The Walt Disney Company (DIS) Q2 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Second Quarter 2011 Walt Disney Company Earnings Conference Call. My name is Stacy, and I'll be your conference moderator for today. [Operator Instructions] As a reminder, this conference call is being recorded for replay purposes. I would now like to turn the presentation over to your host for today to Mr. Lowell Singer, Senior Vice President of Investor Relations. Please proceed.

Okay, thank you, and good afternoon, everyone, welcome to the Walt Disney Company second quarter Earnings Call. Our press release was issued almost an hour ago, it's now available on our website at www.disney.com/investors. Today's call is also being webcast, and the webcast will be on the website after the call. Finally, a replay and transcript of today's remarks will be available on the website as well. Joining me in Burbank for today's call are Bob Iger, Disney's President and Chief Executive Officer; and Jay Rasulo, Senior Vice President and Chief Financial Officer. Jay is going to lead off followed by Bob, and then we'll be happy of course to take your questions. With that, let me turn the call over to Jay and we'll get started.

Thanks, Lowell, and good afternoon, everyone. We reported Q2 earnings per share of $0.49, up $0.01 from last year. The underlying quality of our earnings was good, but our results were particularly impacted by 4 items which we estimate collectively reduced operating income by approximately $170 million versus last year. These items are: first, the impact of the very disappointing performance of Mars Needs Moms and the year-over-year timing difference of key Pixar DVD releases, which together reduced results at Studio Entertainment by roughly $90 million; second, an estimated $23 million impact on Parks and Resorts from the Easter calendar shift; third, the impact of the devastating Japan earthquake, which we estimate reduced operating income at our Parks and Consumer Products businesses by $25 million; and finally, a $34 million impact on Interactive Media results from purchase accounting from the Playdom acquisition. These 4 items collectively reduced EPS by about $0.06. Now I'll turn to the main drivers of our Q2 performance in our business segments. Media Networks operating income was up 17%, driven by growth in affiliate and advertising revenue at ESPN and Disney Channels, as well as at our broadcast network and our TV stations. At ESPN, ad revenue came in 43% above prior year. During the quarter, ESPN added 3 BCS college football games, including the National Championship Game. When adjusting for these, we estimate that ESPN's ad revenue was up by 23%. In Q2, ESPN recorded lower equity income as a result of higher programming costs at our ESPN Star Sports joint venture due to its airing of the Cricket World Cup. At Broadcasting, strong results were driven by increased revenue from advertising and from retransmission fees, as well as higher sales of ABC produced shows. Results were also helped by decreased news production costs. ABC…

Thank you, Jay, and good afternoon. I'd like to reiterate that we're pleased with the underlying quality of our earnings this quarter, and are confident in the trends we are seeing across our segments. The attendance and spending trends at our Parks and Resorts remain encouraging, as do the advertising trends at our Broadcast and Cable Networks. With a wealth of great creative properties coming in the next 6 months, 2011 is shaping up to deliver strong results. As you know, last month we broke ground on the Shanghai Disney Resort, our 6th resort, and the first in mainland China. This marked a defining moment in the history of the Walt Disney Company. Shanghai Disney Resort is our largest foreign investment, and will be a critical component of our growth in China. Our Imagineers are deep into the design phase and when it opens in approximately 5 years and will combine great Disney storytelling and beloved characters, with authentic cultural touches, tailored specifically for the people of China. In essence, it will be authentically Disney and distinctly Chinese. At the Studio, we're extremely excited for the May 20 release of Pirates of the Caribbean: On Stranger Tides, the fourth film in our extremely successful, multibillion-dollar franchise. Johnny Depp reprises his iconic role, this time with Penelope Cruz by his side. And just this past weekend, we celebrated the world premiere at Disneyland, home of the original attraction, and the film stars are now in Moscow for our first ever Russian premier of the Pirates film. It will also release day in date in China and most foreign markets. On June 24, Disney/Pixar's Cars 2 premieres. The Movie directed by John Lasseter will continue to drive a significant consumer products presence at the Disney Stores and major retailers, which should sustain…

[Operator Instructions] And your first question comes from the line of Ben Swinburne with Morgan Stanley.

