Disney Speakers: Bob Igercdn.media.ir.thewaltdisneycompany.com/2007/q1/q1-fy07-earnings-transcript.pdfgenerated the highest conversion rate for any Pixar animated film since Finding

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Q1 FY07 Earnings Presentation

FEBRUARY 7, 2007

Disney Speakers:

Bob Iger President and Chief Executive Officer

Tom Staggs

Senior Executive Vice-President and CFO P R E S E N T A T I O N OPERATOR Welcome to the Walt Disney Company’s quarter one fiscal year 2007 earnings

presentation. And now, I turn you over to the live Q1 earnings commentary being

presented from Disney's 2007 investor conference at Walt Disney World in Florida.

[OPERATOR INSTRUCTIONS]

Q1 FY07 Earnings Presentation February 7, 2007

Bob Iger – President and Chief Executive Officer, The Walt Disney Company Good afternoon. It's great to be here at Walt Disney World, particularly in light of the

quarter results that we just announced. I'm very pleased to report such strong quarterly

earnings to kick off 2007. I think these results are particularly gratifying given the fact

that we had such a great year in 2006, and I think they're another clear sign that our

strategy is driving growth and creating real shareholder value.

You're going to be hearing from a variety of people at The Walt Disney Company over

the next day and a half. There's a lot going on with the company, as you'd expect, and

my team and I are looking forward to the interaction with all of you. I'll be getting up

tomorrow morning to make some opening remarks, and then I'll be available at the end

of the day tomorrow after all the business units have presented to take your questions,

and so with that, here is Tom Staggs, our CFO, to give you the details of the quarter.

Tom?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company To all of you here, welcome to Walt Disney World. To all of you listening in, welcome

to Disney’s 2007 investor conference. It's a pleasure to be with you here again in

Orlando. As you’ve seen by now, the creativity, hard work, financial discipline and

unwavering focus of our managers drove another quarter of exceptional financial

performance, with segment operating profit and earnings per share each up by over

40%.

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In our sessions later tonight and tomorrow, you’ll hear a great deal about each of our

major lines of business and the integrated approach we’re taking to managing them to

deliver continued strong financial results and increased value to our shareholders. So

for this session, I want to focus on our current quarter earnings and some of the swing

factors we see for the balance of the year. In many ways, strong results like the ones we

just reported speak for themselves, so I will keep my comments brief.

Any discussion of this quarter has to start with Pirates and Cars. They represented two

of our biggest performing films in theaters last year and their home video releases

helped drive record studio results in Q1.

Together with the release of Little Mermaid, Pirates and Cars drove an increase of more

than $475 million in Studio operating income for the quarter. Between these titles we

recorded over 50 million DVD unit sales. For the quarter as a whole, we sold 128

million DVDs, compared to a little over 70 million in Q1 of last year.

The conversion of box office results to DVD sales was especially strong for Cars, which

generated the highest conversion rate for any Pixar animated film since Finding Nemo.

Our success with Little Mermaid is another reminder of the particular strength and

longevity of our library and all indications are that we have added another evergreen

title to our inventory with Cars.

The success of the Cars and Pirates films is tremendous. But the benefits these

franchises will continue to deliver to the entire company - and the Disney brand - well

into the future is the real value-creation story. As we have said for some time, creating

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high quality, branded content with enduring franchise potential like Pirates and Cars is

central to our business and investment strategy.

Our studio performance also indicates that distribution of our films on new digital

platforms is not cannibalizing traditional platforms. To date, over 1.5 million of our

movies have been downloaded through iTunes and we think this broader distribution

of our product is a catalyst for broader consumption of our product.

The quarter’s strong home video performance was somewhat offset by theatrical

results, given that last year’s quarter included the release of The Chronicles of Narnia.

For the rest of 2007, the primary swing factors in our Studio results will be our

remaining major theatrical releases. These include the Touchstone release Wild Hogs

and Disney’s next animated feature Meet the Robinsons. You should note that since

Robinsons opens on March 30th the majority of our marketing spend will hit the March

quarter, with substantially all of the revenue from the theatrical window coming in the

June quarter.

Our two most notable theatrical releases this summer will be the third installment of

Pirates of the Caribbean and our next Disney/Pixar film Ratatouille. You’ll hear more

about these films during Studio’s presentation tomorrow.

In home video, we’ll face some tougher comparisons in 2007, especially in Q3 when

we’ll be comparing against The Chronicles of Narnia which was our best-selling DVD title

last year. The popularity of Pirates and Cars also bolstered our Consumer Products

results, along with our portfolio of evergreen franchises like Princess, Mickey and Pooh.

