Walt Disney (NYSE:DIS) crushed analyst expectations on May 5, reporting positive surprises on both the top and bottom lines. Stabilized by this fine second-quarter report, Disney shares continue to ride high. Current share prices sit just below Disney's all-time highs, and the stock has more than tripled in value over the last five years.
The numbers seldom tell the whole story, though. Serious Disney investors would be wise to listen in on the company's earnings call with Wall Street analysts, when analysts were given the chance to ask probing questions and management explained the quarter in far greater detail than the simple earnings report.
To save you some time, here are five of the most interesting management quotes from that call. I'll even put them into context for you, explaining why each tidbit makes a difference.
The magic of MagicBands
CEO Bob Iger loves the way Disney's MagicBands have improved the visitor experience at Disney World, but he can't quite put a finger on how much the system is helping his business:
MyMagic+ has had an impact, especially as we've now sort of anniversary-ed the start-up costs that we had there. And it really is integrated into the total Walt Disney World guest experience. So it's difficult to say just how much it contributed because it's so integrated, but it clearly was a contributor to results.
Roughly half of our guests now are entering the parks with MagicBands, and the response from those guests has been overwhelmingly positive. So we're very pleased with that.
MagicBands or MyMagic+ has been a driver. Going forward, it will still be a factor but perhaps not with as great an impact as we've seen in this quarter. Again, it becomes even more integrated into the base experience.
For those unfamiliar with MagicBands, they are Disney's way of dipping a toe into the trillion-dollar waters of the Internet of Things.
Disney World guests can set up their park experience days or weeks in advance, then link their plans to a smart bracelet that's worn in the park. Disney's systems always know what you like, where you are, and which of your favorite rides have the shortest lines. The bracelet nudges you in all the right directions, shortening the time spent waiting in line under the merciless Florida sun.
"Any sufficiently advanced technology is indistinguishable from magic," in the words of Arthur C. Clarke. That's the feeling Disney is aiming for here. Happy guests spend more money at the resort -- and from their perspective, the magic is real.
Despite tough currency exchange effects dampening Disney's overseas results, the parks and resorts division recorded 6% year-over-year sales growth in the second quarter. Operating profits for that segment rose a staggering 24%. According to Disney, these results sprung from higher ticket prices plus "increased food, beverage and merchandise spending."
As Iger explained, it's hard to tease out exactly how much the MagicBands lifted the average spending levels, but it's an undeniable growth driver. I would be shocked if Disney didn't roll some version of MagicBands out across all of its parks, resorts, and cruise ships over the next couple of years. As a Disney shareholder, I'd even be downright disappointed.
Planting a flag in China
Chief operating officer Tom Staggs, who seems poised to take over Iger's CEO title in 2018, shared his thoughts on the new Disneyland resort that's under construction in Shanghai, China:
We will ramp it up toward profitability after opening, so that the real positive impact from Shanghai Disneyland, you'll see it in years post-2016. But at the same time, as we've discussed in many times on these calls, the prospects there are spectacular.
And certainly, planting the flag in China, we think, will have a ripple effect throughout the rest of our businesses as we establish the brand in that way.
So you shouldn't expect massive profits out of the new Shanghai resort in its debut season. Give the Chinese market some time, though, and you should see the park driving Disney's brand awareness higher while the park itself starts earning back its $5.5 billion construction costs.
Establishing a tentpole in the world's second-largest economy can only help in the long run. Only 14% of Disney's sales came from abroad in the second quarter. If you thought Disney was a global brand today, there's lots and lots of room for improvement overseas.
The sting from Verizon and Sling
Two weeks before the second-quarter report, Disney's ESPN network sued Verizon (NYSE:VZ) over unbundled TV services. The suit calls Verizon out for breach of contract, as the new "Custom TV" bundles for FiOS push ESPN's stations out into a separate sports package. "Among other issues, our contracts clearly provide that neither ESPN nor ESPN2 may be distributed in a separate sports package," according to the Disney division.
On the other hand, DISH Network (NASDAQ:DISH) recently launched an online TV service under the Sling TV brand. There you'll find a couple of ESPN channels in the core package, but three other ESPN properties in the add-on sports package. This time, Disney was a proud launch partner.
What gives? Here's how Iger explains the paradox of allowing separate bundling in one case but not in another:
In the Verizon case, we were simply asking them to adhere to the contract that they had negotiated with us.
In general, as it relates to skinny packages, we've been, for the most part, at the forefront of offering consumers more choice, because we happen to think that we've entered into an era where the consumer has more authority and therefore is going to demand more flexibility and more customization.