It's Ben Swinburne. Maybe one for either of you, I wanted to ask about the park's trends and if you'd qualitatively describe for us how you think the consumer is behaving out there or how they might be impacted if at all by gas prices and maybe the Wizarding World in Orlando, or if you think the attendance trends you saw in this quarter and also the Thor bookings are generally in line with your expectations. I know you're in the process of unwinding prior-year discounts and to work through that, but I'm just curious if you've seen any kind of bumps or slowdown in the overall consumer. And then just 1 kind of cleanup question. Jay, on the $34 million of Playdom related, did you say those were charges as in 1 time or is that a recurring amortization number?

It's the latter, Ben, and you can expect to see similar numbers in the coming quarters.

On the Parks trends side, Ben, we work really hard to win the consumer of the discount. And it worked in the second quarter where we had slightly improved and in fact throughout Easter attendance and occupancy rates. And better pricing, which is really important. The goal remains the same for the third quarter. Whereas Jay mentioned, we're running very slightly behind last year. This time bookings-wise, about 2.5%, but our pricing is up in the mid-single-digits. And we feel that's basically in line with where we would like to be -- sorry the pricing is up in the double digits right now, for the hotels that are reserved on the books. And so with that in mind, we think that the consumer is willing to pay higher prices for good product, that's a good thing. They're still booking late though and I think that's interesting because I think there's still an expectation in the market place that there's going to be some discounting, and that's probably why we're seeing the trends that we're seeing. We've said this a few times, we don't really see much of a specific or direct impact from higher gasoline prices, at least that's never been the case. Of course we don't know what happens when pricing gets as high as it could get. But so far, we don't believe that's a factor. And we're going to continue to watch our pricing carefully with an eye toward not diving for volume at the expense of pricing, continue to keep our pricing higher so that we can send the signal that we need to send to the consumer that the economy is stronger than it was a few years ago, and that discounting that we obviously had to implement during the downturn is something of the past.

Your next question comes from the line of Michael Nathanson with Nomura.

First one would be, Jay, when you look at the Domestic Parks business and just take away for a bit the Tokyo impact and the ships impact, what is the core operating margin improvement you're seeing? So this quarter a lot of different noise. We wondered are you seeing improved margins kind of apples-to-apples within the Domestic business and which other cost growth is there -- are there?

Michael, if you account for the Easter shift, we did see on Domestic Parks a moderate margin improvement for Q2.

And then, Bob, when we say we're short in Interactive, I know you had the Playdom accounting charges, but we had assumed that Interactive would start getting towards breakeven. And I wondered, looking at this quarter for the rest of the year, will we see improvements when the year is over, x Playdom charges of -- in profitability in Interactive?

Well first of all we didn't specify that we'd get toward breakeven. I think we talked to the Investor Conference about profitability in 2013. And it's a work in progress. What we've decided to do at Playdom had somewhat of an impact at least on our revenue this year. And that is that when we looked at the marketplace, specifically in social games, we determine that there was a great need to improve the quality of the games. So the games that worked initially which were relatively simple, were not only going to continue to work at that level. And given not just what we believe the consumer wanted, but what the competition was doing, we thought it would be wise to improve the quality of the games that we're going to release. So we took a 5-month hiatus which has not been planned from releasing games, to build a higher quality game, and then also, to restack our technical capabilities to deal with volume, or to deal with scale, which we are hoping to achieve. And the results so far have been very good. We released -- Playdom released its first real hit game called Gardens of Time, which is a top 10 and may even be a top 7 game right now on Facebook. It's doing extremely well in some of the typical measurements which are MAUs and DAUs. But what's really interesting is that it's monetizing very well, which is another 1 of our goals. While we believe that volume consumption measured at least by the standards that have been created in MAUs and DAUs is important, it's more important to create games that are more monetizable and that's our goal. So we got a number of games in the pipeline, some of it will be released in '11, more in '12. Some that are new made from whole cloth, not derivative, some that are made from other products like ESPN-branded, Marvel-branded, Disney-branded. And we feel good about the direction of Playdom, particularly with this new hit game in the marketplace. On the disney.com side, we are hopeful to launch a completely redesign of that site in the coming months. We're not making any predictions in terms of breaking even or increasing the revenue at this point. We're mostly trying to get it right in terms of navigation, user interface, universal registration and then obviously, opportunities whereby creating greater entertainment to better monetize mostly with advertising.

Your next question comes from the line of Doug Mitchelson with Deutsche Bank.

