Disney Q2'16 Earnings Conference Call: Full Transcript

Operator:

Welcome to the <b>Walt Disney Company</b> DIS Quarter Two Fiscal Year '16 Earnings Conference Call. My name is Katy and I will be your Operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I will now turn the call over to Lowell Singer, Senior Vice President of Investor Relations. Please go ahead, sir.

Lowell Singer:Senior Vice President, Investor Relations:

Good afternoon and welcome to The Walt Disney Company's second quarter 2016 earnings call. Our press release was issued about 45 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and the webcast and a transcript will also be available on our website. Joining me for today's call are Bob Iger, Disney's Chairman and Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer.

Christine is going to lead off followed by Bob and then of course, we'll be happy to take your questions. So with that, let me turn the call over to Christine to get started.

Christine McCarthy:Senior Executive Vice President and Chief Financial Officer:

Hello and good afternoon everyone. Second quarter earnings per share excluding items effecting comparability were up 11% to $1.36 marking the 11th consecutive quarter in which we delivered double-digit growth and adjusted earnings per share. Our financial results this quarter which I will discuss in more detail in a moment demonstrated once again how the strength of our brands and a relentless focus or creative excellence and execution can continue to drive growth across our businesses and create value for our shareholders.

Our studio delivered another great quarter with operating income up 27% versus last year. The growth in operating income was primarily due to the worldwide theatrical success of Star Wars - The Force Awakens and Disney Animation's Zootopia.

Fiscal 2015 was a record year for the studio and the first half of fiscal 2016 is off to a record start with over $1.5 billion in operating income due to the phenomenal performance of our film slate. Fiscal year-to-date Star Wars - The Force Awakens, has generated almost $2.1 billion in global box office. Zootopia has generated $960 million, making it the number one film of the year so far and the second highest grossing Disney Animation Studio film behind Frozen. I will also note that Zootopia is the number one animated film of all time in China grossing over $235 million to-date.

The success of our studio is no accident. It is the result of our strategy of making high quality branded films and leveraging that success across a number of our integrated businesses. No company does a better job than Disney in creating cultivating and extending the value of a franchise. As a result, when we have a successful film franchise we are able to drive industry leading returns on investment.

At Parks and Resorts the investments we have made to both maintain a high level of guest experience and to drive demand, continue to pay off. In Q2, the segment set new second quarter records in both revenue and operating income.

Our domestic operations in particular continue to benefit from strong demand from guests specifically at our domestic parks and at Disney Cruise Line. Operating income at our domestic operations was up over 20% in the quarter and margins were higher by about 300 basis points. Attendance at our domestic parks was comparable to the second quarter last year and per capita spending was up 8% on higher admissions, food and beverage, and merchandise spending. Total room spending at our domestic hotels was up 5% and occupancy was down one percentage point to 88%.

Second quarter results reflect the unfavorable impact of the New Year holiday shifting into our first fiscal quarter which was largely offset by the favorable impact of the shift of the Easter holiday. The shift of the Easter holiday period will also have an impact on Parks third quarter results as the holiday period sale in the second quarter this year were as the holiday period fell during the third quarter last year. As a result, about $90 million in operating income was shifted into Q2 that was recognized in Q3 last year.

Domestic resort reservations for the third quarter are pacing up 5% compared to prior year levels while booked rates are down 2% for selecting the impact of the Easter holiday shift.

Our Cruise business set new second quarter records in revenue and operating income driven by higher ticket pricing and on board spending. Disney Cruise Line continues to be a market leader in innovation, creativity, and guest service. The business achieved record financial performance in 2015 and that strength continues in fiscal 2016 with Disney Cruise Line generating its best first half ever. During the second quarter, we announced plans to build two additional ships that will be completed in 2021 and 2023.

Our decision to expand the fleet was driven by the outstanding guest response to our product and a business in which we have a strong competitive advantage and where we believe we can drive attractive returns on investments.

Growth in domestic operations was partially offset by a decline at our international parks due primarily to pre-opening spending at Shanghai Disney Resort. We are extremely excited for the grand opening of the resort which Bob will discuss in greater detail.

Operating income at Media Networks was up 9% in the second quarter due to growth in cable which was primarily driven by higher operating income at ESPN. The higher resulted ESPN benefited from lower programming and production costs in the second quarter and higher affiliate revenue partially offset by lower advertising revenue.

Lower programming costs and advertising revenue reflect the shift of six New Year's Eve and New Year's Day college football playoff ball game including the two semi-final games. These games aired during our first fiscal quarter this year whereas the aired doing our second fiscal quarter last year.

The shift in timing of the ball games had an adverse impact on ESPN's ratings and -- in the second quarter which were partially offset by an increasing units sold. As a result ESPN's ad revenue was down 13% but we estimate ad revenue would have been up about 3% adjusted for the timing of the ball games. So far this quarter, ESPN ad sales are pacing up 5% versus prior year.

