's question.

The space that you guys have leased.

Is that space exclusively for office space, not for production space, or is there a potential for a combination of both?

Obviously, there's lots of people, wishing and hoping and thinking that perhaps there would be more than three films in production at one time.

We actually own the campus here.

No, I know that.

We don't lease the campus.

But you have extra space that you've leased, correct?

We own two buildings, and we lease a small amount of additional space around the -- just around -- like across the road.

But we have additional space where we have room to expand into that space which has been built out at the moment.

Great.

Thank you.

Thanks.

Thank you, Mr. Logston.

The next question comes from Spencer Wong of J.P. Morgan.

Two questions.

In the past, I know you haven't been all that keen to the idea of doing sequels to you existing franchising.

I wonder if your success of Shrek 2 changes that process.

And second, now that you've wrapped up production on The Incredibles, I was wondering if you could give the negative costs on the film.

We can't comment on the negative costs but I was wondering if you could talk about the sequels.

Toy Story 2 did well as a sequel to Toy Story 1.

We are aware of that.

The one thing we've been clear of, we have made a conscious decision that our film output is governed by the creative ability and not the production abilities.

And going forward, that will continue to be the gating item for the rate at which we grow or take on any projects of any sort.

Thanks.

Thank you, Mr. Wong.

We do have a question now from Robert Routh, representing Jeffreys and Company.

Please go ahead.

Good afternoon.

Just curious if you could comment a little bit about the recent news about Dreamworks trying to take their animation division public and how that could impact you and your valuation in the public markets.

Just how you feel about having another public competitor pure play.

And second, if you can comment a little bit on recent maneuvers by IDT to grow their entertainment division.

It seems as though their focus is largely animation as well.

So it seems as though a lot of people are trying to copy or model yet be the, obviously, you guys are at the front runner at the moment.

I'm wondering if you could give a macro level viewpoint of those two events.

I think the Dreamworks animation, if they do go public.

I think if that attracts people to this sector, I think that's probably positive from our point of view.

I don't see any negative in that.

IDT, I'm not as familiar with as a company.

But clearly, you know, there are a lot of people looking at our success and wanting to try and do something similar.

We wish them well.

Well, not actually.

Actually, every studio will try to copy this.

And some have already tried.

And there have been a number who have not succeeded already.

It's very hard to make these films.

It isn't just about buying some off the shelf hardware and software and making a movie.

It's very hard.

So in that kind of environment, for us, it's just very clear, make great movies and opportunities will come out of that.

Great.

Thank you.

Representing Pacific Crest Securities, we have a question now from Steve Lindberg, please go ahead, sir.

Good afternoon, guys.

I was hoping you can provide information with regards to the mix you saw between DVD, VHS and the international markets.

I guess cumulatively to date.

And secondly, what did headcount end up at the end of the quarter, and lastly, in terms of deferred revenue.

What was the sequential uptake related to?

Thank you.

Head count is a pretty stable around 740.

On the deferred revenue, the only significant piece there is we did a Monsters -- we have actually been earning higher participation than the revenue that we've been able to recognize so far.

So that accounted for about 8 million of the increase in deferred revenues.

And the third -- the first part of your question was --

Mix between DVD and VHS.

Clearly, internationally, the DVD piece now is much larger than the VHS piece though we are still getting significant VHS sales.

Is it more similar to what you're seeing in North America now.

It's still not quite there.

But certainly, in certain markets, it's exactly the same -- and some of the key bigger markets, its the same as the U.S. or more so than the U.S.

But overall, the internationally, still -- you know, still the VHS piece is slightly higher than the U.S. piece.

Sure.

Thank you very much.

The next question comes from the line of Gordon Han representing Thomas Weisel Partners.

Please go ahead.

Good afternoon, this is Lauren dialing in for Gordon.

I have one very quick question.

That's in regards to the rating of PG on The Incredibles.

Just wondering, if going forward, there's any plans or strategy in regards to rating or whether that will depend on the content of the film in particular.

Thanks.

Well, in the case of The Incredibles, we knew it would be PG when we started it.

As a company we thought we would either do G or PG.

It will depend entirely on the nature of the film.

Cars, for instance, clearly will be a G rated film, Shrek 2 is PG.

So it's within those two categories that we will stay.

Great, thanks.

Thank you very much, madam.

Ladies and gentlemen, we appreciate the strong interest in today's conference, however, time now for one more question.

Our final question comes from the line of Dennis McAlpine, representing McAlpine Associates.

Thank you and good afternoon.

Two pieces.

With regard to a question that's been asked sort of a couple of times, you can say whether you have had any recent discussions with Disney?

Or are those still canceled?

And second, you can talk about the '07 film as to when you have to decide what it's going to be and get started on that?

There's been no change in the status of our distribution agreement.

I just don't have anything else to add to that.

I think, Dennis.

On the 2007 project, we are in development on a number of projects, but we haven't got anything to announce to you yet.

At what point would you have to select what the film will be for the '07 project.

We are working on a number of development projects taking place.

So it's just a question of when we announce to the market which one we think is going to be -- you know, next in line.

Thank you.

Thanks.

With, that I will turn the call back to you for your closing remarks.

Thank you very much for attending this conference call.

We're disappointed that Steve couldn't be with us.

But we are very pleased with the performance of the quarter.

Thanks.

And, ladies and gentlemen, your host is making today's conference available for digitized replay for four days.

It starts at 8:30 eastern August the 5th all the way through 11:59 P.M.

August 9th.

To access AT&T, please call toll-free 800-475-6001.

Conference ID 739503.

That does conclude our earnings conference for this quarter.

Thank you very much for your participation as well as using AT&T executive teleconference service.

You may now disconnect.