If I could just do a follow-up on Ben's question and a question on the Olympics. For the rooms in the books down 2.5% for the June quarter, I think you get a 1 extra-week benefit from spring break. So I just wanted to understand the confidence in the underlying trends. Is the potential park attendance doing better than the room bookings?

Yes, Doug, in fact, the spring break is so heavily booked that it doesn't really affect the rooms' totals as much as it does, local attendance and spending. So you don't see a big difference in the Easter swing that we talk about week to week in terms of occupancy. I would say that we're partially into the quarter. The timing of some of the programs that we had and when we announced them last year versus this year, has more to do with what I would consider a very mild and not easy to read as to where the quarter will wind up, change in the bookings versus last year. But as Bob mentioned and I did as well, the room rates, I think, there's a definitive signal there that our decrease in discounting and the room rate price increases that we took are definitely sticking. And what we've got on the books is significantly up to the tune of double digits from where we were in the prior year.

And for Bob, I'm just curious on strategy, given ESPN seems like it's at this point where it can't get any more fully negotiating leverage than it already has, it has a ridiculous amount of leverage already. So when you're talking about taking on new sports properties like Olympics bids which are around the corner, are you at the point where you start to look at that stuff on an ad-supported basis, on a pure ad-supported to underwrite them? Isn't there a disincentive to go after new properties like the Olympics at this point?

Well I will comment on your ridiculous amount of leverage description. What ESPN has tried to do is obviously create a -- kind of a must-have product for consumers, and thus, a must-have product for distributors who need to keep their consumers happy. And I think they've done a brilliant job of buying sports rights and turning the rights into both profitability and significant brand building, which I think has led to the position that I just described as well a bit of a competitive advantage. Between now and when the Olympics rights that are being bid out occur, ESPN has a number of rather large negotiations with distributors to engage in. And so, there are definitely opportunities for ESPN to address its subscription revenue, based on the general program offering that it has, which is both a collection of events, including the Pac-12 or sports that's already booked and possibly, sports that it may buy. So I think it would be wrong to assume that the purchase of an Olympics should only be looked at as a possible generator of incremental advertising revenue. It would definitely generate incremental subscription revenue. I also want to say that while ESPN certainly intends to take a look at the Olympics seriously, ESPN is also demonstrating a great ability to walk away from opportunities that they didn't believe made sense from a bottom line perspective. And they've also demonstrated an ability to divest certain rights that they feel weren't driving the value that other rights could have. So it's going to be -- continue to be a balance. They're mindful of their profitably, they're mindful of their margins, they're certainly mindful of maintaining a great competitive advantage, and essentially, the must-have status that they've managed to achieve, which is something obviously that's incredibly important for the company overall.

Your next question comes from the line of James Mitchell with Goldman Sachs.

I had a couple of questions on ESPN specifically. One was -- it looks like margins dipped a little bit on a reported basis, but increased if I x out Cricket World Cup depressing the equity and income of investees to cable and apps is that correct? And then second, I think you said ESPN advertising revenue is tracking up single digits in the third quarter. Now a year ago I think you mentioned that was a 14-point benefit to the ESPN add revenue for the World Cup and the 2 extra NBA games. So is it fair to take the single digits guidance at 14 points, and then infer a kind of underlying ad growth at ESPN in the third quarter?

Let me take your first question first, James. The -- your analysis, as it stands, I mean we give the cable margin number and if you are correct in terms of backing out or the impact of the Cricket World Cup on those margins, the ESS equity number affecting the margins and the down drift, but they are plus 1 otherwise. And your second question, I want to just highlight the fact that remember we are now lapping quarters in which ESPN had incredibly strong advertising growth in the prior year. So we were up double digits, I think 13% last time around, and this time around, we basically are seeing what the impact of that, I gave you the wrong number, it was 31% last time. And we're basically seeing the impact of lapping of those incredible numbers, and that's where we're reporting our signatures up.

And the 31% was 17% x World Cup and the 2 extra NBA games, is that correct?

Correct.

Your next question comes from the line of Anthony DiClemente with Barclays.

First for Jay, on Parks, thanks for splitting out the impacts of Easter and Japan. I was just wondering if you had the contribution to revenue from the Disney Dream in the quarter?

We are not going to break out the specific revenue, but Bob mentioned in his remarks how pleased we are with the booking of this ship. And in fact, I would venture to say if you try to get a state room between now and end of the fiscal year, you'll have more better contacts than I do.

Jay can you split up the launch costs, please?

