迪士尼 (DIS) 2008 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter earnings Walt Disney conference call.

My name is Shamika and I will be your coordinator for your call today.

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

We will conduct a question and answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) I would like to turn the presentation over to your host for today's call, Mr.

Lowell Singer, Senior Vice President of Investor Relations of Walt Disney Company.

Please proceed.

Thanks, good afternoon, everyone.

We want to welcome you to The Walt Disney Company's fourth quarter 2008 earnings call.

Our press release was issued a few minutes ago.

It is now available on our website at www.disney.com/investors.

Today's call is also being webcast and that will be available on our website as will a replay and a transcript of today's remarks.

Joining me here in Burbank are Bob Iger, Disney's President and Chief Executive Officer; and Tom Staggs, Senior Executive Vice President and Chief Financial Officer.

Bob and Tom will lead off with some comments and then we will of course be happy to take your questions.

I will then come back to read the Safe Harbor provision.

With that, let me turn the call over to Bob.

Thank you, very much, Lowell, and good afternoon.

While we're announcing our fourth quarter and year end earnings today, there is no question that current business conditions and our response to them are of great interest and relevance and we will spend most of our time discussing them.

We're pleased with our 2008 fiscal results.

Despite a steadily weakening economy, we delivered a very solid performance for the year, posting record revenue, operating income, and earnings per share.

Our strong assets and brands, our creativity, our strategy, and the strength of our management team enabled us to remain relatively resilient throughout the year and we are pleased with the results.

However, in recent weeks, as the economy deteriorated, our pace of business has been impacted.

I will briefly describe the conditions we are experiencing, and talk about our steps we are taking to mitigate them.

It is important to note that it is difficult for us to predict the length or depth of the global economic downturn and consequently the impact of our businesses.

Let me describe the business conditions we are experiencing.

On the advertising front, we have seen significant softening in the local ad market as well as a slowing of the pace of national advertising.

On the local level, our exposure is quite limited, with only 10 television stations.

But even though we lead in most markets and have benefited from political spending, advertising revenue in our stations is off considerably from this time last year.

The decline is being led by domestic automotive manufacturers, but weakness in other key sectors is also taking its toll.

On the national level, ad pacings at ABC, and to a lesser extent ESPN, are off from last year as spending in the auto, electronics, financial, and other categories has slowed.

I would also note that overall broadcast television ratings are down so far this season, and ABC is no exception.

The writer's strike is partially to blame.

At the same time, industrywide cable and broadcast television viewership is up versus last year as both the financial crisis and the election have captured viewer attention, with cable news being the primary beneficiary.

ABC leads in the important C3 category, and we like our overall position in the marketplace, given our attractive demographics.

But our goal is to strengthen our schedule with the addition of numerous mid-season programs.

At ESPN, its brand and its programming are incredibly strong, and there may be opportunities to add to its strength in this environment.

At our parks and resorts, attendance has held up reasonably well and thus far this quarter it is down only 1% versus year at our domestic parks.

However, bookings during the last month have fallen off considerably.

Part of this change is likely a reflection of consumers taking a wait and see approach to the economy or waiting to see if the market produces discounts.

Bookings at Walt Disney World during the upcoming two week holiday period are down only 1%.

And parks and resorts -- our brand and the experiences we offer have never been stronger.

But consumer confidence is the lowest we've seen in over three decades, and even the best product out there is feeling the effect.

We are also tracking the economy's impact on retail, and while we have great in-demand merchandise in the marketplace, we believe consumer spending will be down.

That could impact us, possibly during the holiday season, but almost certainly during calendar season 2009.

I realize this is a sobering outlook, but we are extremely confident in our ability to contend with current conditions successfully and to rebound strongly when they improve.

During the last several weeks, our senior management team has stepped up to the task of identifying and implementing steps to reduce expenses and to create more efficient operations.

Many of these steps are designed to mitigate current conditions, but some we expect to have long lasting benefits and significant savings will be delivered.

At parks and resorts, our experience during previous downturns, especially the challenging period after 9/11, taught us to be very good at managing variable expenses based on variable demand.

We will do this while preserving the quality of the guest experience, something we consider sacred.

Reductions in operating costs will necessarily respond to a reduction in attendance and occupancies.

We are also putting in place new marketing initiatives and accompanying pricing incentives, designed to stimulate bookings and attendance during the first half of 2009.

Details of this promotional offer will be announced tonight by the parks.

Our yield management program is design to designed to deliver results in both good times and bad and should serve us well in this environment.

The pricing strategies we implemented a few years ago to increase length of stay while delivering value to the consumer will also help, as will our new What Will You Celebrate campaign, which has already produced almost 1 million registrants for a program that kicks in on the first of the year.

Our company's executive team has been tested by and managed their businesses through very challenging times in the past.

