迪士尼 (DIS) 2005 Q1 法說會逐字稿

Welcome to Pixar's first quarter 2005 earnings conference call. [OPERATOR INSTRUCTIONS] I would now like to turn the conference over to our host, Mr. Simon Bax, Executive Vice President and Chief Financial Officer and joining Mr. Bax will be Mr. Steve Jobs, Chairman and Chief Executive Officer.

Gentlemen, please go ahead.

Thank you.

Good afternoon and welcome to Pixar's conference call for the first quarter of 2005.

Before I begin today's discussion of our financial results I need to remind you that some of the statements made throughout the course of this presentation are forward-looking and it is possible that actual results will differ materially.

Among the factors that is could cause these results to differ are the timing and amount of worldwide revenues and distribution costs related to our films, and the timing, accuracy, and amount of information received from Disney and other sources 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 circumstances after the date they were made.

Additional information concerning these and other factors that could cause results to differ is contained in our 2004 Form 10(K) and our other filings with the Securities and Exchange Commission.

I would also like to remind you that today's results take into account our two for one stock split which took effect April 19, 2005.

All earnings per share calculations have been adjusted to reflect our increased share count.

With that I would now like to turn to our financial results.

For the first quarter ended April 2, 2005, our revenues were 161.2 million.

Net income was 81.9 million diluted earnings per share was $0.67.

These results compare to revenues of 53.8 million, net income of 26.7 million, and diluted earnings per share of $0.23 recognized in the first quarter of 2004.

The Incredibles contributed 127.5 million of revenues in the quarter.

The film has essentially completed its theatrical run with a worldwide gross of over $631 million.

This was comprised of $261 million domestically and $370 million internationally.

And represents our second highest grossing film after Finding Nemo.

Building on the success of its theatrical performance we released The Incredibles on home video in the U.S. in March,.

By the end of the first quarter we had recognized net unit sales of approximately 17.7 million units of which 97% were DVDs.

Because of the higher ratio of DVDs to VHS tapes we saw higher average wholesale prices and significant margin improvement in the U.S. on a per unit basis relative to Monsters Inc.

Internationally The Incredibles home video was rolled out in several markets including the U.K., Spain, Italy, and Mexico, and for the first quarter we recognized combined sales of approximately 5.7 million net units, 86% of which were DVDs.

Revenues from Finding Nemo were 14.4 million mainly from worldwide home video and consumer product sales.

Since its release in 2003 worldwide home video sales of Finding Nemo have surpassed the 50 million mark, earning it the distinction of being the highest selling DVD of all time.

Our library titles generated revenues of 14.8 million in the first quarter from video, television and consumer products.

Software licensing revenues were approximately 3.3 million which demonstrates the continuing demand for our in demand software.

Operating expenses were 8 million compared with 6.8 million for the same period in 2004.

Other income was 4.8 million and our tax rate was 37.3%.

Our earning of $0.67 per diluted share exceeded our split adjusted guidance of between $0.43 and $0.48.

The main reason for the variance was higher than expected initial sales of the Incredibles DVD in the U.S. which resulted in $0.11 of EPS upside.

A further $0.04 related to revenues from Finding Nemo and the remaining $0.04 were from our library titles, particularly international television sales of Monsters Inc.

At the end of the quarter our shareholders equity was over 1.3 billion.

Our cash and investments totaled 876 million and our accounts receivable had increased to 193 million.

The majority of which reflects cash due from Disney for our share of film revenues primarily from sales of The Incredibles home video.

Other sources of cash this quarter were software revenues, interest income and proceeds from stock option exercises which were partially offset by film production costs and tax payments.

Capitalized film costs were 132 million versus 140 million at the end of 2004 reflecting production spending on our current film projects offset by film amortization of 27 million.

We expect capitalized film costs to increase throughout the year as we continue our transition from share income costs with Disney to bearing 100% of the production costs for our films beyond Cars.

Looking ahead to the second quarter we expect to report earnings per diluted share of approximately $0.15.

The primary driver of these results will be international home video revenues from The Incredibles due to its release in a number of territories including France, Germany, and Japan.

We are not anticipating any material domestic shipments of the title over the next two quarters.