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Q1 represents our third straight quarter of double-digit, year-over-year growth in

earned royalties at merchandise licensing. However, that growth was offset by lower

guaranteed revenue recognition in the quarter. As we noted at the beginning of the

year, we expect to record roughly $70 million less in minimum guarantee revenues in

2007 than we did in fiscal 2006. Roughly $44 million of that year-over-year impact hit

us in Q1.

We completed the $300 million sale of our stake in US Weekly at the beginning of this

last quarter. We invested $30 million in “Us” six years ago for a 50% stake in the

magazine. Since that time, Jann Wenner substantially increased its value, giving us a

great return on our investment. Until the sale, this business rolled up into Consumer

Products and accounted for approximately $25 million in operating profit in 2006.

As we will discuss in greater length tomorrow, we continue to ramp up our investment

in video games. This business is important to us both as a potential source of future

growth and as a creative engine for our company. As we ramp-up, this spending

dampens Consumer Products results for the quarter and the year. In addition, Q1 of

last year included two of our strongest titles, Chronicles of Narnia and Chicken Little,

which sold more than 3 million units combined. Our most important releases for this

year, which include Meet the Robinsons and Pirates 3, launch in Q2 and Q3 respectively.

We expect to increase video game development spending to roughly $130 million in

2007 - 30% higher than our 2006 levels. As we have said previously, over the next 5 – 7

years, we’re targeting to increase our video game development spending to $350

million per year.

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In broadcasting, the absence of the NFL dampened revenue growth for the quarter, but

resulted in increased profit. This change, coupled with Primetime CPM increases of a

little under 4% versus upfront pricing, more than made up for a slight ratings decline in

Primetime. So far in Q2, we’ve seen a very strong ad market with CPMs up low

double-digits ahead of upfront pricing which – if the trend continues – is a good sign as

we enter this year’s upfront selling season.

Positive network results were offset in the quarter by higher TV production costs as

well as costs associated with shows that were cancelled during the quarter.

Although we saw higher costs at the television studio this quarter, there is significant

upside from owning some of our most successful shows. As we’ve noted before, shows

that are currently in – or slated for – syndication including According to Jim, My Wife and

Kids, Lost, Grey’s, and Desperate Housewives – should contribute over $1 billion in

operating profit to our TV studio as we distribute them in syndication, on DVDs and

through other new platforms.

Our TV stations are also extremely well positioned in their markets, thanks to the

strength of our local news franchises, syndicated programming and the ABC schedule.

This past November Sweep, 8 out of 10 of our stations again ranked #1 in primetime,

and our top five stations actually ranked #1 from sign-on to sign-off. They also ranked

#1 for their 5 p.m. and 6 p.m. newscasts and for ABC World News with Charlie Gibson.

This performance – coupled with political spending prior to the mid-term elections -

helped drive a particularly good December quarter, with ad sales up roughly 15%

versus last year.

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Of course, in Q2 our TV stations face difficult comparisons to last year which included

the Super Bowl, and as you would expect, ad sales at the stations thus far are pacing

down by mid single digits.

At radio our ad sales grew by 3% in Q1 and this quarter pacings are also up low-single

digits ahead of the prior year. The ABC Radio transaction is on track to close early this

summer, and we anticipate distributing the stock we receive in the form of a spin-off.

When this deal is concluded, the portion of our radio assets involved will be treated as

discontinued operations for all periods that we present in our financials. These assets

represented roughly 4 cents of our 2006 EPS.

In Q1, broadcasting results also reflect the ramp-up in our investment for Disney

Mobile’s ongoing roll-out. So far sales are tracking in-line with our plan and we’re

pleased with consumer response as Steve Wadsworth will discuss in greater detail

tomorrow.

Our cable networks met with great success this quarter, reflecting our ongoing focus on

branded content and sports programming that we can leverage across different

businesses and different distribution platforms.

At ESPN, the multi-media success of Monday Night Football contributed to solid ad

revenue growth for our cable businesses in the quarter. Online, ESPN.com’s NFL and

Monday Night Surround content viewed on computers and wireless devices generated an

average of 24 million page views on Mondays, up more than 50% over page views last

year. This in turn helped reinforce TV viewership, driving an increase of 40% in

revenue-per-game versus Sunday Night Football last year.

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At the same time, ESPN’s reported operating income was impacted by the fact that we

deferred $60 million more in affiliate revenues this quarter than we did in Q1 of 2006.

