Disney profit up, but revenue disappoints

Walt Disney Co <DIS.N> reported a 12 percent rise in quarterly profit on Tuesday as strength in its television business and theme parks outweighed a sharp drop in profits at its film studio.

Earnings topped Wall Street expectations at Disney but revenue lagged analysts' targets, and share rose only 1.7 percent to $30.05 in after-hours trade.

In the second quarter, Disney saw its TV advertising rates and viewership soar on hit shows such as "Desperate Housewives" and "Lost."

Disney posted net income of $733 million, or 37 cents per share, compared with $657 million, or 31 cents per share a year ago.

Revenue rose to $8.03 billion, from $7.83 billion in last year's second quarter. Analysts, on average, expected net and adjusted earnings of 31 cents per share and revenue of $8.2 billion for the second quarter, according to Reuters Estimates.

"It's a killer upside surprise on the EPS line," said Sanders Morris Harris analyst David Miller, who had forecast earnings of 31 cents per share for the quarter. The media networks division results showed "an explosion" in growth, he added.

"It looks like the revenue line came up a little shorter than our models due to weakness in the studio," he said. "Consumer goods did much better than we thought. Parks and Resorts were in line with our models," he added.

DOUBLE DIGIT EARNINGS GROWTH

In a conference call with analysts, Disney Chief Financial Officer Tom Staggs said the company expects its all-stock purchase of Pixar Animation Studios Inc. to dilute its fiscal 2006 earnings by 10 cents a share.

Staggs said the impact would be nearly equal in its fiscal third and fourth quarters.

But Staggs said the company looks forward to double-digit earnings growth in fiscal 2006 compared with one year ago even after the Pixar dilution.

Staggs also said a recent spike in gasoline prices was not expected to affect Disney's theme park business this summer, and that combined hotel room reservations were running higher than last year's third quarter at a rate of high single digits.

Media networks earnings rose 20 percent to $969 million, more than half total segment operating income. Parks income rose 17 percent to $214 million, while studio profit fell 39 percent to $147 million and consumer products income fell 8 percent to $104 million.

Disney last week completed its $8.1 billion acquisition of Pixar Animation Studios Inc <PIXR.O>, giving Apple Computer Inc <AAPL.O> Chief Executive Steve Jobs a 6.3 percent stake in the company and a seat on its board of directors.

Disney shares were trading at price-to-estimated 2007 earnings ratio of 17.8, compared with a price-to-earnings ratio of 16.5 for Time Warner Inc <TWX.N>, and of 17.3 for Viacom Inc <VIAb.N>.

Disney shares are trading at a 52-week high.

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Disney’s Hong Kong Headache

Disneyland is supposed to be "The Happiest Place on Earth," but Liang Ning isn't too happy. The engineer brought his family to Disney's new theme park in Hong Kong from the southern Chinese city of Guangzhou one Saturday in April with high hopes, but by day's end, he was less than spellbound. "I wanted to forget the world and feel like I was in a fairytale," he says. Instead, he complains, "it's just not big enough" and "not very different from the amusement parks we have" in China. His seven-year-old daughter Yaqin disagrees, calling the park "fantastic," but her father grumbles: "If she wants to come again, "I'll send her with somebody else."

Hong Kong's Magic Kingdom has so far been a little short on magic. The $1.8 billion theme park, which opened last September, was touted by Disney executives as its biggest, boldest effort to build its brand in China, a potentially vast new market for its toys, dvds and movies. The Hong Kong government—which aggressively wooed Disney and is the park's majority owner"hoped Disneyland would help secure the city's reputation as one of Asia's top tourist destinations. However, the conservative approach of Disney and its partner has produced a pint-sized park that so far hasn't matched visitors' lofty expectations. Hong Kong Disneyland has a mere 16 attractions—only one a classic Disney thrill ride, Space Mountain—compared to 52 at Disneyland Resort Paris. Meanwhile, management glitches involving everything from ticketing to employee relations have further tarnished the venture's image. In a recent survey conducted by Hong Kong Polytechnic University, 70% of the local residents polled said they had a more negative opinion of Disneyland since its opening. "Disney knows the theme-park business, but when it comes to understanding the Chinese guest, it's an entirely new ball game," says John Ap, an associate professor at the university's School of Hotel and Tourism Management.