I would call, needless to say in the additional cost that go with the cruise line, there is a straight up operating costs for the period that we were taking in revenue, and also the marketing and launch costs, which I would call the latter at about $15 million, between $15 million and $20 million.

And to the point Jay made about bookings, our 3 ship fleet is over 95% booked for the current quarter, 86% booked for the fourth quarter, and believe it or not, almost 60% booked for Q1, which is pretty interesting, given the fact that the new ship has 4,000 guests on it, considerable number of state rooms. So we added a significant amount of inventory and bookings are very strong.

And then Bob, just a general question about the Marvel acquisition. At the time of the deal, I think you talked about 1 of the bigger opportunities being in terms of upside in Consumer Products, benefits to television and this summer, we're seeing the integration to film studio, I just wonder if you can just talk about Marvel, talk about where you've seen kind of the most upside or downside versus your expectations upon the acquisition. And importantly, do you see any other potential acquisitions like Marvel out there in terms of IP that you can lend to the Disney global infrastructure?

Well everything about Marvel for us, as we looked at it was designed to deliver long-term value. And we knew that it was going to take time to get at some of that value because there were a number of deals in place, both on the distribution front and on the licensing front, that had to essentially wind down or be changed before we fully took advantage of what is clearly a treasure trove of value, both on the character side but also on the executive front. We're pleased with what we see as the potential for Marvel, particularly as we look ahead. We ended up negotiating with Paramount, an earlier exit from the distribution deal on the Studio front, which gives us the ability to distribute The Avengers next year. And I'd say that is our first, really big initiative since the acquisition. Because not only will we distribute and market it, but we know that Marvel is working really hard with the cooperation of a number of entities at Disney to turn Avengers into a true franchise. The release of Thor was a critical part of that because Thor is a component of The Avengers. And we feel good about the release of that film this year as we feel optimistic about Captain America coming up and when you add to that Iron Man and Hulk, we think we're going to have a big franchise on our hands. And that's kind of the focus at this point. We're also working on creating a Marvel television block for the Disney XD platform, and there's a show on the air, there's 1 in development, there's also development activity at ABC Family and at ABC, and of course, there's a Consumer Products side. We're well-integrated in international markets and starting to approach licensing in a much more coordinated fashion, less so in the United States. But Marvel's done a great job on its licensing endeavors in the U.S. and it's sort of, "if it ain't broke, don't fix it" approach in that regard. But we feel great about Marvel, and we feel really good about the quality of the film that they made that was released this past weekend, Thor.

Your next question comes from the line of Doug Creutz with Cowen and Company.

I was wondering if you could comment on what the impact could be, if any, to your ESPN affiliate revenue if there are extended work stoppages for the NFL and/or the NBA.

There are so many variables in terms of potential work stoppage. It could be 1 game, it could be an entire season, for instance. And so it would be wrong for us to predict plus the nature of our agreements with the distributor is also confidential, so we're not going to predict there. We can only say that if there is a work stoppage, even significant length, the impact on our bottom line should be negligible. That in part comes from the belief that ESPN that if there is a loss of NFL games, there will be a mad dash for mail demos and other sports notably college football, where ESPN has almost 300 games across its multiple platforms, including ABC and the ability to add inventory to those games by changing formats and drive substantially increased CPM rates, which you might even see in the ESPN upfront that reflects a concern by advertisers of possible work stoppage and their inability through the NFL to get access to mail demos.

Your next question comes from the line of Richard Greenfield with BTIG.

Just kind of a high-level question for Bob. You led this quarter with a financial review, which I think in 16 years, I've never heard Disney actually do. And we're just curious, kind of the stop process behind leading off with financials and should we take any meaning out of the change and how you thought about laying out the earnings call? And specifically on Playdom, I think this is an initiative that really surprises people. You put up a number that wasn't terrible last quarter for Interactive Media. This quarter, you're actually citing a pretty big number for purchase price that wasn't broken out last quarter, yet I think you owned it for the whole quarter. So curious kind of why the disclosure now versus last quarter? And the share count also didn't go down despite the fact that you bought back a ton of stock. Where there options related to Playdom that also came into play that impacted that? Just curious, because I think there's a lot of concern about the interactive side and why you're bothering with this piece of the business at all. So maybe if you could just kind of help us understand why you're doing this going forward, that would be great.

