A look at the latest numbers and it's clear that Walt Disney (NYSE:DIS) still has the magic touch. In our previous conference call analysis for the media and entertainment enterprise, we focused our attention on developing business pursuits in both Internet and interactive gaming.
Today, to get a deeper understanding of what worked in the first quarter and what investors can expect over the remainder of the year, the discussion will center on the company's bread and butter: its film business, particularly as it relates to DVD sales.
Ahoy, mate!
In providing a snappy analysis of Disney's first-quarter results, my Foolish colleague Rick Aristotle Munarriz pointed out that "fast cars and faster swashbucklers" led the way for the entertainment giant. Of course, he is referring to the highly successful DVD releases of Cars and Pirates of the Caribbean: Dead Man's Chest.
CFO Tom Staggs indicated in the call that those two films and The Little Mermaid generated more than 50 million DVD unit sales for Disney. The strong contribution from the three helped the company record 128 million DVD sales, significantly outpacing the 70 million mark it hit this time last year.
The latest success of Disney DVD is important for a variety of reasons. As Staggs reminded analysts, strong sales from The Little Mermaid again highlight the "strength and longevity" of the company's library. The depth of its film catalogue is important because over the next few years, Disney should be able to derive meaningful revenue from its favorite titles (what Staggs referred to as "evergreen titles") as consumers start to build out their home libraries with the next-generation DVD technology ushered in by Sony's (NYSE:SNE) Blu-ray and Toshiba's HD-DVD.
A second important factor that comes to mind when analyzing the latest quarter is perhaps the most critical: a confirmation of Disney's ability to convert box-office results to DVD sales. Cars, for instance, achieved the "highest conversion rate for any Pixar-generated film since Finding Nemo." Even more, a successful DVD conversion can help generate attachment sales from the consumer products division. Staggs pointed out the popularity of Pirates and Cars in helping Disney achieve a "third straight quarter of double-digit year-over-year growth" in consumer-product sales.
No cannibalization here
Further, the 128 million DVD unit sales from the first quarter serve to reinforce the view that this more traditional medium is not being cannibalized by the emergence of digital downloading. Disney has sold more than 1.5 million movies through Apple's (NASDAQ:AAPL) iTunes, but instead of being a potential draw away from DVD sales, the company is finding that the broader distribution of its products is actually acting as a "catalyst for broader consumption."
One analyst was looking for more clarity on the topic and asked whether the strength of Disney films on the iTunes platform has come at the expense of traditional retail channels in Wal-Mart (NYSE:WMT) and Target (NYSE:TGT). Staggs quickly doused the notion, saying, "I think that it's safe to assume that given the strong results we saw in DVD, we were selling through strong numbers through all of our major retail partners." Staggs then reaffirmed an earlier announcement that Disney will participate in Wal-Mart's movie download program.
DVD: Highly profitable
And a final point I wish to raise is this: Since DVD is highly profitable for Disney, one might expect expanding profitability -- and that's exactly what we are seeing. Margins improved this quarter, thanks in large part to DVD, Staggs said in the question-and-answer portion of the call.
Staggs helped to explain why DVD is so profitable. When Disney initially releases a film, the company amortizes the estimated costs associated with the film release, taking into account all the various "windows" through which the film will go, including DVD. A little defining may be useful here: To amortize, in this sense, is essentially to do a gradual expense write-off of the estimated total cost of producing and releasing a film title over a given period of time.
Staggs elaborated further: "Only so much of the cost will come forward into video." That means more robust DVD sales translate into more robust profit margins.
This process becomes even more meaningful for a title like The Little Mermaid, Staggs explains, because this film has already been "fully amortized." So when an "evergreen title" like that one is re-released, it has a "very strong impact" on the company's profitability.
Another year of Disney magic
What all this means is that shareholders have much to look forward to over the remainder of the year. As major films hit the big screens, including Touchstone's Wild Hogs, Disney's Meet the Robinsons, Pixar's Ratatouille, and what's likely to prove to be the biggest blockbuster of them all, the third installment of Pirates of the Caribbean, you can bet that Disney will be looking at both DVD and consumer products to drive even more sales as it approaches the holiday shopping season. Plus, Disney will be looking to drive more green from its "evergreens" as the old classics continue to find their way to the newer DVD formats.
Disney doesn't provide guidance to analysts, but if recent history is any indicator, this is one company you don't want to bet against.
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Fool contributor Jeremy MacNealy has no financial interest in any company mentioned. The Motley Fool's disclosure policy wishes it could be ... part of your world.