Nonetheless, Disney executives insist the park is on track. Jay Rasulo, chairman of Walt Disney Parks and Resorts, says: "I feel great about how Hong Kong Disneyland is doing." Disney's own surveys of park visitors show an 80% satisfaction rate, among the highest of any of the company's parks, says Rasulo: "People feel this is a great experience."

The Burbank, California, headquartered company knows what it is talking about; it welcomed its 2 billionth visitor last week. And it is no stranger to tempestuous beginnings at an international park, at times caused by imposing a very American sensibility on foreign guests. When Disneyland Paris opened in 1992, Disney famously banned wine from park restaurants, much to the dismay of European bons vivants. In Hong Kong, Disney went out of its way to tailor the park to local tastes. Its "imagineers" installed Main Street's first Chinese eatery, along with Fantasy Gardens where Mickey Mouse, local favorite Mulan and other Disney characters reside so tourists can readily snap pictures with them—a priority for many Chinese visitors. Ironically, Disney's most high-profile stumble resulted from being too local. When executives decided to serve shark-fin soup, a Hong Kong favorite, environmentalists howled and Disney ignominiously yanked it from the menu.

 
 
 



Another embarrassment came over the Lunar New Year holiday beginning in January, a popular vacation time in China. Disney neglected to block off the entire week as "special days" for which visitors required specific tickets. Tourists with valid tickets got turned away at the front gates after the park quickly filled up; the jilted travelers screamed at park employees, while TV cameras filmed one family trying to pass a child over the fence. Henry Tang, the city's Financial Secretary, voiced concern that this disarray "might affect the image of Hong Kong's tourism industry." Bill Ernest, Hong Kong Disneyland's managing director, says the company "had no idea" that demand would spike so sharply at that time and adds that Disney has since expanded the number of "special days" to improve crowd control during holidays: "We don't make the same mistake twice."

Disney has also strained its relationship with Chinese travel agencies, which play a crucial role in funneling tourists into the park. Victor Yu Limin, a general manager at China CYTS Outbound Travel Service in Beijing, complains that Disney originally demanded several weeks' notice when the agency wanted to reserve a guaranteed number of rooms"a nearly impossible deadline, he says, as Chinese travelers often don't finalize trips more than a few days in advance. Agents also say they make so little money organizing Disneyland trips that they don't have any incentive to market the park. Disney has tried to improve its ties to travel agents by, for example, boosting the commission they earn on selling tickets and reducing the advance notice needed to secure hotel bookings. "We're listening to everything they have to say and adjusting where we can," says Josh D'Amaro, Hong Kong Disneyland's vice president for sales and travel-trade marketing. But, Yu says, Disney is "still far from understanding the real market in China. They started off doing business the American way, so they have encountered problems."

Some workers assigned to play the parts of supposedly cheery characters like Mickey and Tigger have also complained. In April, the Hong Kong Disneyland Cast Members' Union made public a litany of gripes over poor pay, excessive work hours and, most of all, the sweltering conditions inside their costumes. Disney counters that the complaints are an "inaccurate representation" of the work environment at the park, that staffers have been granted extra rest days beyond those mandated by their contracts, and that their costumes are no different to those worn at its hot park in Florida.

Given the complexity of the Hong Kong operation, such "teething pains" are hardly surprising, says Rasulo. What may be tougher to solve, though, are the yawns the miniature park is generating among tourists. Rasulo says the park wasn't built on a grand scale because the Chinese didn't grow up with Disney and don't know the characters as well as Americans and Europeans do, which acts as a constraint on its potential audience. Ernest calls it a "great introductory park." They also point out that the company plans to keep adding new attractions at Hong Kong Disneyland, including an updated version of Disney's classic Autopia racing game, scheduled to open this summer. The government is reclaiming land on an adjoining site to expand the park further. But James Zoltak, editor of Amusement Business, a trade magazine for the theme-park industry, says Disney isn't moving quickly enough: it needs to "get on a crash course in terms of expansion. The rate of building it up has to be swifter than anything they've done at any of their parks."

