Disney's 'High School' hype

NEW YORK (CNNMoney.com) -- Walt Disney has a lot riding on the sequel to the wildly successful "High School Musical" movie. "High School Musical 2" premieres on the Disney Channel on Aug. 17.

The first movie - about a bunch of teens putting on an annual show - was watched by 7.7 million people during its first showing on Jan. 20, 2006. That was a record for the Disney Channel at the time, with another 6.1 million people watching a night later.

Millions of "tweens" are expected to tune into "High School Musical 2," featuring Lucas Grabeel as Ryan (left) and Ashley Tisdale as Sharpay (right) on the Disney Channel on August 17.

The movie spawned a cottage industry of "High School Musical" DVDs, soundtracks, books, video games and even a concert tour and ice show. Wal-Mart (Charts, Fortune 500) will be launching an exclusive line of merchandise for the second movie in time for the crucial back-to-school shopping season.

Disney (Charts, Fortune 500) has already green-lit a third "High School Musical" movie for 2008 and Disney is said to be considering making the movie for a theatrical release, a huge sign of confidence in the franchise.

"'High School Musical' has helped Disney across the entire company," said Alan Gould, an analyst with Natexis Bleichroeder, referring to the fact that the company has been able to use the movie to promote its theme parks and sell so many consumer products. "This is yet another example of the company being reinvigorated under Bob Iger."

Shares of Disney have gained more than 20 percent in the past twelve months and are up nearly 50 percent since Iger succeeded Michael Eisner as CEO in September 2005.

The success of "High School Musical" is a big reason why Disney's business is booming. Sales from many "High School Musical" products, such as DVDs, actually get lumped into Disney's cable networks division, which accounts for about 40 percent of total sales and more than half of the House of Mouse's operating profit.

The Disney Channel is not a channel that is advertising dependent, however. So the strong ratings for the movie have not led to a big boost in ad sales at the channel, analysts said.

But the company said that in its fiscal first quarter, which ended in January, DVD sales of the original "High School Musical" movie helped fuel a double-digit percentage increase in operating income at the cable division.

Laura Martin, an analyst with Soleil - Media Metrics, estimates that "High School Musical" has generated $1 billion in operating profits to Disney over the past two fiscal years.

"This is an extraordinarily important franchise for Disney. It's much lower risk and lower cost than something like 'Pirates of the Caribbean' or other movies," she said. "Disney doesn't have to spend as much on marketing or distribution since the movie is on cable and there are no big special effects."

The movie has also helped lift Disney's licensing sales. The company announced in June that overall licensing revenue would increase 13 percent this fiscal year, which ends in September.

And a big part of that is due to the fact that Disney expects retail sales related to franchises catering to tweens - kids between the age of 9 and 14 - to hit $400 million worldwide this fiscal year.

In addition to the "High School Musical" franchise, Disney also has tween hits with its "Hannah Montana" and "That's So Raven" programs.

Disney will report its fiscal third-quarter results on Aug. 1. "High School Musical 2" shouldn't have an impact on the company's results this quarter since the new movie will be airing in the fiscal fourth quarter.

Analysts expect Disney to report a profit of 54 cents for the latest quarter and sales of $9.05 billion, led primarily by strong advertising sales at the ABC broadcast network and a deferral of ad revenue at the ESPN cable network.

Expenses related to the release of Disney's blockbusters "Pirates of the Caribbean: At World's End" and "Ratatouille" could eat into profit at the film studio business, though.

Nonetheless, it will be interesting to see what company executives say about the "High School Musical" franchise during the conference call. Michael Kupinski, an analyst with Noble Financial Group, said Disney should see some better consumer product revenue in the next few quarters.

And Martin Pyykkonen, an analyst with Global Crown Capital, said that in the quarters and years ahead, Disney could also benefit by expanding the "High School Musical" franchise to international markets such as India and China with locally produced versions of the movie.

"The key with 'High School Musical' is that it is low cost to produce and has high profit margins, and can be replicated worldwide," said Pyykkonen.

Analysts quoted in this story do not own shares of Disney and their firms have no investment banking ties with Disney.