And not only are they responding well to today's conditions, but their experience will enable us to operate effectively in this marketplace.

On the investment front, we are going forward with a number of announced initiatives, like our two new cruise ships and our increased investment in video games.

We are taking a very pragmatic approach to new investments across the company and will press ahead only in those areas we believe offer the greatest opportunity for long term growth and returns.

Our strategic focus these past few years has been on high quality branded product that successfully spans multiple technology platforms across geographical and cultural boundaries.

That is where we're investing the most capital and we continue to deliver solid results.

Our strategy for creating and building franchises is working well, illustrated most recently by the success of High School Musical and Fairies.

We remain excited about the prospect of and will continue to invest in key franchises from Cars to Princesses, and from Pirates to Toy Story, Mickey Mouse, Pooh, Hannah Montana, and the Jonas Brothers.

Our brand strength, competitive position, and business strategy will serve us very well in this environment as they did in 2008.

And I am confident that just as those elements delivered resiliency during this past year, they will position us well to recover as market conditions improve.

We remain committed to creating quality product and long term shareholder value no matter what the environment.

Most of all, we remain optimistic about the future of Disney.

This is a strong company with great assets, great brands, great people, great creativity and a significant global reach, all of which will help us surmount the challenges we face today and allow us to prosper in the years to come.

And now I'll turn it over to Tom Staggs.

Tom?

Thanks, Bob, and good afternoon everyone.

Despite a challenging environment, our 2008 performance translated into a double digit increase in earnings per share, not including gains on the sale of E!

and Us Weekly last year.

Our broad based success in 2008 provides further evidence of the competitive strength of our company and our strategy.

But as Bob indicated, during Q4 and thus far in Q1, the environment has deteriorated further, which is reflected somewhat in our Q4 results.

Rather than recap the year as a whole, I'll highlight a few of the key drivers for last quarters and then address the trends that we're seeing so far in fiscal 2009.

At media networks, ESPN once again delivered strong growth as higher affiliate revenue more than offset lower advertising revenue.

ESPN also benefited from the recognition of $37 million more in deferred affiliate revenue compared to the prior year quarter.

ESPN's ad sales declined due in part to the auto and consumer electronics categories.

Olympic ad spending may have also contributed to the decline.

Our Q4 results reflected improved performance results from Lifetime and higher affiliate revenue from Disney channel and ABC Family.

At broadcasting, the impact of lower ratings at the ABC network is partially offset by higher CPMs.

Expenses increased in the quarter as higher pilot costs shifted from Q3 to Q4 this year due to the WGA strike.

We also incurred higher production costs from political news coverage.

Operating results of the internet group were somewhat better than the prior Q4 as savings from the shutdown of the Disney mobile phone service were partially offset by investments for our international mobile and online operations in our Disney.com website.

Our TV stations continue to out-perform the competition ratings with eight of our 10 stations ranking number one in the respective markets.

However, weakness in the local ad market resulted in a revenue decline at the stations of nearly 12%, driven primarily by lower automotive ad spending, which has traditionally been the station's largest category.

At parks and resorts, higher guest spending in our domestic parks and Disneyland Resort Paris were the primary drivers of revenue growth in Q4.

Operating income, however, was impacted by higher expenses at Walt Disney World, and the 2.5 week drydocking of the Disney Magic cruise ship as part of the ship's routine maintenance schedule.

In the fourth quarter, combined attendance at our domestic parks came in slightly above last year's Q4, despite the softening economy, with a modest increase at Walt Disney World offsetting a slight decline at Disneyland.

For the fiscal year as a whole, we delivered record domestic theme park attendance, and Disneyland Resort Paris set a new record attendance as well.

In Q4, higher average ticket pricing in our domestic parks helped drive a 4% increase in guest spending.

Walt Disney World occupancy was 89%, off just 1 percentage point versus the prior year, while Disneyland's occupancy came in 4 percentage points lower than last year at a still solid 87%.

At the same time, we saw continued strength in per room spending in our domestic resorts, with an increase of 5% for the quarter.

Disneyland Resort Paris has performed well all year and reported higher revenue and operating income in Q4, reflecting higher ticket pricing and strong per room spending.

Results also benefited from favorable currency rates.

Turning to studio entertainment, operating income was lower in the fourth quarter, primarily due to the performance of Swing Vote and Miracle at St.

Anna, and higher marketing spending for Q1 theatrical releases, which include Beverly Hills Chihuahua.

At consumer products, the scope and strength of Disney franchises continue to bolster our performance in merchandise licensing.

Robust demand for High School Musical and Hannah Montana products helped to drive double digit increases in earned royalties for the fourth quarter.

Our broad base of successful franchises and our solid positioning with mass retailers like Wal-Mart, Target, Tesco, and Carrefour, should help mitigate the impact of a retail downturn and position our merchandise licensing business well for the long term.