While Ernest concedes that attendance is "a little behind" expectations, Disney is sticking to its target of 5.6 million guests in its first year. To hit these numbers, Disney is running aggressive promotions. Last month, the park offered free tickets for 50,000 Hong Kong taxi drivers, says Susan Chan, Hong Kong Disneyland's director of publicity, so they "can experience the Disney magic themselves [and] better share it with their passengers." And even if attendance lags for a while, Disney says the park is already benefiting its other businesses in Asia. Andy Bird, president of Walt Disney International, says there's been "a noticeable lift in our brand and character awareness" in China since the park's opening—for example, sales of Buzz Lightyear merchandise have jumped, in part because the character features in Disneyland's popular Astro Blasters ride. David Miller, an analyst at investment-banking firm Sanders Morris Harris in Los Angeles, agrees: "Hong Kong Disneyland has been a solid success in terms of opening up the brand in China."

Indeed, Disney continues to bet that its long-range investment plans in China will pay off, regardless of the recent headaches in Hong Kong. The firm is still in talks with Chinese officials about opening a mainland theme park, possibly in Shanghai, says Rasulo. "Have we made some mistakes?" he asks. "Absolutely. We are in a brand-new market. We have to keep listening and keep learning." Restoring Tinkerbell's health only requires a round of applause, but Hong Kong Disneyland will need a bit more work.

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Jobs stake in Disney valued at $3.9B

Steve Jobs, the former chief executive of Pixar Animation Studios Inc., has received shares in The Walt Disney Co. worth $3.9 billion as part of Disney's acquisition of Pixar, according to a regulatory filing Monday.

Disney's purchase of Pixar for $7.4 billion in stock was completed Friday. Pixar shareholders received 2.3 shares of Disney stock in exchange for each of their shares.

That makes Jobs the single largest holder of Disney stock with 138 million shares, or 6.3 percent of outstanding stock.

Jobs was also named to Disney's board as a non-independent member.

Disney shares fell 32 cents to close at $28.77 Monday on the New York Stock Exchange. The stock has risen more than 20 percent so far this year.

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Mouse website reaches Oz through Optus

The Walt Disney Internet Group is partnering with Australian broadband services provider Optus to launch its Disney Connections broadband site in the country this summer.

The arrival of Disney Connections in Australia in July marks the ninth country for the Mouse's broadband website, which features an array of interactive games and video content based on its various brands. The site is already live in countries including Argentina, Brazil, Mexico, the US, Spain and Japan.

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Disney losing appetite for fast food

Marketing ties with McDonald's hit lean times
  

For 10 years Disney and McDonald's appeared to have a beautiful billion-dollar marriage. Happy Meals bore little figurines of Nemo, Mr. Incredible, and Peter Pan.

But no more. This is one relationship that's ending because of the children.

Disney is not renewing its billon-dollar, cross-promotional pact with the fast-food giant, which ends with this summer's release of Cars and Pirates of the Caribbean: Dead Man's Chest. The reason, in part, say multiple high-ranking sources, is the family-friendly entertainment giant wants to distance itself from fast food — and its links to the epidemic of childhood obesity.

Disney's not the only studio that thinks french fries loaded with trans fats may be too hot to handle.

DreamWorks is working with McDonald's to promote Shrek 3, due out in 2007. But according to one top-level studio source, there is already internal debate about whether the lovable green ogre should steer clear of chicken nuggets and Big Macs in favor of the healthier fare on McDonald's menu, such as salads. Compounding the issue is the fact that Shrek is, after all, overweight.