Rich a lot of terminology there on the order of our comments today. I don't -- I'll be surprised if it's been 16 years. I think we did it differently at times when Michael was involved too. We thought it would be appropriate for Jay to go first because we wanted to address we're in excess of $170 million in factors that led to a disparity between where the Street thought we would be and where we were. And we thought by breaking those down early, which I also did on CNBC, after we released the earnings and before this call, would be a wise thing to do to sort of get that out in the open as quickly as possible. There's no other signal in terms of anything to do with our -- the quality of our earnings or anything that would have a long-term impact. On Playdom, we had a $34 million accounting charge in the last quarter as to why that wasn't broken down, Jay, Lowell, I think, we just didn't considerate it to be particularly material, it wasn't the driver of the quarter, which is your call. We're substantially above where the Street thought we would be, and just wasn't an issue. But because there was a collection of factors this time around, we thought it would be smart.

We also, even though there was in fact a bigger miss in last year's -- in last quarter's earnings in the opposite direction, we didn't feel the need to describe what factors might not have been accounted for by the analyst, 1 being the Playdom accounting, which you guys would actually have no idea about, but decided that there is a disparity this time around on the opposite direction we would point out 1 of the potential reasons for that.

You asked a couple of other questions, one I think had to do with option exercises?

Number of shares outstanding.

I think we had probably -- no not probably, we had a significant number of options exercised because the stock price ran up to -- in excess of $44 a share. And I think that's probably what you're seeing, in terms of dilution or in the number of...

Not specifically related to the Playdom acquisition.

Right. Was there another question related to Playdom, Rich?

Just I think, the overall -- looking at people's reaction, people are just kind of shocked at the size of the Interactive Media losses, and so there's a lot of question like why did Disney need to be in this business versus just licensing its content to visiting those of the world. Why is this so important to you?

We've approached games in kind of a blended way on the console side, we've licensed and we built our own. As you know, we've gotten more conservative on that side about building our own because we felt the risks were substantial. We’re looking at the social media space today, particularly games and believe that there's an opportunity to leverage current IP or create new IP in a space that we think is still in its infancy, still going through a bit of a shakedown but we still thought that it would be a wise bet on new technology platform earlier than maybe when we were betting our resources on the console space. So the opportunity for growth on the social games side, at least at this point of our entry, is probably greater than it had been when we entered the space on the console side. I guess the same would be true on the mobile side. We just feel that controlling our destiny and making some smart bets that have potentially greater upside, albeit bearing some more risks would be the right thing for us to do.

Your next question comes from the line of John Janedis with UBS.

First, just deeper into the Parks, how different are the trends between value moderate and luxury? I'm trying to maybe get a better sense of how broad the strength of the consumer looks across the category. And then I got a follow up.

The typical trend in bookings is that interestingly, the earliest things booked are usually at the polar opposites. The highest end rooms for those who want to be, if you will, the closest to the magic, and then value related guests who know they are going to book in an economical way and want to be sure that they get in. And it tends to close towards the middle. Some of that is directed by us. We actually start to trade people up in rooms when the value segment starts to fill because we obviously, the volume is of great strategic importance. And secondly, the trend and we don't -- the general trends, and I don't think we've seen anything remarkably different this time around.

On the third quarter, can you talk about what you're seeing for 3Q options and to what extent you're seeing more caution from the auto, CPG or food categories?

Option exercise or option pickups have been particularly strong, have been all year, extremely strong in the second quarter, continue to be very strong in the third quarter. Automotives have been quite strong, certainly for ESPN. There's obviously a little bit of issue or hesitation on the Japanese side, but generally speaking, it's been a strong category, particularly for ESPN, as has telecoms and technology and packaged goods.

Your next question comes from the line of Spencer Wang with Credit Suisse. Spencer Wang - Crédit Suisse AG: Two questions. First, to go back to the Park margins. Sorry to beat the dead horse on this, but Jay, you gave us, I think a $23 million operating income impact from the Easter shift. I was wondering if you could just give us a rough approximation for the revenue impact? And then also, were fuel costs -- could you quantify the fuel cost perhaps impact for Cruise lines? I know sometimes you guys are hedged, so if you know if that was material?