Broadcasting operating income was down in the second quarter as growth and affiliate and advertising revenue was more than offset by lower income from programmed sales compared to prior year as well as higher programming costs. Ad revenue at the ABC Network was up 5% in the second quarter and benefited from higher rates but was adversely impacted by lower ratings in the quarter compared to prior year. So far this quarter, scatter pricing at the Network is pacing 20% above upfront levels. Media and Networks affiliate revenue was up 5% adjusted for the adverse impact of foreign exchange and leap day driven by 4% adjusted affiliate revenue growth at Cable and double-digit growth at Broadcasting.

At our Consumer Products and Interactive segment, operating income was lower in the quarter. Our Merchandise Licensing business was up in the quarter but segment results were weighed down by an adverse impact from foreign exchange as well as lower results from both our Disney stores business and Infinity. When you look at the segment results, it's important to note our underlying merchandise licensing business remains very strong. On a comparable basis, earned licensing revenue was up 18% in the second quarter.

This was driven by strong ongoing demand for Star Wars merchandise partially offset by the expected difficult year-over-year Frozen comparison. Merchandise Licensing was also impacted by lower minimum guarantee shortfall recognition in the quarter which relates to the shift in our fiscal calendar.

So while some headwinds and timing related ins and out impacted second quarter results, we are quite pleased with our first half segment results. Comparable earned licensing revenue was up over 20% for the first half of the fiscal year which helped drive merchandise licensing operating income growth of over 20% and segment operating income growth of 12%. During the quarter, we took a charge of $147 million in connection with the shutdown of our Infinity console games business. Going forward, our console game strategy will focus solely on licensing our great portfolio of content.

We continue to actively repurchase our shares and in the second quarter, we bought back $20.8 million shares for $2 billion. Fiscal year-to-date we repurchased about $47.3 million shares for approximately $4.9 billion.

And with that I will now turn the call over to Bob.

Robert A. Iger:Chairman and Chief Executive Officer:

Thanks Christine and good afternoon. Since Christine has already covered our businesses in the quarter, I want to focus on a couple of things we are very excited about; the unbelievable momentum of our studio and the grand opening of Shanghai Disney Resort which is now just about a month of way.

Since our acquisition of Pixar, we've released 27 movies under the Pixar Disney Animation, Marvel, and Lucasfilm brands, with an average global box office of about $770 million each. And as Christine mentioned, the Studio's winning streak continues. This weekend, our 2016 box office total crossed $1 billion domestically, $2 billion internationally, and $3 billion globally, reaching those milestones faster than any studio in history.

Zootopia's fantastic performance is just the latest in the string of incredibly successful original movies from our Animation Studios including Inside Out, Big Hero 6, and Frozen, to name a few. We are also having tremendous success re-imagining Disney classics as exciting live action movies, most recently with The Jungle Book, a stunning movie pushing the limits of innovation and technology to bring some of our most beloved characters to life in a spectacular new way. It's being gratifying to see the worldwide response. Global box office for the Jungle Book to-date is $783 million including almost $150 million in China.

And in India it's now the highest grossing Hollywood movie in history.

And of course Marvel's Captain America - Civil War just opened around the world to wide acclaim and huge box office. Its domestic debut last weekend generated almost $180 million in box office making it the fifth biggest opening weekend of all time. With this success, our Studio has delivered five of the top six opening weekends on record. Global box office to-date for Captain America - Civil War is more than $705 million and climbing.

There are now thirteen films in the Marvel Cinematic Universe generating almost $10 billion in global box office to-date. We've got an unprecedented pipeline of terrific movies on the way with major release date announced through the end of the decade and the near term we are looking forward to Alice Through The Looking Glass and Pixar's Finding Dory which will both be in theaters this summer.

We are obviously very thrilled with our Studio's performance and its position going forward but what we are most excited about right now is the grand opening of the spectacular Shanghai Disney Resort on June 16. I was there again last week as we are putting the finishing touches on the Resort. We began trial operations over the weekend allowing invited guests to explore the Park and enjoy some of the attractions, entertainment, and dining experiences. It's incredibly exciting for all of us to see the Park truly come alive for the first time and the initial feedback from guests so far has been absolutely phenomenal.

We will continue to fine tune everything over the next few weeks to ensure the experience we deliver on opening day is everything we wanted to be for our guests. After 17 years of working on this project I am still awed by it; the scale, the detail, the sheer artistry, it's all breath taking. I find something new to marvel over every time I visit and I know our guests will do the same. Even though it has all of the Disney details, it unlike any other destination we've ever created.

We set out to build something truly extraordinary and we've succeeded in a way that far exceeds our most ambitious expectations.

We've re-imagined everything, even our most familiar iconic attractions have been elevated and transformed with the help of cutting edge technology that allows us to take our creativity farther.