The ending of the McDonalds-Disney partnership comes at a time when the processed and fast food industries are under fire on a number of fronts because of growing concerns about childhood obesity. Just last week, former President Bill Clinton succeeded in yanking sugary sodas from elementary school campuses.

But some say the more discreet actions of the movie industry could ultimately have a much greater impact, especially if other corporate giants follow suit.

"I think it would have impact in contributing to the cultural change that is necessary," says Dr. J. Michael McGinnis, the chairman of a National Academy of Sciences panel that just released a study showing how food marketing affected children's diets. "The committee thought it was important for the use of cartoon characters that appeal to children only to be used in the marketing of healthy products."

One of the industry's most prominent critics, Fast Food Nation author Eric Schlosser, said it will be hugely significant if the Hollywood studios don't want to be associated with Happy Meals. "It will put more pressure on McDonald's to change what they sell in Happy Meals. The obesity issue would be irrelevant if the food in the Happy Meals was healthy."

This month Houghton Mifflin releases a new book by Schlosser and co-author Charles Wilson: Chew on This: Everything You Don't Want to Know About Fast Food, that has already put McDonald's on edge.

Animated ambivalence

Disney declined to comment about the end of its arrangement with McDonald's. The company has not signed any new promotional deals with any fast-food providers even though its recent purchase of Pixar Animation Studios gives it an even bigger slate of potential family-oriented blockbusters to market to youngsters.

In a conference call with analysts last August, Steve Jobs, the chairman of Pixar and now Disney's largest shareholder, was asked about the end of the McDonald's deal, and signaled the company's ambivalence about the fast-food sector: "There is value in [fast food tie-ins]. But there are also some concerns, as our society becomes more conscious of some of the implications of fast food."

Skipping the fast-food sector would certainly impact Disney's promotional strategy, says analyst Lowell Singer, from A.C. Cowen. "Fast food has been a very important promotional partner in promoting films to children. As the animated marketplace gets more competition over the next few years, Disney will need to be much more aggressive and creative in reaching children though other promotional outlets."

Restaurant analysts don't expect the Disney decision to affect McDonald's, which is free to work with other movie studios, as well as toy companies as disparate as Lego and Build-a-bear. In fact, while McDonald's relationship with the entertainment giant boasted hit promotions for such films as 101 Dalmatians, and Lilo and Stitch, some franchisees began to chafe when the studio churned out clunkers like Treasure Planet. The company also had to abide by Disney's strict rules regarding use of their characters, which were not allowed to be seen eating McDonald's food.

While even nutritionists caution that fast food isn't the only culprit when it comes to childhood obesity, it's certainly a factor.

Happy Meals are specifically marketed to children between the ages of 3 and 9. A regular six-piece Chicken McNugget Happy Meal with fries and Hi-C contains 620 calories, 28 grams of total fat, and 5 grams of trans fat. In recent years, McDonald's has also added healthy alternatives such as apples and low-fat milk.

All about the toy

At the end of the day, what often sells a Happy Meal is the toy, not the food. A good toy promotion can double or triple the sales of Happy Meals.

Blame impressionable young minds and "the `nag' factor," said Prof. Jerome Williams, an advertising expert at the University of Texas.

"Kids see a movie, and see it's being promoted with a particular product, they'll nag their parents about it," he said. "Studies have shown that, after a while, parents will give into their children. They're not so much expressing a preference for a Happy Meal but for the character the Happy Meal is associated with."

According to study released last month by the National Center for Health Statistics of the Center for Disease Control, 19 percent of children ages 6-11 are overweight, and 17 percent of teenagers are overweight.

Those figures may be conservative, said Prof. James O. Hill, director of the Center for Human Nutrition at the University of Colorado. He says the new governmental data suggests that as many as 40 percent of young children are overweight, and about 20 percent fall into the obese category.

But Disney isn't divorcing itself from McDonald's, either. The fast-food giant will continue to be a staple in the theme parks. They're also leaving open the possibility of McDonald's promotions geared towards adults.

"Our relationship was ongoing before the agreement and will continue after," said Dean Barrett, senior vice-president of global marketing for McDonald's.