As anticipated, the Disney Stores North America contributed to a revenue growth in the quarter, but also drove a reduction in operating margins.

As detailed in the press release, we took a reserve that impacted EPS by $0.03 per share in Q4, [willing to receive] what we hold from Lehman Brothers that arose through foreign exchange hedge transactions with them.

While we are now fully reserved for this receivable, we continue to pursue payment.

With that, let me expand a bit on what we're seeing in the current environment.

As Bob noted, attendance thus far in the quarter has held up reasonably well.

But the pace of bookings for our domestic resorts has slowed meaningfully since about the time of Lehman Brothers bankruptcy.

Our current room reservations on the books for the first two quarters of our fiscal year are a little under 10% below the prior year, with Q1 bookings down somewhat less than what we're seeing so far for Q2.

We also believe that the booking window could contract from the 12 to 13 weeks we have experienced in recent quarters, which makes it more difficult to interpret these trends.

Bob also discussed the softness in the ad market.

At the network, our scattered pricing has been running low double digit percentages ahead of upfront pricing, but the pace of scatter sales for Q1 are down appreciably.

Option tickups for Q2 are currently only modestly behind last year.

Ad pacings are down versus last year at ESPN, though slightly ahead of where we came out for Q4.

Pacings at ABC Family are up nicely so far in Q1.

It is worth noting that advertising represents less than 30% of our cable networks revenues, and for the company as a whole, advertising is just under 20% of our revenue.

Disney Entertainment faces a tough Q on comparison this year, given the success of last year's DVD releases, especially Pirates 3.

[CPS] releases in fiscal 2009 include the recently released High School Musical 3, our animated release Bolt, coming to theatres on November 21st, Bedtime Stories being released on December 25th, and Disney Pixar's Up and G-Force, both slated for release this coming summer.

In 2009, we expect to increase our investment in a number of strategic initiatives that include film and TV programming, including local content production in key emerging markets and digital media.

We will continue to invest in developing our video game publishing business.

We incurred roughly $170 million in video game development costs in 2008 and we currently expect to increase our video game investment by $75 million to $100 million in 2009.

Our video game releases of this fiscal year include titles based on Hannah Montana, High School Musical and Bolt.

In addition, we expect to invest in key initiatives we have identified at parks and resorts, including the renovation and expansion of Disney California Adventure at Disneyland resort, new vacation club properties, as well as the construction of two new ships at Disney Cruise Lines that Bob mentioned.

Over the past several years, we've returned substantial capital to shareholders via our dividends and share buybacks.

We have done so while at the same time strengthening our balance sheet and enhancing our liquidity.

As a result, we're in a very strong capital position.

In the current environment that strength is more important than ever, and better capitalized companies will likely be better able to take advantage of opportunities to improve their market share and competitive position.

With this in mind, and given the recent turmoil in the debt markets, we're not expending capital on share repurchases for the time being.

However, given the substantial gap between our share price and our estimate of intrinsic value, to the extent we are once again inclined to pay out capital shareholders over and above our regular dividend, we would be back in the market for our stock.

Disney has a strong balance sheet, a diversified revenue base, and substantial long term earnings growth and cash flow potential.

Even more importantly, the company's brand strength and business models confer competitive advantage that we expect will sustain us through this economic cycle and create substantial value for our shareholders far into the future.

With that, I'll turn the call back to Lowell for the Q&A.

Thanks.

Operator, we are ready for the first question.

Thank you.

Your first question comes from the line of Benjamin Swinburne of Morgan Stanley.

(OPERATOR INSTRUCTIONS)

It's Ben Swinburne.

Good afternoon, maybe we could focus in on the cable network side at ESPN and give us a little bit of the sense of category, exposures as we head in?

Obviously there is a lot of newsflow on the auto sector, potential consolidation.

And if you could expand that to the station group as well?

Just give us a sense of how much you think the overall ad business at Disney is exposed to autos, how that has been trending, national versus local?

And how that might be impacting ESPN in particular?

Autos is the largest category at the station as I mentioned in the prepared remarks.

It is also quite a large category for ESPN, although much less so at the network.

And there we have seen a fair amount of softness.

Bob mentioned in his remarks that electronics has come down.

That -- it is not as big at the stations, although it is an important category for ESPN, and can be an important category for ABC as well.

So -- and these categories are down to varying degrees.

The ones that we mentioned are all down double digit percentages year-over-year, and so that is where we're seeing the most acute softness.

Any early look at capital expenditures in the next fiscal year versus this year?

Well, we're taking a look at it.

The fact that we have got California venture and some of the scheduled payments for the cruise line, I expect that we'll see capital expenditures increase somewhat for the year.

The pace of spending is something we're taking a hard look at, given the environment.