In Q2 we expect to defer roughly $85 million more in affiliate fees than we did in Q2 of

the prior year. In both instances, we expect to recognize the deferred revenues in the

second half of this year.

So far in our March quarter, overall ad sales for ESPN are pacing low-to-mid single

digits ahead of last year. This weekend, we launch our ESPN coverage of the NASCAR

Busch series. It’s early, but sales are going well and our first race is sold out.

We’ve made a big investment in key sports rights, and high-quality live sports has been

a cornerstone of ESPN’s success. But ESPN’s results demonstrate our ability to leverage

these rights across platforms to generate consistent growth. In addition, the strength

and reach of ESPN provides unique, multi-platform coverage that is increasingly

important to sports leagues in achieving the reach and recognition that they seek.

As with ESPN and our Studio, our experience at Disney Channel reinforces our belief

that digital distribution can broaden audiences. By making hit shows available on the

DisneyChannel.com broadband player, we’re seeing greatly enhanced traffic to the site

and driving ratings success at the same time.

Average monthly unique visitors to the site in Q1 more than doubled versus last year.

And, Disney Channel was the #1 basic cable network in primetime with both Kids 6-11

and Tweens 9-14 for the fourth consecutive year in calendar 2006.

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Although Disney Channel is not ad supported, this quarter’s results demonstrate the

value of the hit programming that Rich Ross and his team are creating there. DVD

sales of High School Musical and Cheetah Girls 2, coupled with strong Hannah Montana

soundtrack sales helped drive a double-digit percentage increase in operating income at

our cable businesses this quarter, and helped bolster the studio segment’s results as

well.

At Disney Parks & Resorts, we again posted solid growth in revenue, profits, and

margins. Overall attendance for our domestic parks came in flat, with Disneyland

Resort down 5% because of difficult comparisons to the 50th anniversary celebration.

Walt Disney World attendance was up 3% which was noteworthy given last year’s

record holiday season.

Per capita spending at our Walt Disney World parks grew 7%. At Disneyland, per

capita spending came in just below last year due to the substantial merchandise sales

associated with the 50th Anniversary last year.

On the resort side, our Orlando hotel occupancies increased to 85% and per room

spending grew 2%. At Disneyland occupancies were 94%, down slightly from the prior

year, while per room spending came in just above last year.

Looking ahead, advance bookings for our combined domestic parks for the March

quarter are trending about 3% ahead of last year, as the Year of a Million Dreams

celebration appears to be resonating with our guests.

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The first quarter reflected lower than expected results at Hong Kong Disneyland, with

attendance and per caps falling short of our expectations. The early going in Hong

Kong has been more challenging than we had hoped, as Jay Rasulo will discuss in his

presentation later this evening. At the same time, we remain both confident in - and

committed to - the long term success of our project there.

This quarter’s asset sales and our pending ABC Radio transaction, reflect our focus on

maximizing the value of our assets. We’ll continue to direct resources primarily toward

branded entertainment experiences that can be leveraged across businesses and

platforms in order to benefit the whole company. We will also continue to allocate

excess capital to share repurchase and dividends. This year’s $0.31 dividend

represented our 51st consecutive year of dividend payments.

During Q1, we also repurchased 29 million shares of Disney stock for roughly $1 billion

and through last Friday, we’ve purchased over 18 million additional shares, bringing

our fiscal year total share repurchase to roughly $1.6 billion.

The keys to Disney’s success are the quality of our content, consumer affinity for our

brands and our ability to leverage creative success across the scope of our businesses.

Our company-wide focus on these competencies has resulted in the earnings growth,

strong cash flow and improving returns you’ve seen us deliver for four straight years

now and will, we believe, always remain at the core of Disney’s success.

Tonight and tomorrow, you’ll hear more about our efforts to strengthen and extend

Disney’s competitive advantages in our various businesses in response to the changing

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environment. Our outstanding Q1 financial performance on the heels of our record

2006 results is an indication of our progress in that regard.

At the end of our conference tomorrow afternoon, Bob and I will be back to address

your questions about the company and business as a whole. But for this evening, I’d be

happy to take a few questions regarding the results we just reported. Since we’re

Webcasting our sessions, please wait for a microphone before asking your questions in

deference to those who aren’t here with us in the room.