However, we expect The Incredibles home video to sell a similar number of units to Monsters Inc. over its life time.

As we look to the second half of 2005 other notable events will include the domestic pay TV debut of The Incredibles in the third quarter, the opening of the domestic television window for Finding Nemo in the fourth quarter, and the U.S.

DVD release of Toy Story on September 6, in celebration of the films tenth anniversary.

As a reminder Toy Story falls under the terms of the original 1991 feature film agreement.

As a result film revenues from the home video re-release will not be split evenly with Disney.

We are also currently discussing with Disney the U.S. re-release of Toy Story 2 towards the end of the year as well as the international re-release of both Toy Story and Toy Story 2.

However we have not yet finalized these plans.

With that I would now like to turn the discussion over to Steve for a few additional comments.

Thanks, Simon.

I've only got a few things to add this quarter.

Things are going great.

The first thing is that we are on track to finish Cars this October and it's looking terrific.

We are now very far along in production and, for example, over two-thirds of the animation is now finished.

It's turning out to be even more stunning than we imagined.

Cars is going to be the most detailed computer animated film ever made.

It has a stunning level of modeling and shading in it.

It's rendered with Pixar's state-of-the-art ray tracing to give amazing reflection off the cars and there is a level of subtlety in the lighting and the shadowing throughout the film that is simply gorgeous.

Of course all this visual richness is matched by a wonderful story and what we hope will be timeless characters.

We are all very excited about Cars.

Beyond Cars we plan to announce our next three films beyond Cars before the end of this year.

In addition to Cars we now have several films in various stages of production and development and our post Disney pipeline is building very nicely.

Speaking of Disney, I've had some nice conversations with Bob Iger but we are not yet in any negotiations to strike a new deal with Disney at this time.

We are still waiting to see what happens and we will let you know when something, if something starts to happen.

Speaking of time, a wise person once told me overnight successes take a long time.

Well, it's hard to believe it will be Toy Story's 10th anniversary this November and Pixar's 20th anniversary this coming February.

To celebrate Pixar and Disney are re-releasing Toy Story as Simon mentioned, the world's first computer animated film in a 10th anniversary special edition this September and New York's Museum of Modern Art will be celebrating Pixar's 20th anniversary with a special exhibit entitled Pixar featuring Pixar's artwork which opens this December and runs through February of 2006.

So Simon and I would love to answer any questions that you may have.

Thank you. [OPERATOR INSTRUCTIONS] Our first question from the line of Lowell Singer with SG Cowen.

Please go ahead.

Actually, I have two questions.

Steve, could you talk a little bit about the progress of the 2007 film?

Is it at the same stage where The Incredibles and Finding Nemo were at this point in their development relative to the release date?

And, second, can you talk a little bit, as you talk to Bob I mean it seems to me that there are sequels that you guys feel passionately about.

I don't want to negotiate this on the call but as you talk about the possibilities of working with Disney in the future are there sequels that you really do care more about than others or do you view the intellectual property as one entire element?

Well, first let me talk about our 2007 film.

We are well into production on our 2007 film.

It's looking very good.

And there is not going to be any issues with finishing it in time.

So I assume that's what your question was about.

Exactly.

Yes, there will be no issues there.

And as far as if we do enter into any negotiation with Disney all I really want to say is that sequels will play a part of it.

And leave it at that.

One follow up.

On this Toy Story re-release why is it being re-released separately from Toy Story 2 as opposed to as a box set?

Disney has a very good home video marketing team and I think that they feel pretty strongly that re-releasing them separately will be more successful than re-releasing them only as a box set.

And so I think we've got plans set for Toy Story and plans are firming up for Toy Story 2.

Not very long there after.

So I think we will have them both out there and hopefully they will be as successful as they can be.

Thanks, Steve.

Our next question from the line of Jessica Reif Cohen with Merrill Lynch.

Please go ahead.

Hi.

I have a couple of questions all along the same lines.

Steve, you just said with Disney, I don't want to belabor it but you did say that you will see what happens.

Did you mean like who is going to be the next Chairman, is that what you were referring to?

No, no, no, in terms of, as I mentioned I've had a few nice conversations with Bob Iger, getting to know him a little bit.