So we're not making any specific projections now, but I think that you'll see some increase in capital for '09 versus '08.

'08 came in pretty close to 2007.

But we'll end up spending less than we would have spent.

Since it's a number that we haven't really disclosed, that probably doesn't mean all that much to you.

Thanks a lot.

All right, Ben, thanks for the questions.

Operator, next question, please.

Your next question comes from the line of Doug Mitchelson of Deutsche Bank.

Please proceed.

Thank you very much.

Your predecessor, Bob, once told me it's easier to manage in hard times than it is in good times, because people expect the cost cuts to be coming.

When you look across your business, particularly for broadcast and cable, how much flexibility do you have in your cost structure?

Are you going to focus on managing margins to flat?

Or how do you manage your production costs at those businesses?

Well, first of all, I find that it is more fun to manage in good times than in tough -- whether it is easy or not is another story.

I mentioned in our remarks, Doug, and you know a lot of the people that work here -- this is a team that has managed through not only good times, particularly these last three years, but really tough times, particularly in the 2001 period.

So not only have we gone through this before, but we have gotten better at it, particularly at parks and resorts.

And first, across the company there are a number of steps that are being taken to mitigate the downturn.

There's some consolidation that will occur.

Clearly we are finding efficiencies in businesses that as you look harder for them, you deliver more of them.

We'll reduce some operating expenses, some production expenses.

We talked about cancellation or delay, or scaling back of certain investments when it comes to CapEx.

At parks and resorts, because so much of what they spend is variable, based on variable demand, as I mentioned, a lot of savings they are focused on delivering are due to that.

Essentially, they reduce some of their offerings because there will be less demand for them.

An example would simply be that the frequency of some of our entertainment, which doesn't change the quality of the experience at all, because you simply have fewer people that are available.

But it does give us an opportunity again to reduce expense with fewer people in attendance or -- at our parks.

We have also discovered that as the business has both diversified and spread globally, there are opportunities to standardize some of our processes that we didn't necessarily have when we were either smaller business and we were less diverse.

And we're spending a fair amount of time -- where the parks and resorts team is spending a fair amount of time looking at that.

That should deliver some interesting efficiencies.

A lot of attention is being paid to -- both on the revenue side, we have pretty sophisticated software in place that work well for us in very robust times, but will continue to work well for us now.

And we have some very, very solid marketing offerings in the marketplace.

The What Will You Celebrate, which enables people to visit the parks for free on the day of their birthday, but encourages people to celebrate other events at our parks.

Timing couldn't be better for that.

It's about 70% of people who vacationed in the last year said they vacationed to celebrate something.

So this plays very well into that.

And tonight the parks are announcing what I think will be a very, very attractive offering to the consumer because of the consumer's demand for value these days.

And that is a four plus three package.

Again, the details are going to be announced later on today.

But this gives people the ability to basically pay for four days and four nights at our parks and hotels, but stay for seven.

And in addition to that, there is an offering that if you book fairly soon, you will get a $200 gift card that you can spend on food and merchandise.

And this will be available in the marketplace right away, but for a limited time and available for people to take advantage of during the first half calendar of 2009.

You know, the consumer today clearly is being very, very careful about what they spend -- how much they spend rather and what they spend it on.

And I think the price to value relationship has probably never been more critical.

And I think that plays very well for a company like ours.

Because brand becomes really important.

And -- the price to value that a brand like Disney can offer, whether you're offering a travel package, selling a DVD or selling a movie or consumer products, I think that sets us up very, very well in what is a very challenging time.

The only thing I'd add is if you think about our cable businesses, we're obviously skewed heavily towards affiliate fees, as I mentioned as opposed to advertising.

And so there, while I think we have got in ESPN's case, a fair degree of semi-fixed costs in sports rights, the margin impact would be more modest than what you might see at an all-ad supported network, where again programming is reasonably well locked in, although we're looking at opportunities to save costs where we can.

I think you should assume that a business like the parks, to the extent that revenues were down, you would see that in the margin as well because of the high fixed cost nature of the parks as a whole.

Thank you.

Thanks, Doug.

Operator, next question please?

Your next question comes from the line of Spencer Wang of Credit Suisse.

Please proceed.

Thanks, good afternoon, a question on the theme parks.

Bob, you talked about how some of the costs are variable in nature, and you can rightsize on the cost.

I was wondering -- I believe in the last recession, park margins decreased roughly about 500 basis points year-on-year.

So I was wondering if you could give us a sense of given the current environment, would the impact be perhaps more mitigated this time around?

Sorry, the second part of the question maybe for Tom is, in comparable times when the booking window is narrow, can you talk about how the booking number down 10% -- you're talking about maybe got translated in terms of ultimate or actual attendance growth or decline?

Thank you.