Audience Member My first question has to do with scatter pricing that you’re seeing at the network and

whether or not it's industry related or particular to ABC? And the second question has

to do with your investment at the Disney Channel and whether you’re looking to ramp

up that investment given the success you’ve seen in those shows?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to the scatter market, I think it's a generally strong scatter market that we're

seeing. There is not a terribly large amount of inventory out there. So I think there's

some impact from the fact that there's a little bit less supply, as some folks have less to

sell than others. I don't have the exact tracking for what the other networks are selling

but it looks to me that it's the ad market itself that is strong. The fact that we have some

of the most sought-after shows is helping us quite a bit as well. It’s clear that just like

we saw with DVDs, etc. people are making choices as to where to put their money,

whether it's buying content or whether it's advertising content. And so we're obviously

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pleased with the strength of what we've seen at the network, especially with the move

of Grey's to Thursday night, etc.

With regard to spending at Disney Channel, we talked at the beginning of the year and

in fact talked some last year about the fact that we'd like to continue to ramp up our

investment in programming for Disney Channel and Disney branded programming

more broadly. We're going to do that in terms of the domestic Disney Channels. But

we're also spending more to create programming around the world, specifically for

certain countries. Then, when we have hits in certain countries, we’ll export those.

Rich Ross is going to talk a bit more about those plans tomorrow as we give you a sense

of how we're thinking about measuring that investment. But overall we think there's an

opportunity to invest more in Disney branded programming, both domestically and

internationally.

Audience Member

My first question has to do with deferred revenue at ESPN and the profitability impact.

The second has to do with the timing for when there would be a material impact from

digital downloads, et cetera.

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company As I mentioned, we deferred $60 million more in revenues in Q1 of this year than we

deferred in Q1 of last year. There are no deferred costs that go with it; only revenues are

deferred. Therefore, with all other things being equal, that should result in a direct shift

of profitability from one quarter to another. And as I said, that money is expected to be

recognized in the second half of the year.

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With regard to digital downloads, it's early still. For example, right now for iTunes

downloads at the Studio we're pacing to do about $25 million in revenue for the year.

It's nice because it looks like that's a purely incremental audience by all accounts.

Certainly our DVD sales in the first quarter would point to the fact that the worst case

scenario is that [downloads] are not cannibalistic. The best case would be that they are

audience expanding. I think it's probably the latter that's true.

So, having that extra revenue certainly already impacts the bottom line and I think it's

going to continue to grow. We don't want to make any projections about just how fast it

will grow, but it looks like the digital download audience is going to continue to

expand and become a more important part of our overall studio business. Again, we

also think that the impact of that is that the overall pie will continue to grow as a result.

You'll hear more about that from our studio folks tomorrow and in some of the

comments that Bob will make in his opening.

Audience Member The first question is on the studio, where the number is very strong. It looks like you

converted about 80% of the incremental revenue in DVD to the studio. So, was that just

a function of mix or is there something else going on there that's helping the margins? I

don't think you've had a 23% margin at the studio in a long time. And then secondly,

the free cash flow line that was down about $100 million and it looks like it was mostly

due to the increase in receivables. Was that also related to the DVD sales?

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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to studio margins, we did have a very nice flow-through rate. A couple of

things are going on there. Number one just being the fact that it was being driven by

home video. As you all know, when we amortize the cost of a given film in its initial

release, we amortize those costs based on our estimate of the windows through which

they'll go and we adjust those as we go along. There's only so much of the cost that will

come forward into video, of course, because we still have very robust ancillary

windows for future revenue. And so, as you add incremental sales, you get a very nice

flow-through rate of that from a profitability standpoint.

We also, as I mentioned, saw a lot of strength from our Little Mermaid release which is a

fully amortized title. This is something we've talked about in the past. The nature of our

Disney branded library is such that it continues to show evergreen qualities. When it

sells through as strongly as we're seeing, it has a very strong impact on our profitability,

as you would expect.

With regard to the second question on cash flow, you hit the nail on the head. The

biggest impact to cash flow this year in terms of comparing it to the earnings and

comparing it to last year is that we had a much greater investment in receivables this

year than last. And as you expect, over two-thirds of that was driven by the studio.

We sold quite a few DVDs during the quarter and those generated a big uptick in

receivables-money that we'll be collecting over time. So, the cash flow will bounce back

as we make the collections on those receivables. There is a modest increase in capital

expenditures as well, consistent with what we talked about at the beginning of the year.