Yes. Let me take your second question first. We are -- because of the volatility of the market, we are not fully hedged either on our theme park operations or cruise ship operations for fuel. But we are hedged to the tune of 1/3 to 1/2 of our fuel usage. I will only say that fuel cost increases were not a driver for the quarter, and I don't want to give you the specific number but suffice to say it was de minimis. Revenue on the Easter shift is about $27 million against $23 million of profit. Spencer Wang - Crédit Suisse AG: And then maybe for Bob, I was just wondering, it seems like the TV station ad growth seems to be decelerating, that's in contrast to what seems to be a very strong national TV ad market. So I was wondering if you could just talk about the diversions you're seeing there. Is that just purely a function of the political comparisons for local or perhaps auto, at the local level or something else?

If you take the political out in the second quarter, the stations were 9% above where they were last year now. Now where in the third quarter, and then again, in the fourth quarter, we're going to be lapping what was an unbelievably strong second half of the year last year with political spending. So your comps are going to get even more difficult. In general, pacings at our stations have been relatively strong, we continue to have industry-leading stations in the markets that we operate and in most of the markets that we operate in. Let's say the back half of what was the third quarter might be slightly softer than the second quarter, part of that has to do with what's going on with the Japanese automotives.

Spencer, just a little detail on the political. Last year's Q3 and Q4 were about a little less than $55 million of political advertising combined.

Your next question comes from the line of David Miller with Caris & Company. David Miller - Caris & Company: Jay, just one quick question for you. Should we infer from your prepared comments vis-à-vis the Studio and Mars Needs Moms that the size of the Mars Needs Moms write-down was $90 million? Would you be willing to quantify it for us or are you even allowed to say? And then Bob, I want to ask you a question that I really never got to ask you during the Analyst Day back in mid-February and that is, where do you see the strategic significance or what's your sort of strategic rationale for owning the equity interest in Hulu that you do at this time? It seems to me that dating back to December 8 where you made that announcement vis-à-vis Netflix, the selling of some of that ABC Family content, the Disney Channel content for roughly $100,000 an episode to Netflix, it seemed like you were saying at least rhetorically, that you kind of favor Netflix as a streaming partner over Hulu, which is somewhat of ironic. I think you would admit just given your equity interest in Hulu. So with that, what's your priority for Hulu at this time, if at all?

Let me take a question first. I don't want to be -- I'm going to reiterate what I said about the second quarter. The P&A spending of the $70 million related to the Studio, the $50 million of it was more in the P&A costs to launch and market Mars Needs Moms, and the remainder being incremental impairment. But I'm not going to go back and talk about what we impaired prior on the IMD write-down.

And regarding Hulu, we haven't lost interest in Hulu. And the deal that was done with Netflix, was not in any way, a signal of such. We got involved in Hulu because we thought it would be important to help support a new platform that could -- we thought could contribute nicely to the company. Not just an equity partner, but as in honor of IP, and we continue to be supportive of what Hulu is trying to accomplish. We never believe that Hulu would end up either through our contract, or any contractual arrangement with Hulu or on a de facto basis due to our ownership in an exclusive position as a distributor of the company, except where we specify that Hulu would have certain exclusive rights. We continue to look opportunistically at all of the new platforms that are entering the space. We know that between Amazon and YouTube and who knows who else is going to crop up, that it's a world where the owner of IP has substantially expanded opportunities to monetize their content. And we don't intend to let a platform, even one that we own necessarily get in the way of our ability to do that. We don't think that was right. That said, we believe in Hulu and what it's trying to accomplish, and I think they've done a really good job of building a very viable platform for consumers and a viable platform for distributors.

Your next question comes from the line of David Bank with RBC Capital Markets.

The first is, Bob, historically, I've heard you say that the greatest strategic value to ownership in ABC is it's used to serve a first window to create content that you own and monetize it sort of globally across lots of different platforms. I think right now, the greatest opportunity to display content is probably on a non-serialized dramas and sitcoms. How do you feel about how you've been doing with that over the last couple of years and what's your outlook to fully exploit the ABC platform there? And the second real quickly, can you guys talk about what the timing of the compensation from Netflix will look like? Is it upon delivery of content is it over the life of the contract?

The housekeeping question, yes, the payments for Netflix are along the delivery of the products for Broadcast.