As I said in my remarks, attendance so far this quarter is down very marginally domestically, 1%.

And bookings for the Christmas season, the two week holiday period are down around 1% as well.

That is very, very small.

And so at the moment, because of our attendance, and because of our near term bookings, bookings through what I'll call calendar 2008, at what they are -- I don't think you'll see much need for us to vary our expenses, because our attendance is likely not to vary as much.

In terms of what happens beyond January 1, we can't predict right now.

Tom talked about our bookings, but we just don't know whether what we're seeing is simply a shortening of the bookings window.

And so I can't say right now whether our ability to manage through a downturn will be better this time in terms of resulting in better margins.

But I can say that our experience of 2001 will be quite helpful during this period of time, which at least gives us the ability to not suffer the margin reduction to the extent that we suffered in 2001.

But again I'm not making an absolute prediction on that.

No two economic environments are exactly alike.

That makes it more difficult to say precisely how things will work out.

There's a couple of things going for us in this instance.

The health of our vacation club business, the health of our cruise line business, the high degree of value price rooms that we have, the pricing strategy that the parks put in place years ago.

I think all of those things bode well for us.

And Bob of course mentioned that team, and the rest of the company's ability to respond appropriately.

As Bob said, it is -- for periods that are going to be busy periods like the two-week holiday periods, we won't vary the offerings because we we're not going to sacrifice the guest experience at all.

Now on the shoulder periods and that sort of thing between Thanksgiving and Christmas, the shoulder periods there after, we'll have to take a hard look and see where we stand, and then proceed accordingly.

With regard to the booking windows coming in some, and what 10% for the first two quarters would translates to, it is really too early to make that prediction, to be blunt.

Without knowing exactly how much of that is the contraction of the booking window and how much it might be people deferring their vacations, and that is what we found in past people do.

They defer the vacations, and we get them to the park later on.

It's difficult to say at this point.

We're really not making a prediction.

Spencer, as you know, we were fairly resilient through 2008, and I think most people were surprised that we held up as well as we did, through what was a pretty challenging year and a year that got even more challenging as it progressed.

And I think a lot of the resilience that we showed was due to the things that Tom pointed out -- a more diverse business.

A stronger brand, by the way, which I think had a positive impact on our theme parks.

The pricing strategies, the revenue yield management, and accessibility.

We talked a lot about our room mix where in prior recessions, we didn't have nearly as many value-priced rooms, which I think sets us up at least in a tougher environment to be more attractive or more accessible when people are looking for more value.

But again we're seeing a marketplace that is clearly more tougher than it was throughout our fiscal 2008.

Our ability to predict is very limited.

Thank you.

Thank you, Spencer.

Operator, next question please.

Your next question comes from Michael Nathanson of Sanford Bernstein, please proceed.

Thanks, going for the last two if I can dig a little deeper.

Let's just assume that the current trends and [current pace] of business stands.

I wonder can you take out variable costs fast enough to hold margins if that is indeed the rate that materializes?

That is the first question.

The -- well, I'm not going to make predictions about what happens in the quarter.

But as I said the parks have a high fixed cost base, and they have a part of the cost that is variable.

The team knows how to deal with that.

But to the extent there is a meaningful downturn in revenue, I think you're going to see an impact in the margin line.

Okay, and the second one would be, given your focus in more family, I wondered -- do you see anything different on demand for DVDs, current or catalogue this quarter, anything change on the demand side for DVDs?

We actually have had a pretty good year from a DVD perspective meaning per title.

There is some ins and outs because we had stronger titles a year ago, but we have not really seen softness in our DVDs.

We think part of the reason for that is it is a title driven business.

And the titles we have had in the marketplace are strong and attractive, and there is brand value as well.

By the way we haven't announced this, but we will now.

We came out of the marketplace roughly a week ago with a Tinkerbell DVD, which is direct to video, the first of what will be four Fairies titles, and we sold 2 million units in the United States in seven days.

So while there might be pressure on the business in general, we like how we're positioned in the business.

And this is obviously a result of the studio's focus on Disney titles as well.

We'll know a lot more as the year progresses.

But we're in the marketplace differently in many respects than our competitors.

We have fewer titles in general, and most of them bear the Disney brand.

And in a market where consumers are looking for price to value relationship, we're delivering it.

Thanks.

Thanks, Michael.

Operator, next question please.

Next question comes from Michael Morris of UBS, please proceed.

Thank you.

With regards to foreign exchange, can you give us a little insight in terms of what year exposure is there, both I guess -- which currencies you may be more exposed to?

How it could impact you?

An update on hedging and when that could impact you?

And also you answer this I think on pretty much every call.

But what percentage of parks visitation is from foreign visitors?

And with the weakness you're seeing in the bookings right now, can you tell if any of that is coming from your foreign customers?

Thank you.