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Audience Member Can you talk about on the cable network segment, where you had some very strong

international growth? Of the 22% year-over-year operating income growth, how much

was international versus domestic at Disney Channel? Secondly, on the iTunes contract,

when does that expire and would you look to renegotiate given the profitability of your

DVD segment? How do you look at the iTunes contract for film and also on the TV side

versus where you have it today in terms of a renewal possibility? And then related to

that, have you had any discussions with YouTube about pulling down the content as

Viacom did last week? Or are you any closer to a negotiation there?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company I'll try to track through those. I'll go in reverse order and no doubt forget the first

question by the time I get there. With regard to YouTube, I'm not going to comment

specifically about any discussions that we're having. At the end of the day, it's

obviously an issue that we're looking at closely. In the comments we'll make over the

next day and a half, you'll get a sense of how we want to be aggressive in terms of being

out there on additional platforms and how we continue to favor a market-based

solution to these things. At the same time, when we think about video out there on the

Web, we want to make sure that it's out there in a way that respects the copyright

holders, both ourselves and others. It’s an issue that's going to evolve over time but

there's no set answer to it at this point.

With regard to the iTunes contract, we've been very satisfied with what we've seen

there. We've talked about the film downloads to date and we've talked about the ABC

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television shows. Anne Sweeney is going to talk a little bit more about it tomorrow. I

wouldn't anticipate any dramatic changes going forward.

The cable networks' strong results were driven primarily domestically, but we also saw

strong results internationally. Again, Disney Channel programming is really resonating

around the world and we're seeing some strong figures there. The High School Musical

DVD was a very big seller in the U.K., for example, outselling major theatrical releases

there even though it had been on television several times, free TV, and on the Disney

Channel. So, we're seeing strength in both areas.

Audience Member Two questions. First, could you give us a sense how the NASCAR contract is going to

get amortized by quarter? I know you started the Busch series but I think the NASCAR

series is at the end of the year. And second, for football, have you looked at the

profitability of your deal with the NFL this year versus last year when you had it on

both networks? Is it more profitable, about the same, or less profitable? Can you give us

a sense of what the overall impact is on the Company? Thank you.

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company

Sure. So, with regard to NASCAR, I mentioned that we've got the first race coming up.

But the bulk of the races are in the fourth quarter and that's where you're going to see

most of the amortization. Remember that this year, only about 60% or so of the first

year of NASCAR will be in the fiscal year. And something on the order of 70% of that

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will be amortized in the fourth quarter. So, it's back-end loaded and it's not quite a full

season this year for NASCAR.

We look hard at the profitability of football and there are a number of different ways to

look at that profitability. At the end of the day, I talked about some very, very strong

results and those results exceeded our expectations. So we're pleased with the relative

profitability of the NFL. How you allocate revenues to the NFL is going to have a great

impact on how you view the profitability of that contract. I would say to you that it's a

contract we're pleased to have and it's one that I think benefits the NFL and one that

benefits ESPN. I really have to commend ESPN for the job they've done in this first

year, moving to Monday night, driving performance across platforms. I don't want to

steal George's thunder because I know he's going to talk about it more tomorrow but

it’s really been a spectacular job by him and his team.

Audience Member

To follow up on the ESPN comment for a second. Not to pigeonhole you too much here

but if we add back the $60 million, it seems pretty apparent that ESPN had underlying

EBIT growth of over 10%. Can you confirm that? And given that, in the face of the

step-up in the NFL programming, I would think your confidence in ESPN’s ability to

deliver double digit growth is probably quite strong. Is that accurate? And then

separately, you just delivered 10% earnings growth for the year in the first quarter. Are

you ready to commit to 10% earnings growth for the Company overall for the year?

Thanks.

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So, let me translate those questions. You'd like guidance on ESPN and guidance on

earnings.

Audience Member Yes. Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company We really have made a point of saying that we don't think the best thing we can do for

our business is to give guidance but I am happy to try to talk about swing factors. It's

obviously a great start to the year. When I think about the remainder of the year, I think

the toughest comparables are in Q2 and Q3 in terms of the lineup that we've got from

the film release standpoint and that sort of thing. We’ll be watching those closely to see

where the overall year turns out. But it's hard not to be pleased where we are, out of

the blocks here. We've tried to convey our confidence in ESPN in a number of ways.

Our confidence hasn't waned at all. I'm not going to make a specific projection about

ESPN's growth this year. But in response to the question that I think Anthony asked in

the last conference call, I mentioned that we had said that ESPN would grow on

average double-digits through 2009 and that this year's growth rate would be consistent

with that goal. I'm happy to stand by that comment.

Audience Member

Just one quick question. Given the very robust DVD unit sales in the quarter, my

question is, holding the great content aside, are there other changes that have occurred

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in the business, either in terms of pricing or distribution agreements or higher

marketing budgets and accounts that were robust?