Other factors contributed to the unraveling of the McDonald's-Disney alliance.

For its part, Disney grew disgruntled with some of McDonald's more recent advertising efforts, and had problems with the fast food giant's toy production schedule, according to a source. The studio had to lock down release dates at least 18 months ahead of time to accommodate McDonald's needs. If the studio moved the date, it had to pay a steep penalty to McDonald's.

Hollywood and fast food have been closely aligned since the 1980s, with almost every major film targeting children boasting a fast food tie-in of some sort.

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Disney acquires Pixar studio

WALT Disney Co., the No. 2 US media company, completed its $8.06 billion purchase of Pixar, bolstering its animation unit by gaining the creators of Toy Story and next month’s Cars. Pixar chief executive officer Steven Jobs, 51, becomes Disney’s largest shareholder and gets a board seat. President Ed Catmull will be president of the new Pixar and of Disney animation studios, and John Lasseter was named creative chief for animation, California-based Disney said in a statement. The purchase brings Disney chief executive officer Robert Iger the studio that created five of the 10 top-grossing animated films of all time, including No. 2 Finding Nemo. Pixar is Disney’s biggest acquisition in more than a decade and helps revive Disney’s once-vaunted animation division. “Pixar did what Disney used to do — tell great stories with dazzling animation,’’ said Brandon Gray, president of Burbank, California-based film tracker BoxOfficeMojo.com. “Disney has struggled in animation and hasn’t been able to capture what Pixar does.’’

Before Iger, 55, and Jobs agreed to the deal in January, Disney distributed films from Emeryville, California-based Pixar, which also created Toy Story and The Incredibles. “We will still be Pixar films,” Catmull told investors at a meeting in San Francisco where Pixar shareholders approved the deal. “It works. You don’t break what works.” Gains in Disney shares lifted the value of the stock transaction to $8.06 billion, from $7.4 billion when it was announced. Disney’s stock price hit a 52-week high of $29.15 during the day’s trading. Pixar shares rose $2.41, or 3.7%, to a 52-week high of $67.69 in Nasdaq Stock Market composite trading, and are up 28% this year. Catmull assured investors that Pixar’s culture will be preserved, reiterating comments from Iger and from Jobs when the deal was announced in January, and again in a regulatory filing that outlined safeguards of the company’s culture. Being independent helped Pixar “create the computer-animation genre,” BoxOfficeMojo’s Gray said. 

A change in management at Disney also brought the two companies closer together after Jobs and former Disney CEO Michael Eisner clashed. Pixar management was “incredibly impressed” with Iger’s vision, Catmull said. Iger was a “major factor” in deciding to move forward with the sale, he said. Catmull will report to Iger and Disney Studios Chairman Dick Cook. Lasseter, who was executive vice president at Pixar, will also be principal creative adviser at Walt Disney Imagineering, helping to design theme park attractions. Iger said in February that he decided to buy Pixar after concluding that Disney’s animation unit, home to Mickey Mouse, Snow White and Cinderella, hadn’t created any recognisable animated characters in the past decade.

According to an April 3 regulatory filing, Pixar shareholders get about a 12.6% stake in Disney.

Jobs owned almost 50% of Pixar, which translates to about 6.3% of Disney’s shares. Disney’s largest purchase was Capital Cities/ABC Inc. for $19 billion in 1996. Shrek 2, is the top-grossing animated film of all time.

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“Walt Disney’s It’s A Small World of Fun” Comes to DVD

Buena Vista is releasing Walt Disney’s It’s A Small World of Fun, a new DVD collection with two volumes of Disney animated short films. Starring Mickey, Goofy, Pluto and friends, each volume features adventures that are themed to different countries from around the world.

Walt Disney’s It’s A Small World of Fun features Disney’s FastPlay™, the family-friendly, exclusive patent-pending technology that puts viewers in control of their viewing preferences. With Disney’s Fastplay, viewers simply put in the disc and the DVD automatically navigates for them.