Anchoring our first ever Pirate's theme land, Shanghai's Pirates of the Caribbean - Battle for the Sunken Treasure is the first attraction inspired by the blockbuster movie franchise. Its stunning size and incredible technological innovation allow us to immerse our guests in a grand adventure on high seas like never before. We have also re-imagined the Disney Castle expending the size and introducing more entertainment experiences and shopping and we are introducing new lands and brand new attractions throughout the Park like the Tron light-cycles. We are taking great care to create a number of stunning features and original experiences especially for our Chinese guests as well including some unbelievable entertainment throughout the resort such as our first ever Mandarin production of the Lion King.

It really is impossible to overstay our excitement about this particular Resort. It represents the very best that Disney has to offer in a way that is both respectful and relevant to the people of China or as we have been saying, it is authentically Disney and distinctly Chinese and we can't wait to share it with the world. Opening the gates and officially welcoming our first guests will one of the proudest and most exciting moments in the history of this phenomenal company not to mention a monumental achievement.

And with that I going to turn the call back over to Low and Christine and I will be happy to take your questions. Low.

Lowell Singer:

Bob, thanks a lot. Operator, we are ready for the first question.

Question & Answer

Operator:

Thank you. If you have question please press star then the number one on your touch tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you are using a speakerphone you may need to pick up the handset first before pressing the numbers.

Once again, if you have a question, please press star then the number one on your touch tone phone. And our first question comes from Anthony DiClemente. Please go ahead.

Anthony DiClemente:Nomura Securities:

Good afternoon and thanks for taking my questions. I'll start with one for Bob. Bob I hope you find this to be a fair question. I think investors would value any context that you could provide us with respect to Tom's resignation last month and looking forward if you can give us any update on CEO succession plans and specifically help us out with the probability that your contract could potentially be extended beyond June of 2018? And then Christine, you said I think recurring cable network affiliate fee growth at cable was 4% in the quarter.

I think that was a half a point ahead of the 3.5 that you realized last quarter. Could you just talk about the drivers of the 4% in terms of rate and volume and any forward outlook that you'd be willing to provide us? Thanks a lot.

Robert A. Iger:

Anthony, thank you and I don't mind your question at all. Obviously Tom was a valued colleague and a friend of mine and many others at the company. And so we are sorry what came to pass but we don't really have much more to say about that.

I will say that or remind people that I have just over two years left on my contract as CEO of the company and the Board is very actively engaged in a succession process as it has been actually for some time. And it believes that it has ample time to identify a successor under timing circumstances that will be just fine for the company. I have nothing really to add in terms of the extension of my contract except that I don't currently have any plans to extend beyond the June expiration date that is June of 2018.

Anthony DiClemente:

Okay. Thanks.

Christine McCarthy:

Anthony your question on the affiliate revenue growth for Media and Nets, the number we gave you 4% adjusted affiliate growth at cable, that was based on the solid rate of growth with some offset from foreign exchange and subs.

Anthony DiClemente:

Okay and I think this is a follow up. Last quarter you had talked about an uptick earlier in the year from lighter packages I think in part driven by Sling TV subscribers. So do you care to kind of talk about that where the lighter bundles were the Sling TV like services a driver of subs in anyway can you kind of characterize the trajectory of those subs for ESPN? That'd be helpful. Thanks.

Robert A. Iger:

Yes Anthony I will take this one. We launched with Sling as you referenced we also launched with Sony View and the numbers on both those platforms have been encouraging and they were a driver of sub. They did contribute incremental subs for ESPN this last quarter.

We're also in discussions with a number of entities, some current distributors that are coming forward with new packages and some completely new distributors, all have expressed an avid interest in having ESPN and or other channels included in their initial offerings and we were very, very encouraged by the discussions / negotiations that we're having. But other than the Verizon settlement that was mentioned today, we don't really have any new news to give you on this at the moment accept to say again that there are a number of new entrants in the marketplace. They all want ESPN. We like where the status of our talks with them and we actually like the trends as well.

These products are very attractive because they are offering consumers more choice. They typically are better at mobility and their user interfaces really positive, is really strong and those are really important when it comes to today's environment. So we think long term given the discussions that have and given experience that have had these last few months, we feel good about what we are seeing.

Anthony DiClemente:

Okay thanks a lot.

Lowell Singer:

Anthony thanks for the question. Operator next question please.

Operator:

Our next question comes from the Alexia Quadrani from JPMorgan. Please go ahead.

Alexia Quadrani:JPMorgan:

Hi. Thank you. I'll just start off as I can Bob your commentary just now about being in discussions with a number of potential over the top for streaming partners there, how expansive do you think you know that opportunity can be? I think if you look out for the next few years, do you think it can be a meaningful positive or have a meaningful positive impact on either of your subs or affiliate revenue outlook?