Your question regarding ABC, in particular, owned IP. I meant what I said clearly that 1 of the core strategic values of ABC is as a platform to support the investment in intellectual property, mostly scripted, that is now leverage-able in more ways than we've ever seen before, particularly when you think of the global opportunities, as well as the new digital platform opportunities. There are other strategic value. There's other strategic value to ABC. In terms of our ownership of our IP and our success, we clearly had a phenomenal run, with Lost and Desperate Housewives and Grey's Anatomy to name a few. We've had some successes since then. And certainly, Castle is one of those and there are some others as well. But clearly, our successes these last few years are not as great as the successes that we saw some -- when it was 5, 6 years ago. I'm in the middle of so-called pilot season with the ABC folks, screened all their product, and I've seen a fairly wide range of quality shows, both owned and licensed. I'm encouraged by what I've seen in both fronts. I'm hopeful that ABC Studios is going to contribute, not only to ABC's success in terms of its primetime network schedule, but to its future bottom line because the ownership of IP. There's some really strong shows from the studio right now. And since no decisions have been made yet by ABC about their schedule, it wouldn't be appropriate for me to say anything more than my enthusiasm that I just expressed and optimism.

Your next question comes from the line of Tuna Amobi with Standard & Poor's equity group. Tuna Amobi - S&P Equity Research: So my question is on DVD market. Given the latest data point, seemed like the sell-through segment actually are falling off a cliff there. So to what extent, I know you guys have said that sell-through actually performs relatively better for you, given the nature of your titles. So I wanted to get a sense how much this is a factor in your quarterly results. It seems like I know there were some difficult comparisons. But beyond that, do you have any commentary, in terms of how your titles might actually performing would be helpful? I also saw that you called out Blu-ray pricing, which you haven't done in a while. So if you can provide any color as to how your Blu-ray titles are performing vis-à-vis a standard DVD would be helpful.

Tuna, on your first question vis-à-vis, how this affected the quarter, and then I'll turn the rest of it over to Bob, the major driver in the number of units sold is the timing issue that I spoke about in my prepared remarks where in Q2 of last year, we released UP in most international markets. And this year time around, in Q1, Toy Story was released in Q1. So that was the major -- the majority of the driver in terms of what you saw affecting our quarter. We also, in prior year, re-released Toy Story 1 and 2 in anticipation of the theatrical release of Toy Story 3 and had that out in the market, which had an impact on the quarter as well. In terms of what we see in the future, I'll turn it over to Bob but we've seen very good results for Tangled. And our conversion, while of course it's impossible for us to avoid the overall secular decline in DVD sales, our conversion still seems to be holding on the right titles for sell through.

By our estimates, our title conversion has exceeded other studios for 8 of the last 10 quarters. And we exceeded the conversion rate for the other studios. In Q2, we just reported nicely by about 25% actually. And that was primarily because of Tangled, which did very well from a conversion rate perspective. But we continue to believe that this is a business that is undergoing secular change, we've been saying that probably for 2 or 3 years. We continue to believe that's the case. We believe though that our titles tend to be titles that people would prefer to own than to rent. And that's because their kids watch them so many times. That doesn't mean that every one of our titles works. We at times make films that don't convert as well because they're not considered a film that a family must own, or they don't convert as well because they're not very good films. And we've certainly had our share of those. When we have a decent Disney title, though, that is aimed at essentially the entire family audience. Our conversion rates are really stellar and that was the case with Tangled. As to Blu-ray, Tuna, I think we continue to see encouraging results where Blu-ray continues to creep up in terms of percent of total sales, as does -- kind of the multi-format concept that we're in the marketplace with, with the downloadable file, and ultimately, what I'll call the stream-able file. And we're encouraged by the buy rates on those as well. Tuna Amobi - S&P Equity Research: Very helpful. Just quick clarification on the debt situation. So you have about $4 billion of debt due in next year. You talked about your leverage, your disciplined financial management. So just wondering here Jay, what you're thinking -- or should we expect that that's going to be refinanced? Or are you actually going to pay that down substantially? In which case, that creates even more room for a sizable capacity? Any thoughts would be helpful.

We're very happy with the strategic positioning of our balance sheet. We like where we are, we don't see any fundamental changes in terms of vast reduction in our debt or for a no reason increase in our debt. So I wouldn't read too much into what you see between the shift between long-term and current. You probably know, we just re-upped our long-standing second half of our long-standing facility. And very happy with the pricing on it. And I just, Tuna, I just wouldn't look too much into the shift in accounts between debt categories.

Thanks again, everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance of the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied, in light of a variety of factors, including factors contained in our annual report on form 10-K and in our other filings with the Securities and Exchange Commission. This concludes today's conference call. Thanks again, everyone, for joining us

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