Well, this [performance] wasn't driven by higher marketing budgets. We obviously

used a pricing strategy that was generally consistent with what we've done before. So,

there aren't major changes there. I think [this performance] is consistent with what

we've been talking about for a while. Our biggest job is to make sure we're making very

high-quality product. We have the benefit of creating that profit under the Disney

label. We think it's going to help to take advantage of whatever market was there. It

turns out that the market was quite strong. But the consumer is increasingly getting

used to choice. And as the consumer's ability to choose increases, being focused on

quality content that's marketed under strong recognizable brands is a winning strategy.

We're going to talk tomorrow about where we're taking the studio strategy and it's

consistent with that. It's what we see going on in the marketplace, basically business by

business. We were very pleased with our creative success last year. We know that we

have to continue to be successful creatively. But at the same time, in doing so under

these brands, you can see us deliver an enhanced return on our investment and a

greater ability to access whatever market strength there is.

Audience Member Question one relates to just trying to better understand the organic growth rate of

revenues and operating income of broadcasting when you adjust for the year-over-year

change that you've had with football including the negative impact on revenues and the

positive impact on cash flows. And the second piece, when you look at some of your

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peers that have had huge fourth quarters in DVD shipments, sometimes there have

been issues with some of them struggling with actually getting those to be accounted

for at the end of the day in terms of returns. What type of visibility do you have or

how much comfort or reserve has been taken into account for the visibility that seems to

have changed over the last couple of years in the DVD business?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company With regard to reserves in the DVD business, whenever the sales are that big, we have

to take a very, very hard look at the return reserves. And it's something we take very

seriously. I'm very comfortable with where we peg them. But it is something that we

pour over and have to exercise judgment about. I think that you should assume that we

try to be relatively conservative in that regard so that we feel good about where the

sales are.

I don't know that I would encourage you to try to use any given quarter to judge

organic growth in a business like broadcasting. With this quarter, obviously for our

network, the NFL moving over to ESPN had a pretty big impact on the quarter as a

whole. At the end of the day, if you take that out, it was solid performance but not

spectacular growth. We remain pleased even absent the improvement that we saw in

sports with where the network is going.

Remember, the picture isn't just the network by itself anymore. I think you've got to

look at the overall programming business. We create shows, we launch them on the

network, we launch them in other networks in certain instances. We sell those shows in

syndication. If you look at that overall picture, I think that it's a business that continues

to be robust. We were very pleased with the growth in international syndication

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markets this last year. We had an ad market that was up versus the upfronts. We

continue to see a very solid business environment. We continue to see great success

with some of our key shows.

And if you think about ABC - and it's something that we'll talk about tomorrow - and

the collection of key shows there, I'm not sure I would trade with any of the networks.

They have a very solid set of key shows. The name of the game is to continue to create

great shows and to put them on the air.

Audience Member

[Inaudible question - microphone inaccessible; question was regarding

the cruise business, including the great results Disney has had to date and how we

would feel about expansion.]

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company I'm not going to answer in great detail right now because later on this evening you're

going to hear from Jay Rasulo. He’s going to talk a lot about our attitude towards

growing the theme park business. So, I want to leave the detailed comments to Jay for

this evening. Having said that, we have had great results with cruise. We've got a

very, very strong return business there, double-digit returns on invested capital. To the

extent that we feel there's an opportunity to earn attractive incremental returns on our

capital by investing more, we'll look hard at that but it has to be the right circumstance

and it's something that Jay will address himself later this evening.

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Audience Member

You mentioned that scatter premiums at this point [are 10+% above upfront] are

putting you guys in a pretty good position with regard to going to the upfront season

here in May and June. And yet media buyers already -- here it is February 7 - media

buyers are basically saying they're not going to pay for anything this year except for live

ratings. Not live plus one or live plus two or live plus a week or anything like that.

Last year, you guys changed your negotiating stance on that at the last minute. I think it

was Mike Shaw that was directing that. Do you have any sense of how you'll prepare

for that this time and what stance you'll take with regard to live ratings? Thanks.

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company Well, I don't think it's appropriate for me to have the debate about live ratings in this

forum. That's primarily for Mike Shaw to do with the buyers at the right point in time.

The extended audience - that is the audience beyond live, live plus 24 hours, live plus 7

days - is becoming a more important part of the audience. This is something that over

time we and our advertising partners have to address because it's an important

audience for us both to be capturing. If we're capturing it, we need to make sure that

we're taking it into account in terms of the advertising opportunities that we're selling.

