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Disney beats the Street
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November 9, 2000: 2:03 p.m. ET
Theme parks, 'Millionaire' boost earnings, but stock dips on concerns
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NEW YORK (CNNfn) - Fourth-quarter profit surged at Walt Disney Co., driven by its amusement parks and the enduring strength of the TV game show "Who Wants to Be a Millionaire," but Disney stock tumbled 15 percent Thursday amid concerns about future earnings.
Citing a slump in the advertising environment and a drop in the "Millionaire" viewing audience, Wall Street analysts and the company warned that profits early next year could be smaller than previously expected.
The cloudy forecast overshadowed the company's otherwise positive results, which beat Wall Street forecasts. Shares of Burbank, Calif.-based Disney (DIS: Research, Estimates) slumped $5.81, or over 15 percent, to $31.06 a share in afternoon trading after investment house Merrill Lynch cut its near-term rating on the stock to "neutral" from "accumulate," amid concerns about the weak advertising environment's effect on future profitability.
 The entertainment and media company said profit for its fiscal fourth quarter, ended Sept. 30, including its Internet businesses, rose to $240 million, or 11 cents a share, from the year-earlier $85 million, or 8 cents a share. Analysts polled by earnings tracker First Call forecast a profit of 7 cents a share including the Internet operations.
Sales grew about 6 percent to $6 billion from $5.7 billion.
For the full year, Disney net income slipped to $1.2 billion, or 57 cents a share, from $1.3 billion, or 62 cents a share, the year before. Sales grew to $25 billion in fiscal 2000 from $23.2 billion in 1999.
"2000 was a great year that exceeded expectations, which can be attributed to the tremendous earnings power of Disney's diverse businesses," Chairman Michael Eisner said. "This year, media networks turned the most impressive gains, while parks and resorts registered its sixth consecutive year of record earnings."
The Internet Group posted a loss equal to $6.18 a share for the year. A 1999 figure is not available because the Internet Group was formed at the end of last year. Sales at the Internet Group, which includes Disney's Go.com search engine, fell for the quarter but rose 13 percent to $392 million for the year. But costs and expenses more than offset the sales gain on the year, the company said.
Strong 'Millionaire' ratings slip, but recovery seen
Even as Disney executives cheered the results, Merrill Lynch analyst Jessica Reif-Cohen downgraded her rating on the stock. She cited an overall slump in spending on advertising and the shrinking audience of "Millionaire," a ratings juggernaut hosted by Regis Philbin, that has fueled Disney's bottom line since its introduction some 15 months ago.
Cohen suggested that positive quarterly earnings surprises from Disney seen over the past year, due almost entirely to "Millionaire," may be a thing of the past.
 "We note that even up against super-easy comparisons last year (before) the November Sweeps, 'Millionaire' ratings are down 20-25 percent," Cohen wrote in a note to clients. Sweeps are the key periods of the year when ratings are used to help set advertising rates.
Salomon Smith Barney analyst Jill Krutick echoed the concern, and downgraded her rating on Disney to "outperform" from "buy."
"We think a slowdown in 'Millionaire' ratings exacerbated by mixed signals in the ad market are likely to weigh on the stock," Krutick wrote in a note.
On an analyst conference call, Disney President Robert Iger acknowledged "Millionaire" is not delivering the same audience that it did during this year's January-May period, adding that despite some preparations for ratings erosion, results have been "below our plan." High-profile TV events, such as the Olympics, and sampling of other newer shows are to blame for some of the rating lag, he said.
But, stressing his belief that the show is still a strong franchise, Iger said the company plans several structural changes to the show to make it more attractive. Shows in the works feature celebrity contestants, high school tournaments, newlyweds, and "Rock and Roll Star Millionaire," as well as changes to the way prize money is awarded.
"Over time, viewers will come back to 'Millionaire' in higher levels than they are watching today," Iger said. In taking issue with Cohen's analysis, he said that while a fiscal rough spot lies ahead, the company's outlook is much more positive than some analysts' perceptions.
"Quite frankly, our look at of the future isn't nearly as bleak as (Cohen's) look," he told CNNfn. "Our outlook for the year is much more positive." (WAV 449K, AIFF 449K)
 Indeed, "Millionaire," which airs for four hours each week, continues to be one of the most popular programs on network television, with multiple episodes routinely landing amongst the week's top ten.
Despite its optimism about "Millionaire," Disney noted that the weak advertising environment likely would affect earnings in the early portion of fiscal 2001. Chief Financial Officer Thomas Staggs said the company sees its first-quarter profit "roughly on par" with the 25 cents a share it delivered in the first quarter of fiscal 2000.
Analysts had forecast Disney to earn 32 cents per share in the quarter ending Dec. 31, before losses at Disney Internet Group, according to a survey by First Call before the release of the results.
Merrill Lynch lowered its fiscal 2001 estimates to $4.5 billion, or 67 cents a share, from $4.85 billion, or 74 cents a share. First Call said analysts had expected the company to achieve a profit of 68 cents a share in fiscal 2001.
Merrill's Cohen also noted that results at Disney's theme parks could be hurt by higher oil prices, weak European currency, and a slowing domestic economy.
Theme parks results strong, films lag
The company said its Parks & Resorts unit revenue for the quarter rose 10 percent to $1.7 billion, while operating income grew 10 percent to $362 million. The segment's results were boosted by increased guest spending and theme park attendance at Walt Disney World and Disneyland, and improved performance at the Disney Cruise Line, partially offset by increased costs at Walt Disney World and Disneyland.
In its Studio Entertainment segment, Disney said fourth-quarter revenue decreased 2 percent to $1.5 billion, while operating income was $87 million, compared with an $84 million operating loss in the year-ago quarter. The results were hurt by declines in worldwide home video and network television production.
Disney' consumer products unit reported a drop of 7 percent to $628 million, while operating income increased 25 percent to $100 million, although the prior year included charges for write-downs of underutilized assets and inventory. Results reflected declines in worldwide merchandise licensing, and increased advertising costs.
Looking forward, Eisner said the company will focus on maintaining growth in media and parks while "better positioning" itself to improve performance at Disney Studios and in the consumer products business.
On a pro forma basis, Disney reported an 89 percent increase in net income for the fourth quarter to $1.1 billion, or 55 cents a share, and a full year loss of 30 cents a share because of a $648 million non-cash charge.
Pro forma results are reported as if the company had completed its acquisition of the remaining interest in the Infoseek Web portal, which became Go.com, and subsequent creation of the Disney Internet group. Those results also assume the completed disposition of magazine publisher Fairchild Publications, which occurred at the beginning of fiscal 1999. 
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Walt Disney Co.
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