Robert A. Iger:

I think it will have meaningful effect on the marketplace for us. I can't give really guidance in terms of where I think it’s going to end up whether we are ahead of our projections were at one point but there definitely are very, very encouraging signs in terms of what we've seen already. And we are not at liberty to give numbers for Sling or for Sony except set we can that we anecdotally were told that after ESPN was included in their packets, they saw some very, very encouraging sign ups or trends in terms of sign ups.

So I think this is all very positive for us and as I just mentioned, as a response to the prior question, the conversations we are having have been quite productive. We just haven't concluded new deals to announce as of today.

Alexia Quadrani:

And then a follow up if I can, just looking at the Parks business, you've got a lot of moving pieces there, obviously the big opening in Shanghai, you've got expansion planned domestically, dynamic pricing going on all those technological innovations there. I guess what do you see is the biggest maybe opportunity on for a profit contributor for profit growth going forward?

Robert A. Iger:

I think you're going to see a number of contributors. It will take some time for Shanghai to contribute because we have got startup costs and we're walking before we run there as well. But eventually we have very, very optimistic outlook about the Park that we are opening there and about the market in general.

We like the steps that we have taken in terms of pricing and we have taken a number of steps or made a number of steps to essentially grow revenue. In some cases actually the expense of some attendance where we're changing our pricing approach, sometimes in part to moderate attendance so that the Park experience is a little bit better. But all design will be effective essentially raising revenue. We like as you mentioned we like some of the investments that we're making on the technology front, we also like what we have got in the works in terms of expansion and other locations; The Star Wars lands that we're building in Florida and in California, Avatar in Florida, which opens before that.

We announced two new cruise ships that's coming down the road 2021 and 2023 for instance. We are looking at other expansion opportunities in Hong Kong and Tokyo and generally we think that you're going to see a number of contributors to growth across that sector.

Alexia Quadrani:

Thank you very much.

Robert A. Iger:

Thank you Alexia for the question. Operator next question.

Operator:

Our next question comes from Michael Nathanson from Moffett Nathanson. Please go ahead.

Michael Nathanson:Moffett Nathanson:

Thanks. Hi. One for Christine and then I'll ask one to Bob. Christine can you focus a bit on Consumer Products which surprised us.

Can you walk through the impact of profit -- if you look at the first quarter, you guys are up 23% profits -- so what impact that delta in grown and how do you think about growth to products for the rest of the year?

Christine McCarthy:

Sure, thanks Michael. You are absolutely right. The first quarter growth was 23% followed by the 8% decline this quarter and the several factors that slowed the overall growth rate. The first I would like to mention is that the earned revenue growth was strong again in Q2 at 18%.

Now that compares to an extremely strong growth in Q1 that was 23% in our revenue growth but again second quarter was very strong at 18%.

Star Wars we all know was a great contributor in Q2 but it didn't have quiet the massive contribution at heading Q1 and also remember in Q1 we had the Q4 deferral, the Episode 7 merchandise -- the revenue associated with that merchandise, so that from Q4 was also moved into Q1 which had a bolstering effect on Q1. We also have a timing issue of guaranteed shortfall payments that helped in Q1 and they were a drag in Q2 as I mentioned in my comments and also lastly I will mention that Battlefront was a much more significant driver in Q1 than it was in Q2. And I think if you look at those are good contributing factors to the quarter-to-quarter decline.

Robert A. Iger:

And Michael before you ask me a question, I think it is really important with this business not to look at it as a quarterly business because we are not only continuing to support the $11 billion plus franchises that we have as a company but we continue create intellectual property that is leverageable across our consumer products business. Now not all is leveragable is Star Wars and Frozen for instance but when you look at Zootopia and you look at Jungle Book, somewhat small so far but Captain America won't be. The impact of Captain America long term on that business and the other Marvel properties, the reintroduction of Spiderman.

Spiderman is the hottest or the number one Marvel character from a consumer merchandise perspective and we introducing Spiderman successfully as we have done in Captain America through the release next year's 2017 of Spiderman is something that also is to be considered. So it’s the kind business so I think is very difficult to measure in terms of the bottom-line success on a quarterly basis. We just don't run it that way.

Michael Nathanson:

All right. As part of model...

Christine McCarthy:

Michael you asked about sort of guidance going forward and we don't provide guidance but as Bob mentioned we think we have the best portfolio of properties and we are very encouraged by what we see in this business.

Michael Nathanson:

Okay thanks and Bob can I ask you one on Hulu. Last week Hulu confirmed launch of virtual MSO sometime next year and as a part of Hulu, -- talk a lot about the opportunity in the marketplace. I wonder what would you like to see as a design that maybe fits in between the large bundle I would Sling and Sony View are doing so View could actually both on to the future what are the elements that you think are missing from today's market place?