Well, first with regard to foreign exchange.

I discussed in the past we tend to enter our fiscal years pretty well hedged, close to 100% hedged from foreign currency exposure based on our projections at that point in time.

And therefore we tend not to get a tremendous amount of volatility in our earnings as a result of foreign exchanges fluctuations during the year, and 2009 is such an instance.

I mean the impact of foreign exchange rates in 2008 on the bottom line was about $0.03 a share probably all in, in that ballpark.

So that is -- one side of the equation.

The other which relates to your question is I think that we have mentioned in the past, one of the strongest category, the strongest category from a percentage standpoint in attendance at our domestic parks last year was international visitors.

And so that is something that we'll keep our eye on.

To your question, it is a little early to make judgments about that for the year.

As a whole, foreign visitors are still a strong category for attendance for the quarter to date.

But I wouldn't -- I don't yet draw any great inference from that.

So it would remain to be seen what happens to the dollar and also what happens with that category.

I think that we have found that the appeal of the Disney vacation experience for international visitor is very, very strong.

The intent to visit domestically and the intent to visit internationally is still strong.

When there's a downturn that intense, it tends to build up some as people can defer over that period of time.

But if you look at Walt Disney World attendance for 2008, it was about 20% from international guests.

And that is up a bit from the year, not quite on a percentage basis up to historic peaks, but still strong.

Okay, thank you.

Thank you, Mike.

Operator, next question.

Your next question comes from Imran Khan.

Please proceed.

Yes, hi, thank you for taking my questions.

The question is about your future asset mix.

Bob, as you look at the company over the next three to five years, how important is television business for you?

What kind of synergistic value do you see?

And also in the past you talked about the video game.

How do you see the value of owning a big studio in the [field]?

Thank you.

Well, commenting about the asset mix in terms of potential divestitures or acquisitions is not something I want to do.

We get asked a lot about our television business, particularly our TV station business.

We have 10 stations as you know.

They are stellar performers in their markets.

I just looked at the ratings for election night, and a lot of big markets that we operate in, our stations equaled or exceeded the ratings of some of our biggest competitors combined.

And I think that is a testament to the management strength of our business, as well as to the asset value that they've created, particularly the local news brand.

These are businesses for us that deliver high capital returns, and while they have been low growth, I guess in the past year because of the falloff in advertising no growth, we still believe in them because of the way that we run them and the free cash flow that they throw off for this company.

On the video game side, again I'm not going to comment about potential acquisitions.

I'll comment on the business.

We still see this as a growth business.

We're investing accordingly.

We have always said whether it is related to video games or any of our other business, we will be opportunistic in terms of acquisitions, looking for things that fit our strategy well and that will deliver long term growth and returns to our shareholders.

We have also a strong balance sheet and that gives us an opportunity to be opportunistic or to take advantage of opportunity when they arise.

Okay, thank you.

Imran, thanks.

Operator, next question please.

Your next question comes from the line of Mark Wienkes of Goldman Sachs.

Please proceed.

Thank you.

You mentioned the 12 or 13 window into bookings.

But what is the typical percentage of business on this books at this point in time for the first half of the forward year?

That is actually not something that we tend to discuss, partly because it varies from quarter to quarter and it is a tough thing to read into.

And I'm not sure it's indicative of where things are going.

So we don't give percentage booked information as we go along.

It is -- and there are a number of things that go into that, for instance, the degree to which it is a quarter that is heavy the travel trade versus convention business et cetera, and how quickly those folks -- but the 12 to 13 week window works pretty well for the domestic and international tourist based business.

For the current pacing number that you quoted -- you wouldn't give it out if it wasn't somewhat relevant at least?

Well, as I said, the rooms on the book, the pace vis a vis last year, if you look at Q1 and Q2 combined, is down slightly more than 10% than where the number of rooms on the books were at this time last year.

Slightly less than 10%.

Yes, understood, but not to get overly detailed on the promotion that you mentioned, but the four and three, or whatever the appropriate title is --

That's appropriate.

Perfect.

Is it fair the trade off here is low incremental margins per attendee and the goal is to fill the parks to help cover the fixed cost, or how do you think of the profitability of that promotion?

Well, I think a good way to think about it is what we do is we extend length of stay.

We provide certainly a greater promotional value to the guests.

And the -- what you would end up with at the end of the day, all other things equal, is a slightly lower average daily rate at the hotels with people -- we increase volume to people, this by the way is not -- the biggest promotion we've ever done.

In fact, it is not the biggest percentage discount we have ever seen.

It's reasonably consistent with what we've seen in the past, as recently as 2003.

It has been effective in that regard.

And I have every reason to believe it would be effective here.

And also you have a marketplace that based on our research tells us that people want to take vacations in 2009.

But they're going to be much more value focused -- which I think it is one of the reasons we have seen our bookings fall off.

