Walt Disney Co (The) (DIS) — Q1 2016 Earnings Call Transcript

Good afternoon and welcome to The Walt Disney Company's first quarter 2016 earnings call. Our press release was issued about 40 minutes ago and is available on our website, at www.Disney.com/investors. Today's call is also being webcast and a replay and a transcript will be available on our website. Joining me for today's call are Bob Iger, Disney's Chairman and Chief Executive Officer, Tom Staggs, Chief Operating Officer and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Bob, Tom, and Christine will each make some comments and then, of course, we will be happy to take your questions. So with that, let me turn the call over to Bob and we'll get started.

Thank you, Lowell and good afternoon, everyone. I am thrilled to announce that our Q1 performance was the greatest single quarter in the history of The Walt Disney Company and a phenomenal start to FY '16. Revenue was up 14%, net income was up 32%, and adjusted earnings per share were up 28%, to $1.63, which is our highest quarterly EPS ever and is also our 10th consecutive quarter of double-digit EPS growth. We had tremendous performance across our portfolio of businesses. With the incredible success of Star Wars: The Force Awakens, our studio delivered $1 billion in quarterly operating income for the first time in history. Our parks and resorts also made history, with nearly $1 billion in operating income. And our consumer products and Interactive business set another record, with $860 million in OI. Our results clearly show that our long-term strategic focus and investments in brands and franchises are driving remarkable value in these businesses, greatly increasing their impact on the Company and further diversifying our future growth. Over the last 10 years, we've built an enviable collection of vibrant, valued, and admired brands. We've also created, acquired, or re-envisioned several of the world's most valuable franchises and we're fully leveraging these assets across our portfolio of businesses and around the globe. Of course, nothing reflects the impact of this strategy better than the phenomenal resurgence of the Star Wars franchise. And there is no better way to propel this franchise into the future than by producing quality products. It's been absolutely thrilling to see the reaction to our first Star Wars feature film, The Force Awakens. Audiences and critics alike really love this movie. It's the only film in history to ever reach $900 million in domestic box office; and as you may have heard, it crossed $2 billion in global box office over the weekend, more than doubling the worldwide box office for the last Star Wars release a decade ago. Breaking records at the box office is only the beginning. Global retail sales for Star Wars merchandise in the first quarter exceeded $3 billion, more than triple the global retail for this franchise in Q1 of last year. Star Wars is also driving unprecedented growth for our mobile games, and EA's launch of Star Wars Battlefront was the biggest video game release in Star Wars history, with more than 13 million units sold. Filming of Star Wars: Episode 8, the next chapter of the legendary saga, has just commenced and it will be in theaters December 2017. And production of Episode 9, a 2019 release, has also begun. In the meantime, we will keep fans engaged in the Star Wars universe and further expand the franchise with the release of Rogue One this coming December. It’s a compelling and original stand-alone story about a band of rebels attempting to steal the plans for the Death Star, set just prior to the events in the first Star Wars movie, Episode 4: A New Hope. Filming of Rogue One is virtually completed and we absolutely love what we've seen so far. This is the first of a set of planned stand-alone stories and we're already in preproduction on our next one, for release in May of 2018. And on the Parks front, later this year we will break ground on spectacular new Star Wars theme lands in Disneyland and Walt Disney World. Clearly, Q1 saw the impact of our extremely successful relaunch of the Star Wars franchise, as well as its enormous potential to drive value across our entire Company for the foreseeable future. Given our unparalleled mix of some of the world's best IP and strongest brands, we're well positioned for continued growth over the long term, regardless of changing dynamics in the media landscape. Turning to a subject that has gotten a lot of attention lately, ESPN and the status of the bundle. In the last couple of months, we have actually seen an uptick in ESPN subscribers, which is encouraging. We're also pleased with what we're hearing from Dish about the response to Sling TV, a light package that includes ESPN. The service appears to be growing nicely and is proving very attractive to young consumers in particular, significantly over-indexing among millennials and has been quite successful in bringing previous cord cutters back to pay TV, along with new subscribers. Sling TV is clearly additive to the robust MVPD universe and our networks benefit accordingly. The popularity of sports and the strength of ESPN add great value for consumers who want lighter packages and we're currently in discussions with new and existing distribution partners to create an array of innovative new services and light packages featuring ESPN. We will continue to focus on subscriber trends, moving quickly to embrace and create opportunities to drive value in the evolving market. It's interesting to note that Nielsen has significantly lowered its estimate of losses of multi-channel households in 2015. Regardless, in any market, we believe ESPN is well positioned to continue to thrive for many reasons, including the demand for sports programming, especially live sports, is undiminished and consumption is at an all-time high. Last year, 95% of Americans with a multi-channel bundle watched sports and 81% of those viewers watched ESPN content. Across all platforms, more than 200 million adults engage with ESPN in an average month. In other words, four out of five adults in this country connect with ESPN on some platform every month, usually more than one. ESPN has the sports that most people want. It holds more national sports rights than all other sports media combined and it has the most important rights secured into the next decade, including the NFL, the NBA, Major League Baseball and the most coveted college sports. Consumers, advertisers, and operators see great value in ESPN. The vast majority of consumers still see tremendous value in the multi-channel universe and they consistently rank ESPN as the number one or number two most valuable channel within it. ESPN's ad revenue continues to grow, thanks to its proven ability to reach audiences that advertisers value most. In fact, ESPN's ad sales significantly outpaced the market, growing three times faster than television advertising overall over the last six years. MVPDs just ranked ESPN number one in perceived value for the 16th year in a row, due in part to the fact that ESPN drives more local ad sales and broadband subscriptions than any other service in the market. The expanded basic bundle will remain the dominant product for consumers for the foreseeable future, but competition from new video services and products will only grow. Better user interfaces and greater mobility make these newer services enormously appealing, especially among young people and many of our brands, including Disney, Marvel, Star Wars, and ESPN, are tailor-made for over-the-top direct-to-consumer app-based video products. So expect innovation and continued pursuit of new distribution opportunities. Our results this quarter clearly demonstrate that our focus on high-quality branded content and franchises to diversify our asset mix, our ability to use technology to aggressively create new opportunities and our ambitious global growth are paying off with record performance. We're proud of our achievements, we're excited about the future, and we're confident in our ability to continue to drive growth across the entire Company. I am going to turn the call over to Tom to walk you through some highlights across the Company and then Christine will take you through the details of our performance in Q1.