He seems like a terrific guy and we will see when the conversations turn, if they turn to Disney wanting to strike a new deal with us we will see how things go.

And then just longer term for you guys it seems like you are certainly increasing your physical space, you have a lot more experienced people working at Pixar now that you've been around for quite a while.

Can you talk about potential plans for increasing the output per annum?

At this time as you know we are just about to get to a film a year starting with Cars.

And I think we would like to get that one under our belt before we start imagining what could be down the road.

Were we are very focused on getting to a film a year and intend to do that starting in 2006.

One last question if I may, on Toy Story re-release since you have so many other films that have done so well is the plan to re-release on the 10th anniversary of each of the movies that have been made and can you give us any idea of expectations on the sales on that?

Well, I will handle the first part and let Simon handle the second.

Remember that Toy Story has been in moratorium for a little while.

You haven't been able to by it and that's not true of all of our other films.

I think it's true of Toy Story and Toy Story 2 right now so they are coming out of moratorium for their tenth anniversary and we don't really have any plans for other films 10th anniversary's yet.

I imagine if this does really well maybe we should make some,.

On sales Jessica, I can't give you any specifics on sales now.

We wouldn't be doing that before its release.

Thanks.

Thanks.

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

Good afternoon, and, Steve, congratulations once again on the stellar results.

Another question concerning Disney, there seems to be two camps, if you will, on the Street right now, one camp believes that you really don't need Disney mostly because Pixar is its own brand name now and because Disney will likely never give you the Lucasfilm style arrangement that you've said publicly many times that you are seeking.

The other camp is somehow under the impression that there is still this kind of 50/50 or maybe 6040 creative collaboration with Disney and that a future deal with another distributor just won't yield the same box office results that we've now grown accustomed to with a Pixar release.

Could you speak to that and share with us how much creative input Disney really has at this point in your relationship?

Thanks.

Yes, I can answer that question.

Disney really hasn't had -- has had almost no creative input really since A Bugs Life.

There are a few people at Disney that we have -- always interested in hearing their notes on our films and they know who they are and we would welcome their notes on our films forever, but really the creative has been done 100% at Pixar for really since the beginning with Toy Story and after we got through Toy Story where we did get some help from Disney we have really been on our own since then.

So at this point in time there is no dependency on anyone outside of Pixar's four walls for any of the creative or any of the production.

And as you know we have enough cash to finance our own films as well.

So we are pretty much completely independent.

Okay.

Well said.

Thanks very much.

Our next question from the line of Spencer Wang with JP Morgan.

Please go ahead.

Thanks.

Good afternoon.

Just a couple quick questions.

Firstly, Simon, can you just refresh our memory on how the economics of the Toy Story 1 re-release will work between you and Disney?

And then secondly as you maybe talk with Disney about a new distribution deal, they obviously have their own pipeline of production that's ongoing.

How does that factor into the negotiations?

In other words, would you -- would you pursue a relationship with Disney and let them still do their own internal CG?

Thank you.

Let me address the first part.

We've never disclosed the specific terms of either the co-production agreement or the original film, feature film agreement.

Given that this was the original agreement for -- under which Toy Story was made the terms are less favorable to Pixar than the current agreement is.

I can't go further than that.

In terms of the production, Disney's production pipeline.

I think you should ask Disney about their production pipeline.

We would never seek to suggest, to tell Disney what they should do.

So you should ask them about that.

Would you want your CG relationship to be exclusive with them?

In other words, why have them competing?

You know what's interesting.

Again I've said this several times but I always remind myself so I will say it again, in the personal computer business it's a zero sum gain.

You have winners and you have lovers.

So if somebody buys a Mac they are probably not going to buy a Dell or vice versa.

But in the film business, it's very different.

If there is three bad films you might see none of them and if there is three good films you might see all of them.

As long the films do not overlap in their release windows, if we have a competitor that comes out with a good film.

As an example, Shrek 2 comes out and it does very well, does that hurt The Incredibles, I don't think so.

You could argue that it helps The Incredibles by renewing the peoples -- reminding people how much they love to go to see animated films.

If Shrek 2 had done terribly, would that have helped The Incredibles?

I don't see how.

