Walt Disney 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, whenanalysts were given the chance to ask probing questions andmanagement explained the quarter in far greater detail than the simple earnings report.
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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.
Disney's MagicBand in action, shortening another ride wait. Image source: Disney.
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:
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.
Disney's resort in Shanghai, China -- currently under construction. Image source: Disney.
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:
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.
Bob Iger, Disney CEO and chairman. Image source: Disney.
The sting from Verizon and Sling Two weeks before the second-quarter report, Disney's ESPN network sued Verizon 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 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:
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 that kicks in next year. While the company waits for the digital video pioneer to take the premium content baton, it has already madeNetflix 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:
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...
Image source: StarWars.com.
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:
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...)
The article 5 Things The Walt Disney Co's Management Wants You To Know originally appeared on Fool.com.
Anders Bylund owns shares of Netflix and Walt Disney. The Motley Fool recommends Netflix, Verizon Communications, and Walt Disney. The Motley Fool owns shares of Netflix and Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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