How that evolves, at what pace, I won't predict today but I think it's something that will

continue to be a topic for discussion.

Audience Member Can you discuss the impact of the weak dollar on your businesses? How much of your

revenue is from international right now? And particularly in the theme parks, what

percentage of visitors are now international?

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As you all know, the change in the value of the dollar won't generally have an

immediate impact from a foreign currency translation standpoint to any large extent

because of the hedging activities that we do. So, we try to make sure that the impact is

sort of “feathered in” over time. Having said that, clearly, broad fluctuations in the

value of the dollar can impact our businesses.

Interestingly enough, though, I talked about theme park attendance this past quarter.

International was not the driver of growth at Walt Disney World. In fact, domestic and

residence attendance was a stronger factor in growth than international. I don't think

there's anything much to read into that other than the fact that it doesn't look like the

weak dollar sent a flood of people -- or an abnormally large number of people -- over to

our theme parks.

The mix of international versus domestic attendance has ticked up modestly over the

last several years and it will probably continue to do so. But, it's not dramatically

different than we've seen in the last couple of years. At Disneyland last year, our 50th

Anniversary celebration had a huge impact and it had the biggest impact with domestic

tourists. So, the slight decline we saw at Disneyland this year had mostly to do with not

comping as strongly against the domestic tourists. I don't see a fundamental shift in

the baseline of attendance in those numbers.

Audience Member

One of the surprises I saw was the consumer products on the revenue side. Not the

operating income but the revenue down 6%, particularly with the contributions of those

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Pirates and Cars merchandise. So, the question is, if you strip out those two franchises,

can you give a sense of what that did? Can you provide some color on Princess, which

is something you've talked about in the past? What's the outlook on the revenue side for

consumer products, which you believe is sustainable?


In merchandise licensing, we saw strength across all product categories, and that's

home, hard-lines, toys, etc. We also saw strength across each of our major properties.

Cars and Pirates were clearly standouts but there was strength across the board.

The reason that you saw what you saw in the revenues is two-fold. One, we had $44

million less in guaranteed revenue recognition in Q1 of 2007 versus Q1 of 2006. Second

is that Narnia and Chicken Little were self-published titles in home video that we

released in Q1 of 2006. There were not comparable releases in Q1 of 2007. That had a

very big impact on the revenue side, because as you know, when you sell self-published

titles, you're collecting the whole piece of wholesale revenue on the books. And so

those two things combined are really what drove the revenue decline in consumer

products. The underlying merchandise licensing business was quite strong, as I

mentioned. Double digit, year-over-year growth in earned royalties in merchandising

licensing.

So, it's pretty much as we expected it to be. You'll hear more from Andy Mooney but

I'm pleased with the strength of that business overall. There was not a lot of growth in

publishing but we had said before that that wasn't a segment that we expected to grow

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as quickly. We thought the big potential was in licensing and that's turning out to be

the case.

Audience Member

Equity and income investing-wise, do your results include E! and Us Weekly for the

quarter or were those taken out?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company “Us” was not included in the quarter because it closed right at the beginning of the

quarter. E! is in the quarter, up until November 27. So, you've got a partial quarter of

E! in there. E! will be gone altogether for the second quarter.

Audience Member

[Inaudible question - microphone inaccessible]

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company The question was what was the big driver in the improvement in the equity of affiliates

line. We saw nice improvements across the different equity affiliates. They were all

good performers, there was no standout, no exceptional performers. They all turned in

a very nice quarter overall.

Audience Member [Inaudible question - microphone inaccessible]

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Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company The question is, what are peak occupancy levels in Orlando? (A question I'm almost

certain not to answer.) We’ve really changed the dynamic here. As you know, we've

built out a tremendous number of hotel rooms and vacation units and we're a much

bigger player in the resort segment. If you go back 15 years or so, we had occupancy

levels that far exceeded those that we're seeing today. I think there's room for growth in

occupancy levels. If you take a look at the market as a whole, we're still leading the

market. I think bringing new individuals down to the Orlando area and bringing new

individuals on property are a big part of the strategy that Jay and his team have been

employing. This has really been key to pushing that occupancy number up. I don't

think that it's peaked out. But I also don’t think it's something that you just can grow

overnight, either, given the sheer number of rooms we've got in market.

Audience Member

In light of Wal-Mart and Target's pretty public protests about you putting movies on

iTunes, I was wondering if you saw less of a mix of DVDs sold through those channels

this quarter and/or do you expect to see a change in subsequent quarters?