This gives us an opportunity to provide a catalyst for both early bookings and possibly better attendance or stronger attendance, as the 2009 calendar year unfolds.

It is a stimulant in many ways, and while there is some cost to us, we believe long term the benefits will outweigh that.

Okay, it makes sense, thank you.

Thank you, Mark.

Operator, next question please.

Your next question comes from the line of Jason Helfstein of Oppenheimer, please proceed.

Hi, besides deferred revenue, was there any one time items that impacted the cable network revenue in the quarter?

And then can you just comment with respect to the pilot and development costs?

Obviously that was significant and had a tremendous impact on the lost broadcasting.

Do you expect any of that to trickle into the next quarter?

Or did that mostly get finished this quarter?

Thanks.

With regard to -- we mentioned in the press release, we referred to the sale of a European cable asset.

We recognized the gain on that in the quarter.

It was roughly $20 million in the quarter.

We of course -- last year we recognized a settlement with the European distributer that improved the results last year, that was a benefit slightly greater.

So these sort of offset each other in the current year comparisons.

With regard to pilot costs, they were higher -- pilot costs -- pilot abandonments in Q4 for activity that usually take place in Q3.

Most of that, virtually all of that took place then.

As we look at 2009, I think there is a couple things to bear in mind.

One is because we had a strike-shortened season last year, there will be more original episodes of programming on the air this year, 2009 that is.

That pushes costs up somewhat.

We have also got a number of shows which continue to show great success and reach fourth and fifth years on the air -- Gray's Anatomy, et cetera -- and cost for those shows tend to go up some over time.

We structure our contracts so that it doesn't impact the profitability dramatically.

But we will see increasing costs from that perspective.

But the pilot piece was pretty much through in Q4.

Thank you.

Thanks Jason.

Operator, next question please.

Your next question comes from Jessica Reif Cohen of Merrill Lynch.

Please proceed.

Thank you.

I would like to follow up on comments that both Tom and Bob made.

Tom, I was wondering if you could elaborate on your comments about the health of cruise ship line.

Sounds like things were really good there.

If you could talk about bookings and sales?

And then Bob, you said right at the beginning of the call for ESPN that there were opportunities for investment.

I was wondering if you could elaborate.

Are you talking about international opportunities?

And then I guess the final thing is, on affiliates, the growth for ESPN -- you're in the middle of many of those original contracts that were resigned.

Can you just talk about what the growth rate is for affiliates now?

Okay, so let me talk for a second on cruise and DVC.

And again we'll try to talk about what we have been seeing lately, and estimates -- trying to make predictions.

When it comes to cruise for example, after 9/11 we saw the business hold up quite well.

The same could be said for DVC.

Now we currently have only two cruise ships to fill.

We occupy a comfortable niche in that business.

We're not making predictions that we won't see any impact, but at the same time, we think we're very well positioned in the cruise business with a really strong product and should fare relatively well.

With regard to DVC, DVC wasn't a big driver in last quarter.

But that is in large part because we recognize revenue on a percent completion basis.

The sales of DVC units were actually quite strong.

But because we were selling properties that were on an average basis less complete on a percentage basis, less of the revenue from those sales were recognized.

And so that strength didn't show up in the quarter.

Where that goes from there, we're not making predictions.

But that for us is a business that has continued to show signs of good health throughout 2008 and last quarter.

Regarding ESPN, on the program's strengthening side or the reference to the comment that I made, first of all it is in the best interest of anyone selling programming out there to publicize the fact that ESPN might be interested.

But my comment was meant to say that in a tough economy, the strong from a brand perspective, and a business perspective -- the business model at ESPN is obviously quite sound, have a tendency to improve their competitive advantage.

And I think it is possible that the competition for programming that ESPN has faced could decrease somewhat in the tougher environment.

That is what I meant.

In terms of your question of where we are with affiliate fees, as you know, those fees were going to moderate over time to the mid single digits.

I think you can figure out based on the timeline where we are in the moderation scale, but we're not going to get specific about our program -- our subscriber increases.

Thank you.

Thank you, Jessica.

Operator, next question please.

Your next question comes from the line of Jason Bazinet of Citi, please proceed.

Thanks so much.

Now that we're sort of in the midst of this economic downdraft, I'm more curious about the potential turnaround, and given the investments you've made over the past three years, I'm thinking California Adventure, the video game investments, and the two new cruise ships -- can you just remind us in broad terms how you imagine those coming on line and helping the top line?

Thanks.

Well, we haven't given guidance or projections on what exactly they would do to top line.

In California Adventure, we are beginning the process of that construction.

We actually -- the first piece of it has come online.

And -- the Toy Story attraction, that's there at California Adventure.

But there is more to do through 2010, 2011, 2012, and I think that having an evolving entertainment offering there should actually do a couple of things.