Robert A. Iger:

Well I'll answer before I do, Hulu's become an important investment for us not just as a distributor of the programs that we make but ultimately as a buyer of original product and ultimately is a distributor of our channels and we think they have a great opportunity to become an OTT MVPD because they can leverage their current user base and they also have a good user interface. I don't want to speak for them fully but what they are looking at is a best of cable approach which I guess a response specifically to your question would put them between the big expanded basic bundle category and some of the lightest packages that are available like somewhat Sling has put out.

We feel really good about the opportunity. We are also fully aligned with our partners at 21st Century Fox on this strategy and I also know that there have been questions asked about what the impact of going into the distribution business is on our current distribution partners and to that I would respond even though you didn't ask the question, there are a number of current distribution partners that are in the content ownership content creation business. Most notably Comcast and its purchase of NBCUniversal. So we don't think that there is any negative impact whatsoever to us going into the business of distributing our channels.

Michael Nathanson:

Thanks Bob.

Robert A. Iger:

Thank you, Michael. Operator, next question please.

Operator:

Our next question comes from Jessica Reif Cohen from Bank of America Merrill Lynch. Please go ahead.

Jessica Reif Cohen:Bank of America Merrill Lunch:

Thanks. I guess the follow-up on the Hulu question. How does it change, could you say anything about the timing of the launch and just in place of between those bigger bundles that what it will look like and if you can say anything on pricing and does it change the way you're fairly planned out to as partner OTT and moving away from that on the advertising market it's been incredibly bland. How are you thinking about approaching the market is there any changes in your sales approach from and final and generally speaking, you look more targeted...

Robert A. Iger:

I will answer the second part of the quarter first. We are not going to get in to details in terms of our strategy going to the upfront except that we would agree with what you said. We see a very robust marketplace and a very strong upfront ahead both for our broadcast network for ABC and for ESPN.

We are very encouraged with what we see but we are not going to disclose what our strategy is going in.

Your question about Hulu, I don't think they've been specific about when they are going to launch or what their pricing is going to be but I will reiterate what I said earlier and that is we're fully aligned with our partners at 21st Century Fox on plans to launch on what their user interface is and what their approach is in terms of the overall package. We'll have individual negotiations with them for our channels of course but we like their strategy from a pricing perspective and in terms of what their ultimate consumer offering or consumer proposition is.

I don't think I'll comment much about what we are doing on the experts space base and this is still very dynamic market place and we continue to look for opportunities to sell our content. I will say that we had never seen a better market place to sell intellectual property into and the strategy that we deployed a while ago to invest in the creation of intellectual property is one that we believe in even more today and we're going to continue to invest more in creating intellectual property. And one of the best examples of that would be Marvel and what we've been able to do with Netflix in terms of multiple original series, renewal of second seasons on two of them and the addition of another series from Marvel to Netflix and the fact that Marvel's been in discussions with other distributors as well and so demand on their product is pretty significant, plus we are looking at obviously continuing to invest on to the ABC banner under the Disney banner and potentially under the Lucas banner. So there are many opportunities for us to sell content to fairly voracious marketplace right now for that content.

Jessica Reif Cohen:

And can I just ask one other follow up on Shanghai you mentioned the dynamic placing. Can you just about how much of the difference that might be -- and also what's the impact of having the Park -- because you talked about the movies you talked about how -- movies in China obviously having the Parks into this promotions helps that even further so maybe just a overall report that you -- Park fully opened.

Robert A. Iger:

The pricing that we have in China is for basically peak and off-peak periods and there are more off peak days then there are peak days. There is roughly a $20 differential between peak and off peak and its somewhere in the neighborhood of $76 a day for the peak and $56 for the off peak. There is also some pricing for children and some pricing for senior citizens.

And the reaction to the pricing has actually been quite positive so far as well as reaction to the pricing for our hotels and the pricing for the Lion King show which is a Mandarin produced Lion King. It is the full broad way show but it is a separate ticket. And so far so good. We've actually had no negative reactions whatsoever to our pricing approach.

The value of our intellectual property in China is on the rise. That's obviously as you noted Jessica evident in how our movies are doing. It's having a very positive on our brand and our brands that would include Disney and Marvel in particular. We do have Marvel presence in the Park.

It will grow overtime so there will be all kinds of opportunities particularly for character interaction with Marvel characters. I know that with interest in a recent visit to Disneyland here in California that there was a line early in the morning for our guests to meet Zootopia characters. I can tell you that Zootopia having done so well in China, there will be Zootopia characters in our Park in China surer than we had initially anticipated.

But in general you are going to find a park that is going to take advantage of what is clearly a growing interest in our intellectual property as we as a blend of some original intellectual property too. We wanted this park to be unique in that it would have things than our parks in other locations around the world didn't have but it's definitely a blend.

Jessica Reif Cohen:

Thank you.

Robert A. Iger:

Thanks, Jessica. Operator next question please.

Operator:

Our next question comes from Omar Sheikh from Credit Suisse. Please go ahead.