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company 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. We're pleased

and hopefully, they're pleased. We also feel that they must see the same evidence of the

lack of cannibalization. Yesterday we announced that we will participate in Wal-Mart's

movie download program. And so, we'll be there for Wal-Mart downloads. So, I'd say

that we're pleased with where that relationship is and we think they’re a great

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distribution partner to have. And, with the strong content we've had, I think we made a

difference in their quarters as well.

Audience Member

Tom, two questions. First, is there a public position for Disney on getting cash

retransmisssion payments from the cable industry and was that an issue of contention

with Comcast? And the second question is, my thinking was that the net difference

between amortization of TV and film investment as related to the amortization would

be a negative number on the free cash flow. This quarter it seemed positive.

Tom Staggs –Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company In terms of cash retransmission consent, the answer is we haven't taken a public

position on it. And as we discussed before, when it comes to the Comcast negotiation,

that was a negotiation that evolved for a long period of time around new platforms,

new opportunities to be on those platforms, et cetera. Cable rates and the

retransmission consent part hadn't been an issue for quite some time there, so that

wasn't a hang-up in that negotiation.

Investment amortization in the television business. That number is going to fluctuate

from quarter to quarter. I think you should expect that given what I've said about

investment in Disney branded programming, we're looking for opportunities to invest

profitably. And we'll ramp up programming spending. I said last year that we would

expect to increase our overall investment in programming this year versus the prior

year. So what you're looking at is really a quarterly timing issue as opposed to a change

in that trend.

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Audience Member

Good afternoon. You mentioned you have about a $1 billion dollar pipeline of

syndication ahead of you here on the TV side. I'm just curious when you look at the

timing of the shows, what do you expect this year or next year?


When I think about the timing of the syndication, a lot will depend on what could be a

changing market in terms of when shows are made available, when is the right time to

go to market, et cetera. But having said that, I would expect 2007 would be slightly

lower than what we saw in 2006. But not dramatically lower. I think right now that

2008, depending on what happens with some of our new shows, is likely to be

meaningfully lower than 2007. And then in 2009 we’ll see an uptick back up closer to

these levels. So, it really is something that can fluctuate. I just have to emphasize that

the timing I just gave you can change because our folks go to market and make shows

available based on a whole bunch of different factors. But I do think 2007 will be

slightly lower than 2006 in terms of the operating income impact from those shows in

syndication.

Audience Member Just one follow-up. You gave a $700 million target revenue number for digital for the

year. Could you talk about what that was in the quarter and how it's pacing towards

that number?

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We’re targeting north of $700 million in terms of the digital-based initiatives including

Internet, et cetera, for the year as a whole. We expect that number to be ramping up

throughout the year. Last year [the comparable number] was a little over $500 million.

So you get a sense for the growth rate. The first quarter was consistent with that

anticipated growth rate. The one piece that we'll look to see ramping up a little more in

the middle of the year as we really get our legs is MVNO. So, the only one that sort of

was a little behind that growth rate expectation was MVNO. We're just ramping up

that effort and should be selling more later in the year. So, we're on track to hit the

numbers that we talked about.

Thank you very much. We have a day and a half where any of the remaining questions

you have will be answered. And we'll be back tomorrow night, Bob and I, to answer

some more.

# # #

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Management believes certain statements in this call may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are made on the basis of management’s views and assumptions regarding future events and business performance as of the time the statements are made. Management does not undertake any obligation to update these statements. Actual results may differ materially from those expressed or implied. Such differences may result from actions taken by the Company, including restructuring or strategic initiatives (including capital investments or asset acquisitions or dispositions), as well as from developments beyond the Company’s control, including:

- adverse weather conditions or natural disasters; - health concerns; - international, political, or military developments; - technological developments; and - changes in domestic and global economic conditions, competitive conditions and consumer preferences.

Such developments may affect travel and leisure businesses generally and may, among other things, affect: - the performance of the Company’s theatrical and home entertainment releases; - the advertising market for broadcast and cable television programming;

- expenses of providing medical and pension benefits; - demand for our products; and - performance of some or all company businesses either directly or through their impact on those who distribute our products.

Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year ended September 30, 2006 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”. Reconciliations of non-GAAP financial measures to equivalent GAAP financial measures are available on Disney’s Investor Relations website.

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Disney Speakers: Bob Igercdn.media.ir.thewaltdisneycompany.com/2007/q1/q1-fy07-earnings-transcript.pdfgenerated the highest conversion rate for any Pixar animated film since Finding

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