So it's not a zero sum gain as long as the films are not overlapped in their distribution windows.

We are really competing against, can we make a film that audiences want to go see and hopefully go see again and by on DVD.

That's our competition.

And so it's a very different, different industry.

It's not a zero dum gain.

How about on the cost side, though, Steve, in terms of the potentially -- timing of the labor market?

Pixar is enjoying a very fortunate position where we are able to attract and retain what we believe is the best talent in the industry.

And we are very lucky.

And we never take that for granted.

And so we are not, we are not feeling any effects of some of the other studios in the animation business in that regard.

Thanks.

That's very helpful.

Our next question is from the line of Kathy Styponias with the Prudential Equity.

Please go ahead.

Hi.

Thanks.

I have a couple of questions.

First with respect to the Toy Story re-release, is the re-release also going to include a theatrical release or is it just going to be DVD?

And could you remind us when the last time Toy Story was released on DVD, if at all?

And then second, the second question is a hypothetical one for you, Steve?

If and when Apple comes out with a video iPod could you make the Pixar movies available on that device or does Disney have to give approval of that, too?

Thanks.

Let me do the first one.

There are no plans to do a theatrical re-release of Toy Story.

It's just going to be the DVD re-release.

And it's an all new version of the film.

It looks fantastic.

We've also completely redone the music and the sound.

And the last time it was available, from memory, is around three years ago.

It was available in a couple of different box sets and it was available for a short time as a single disc.

Steve, do you want to address the iPod?

Sure.

We co own own our films with Disney in perpetuity.

So to exploit them in any new ways Disney would have to agree.

And that's the way it is.

Just as a quick follow up, have you ever had any discussions with them about pursuing new distribution channels like a video device, mobile video device?

Thanks.

Yes, we do have discussions with them about such things, sure.

Thank you.

Our next question from the line of William Drewry with Credit Suisse First Boston, please go ahead.

Hi, thanks.

It's Bill Drewry.

Three quick questions.

First off, Steve, or Simon, could you tell us how many pictures or how many scripts that you internally green lit with and how many of those you pictures you currently have in production?

Two, as we understand it Disney has notified you they intend to produce sequels of Toy Story 3 and Monsters 2, and Nemo 2 and that you have turned down participation in all three of those.

Can you confirm or deny that?

And then finally, Steve, I think Bob said in a pretty public forum recently with investors that they were happy that you guys didn't pick up their last offer that was on the table and they had no intention of making that offer again and I got to assume that you are still dissatisfied with their last offer.

So I'm just curious where any common ground for a new significant agreement could exist.

Thanks.

We have -- we don't discuss how many films we've internally green lit but we have, let me just say at least four films in some stage of production or development.

That's the first part of your question.

As far as, again, details in negotiating with Disney I would just like to say I've had some good conversations with Bob Iger and as you know we have not struck a deal with anybody else.

We have been waiting to see what would happen at Disney.

And so as Bob -- as Bob assumes control of the company we will probably figure out fairly quickly whether there's some common ground or not.

When we reach any conclusions we will let you know.

Have you notified them that you are not participating in those three sequels?

Yes, we have.

Toy Story 3 actually was several years ago and Monsters, Nemo, and A Bugs Life was more recently.

So there is four actually that they intend to do and you won't be a participant.

Well, we don't know if they intended to them but they've certainly asked us if we wanted to actively participate in them if they were made and we declined.

And we will passively participate in them.

Thanks very much.

And our next question from the line of Gordon Hodge with Thomas Weisel Partners.

A couple of questions, one, you had some great international success with home video with Incredibles.

I'm just curious if you haven't released in Germany, France, and Japan, where you did release, I think it was in the UK for sure but I didn't know where else.

And then curious on the network television revenue you are expected to enjoy later this year, I understand you will get all of the domestic and I'm just wondering how we should think about the international piece of that, if you can help us there?

And then I guess that's good for now.

Thanks.

Okay.

On The Incredibles we released it in tons of major markets, UK, Spain, Italy, Mexico.

It's also been in other markets like Scandinavia.

Canada.

And we have Germany actually was released on April 14, France is going out towards the end of May and Japan is in middle of June.

In terms of television, usually international television comes after the U.S. television.