Omar Sheikh:Credit Suisse:

Thanks. Just a couple of questions. First to Christine on going back to consumer products if I could. Could you may be let us know Infinity asset annualized revenue and operating income contributed to where Infinity was so what to strip our going forward.

And also maybe what the FX headwind was in the quarter of consumer products that will be helpful and then a question for Bob. I know there's been some press reports about your potential interest in MLB's BAM unit I wonder whether you could perhaps comment on that if you care to. But just maybe more broadly, could you maybe update us on your thinking on potentially taking some of the contracts or content that you have control over and taking it direct to consumer. Thanks.

Christine McCarthy:

Thanks Omar. On Infinity, we don't disclose those numbers by product but I will answer your question on foreign exchange headwinds for the segment. In this quarter, the FX impact on consumer products was $18 million and but I also want to reiterate that our forecast for the year-over-year change which we gave you previously of 500 for the year is still the same outlook and we are not making any change to that and that's for the entire company.

Omar Sheikh:

Okay. Thanks.

Robert A. Iger:

Omar I'd not really go in to make a specific comment about our interest in acquiring stake in BAM. I will say that we've been very impressed with their product. It's obviously quiet evident if you are engaged with major league baseball on digital platform.

It's probably among the best out there. On the direct-to-consumer front, we've talked about this often. We're blessed with brands and products that give us the opportunity to take them direct to consumer. It's not always that simple in that we have agreements with current distributors they have to be considered, although they don't go forever and obviously we have to get it right from a technology perspective.

I will say that the product that we launched in the UK, Disney Life which was deemed experimental on our part because we really wanted to see not only how consumers behave with the product but what the pricing should be and whether the technology platform that we created for to put it on with work and we've been really encouraged by that. We had great consumer reviews and we're pleased to say that the transition from basically free to pay has gone really well too and so we're looking at other opportunities around the world to distribute that product too. There has also been great interest in our movies and our television shows on the platform but Interestingly enough as time has passed and people are using it more, we're finding they are going to our books, our games, our music as well. So it's a good product and seems to be working and we think there are more opportunities for it.

Omar Sheikh:

Thank you very much.

Robert A. Iger:

Omar. thanks for the questions. Operator next question please.

Operator:

Our next question comes from Doug Mitchelson from UBS. please go ahead.

Doug Mitchelson:UBS:

Thanks so much. I had one for Bob and one for Christine, I'll just ask them both upfront I think. Bob you've got a lot of discussion already on the call about I guess OTT MVPDs for now we need a better acronym for sure I think. But I am interest in the advertising side for IP streaming world, is Disney been rethinking advertising models including ad loads as your vision for the future of TV advertising and formed your strategy for the Media Networks division and for Christine, the 5% hotel bookings pacing for the June quarter, that's despite the tough Easter comparison so the core trend would actually be better than that, am I thinking about that right? Thanks.

Robert A. Iger:

Yes. I mentioned earlier Doug, what a dynamic marketplace is and I was referring to distribution opportunities. But the same thing would apply on the advertising front and Ben Shore and I had a discussion yesterday about this is related to the non-ESPN Media Networks and just about everything is on the table right now including ad load and pricing and advertising integration into programming as for instance and I think you are going to see just a lot of shifting in terms of not only what we are selling but how advertisers are buying into all different kinds of television product.

I don't know that right now it’s time to declare anything specific in terms of a strategy because again it's such a changing marketplace except to say that it's the strong demand right now for television product and it's obviously evident in how everybody is feeling about the upfront.

Christine McCarthy:

And Doug to answer your question on the resort bookings to date for the third quarter being up 5%, that is incorporating our fiscal year impact at Easter the way it fell this year. So the short answer to your question is yes it does incorporate that.

Doug Mitchelson:

And Bob if I could follow up I mean may be I am fishing here a little bit but you have much greater exposure to affiliate revenue in your Media Networks than advertising revenue. Is that a position that you prefer? Do you think affiliate revenue is you've got lot more visibility over next five years than advertising revenue or do you think perhaps it will end up being the reverse.

Robert A. Iger:

Well we are at a very high level when it comes to affiliate revenue and you are right in terms of the total number we do it more exposure as well. We have in the past preferred that to advertising there was nothing wrong with advertising we certainly drive a lot of it, because of the certainty. Obviously with the discussion that's been in the market place about the shifting dynamics of distribution and to some extent some of the sub-erosion that would perhaps call some of that into question but we would still pick our hand in terms of being more subscription centric than advertising centric.

Because of that we still believe there is much more certainty in that than advertising which as you know is intended to be somewhat cyclical in nature and at times could be fickle in nature based on a variety of other conditions.

And as we look at distribution we still think there is a huge demand for these channels particularly in the United States but worldwide as well and while consumers are clearly shifting their habits in terms of television, we still think that the subscription channel model is going to dominate the marketplace for certainly the next five years if not many years thereafter.

