Disney downturn

Eisner outlines steps to reverse trends

NEW YORK — Despite a strong showing at the box office, Walt Disney Co. posted tepid earnings for the year, in line with Wall Street’s expectations.

But statistics took a back seat Thursday to Chairman-CEO Michael Eisner’s plans as he outlined initiatives he hopes will restore growth.

Disney’s net income for the fiscal year ended Sept. 30 dropped 30% to $1.3 billion. Operating income excluding certain charges fell 21% to $3.2 billion; revenues rose 2% to $23.4 million. Homevideo and consumer products were chiefly to blame for the disappointing results.

The downturn “is an opportunity to review all of the company’s practices across the board,” Eisner told analysts during a conference call. As “enormous profits were flowing” into Disney coffers in recent years, he said, the company “lost some of its bottom-line efficiency. Duplication crept in.” Clean-up will take time, but the process is under way, he said, citing the consolidation of TV production under ABC, streamlining of international operations under Bob Iger and other projects.

Restructuring charges of $132 million were the result of cost-saving initiatives, Eisner said, warning of similar charges going forward along with ramped up investment in network TV production and cable — including Toon Disney and the Soap Net. That means earnings for the 2000 fiscal year are likely to be in line with 1999’s numbers. The Mouse House could see growth in 2001, the first year of an anticipated $500 million in annual savings.

Good ‘Sense’ at studio

The film studio had a nice year, topped by “The Sixth Sense” and “Inspector Gadget” in the fourth quarter. Among Disney’s most profitable businesses just now, the studio is slashing development deals and shedding hundreds of millions of dollars in costs — no easy task. “I consider consumer products and homevideo a walk in the park compared to telling a movie star he’s not getting $20 million, he’s going to get $8 (million),” Eisner said.

Homevid, live-action and toons, along with legit, music and TV production, comprise Disney’s Studio Entertainment division, which saw operating income plunge a whopping 85% to $116 million and revenue dip 4% to $6.5 billion. Income from theatrical releases rose by about $150 million, while it dropped by several hundred million for homevideo as Disney rested its catalog of classic movies to increase demand.

DVD drama

Eisner defended that decision and envisioned a video marketplace radically transformed by DVD, with Disney a big beneficiary. The company is working up a DVD strategy which it will unveil for at an analysts’ meeting in Burbank Nov. 10.

In Consumer Products, operating income fell 24% to $607 million. Revenue eased 5% to $3 billion as merchandise licensing and sales at Disney Stores suffered. Too many licensees are diluting the brand and saturating the market, according to Mouse House execs. Disney chief financial officer Tom Staggs said the company has slashed the ranks of its 4,200 licensees by about a third and promised more focus, a more “cohesive” retail presence and a new Mickey-centric campaign soon. The pace of new store openings will be slowed and current locations revamped, hand in hand with Internet and e-commerce features. A “Tigger” movie next year should help revive the Winnie the Pooh franchise.

The happiest place

Theme Parks and Resorts was a bright spot, with operating income up 12% to $1.4 billion and revenue of $6.1 billion, up 10%. New parks at Disney World in California, in Tokyo and in Paris are under construction or will be soon, and the company recently agreed to build a park in Hong Kong.

“Theme parks and animation are two areas we dominate (and) where we have spent a considerable amount of money to ensure our position,” Eisner said. He noted that Disney World seems to be sturdily weathering competition from Universal Studios’ new Islands of Adventure. No one comes to Orlando without visiting Disney World, he said, even if they also check out the U park. “I was not happy. I was worried, and it’s still early. But so far we’ve held our own,” he said.

Marching to own toon

As for animation, he argued that most of those who tried to emulate Disney’s success in animation — and pushed up the cost of the business tremendously — have by and large pulled out.

Disney’s focus from now on, he stressed, will be on “optimizing the assets we already own,” not buying new ones. That probably means no purchase of TV or radio stations or music companies any time in the near future, he said.

In the Media Networks division, which includes broadcasting and cable nets, operating income fell 8% to $1.6 billion. Revenue rose 5% to $7.5 billion. Declines at ABC due to lower primetime ratings and higher programming costs, NFL football included, squeezed earnings. But Disney’s share of operating income from its cable TV investments soared by 32% to $1 billion. Those assets include ESPN and the Disney Channel plus interests in AT&T, Lifetime and the History Channel.

Lastly, Internet and Direct Marketing posted a flat operating loss of $93 million with revenue down 21% to $206 million, excluding the impact of Disney’s investment in Infoseek. Eisner and Staggs said Disney will spin off Go.com into a separately traded public company at some point after the Infoseek purchase closes.

Behind the curtain

Reporting across five divisions is new for Disney. In past financial reports, the company has lumped all businesses into three massive operating units, which left Wall Street unclear about how specific units had performed. The conference call was also a first and will become a regular quarterly event, Eisner said.

It seemed to go a way toward allaying Wall Street’s anxieties about the company’s prospects. “It showed that the top guy gets it, and that’s half the problem,” said one fund manager.

Eisner was upbeat about the prospects for Disney’s stock. With the stock in the doldrums, Eisner said the company would certainly consider buying back shares.

“It’s a very good use of our capital,” he said, adding “we are pretty encouraged by our own speeches.”

Disney stock reacted well ahead of the earnings report, closing on the New York Stock Exchange at $28.12. However, shares dropped in late-session Nasdaq trading, ending the day at $26.50, down 37¢.