So there will be some pay TV revenues from international markets but no real free television revenues from Nemo.

Usually the rule of thumb think that's around three years after its domestic theatrical release, if that's helpful.

Very helpful.

Thank you.

Next question from the line of Richard Greenfield with Fulcrum Global Partners.

Hi, two questions.

One, Steve, can you just follow up on Kathy's question, just maybe talk about the opportunities for film just broadly in terms of portable video devices?

What do you see as a rough time line in terms of that evolution and how big of an opportunity is it and then just a question strategically?

You've been so successful creatively.

Your balance sheet is so strong.

What is the core reason for being public at this point and might you consider going private at some point?

Okay.

We can talk about portable video devices.

There are a lot of portable video devices already out there and the most successful ones, there is a lot of failures.

But there is one successful class of portable video devices and that's portable DVD players.

You can by a portable DVD player for anywhere from a few hundred bucks to 5 or $600 depending on the screen size and the battery life, et cetera, and they play the same media which everybody is buying which is the industry standard DVD.

So you can watch it at home in your home theater and you can take the same DVD in your travel bag and watch it on an airplane or wherever you happen to be on one of these portable DVD players.

So far nothing else has been very successful.

Sony is going to try with their PSP, their PlayStation Portable to create a platform for portable movie watching.

The problem with that platform is after you've bought your DVD for your home you have to go buy the same movie again on a different piece of media that players only in the PSP.

And we will find out whether they are successful with that or not.

And there are other people that have other devices where you can get video content in digital form and download it onto the a hard disc of a device and those device haven't been successful yet.

So far there really hasn't been a successful portable video device other than those that play industry standard DVDs and that we participate in just because we sell DVDs.

So who knows what's down the road.

But it's, so far been fraught with not too much success outside of the portable DVD players.

Second part of the question is why are we public?

I think, again, we have a certain amount of cash in the bank which gives us negotiating flexibility to be able to finance and even fund the marketing of our films if we chose to and that's going to, I think, come in handy as we negotiate with the studios in the coming months.

As far as why we are a public company.

We would like investors to be able to participate in our success, number one.

Number two, we have a lot of employees who we would like to participate in our success as well as be able to be investors in the Company through company stock options and through buying stock in the public markets.

And, third, we enjoy having a credible track record in the public markets.

Who knows when we might ever need to raise funds in the public markets again and having a long, established track record in those markets can only be a good thing.

Thanks.

Thank you.

Our next question from the line of Doug Mitchelson with Deutsche Securities.

Please go ahead.

Thanks, it was a nice quarter but I'm disappointed you won't tell when I'm getting my video iPod but three questions.

You've talked about Disney's creative input to your films.

Can you also talk about Disney's marketing prowess, do you feel that they do a better job marketing than others might do, even if they are not contributing to the creative of the film.

Secondly, you indicated that wholesale pricing is moving up as a mix shift more towards DVDs.

When you look at the wholesale pricing for DVDs and the wholesale pricing for VHS how are they both trending relative to the sales.

And then lastly I think what Jessica was trying to get at is you have an embarrassment of riches in terms of producers and directors there does not seem to be any variable that would stop you from releasing more than one video per year by say 2007 or so.

So I guess what I'm asking is how do you manage your senior creative team in the light of such a limited number of release spots?

Thanks.

In terms of the marketing, I will just say two things.

Number one we have tremendous respect for Dick Cook and his marking team at Disney.

We worked very well with them.

We think they do a terrific job.

As far as how they stack up against the other studios, you are a consumer just like we are and you can make your own judgments about how films are marketed.

And just as much as we can.

So I will leave that to you.

In terms of more than one film a year, again, we are focused on getting to one film a year in 2006 and beyond.

We think we are going to execute that well and we're really not prepared tow talk about anything beyond that at this time.

Just in terms of pricing, VHS tapes were being discounted.

What we did -- I'm not sure if we are alone in doing this but at Disney's recommendation we didn't discount the VHS tapes for the release of The Incredibles.

If people want to continue to buy VHS tapes they were available but they weren't at any substantial discount to the DVD and we haven't seen any weakness in the pricing of DVDs, quite the contrary we feel like our films are able to support a high price DVD or a reasonable price DVD.