Doug Mitchelson:

Thanks so much.

Robert A. Iger:

Hey Doug, thanks for those questions. Operator next question please.

Operator:

Our next question comes from Ben Swinburne from Morgan Stanley. Please go ahead.

Ben Swinburne:Morgan Stanley:

Thank you one for Bob and a follow up for Christine. Bob can you talk a little bit about how you are looking at the Sling product roadmap Dish talking their call about wanting to bring Disney's channel into their multi stream service and you have been quite complementary of the single stream product lately. I am just wondering how you feel about A; the offering two different products in the marketplace shortly and B; what are the puts and takes to including your networks in the multi stream products where the Hulu plans sort of impact your thought process there, and then I have a quick follow up for Christine.

Robert A. Iger:

When we initially launched on Sling, we like the single stream, it was a new products and we wanted to be careful about the impact of that on our bigger business. When Sling decided to launch the multi stream product we were unable to conclude an agreement with them. Right way meaning to launch with them when they launch the product but they subsequently comeback and engaged with us like they talk Charlie again, I met with Charlie personally a couple of weeks ago and we are engaged in discussion with him about possibly be included in the new product in the future.

I don't want to comment more on those discussions.

And I don't think Hulu at least and from our perspective didn't have any impact on it at all. We are looking for multiple opportunities to distribute our products new platforms because as I said earlier we like new platform offer to consumers and we will continue look pretty expensively at current and new entrance in the marketplace and we believe there will be even newer entrance in the marketplace who will be included in the months and years ahead.

Ben Swinburne:

Got it. And then Christine just going back to cable. Would you be able to give us the domestic affiliate revenue growth for the quarter. I know, should we be thinking that you're reiterating the three year CAGR for cable which I think is mid single-digit is that's the way how we should be thinking about the two quarters left?

Christine McCarthy:

Yes, the domestic cable affiliate revenue outlook that was updated last August up high single-digit is still intact and that as you know is from fiscal '13 to fiscal '16 on a compounded annual rate. So that is still intact.

Ben Swinburne:

And the OI. Sorry.

Christine McCarthy:

That component of the outlook is intact as well. That was cable operating income up mid single-digit over that same time period still on a compounded annual growth rate.

And on the domestic cable affiliate revenue growth, this quarter as well as last quarter we gave you total media networks and total cable affiliate revenue growth and we gave you some broad -- color on the broadcasting affiliate revenue growth as well.

We won’t' be providing domestic cable affiliate revenue growth, we manage our media businesses collectively and we negotiate our affiliate agreements on a consolidated basis and that's how we're going to report the affiliate revenue.

Ben Swinburne:

Okay.

Christine McCarthy:

And if you recall. We started providing domestic cable affiliate revenue because there were a number of business model changes with our international networks but that created some noise in our affiliate growth comparisons and those changes are largely behind us.

Ben Swinburne:

Okay. Thank you.

Christine McCarthy:

Okay. Thank you.

Robert A. Iger:

Operator next question please.

Operator:

comes from Jason Bazinet from Citi. Please go ahead.

Jason Bazinet:Citi:

Just a question for Mr. Iger. I think even before the decision to shutter infinity we were at least getting questions from institutional investors about Disney acquiring a console or a video game company I should say. I am not going to ask you to comment on that but can you just refresh us in terms of what cause you to start as a license of your content pivot into consoles and now move back into licensing what the lessons learned into work?

Robert A. Iger:

We thought we had a really good opportunity to launch our own product in that space otherwise is console space but it was also essentially large component of it was the towards the we call it towards the life space towards the life business and in fact we did quite well with the first iteration of it and we did okay with the second iteration. But that business is a changing business and we did not have enough confidence in the business in terms of the being stable enough to stay in it from the self publishing perspective you know that you take on substantially more risk particularly when it comes to manufacturing and managing the inventory the truly inventory of that business and in fact as Christine noted a good point of the write-off that we just announced comes from having a write-off that inventory that we took responsibility for when we went into publishing business and we just feel that it's a changing space and that we're just better off at managing the risk that business delivers by licensing instead of publishing.

It's just that simple we did fine with the product initially we actually made a good product. I give the developers a lot of credit for the product that they made it was extremely well received. But we knew going in that there will be a lot of risk for this product and in fact we did so well initially gave us the confidence continue with it the truth of the matter is that the risk that we sited at the beginning when we went into this -- with us.

Jason Bazinet:

Okay, all right. Very good, thank you.

Lowell Singer:

Jason, thanks for the question. Operator next question please.

Operator:

Our next question comes from Todd Juenger from Sanford Bernstein. Please go ahead.

