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Disney Delights, Netflix Not

Posted on Thursday, May 8th 2008

I have covered the online movies section earlier in my Web 3.0 analysis. Two relevant companies in the discussion recently announced their results.

Walt Disney Company (DIS), the second largest American entertainment company reported their Q2 financials for the year raising doubts on the recessionary pressures.

Revenue for the quarter grew 10% annually to $8.71 billion, beating market expectations of $8.5 billion. EPS grew by a substantial 32% for the year to $0.58 compared to market’s views of $0.50. The growth was despite the 100 day Hollywood writers strike in the quarter and the growing economic pressures.

Their studio revenue grew by 18% to $1.82 billion. Parks and resorts revenues grew by 11% to $2.73 billion, products grew by 10% to $0.55 and media revenue grew by 5% to $3.6 billion.

The Company has believed in a strategy of creating high-quality branded content with enduring franchise to be their key driver for the growth. The results this quarter were demonstrative of these efforts. Their ability to leverage this content in all their business lines shower results. For instance, this quarter, they launched High School Musical in their Parks in the US, France and Hong Kong and enhanced revenues in their product and studio entertainment through merchandising, music sales, concerts, and theatrical releases.

They continued to invest in locally producing content for their international markets. Also, the lineup for the rest of the year is quite impressive and even includes 3D launches.

The Company entered into the VOD marketplace through an experiment with Comcast and recorded these sales as incremental to their current sales and not detrimental. They view VOD as an opportunity for movies to become widely more pervasive, and accessible in the next five years.

I have mentioned the need for Disney to acquire with the intent of deepening the children’s and family entertainment and sports verticals.They should look at acquisitions in the in the teen-focused social networking space such as Xanga, hi5 and Tagged. The other teen/tween community micro-blogging site that they could also look at is Twitter. However, as of now they don’t seem to be looking there.

They are instead, looking at buying more development teams for their games titles, and branded program focused channels or businesses.

Their stock was trading 2% up after trading hours at $34.50.

1yr Disney

While Disney beat the economic pressures, Netlfix (NFLX) succumbed to them. Despite being a devoted customer of Netflix, I have maintained a safe distance from investing in the industry. Their Q1 results added reason to my point.

Q1 revenues of $326.2 million recorded a 7% increase over the previous year Q1 revenues, narrowly missing the $327 million expectations that the market had. Their EPS of $0.23 grew 44% over the year, but missed the street’s expectations by a cent.

Results for Q1 were record performances for them in their six years as a public company. The subscriber net additions were at $764,000, Subscriber Acquisition Costs (SAC) reached $29.50 from $47.46 a year ago, and churn reduced to 3.9% from 4.4% a year ago. Their total subscriber base at the end of the quarter stood at 8.24 million.

However, this record performance was primarily attributed to the price increase by their prime competitor Blockbuster, instead of some defined strategy.

During the quarter, they completed a $100 million buy-back program, repurchasing 3.8 million shares at an average cost of $25.99.

For the year, they are expecting their subscriber base to increase by 26% to 9.1-9.7 million and an EPS increase of 27% to $1.16-$1.29. Earlier, they had projected an EPS of $1.18-$1.30. For Q2, they are projecting a subscriber base of 8.3-8.5 million and EPS of $0.33-$0.42. Their outlook was short of market expectations of annual EPS of $1.32 and Q2 EPS of $0.41.

I talked about the embedding of Netflix in LG set-top boxes as a good experimental opportunity. The Company feels it ability to offer online streaming and DVD rental at low cost and better service will aid in differentiation and future growth. This year they are planning to announce three more such partnerships where they will be able to deliver content on the Internet to their subscribers at no additional cost. That might be a good viewer engagement model, but is definitely not a good long term profitable model.

They really need to be taking advantage of the community and content features. At the risk of sounding repetitive, Netflix has a great brand, huge traffic, yet its position as an online advertising venue has not been exploited much.

The stock tumbled 14% on its outlook after having reached a new 52 week high of $40.90 just days before the announcement. It is trading at $31 presently.

1 yr NFLX

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It’s surprising that Disney’s stock is not worth more than it is, which I believe is mainly due to a fear that discretionary money is not going to be spent their way this summer. There’s two reasons this theory doesn’t work. 1) Americans won’t travel to Europe this summer as much because the Euro is outrageously expensive, and 2) Americans want to travel in summer and will likely go to their own national sites (which include Disney) more. That tax stimulus check helps with travel costs. But the lengths the company goes to is amazing. I’m staying at the resort this summer, and everything is geared to help families forget about family chores while traveling.

Did you know they will reshape the Disney hotel room specific to your desires, regardless of how many guests they have? Want a full bed, two twins, a pack and play, a crib, or a king? Done. How many hotels do that? Even five stars? Not many. And that’s just one blip of the Disney empire.

I can’t even think how much money I’m going to spend over the next ten years on Disney princess stuff for my daughters. Good thing I own the stock.

Tom Lutzenberger Thursday, May 8, 2008 at 8:00 PM PT

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