One, I think it can drive the overall top line of the Disneyland resort.

Number two, I think it could provide for the potential increase in length of stay as California Adventure becomes a bigger, more important piece of the vacation experience down there at Disneyland.

With regard to the cruise business, we said in the past that we enjoy a mid-teens investment capital in cruise.

And we anticipate having a similar sort of return for the business after the two new cruise ships come online.

That doesn't happen for a few years.

But the increase in the top line would be commensurate with that.

So we're looking forward to that down the road.

I was at Disneyland and California Adventure on Sunday in the middle of this tough economy on a day that started with rain in southern California, and there were 50,000 people at Disneyland and California Adventure for the day, which is -- I know that doesn't help you with very much perspective, but that is a pretty strong showing.

And one of the things that was clear is that at California Adventure, where we have good attractions, a new one, Toy Story Mania, for instance, there is real appeal and real demand.

We have an opportunity there because of the size of the property to infuse it with stronger attractions and I believe end up with a park that is substantially more successful than we have today.

And as Tom referenced, because Disneyland itself is so built out, the primary way to really grow that resort is by improving California Adventure and growing that out.

And when you consider that what we're putting in there is so attractive, Cars Land will be the anchor, a very successful franchise for the company.

We believe that not only will we grow the top line, but our real focus is to grow the bottom line and to grow our returns on invested capital.

Where we have committed to spending capital in 2009 and beyond, in each case, the goal is to do just that -- is to improve not just the top line but return on the invested capital and the bottom line.

Another example of that would be the Disney vacation club, where we have added two very, very attractive properties to that mix.

The contemporary resort tower, which a different name that I can't remember at the moment --

Bay Lake Towers.

-- and an Animal Kingdom build out.

And both properties are considered quite attractive to the marketplace, which is one of the reasons why we're getting the sales that we're getting.

Again, another example of using capital to drive the bottom line.

Thank you.

Okay, Jason thanks.

Operator, we have time for one more question.

Your last question comes from the line of Anthony DiClemente of Barclays Capital.

Please proceed.

Thank you.

Focusing on the US consumer on the demand side, if you look at October, Visa, MasterCard, AmEx, they all talked about the spending on credit cards contracted during the month, and as a result what they decided to do in November is lower maximum credit limits across the board, even for high-end consumers.

So it would just seem like the average consumer just doesn't have the liquidity, regardless of pricing on booking at the theme parks.

Now in the last recession you managed through, you didn't really have that liquidity issues, but you did have terrorist fears, which you don't have now, thank God not to as high a degree as you did last time.

I just clearly know two downturns are the same, but Bob and Tom, I hope based on your experience, can you help us compare on the demand side from the standpoint of Joe the Plumber, so to speak, how those two different calamities compare?

Wow, a political reference.

Joe the Plumber, he is just a memory at this point.

I think you said it well when you said no two downturns or no two recessions or no two economies are the same.

Not only is the environment different, but we're very different as a company too, as Tom pointed out earlier.

We're more affordable today.

So you can argue -- if there are capital constraints, we're more accessible and affordable.

We have more value priced rooms.

It is certainly the case versus '91 and it is the case versus 2001 as well.

So I don't think we can in any way really determine exactly how the downturn that we're currently experiencing will impact us, except to give you the perspective that we gave you today, which is what we're seeing today.

We are very purposeful in giving you as much detail as we could about the marketplace that we are seeing.

But the reason for that is that we really feel that we can't give you anything more than that right now.

And I think that is a consistent theme that you're hearing across multiple sectors from multiple companies.

It is just too tough to tell.

The thing that I feel the best about right now is the strength of of the Disney brand, the mix of our assets, the creative momentum that we have and the experience of our team that has been through if not the same kind of downturn, certainly a significant downturn before.

And we're better prepared to manage through this today than we were in 2001.

And it may sound odd, but the fact that given what Bob just said, we're in a position both with financial strength and business strength to be able to focus on the long term and to focus on continuing to deliver value over time.

And so while we will operate in this environment from the standpoint of either the intrinsic value of the company or the long term prospects of the company, we still feel very, very good about where we stand.

So the downturn will unfold however it will unfold.

But at the end of the day, I think we've got a very good shot of seeing ourselves on the other side and an even stronger position than where we go in.

Great, thank you very much.

Thanks, Anthony.

Thanks again everyone for joining us today.

Note that a reconciliation of nonGAAP measures that were referred to on this call to equivalent GAAP measures can be found on the IR website.

Let me also remind you that certain statements on the call may constitute forward-looking statements under the securities laws.

We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them and we do not undertake any obligation to update these statements.

Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K and in our other filings with the Securities and Exchange Commission.

This concludes today's fourth quarter conference call.

Thank you.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect.

Good day.