Todd Juenger:Sanford C. Bernstein:

Hi, thanks for taking the question. Like most people one for Christine and hopefully one for Bob. Christine on A&E equity income I just want to -- I know there is a lot of puts and takes there and the new one -- so I just hoped you might be able to willing to comment on whether that sort of this quarter was emblematic of how it's going to look for a while with the start up move there with your partner advice and or anything else we should be thinking about in terms of advertising affiliate that would affect that equity income to the next many quarters and then Bob if you don't mind I'd love to hear your thoughts on ABC, you mentioned conversations at the bench heard before you've got new leadership at ABC.

We think about what you're hoping Bob, Ben will accomplish there and what sort of his marching orders are given all the changes and attracting prime time audiences and advertising and the back end value of content and what are hoping to see there what should we be looking for to see if its' on track and delivering what you are hoping. Thanks for your thoughts.

Christine McCarthy:

Okay, I will take the first one Todd and on A&E. As you noted A&E was down year-over-year the biggest driver of that was a decrease in ad revenue coupled with an increase in programming expense and as you mentioned with voice being entered as well there was a negative impact of the conversion of the H2 channel, device land that factored through A&E's numbers and voice land as you know recently launched and is still in a start up phase. So I think you have to give them time to get up to speed and ANE is dealing with some aging shows and putting on new programming and so this is just something that we will be watching on a quarterly basis.

Robert A. Iger:

Todd. So on the ABC, front first of all I obviously like the management changes ever made I have known Canning Dungee for a long time putting her in charge of prime time programming I think is a great move and I have the utmost confidence in Ben as well. I don't know that there is a big headline here. I have said to Ben what I have said publicly and what Ben and I are both in accord on this and that is that you have to look the businesses not just the distribution our network business but as a content creation business too and ABC under ABC Productions has done a great job of creating content that is leverageble beyond the ABC Network into a world that has an unbelievable appetite for that content.

And that just that's not just domestic that's globally as well.

So the goal at ABC is to program the network aggressively but to also support our Studio operation aggressively because that is a very, very important if not integral component of the value chain. The most obvious is the most obvious and that is make great programming, these days there are so much there are so many series that are available to consumers and it puts a tremendous amount of pressure on programmers not only to make things great but to make things that make noise that stand out and the other thing that I again a given the other thing that I have mentioned that I don't we should held back by any of the old rules. You should think out of the box. The world has changed so much that the old rules just don't always apply and he needs to I think consider that.

And that's about it.

I have seen all the pilots this year had the ability to watch most of them when I was in China last week, believe or not I like what I see and as I said earlier I like the market place and I think given the ownership of programming and the fact that a lot of these new shows or hours and lot of the shows that we put on last year including Quantico has done quite well at hours I feel good about the prospects for that business.

Todd Juenger:

Thank you very much.

Robert A. Iger:

Thanks Todd. Operator we have time for one more question.

Operator:

Okay and our final question comes from David Miller from Topeka Capital Markets. Please go ahead.

David Miller:Topeka Capital Markets:

Yes, thanks. Just one for Christine. Looking at the Park margins here 15.9% purely outstanding for a fiscal Q2 just given that fiscal Q2 is usually your weakest quarter. Christine in your opinion how much of this is due to My Magic Plus? How much of a contributor is that just given that the design of My Magic Plus was to just get people moving around more, get people to have a more efficient experience if you will around the Park.

Just curious what the contribution was if there is any way you can quantify it. Thank you.

Christine McCarthy:

Thanks David. My Magic Plus has been around for several quarters and a few years and so it's really been incorporated into the base business in the way the Parks manages their business. So I think another way of looking at Parks margins is to look at the strength of the domestic operations this quarter and as you noted the 15.9% was a total segment including our international operations. But the domestic business was up 20% NOI and their margins were up 300 basis points.

So it's part of the way we do our business but the business domestically has done extremely well.

David Miller:

Wonderful. Thank you very much.

Robert A. Iger:

I want to add one thing. I am actually kind of surprised that after almost 45 minutes of questioning we didn't get one question about our Studio. But I just wanted to reiterate that the studios results were up tremendously in the quarter and up over 60% for the first two quarters of the year.

They've had three movies in the marketplace just recently; Zootopia which is well over $900 million worldwide, Jungle Book; which is well over $700 million worldwide and climbing, then Captain America; which had one of the best openings any movie has had in the history of the business and their slate going forward is just fantastic. Whether you're looking at Disney Live Action, Disney Animation, Pixar, or Marvel and Lucas, and I just feel that we've done a lot of work as a company to grow that business. In fact Studio ROI for the first half of the year is over $1.5 billion and I just want to make sure that we give credit where credit is due to our Studio that has done a fantastic job and it is firing on more than all cylinders. Thank you.

Lowell Singer:

Bob thanks. That really does conclude today's call. A reconciliation of non-GAAP measures that were referred to on this call to 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 this statements on the basis of our views and assumptions regarding future events and business performance at 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 SEC.

This concludes today's call. Thanks everyone for joining us.

Operator:

Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.