When you look at the wholesale pricing for, say, Finding Nemo and the wholesale pricing for The Incredibles a little bit later in time it's the same level or up or down.

Well, for us the wholesale pricing for the DVD on The Incredibles was slightly higher than Nemo.

Okay.

Interesting, thanks.

Yes.

Our next question from the line of Robert Ross with Jefferies.

Please go ahead.

Good afternoon.

Just two quick questions.

First I was wondering if you could comment a little bit on how you see the HD DVD Blue Ray situation playing out and how that could impact Pixar on a going forward basis given the type of content that you have.

And second I was wondering if you could comment given the recent reprieve on the expensing of stock options whether or not the Company still intends on expensing them in the third quarter, whether you are going to delay that, the six months that is permitted?

I'll take the first part, Simon can take the second.

As far as the HD DVD format war as it's called, I think that that will get itself resolved in the next six months and there will be one standard.

And I think that the Blue Ray camp is in the stronger position right now frankly, but different people have different points of view on that.

But I don't think that it would make sense for anybody with really popular films to be an early adopter of that format because there's no players out there.

And I think by the time there gets to be a significant number of high-def DVD players out there we are probably talking 2008, 2009, maybe even 2010.

So this is not something that's going to be particularly relevant to Pixar in the next few years.

Because all of our films were made digitally we can create an HD version of all of them which is to our advantage.

In terms of the stock option pricing given the latest change in the announcement that companies no longer have to adopt in the third quarter we are going to do what everybody else I believe is going to be doing and we are going to now start to adopt in the first quarter of 2006.

Great.

Thank you very much.

Our next question from the line of Anthony DiClemente with Lehman Brothers.

Anthony.

Steve, a couple quick ones.

Steve, what is the latest month that you can reasonably strike a distribution agreement for that '07 film if you can just remind us, is it December, '05?

Another question, what was your headcount at the end of the quarter and maybe you can give us color as to which direction that's going.

And finally, if you can help out with how many Incredibles DVD unit sales in the 2Q does your $0.15 guidance imply.

Thank you.

Because we have moved to a summer release schedule we have -- we would like to strike a distribution agreement by the end of this year and I see us doing that.

And I think we have about 775 employees at the end of last quarter.

That's obviously been increasing over the last few years, particularly as we build up for the one film a year which we've been with the current schedule that we are on now.

Okay.

And then on the DVD units implied in your guidance?

I'm sorry?

In other words, you provided 2Q earnings guidance, I'm just curious as to how many incremental Incredibles DVD units is implied in that forecast?

Well, I can't give you that.

Okay.

Just a final follow-up question is there a specific date for the Toy Story DVD re-release or, I'm sorry if you said that but I think you said fall of '05.

It's September 6.

Got it.

Okay.

Thank you.

Our next question is from the line of Steve Lidberg with Pacific Crest Securities.

Please go ahead.

Good afternoon, guys.

I was hoping you could provide some color with regards to some of the other revenue opportunities around The Incredibles and specifically the video game market and maybe provide some color with regards to what kind of contribution you saw in the March quarter.

I can't give you specifics on the contribution but THQ announced their results this week and they talked about, they narrowed the 4.5 million units on The Incredibles and around 7 million units on Nemo.

So clearly there was a contribution on them in the quarter.

And one point of clarification, Simon, the 17.7 million units , was that strictly U.S.?

Yes, that was just a U.S. number.

Thank you very much.

Thank you and our last question is from the line of Gordon Hodge with Thomas Weisel Partners.

Please go ahead sue.

I'm sorry, I'm curious on the question of cash and the cash balance that you have.

Have you proposed buying back the sequel rights to one of your -- one of the pictures from Disney?

Is that something that's been discussed or that you would entertain?

Like, for instance, The Incredibles?

We just can't go into any details about that sort of thing at this point.

We can assume that would be of interest.

I don't think we can comment any further.

Thanks.

We have no further questions.

Please continue.

Well, thank you everybody and we will talk to you next quarter.

Thank you.

Ladies and gentlemen, this conference call will be made available for replay starting today, May 5, at 8:30 p.m. eastern time.

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