But it's also clear that the price-to-value relationship is important. Consumers still want a lot of choice at the right price. Sling's case was mostly of interest to us because their strategy was to go after the roughly 12 million broadband-only households in the United States with a skinny or less expensive package. So we thought there was value there from a strategic and financial perspective....
I think we're entering into a pretty interesting world, where technology is for the most part the friend of high-quality media, because it's going to give us many more opportunities to reach customers, either directly or through third parties. So we're viewing this as kind of a new world order in many ways, because of the impact of technology on media, but one that's going to be very beneficial to this company.
So it's about sticking to the letter and the spirit of current contracts. It seems like Verizon could have worked around this issue by renegotiating its ESPN agreement before launching the new bundle structures. Maybe that solution is still on the table, ready to deflect Disney's legal threats.
I do agree with Iger when he talks about Disney's open attitude to new technologies and ideas in the broadcast business. Way back in 2006, ABC Television president Anne Sweeney explained that she saw the digital piracy threat as just another type of competition, and that Disney was ready to beat the pirates using the normal tools of business operations. The same year, Iger took a similarly positive view of the digital markets that were just starting to emerge as broadband connections became commonplace:
"We believe in this world that the more often you make content available to buy, and the more places you make content available to consume, the bigger the market will be," Iger said nine years ago. "And so we are very, very bullish on consumption of electronically delivered media. We are taking a very positive or optimistic view about technology. It is our friend. It's a great enabler, versus being a threat or a predator."
Not much has changed since then, except that digital media is growing up and Disney embraces it at every turn. Besides offering mobile apps for consuming its movies and cable channels, Disney gave the traditional premium cable channels the cold shoulder and signed an exclusive, long-term distribution deal with Netflix (NASDAQ:NFLX) that kicks in next year. While the company waits for the digital video pioneer to take the premium content baton, it has already made Netflix the worldwide first-run home for several new Disney shows in the Marvel universe.
So yeah, Disney takes newfangled distribution models seriously. I like Verizon's newfound love for looser cable bundles, but the company should probably take a second look at where ESPN's premium content belongs. Contract amendments happen all the time, right?
Quality first, results will follow
Pay attention, because the next Iger nugget is the key to Disney's entire business model:
We're focused on improving the quality of the product in a relentless way. We're focused on delivering value, not just to the Disney shareholders, but to the distributors worldwide. And I think the growth that we've seen in that business these last few years is a result of all of that and we believe that that should continue.
Tell top-notch stories with great production value and the business results will follow. This thesis has played out time and time again, justifying both the Pixar and Marvel buyouts many times over. Under Iger's steady hand, Disney monetizes quality storytelling like nobody else.
And on that value-packed note, we're swerving straight into...
The Star Wars opportunity
This is a perfect example of the quality-first focus that Iger discussed in the previous quote. Here's how he sees the space opera playing out over the next couple of years:
You have to understand that this is already a very strong franchise. But a film has not been released in 10 years. And so, while we're not treating this as something that is brand new, we're mindful of the fact that there's a whole generation of people out there that were not as steeped in the Star Wars lore and not as, in effect, in love with the franchise as an older generation.
And there are markets around the world that weren't as developed,10 years ago and beyond that. China is probably the best example; it's now the number two movie market in the world. Obviously, when the last Star Wars film released, it was barely a market from a movie perspective....
I think we've got something here that is very, very special, that's going to create value for the company for many, many years to come -- across the world.
We have three films that are going to come into the marketplace between now and May of 2017. Star Wars VII: A Force Awakens in December; Rogue One, the stand-alone film, a year later. And then in May 2017, we're going to have Star Wars VIII. And all three are in varying stages of development and production.
That's a tantalizing market summary. Not only does Star Wars come with a fantastic built-in fan base, but it also benefits from decades of pent-up demand for new mainstream content.
There's a whole generation of younglings, right in Disney's target-market wheelhouse, that wasn't born when the last trilogy left theaters. And we're talking about two solid generations since the last good Star Wars title. (Sue me, I really don't mind the ewoks.)
As a big Star Wars fan (6'5" in socks) I can't wait to see what Disney is doing with this fantastic story material. If early trailers are any indication, the next film seems to match the premium talent level of its creators. Put all of these value-building factors together, and I think Disney will see its $4 billion Lucasfilm investment paying for itself in short order.
I've included the latest official trailer for The Force Awakens right here, so you can watch it and reach your own conclusions. If you squint at the video just right, you can see Disney's studio profits stacking up mile-high, just behind the screen. (Maybe that's just me...)