Volume One includes “The Flying Gauchito” (South America), “In Dutch” (Holland), “Goliath II” (India), “Mickey Down Under” (Australia), “African Diary” (Africa), and “A Cowboy Needs A Horse” (U.S.A.). Fans will also discover “Grievance Of A Starmaker,” a special animated short that has not been seen before outside of Japan.

Volume Two includes “Pedro” (South America), “The Olympic Champ” (Greece), “The Brave Little Tailor” (Great Britain), and “Susie, The Little Blue Coupe” (U.S.A.). Also releasing on DVD for the very first time are “Peter And The Wolf” (Russia) and “Crazy With The Heat” (Middle East).

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Tourist found dead in pool at Disney hotel

A tourist from Colorado has drowned at a Walt Disney World resort.

Nancy Heizer, 58, of Colorado Springs, was pronounced dead Thursday night after another guest noticed her floating motionless in a swimming pool at the Coronado Springs Resort, the Orange County Sheriff's Office said.

 

Guests, including a registered nurse from Maine, tried to resuscitate the victim. Cathryn Paolucci, the nurse, used an Automated External Defibrillator provided by Disney employees but was unable to restart the woman's heart, records show.

Heizer arrived Sunday for a weeklong stay to attend a conference of the U.S. Figure Skating Association, records show. Heizer worked for the skating association.

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Nightmare to get Disney Digital 3-D treatment

On the heels of James Cameron’s optimistic roadmap for 3-D at last week’s NAB2006, comes news that Disney will reissue TIM BURTON’S THE NIGHTMARE BEFORE CHRISTMAS in digital 3-D for a Halloween engagement beginning Oct. 20, reports THE HOLLYWOOD REPORTER.

Industrial Light & Magic, which collaborated with Disney last year on the successful 3-D launch of CHICKEN LITTLE, is currently scanning and converting the stop motion classic with the help of Burton and NIGHTMARE director Henry Selick. Appropriately ghoulish glasses are in the works too.

The beautiful sets and puppetry will no doubt benefit from the immersive experience in 3-D, as Disney hopes to capitalize on the phenomenal success of Warner Bros.’ THE POLAR EXPRESS in IMAX 3-D, which has become a perennial theatrical event at Thanksgiving.

Meanwhile, Disney previously announced that its next animated feature, MEET THE ROBINSONS, would also get the digital 3-D treatment when it opens March 30, 2007.

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Disney to offer “lite” version of thrill ride

Less than a month after a second person died after riding Mission: Space, Walt Disney World is reworking its hazardous but popular Epcot ride to offer a Mission: Space-lite option for some people.

The thrill ride simulates a spaceship launch, flight and landing with a combination of centrifugal and other motion forces and audio and video "virtual-reality" effects. There are four separate centrifuge systems in the ride building, each with 10 pods that can hold four riders each.

Disney announced Tuesday that it will turn off the centrifuge on at least one system, so that riders who don't want, or should not try, the spinning may still ride.

The new option will be available by early summer.

A company spokeswoman said the change is not being made because of the April 12 death of German tourist Hiltrud Blumel, the death last summer of a 4-year-old boy, Daudi Bamuwamye, or numerous complaints of illness. Disney is calling the nonspinning ride an exciting new option.

"By offering a second adventure, we hope to broaden the appeal of Mission: Space and enable even more guests to experience the attraction," Al Weiss, president of Walt Disney World Resort, said in a statement.

Mission: Space has drawn 11.8 million people since it opened in the summer of 2003.

But the ride also draws the most complaints of serious illnesses among all Disney World rides, and it is the only one that includes motion-sickness bags. Besides the two deaths, more than 130 riders have sought medical attention, including 10 reported with serious health effects, since the ride opened.

The ride is safe as designed for people who heed the health warnings, Disney spokeswoman Kim Prunty said. People with cardiovascular problems including hypertension, or who are prone to motion sickness, are warned away by 13 signs, plus video and audio warnings along the ride's queue.

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