Thank you, Bob. Hello, everyone. As Bob just highlighted, the strength of our branded programming networks gives us confidence in our ability to continue to grow our media networks business. In addition, the marketplace offers a range of other new opportunities for us. They include our continued investment in the future of Hulu as both a compelling consumer platform and another active buyer of high-quality content, our investment in and collaboration with Vice, our distribution agreement with Alibaba for Disney Life in China and ESPN's engagement with Tencent in China, as well. Our opportunistic approach also led to our successful Marvel series on Netflix, which helps extend the Marvel franchise and broaden its reach. As importantly, after a decade of strategic value-creating acquisitions and capital allocation, our other businesses have grown significantly, increasing their impact on our results. This purposeful diversification across branded franchises with attractive long-term potential, along with an aggressive approach towards leveraging new technologies and driving global growth, are the key strategies we laid out a decade ago. With branded content from Disney, ESPN, ABC, Pixar, Marvel, and Star Wars, we have the most valuable collection of branded franchises and other high-impact IP in the world and few companies have embraced the promise of new technology as enthusiastically and effectively as ours. The strategies are bearing significant fruit today and continue to guide our path for the future. We have invested heavily over the last several years to significantly expand our parks and resorts business. Those efforts include the creation of Cars Land and transformation of Disney California Adventure, introducing My Magic Plus, and doubling the size of Fantasy Land at Walt Disney World, doubling the size of our cruise fleet, and adding three new lands in Hong Kong. The record results for the quarter, which include all-time high global attendance, record results for our domestic parks, and our best Q1 results ever for Disney Cruise Line, reflect the impacts and value creation of these investments. We're already benefiting from the success of Star Wars at our parks, as well. Since December, more than 6 million guests have experienced new and refreshed Star Wars attractions and features in our parks. And this year, we're rolling out even more themed attractions in parks and resorts around the world, including Star Wars Day at Sea which debuted on the Disney Fantasy last month. Our most important single new initiative at Parks is Shanghai Disneyland, which will have its grand opening on June 16. Tickets will officially go on sale March 28, an announcement that has been incredibly well-received in China. Bob and I were just over there and we couldn't be more pleased or excited with how well our preparations are going. Thousands of new cast members have already been hired, ride testing has started on the attractions and the anticipation is palpable and growing. Shanghai Disney Resort is going to be a tremendous source of pride for everyone involved. It's one of the most extraordinarily creative and innovative projects in the history of our Company which makes it the perfect way to firmly establish Disney in the hearts and minds of the people of China, as well as an attractive and profitable place to deploy our capital for the long term. Our franchise-focused strategy is driving growth across the Company, including our consumer products and interactive business. Star Wars was obviously a huge driver of consumer products and interactive results for the quarter, but it wasn't the only one. We're also very pleased with licensing growth this quarter from Marvel, led by Avengers. As we've discussed previously, we have 11 franchises that generated more than $1 billion each in annual retail sales for the last two fiscal years, making our consumer products business uniquely broad and deep. Our acquisitions of Pixar, Marvel, and Lucasfilm give us some of the most valuable IP in the world. They also brought some of the world's most gifted storytellers and innovators to Disney, unlocking even more creative potential across the Company. Bob touched on the ambitious slate of upcoming Star Wars films, but that's just one aspect of our incredible studio's pipeline. We have two films from Disney Feature Animation this calendar year, starting with Disney Animation's Zootopia, an incredibly original, charming and very funny movie opening March 4. This Thanksgiving, we will release Moana, a comedy adventure with incredible music, very much in keeping with the tremendous legacy of Disney Animation. As you know, a sequel of Frozen is in the works. In the meantime, Disney Animation is creating the first-ever Frozen television special which will air on ABC during the 2017 holiday season. And, following the tradition of Lion King, Beauty and the Beast, and Aladdin, we have a new Frozen stage musical slated for Broadway in 2018. Turning back to Animation, we just celebrated the 10th anniversary of our Pixar acquisition. Pixar and our incredibly talented colleagues there have positively impacted every aspect of our Company and contributed mightily to our success. Looking ahead, Pixar has as strong a lineup of films as we've ever seen. Finding Dory, the long-awaited sequel to Pixar's beloved movie Finding Nemo, opens this June. 2017 will bring us Cars 3, plus another Pixar original film set in Latin America called Cocoa. In 2018 comes Toy Story 4, followed by Incredibles 2 in 2019. From Disney Live Action, this April will bring Mowgli, Balou, and a host of other classic characters to life in a new way with the release of The Jungle Book. Johnny Depp returns this May as the Mad Hatter in Alice Through the Looking Glass and again in 2017 as Jack Sparrow for a fifth installment in the hugely successful Pirates of the Caribbean franchise. 2017 will also feature Disney's live-action version of Beauty and the Beast. In addition, we have a fantastic slate of Marvel movies that extends through the end of the decade. Captain America and Ironman face off in an epic battle when Captain America: Civil War opens in May. The movie features some of the most popular Marvel heroes and we believe it will prove to be one of our best Marvel movies yet. In November, we're launching another compelling character into the Marvel cinematic universe with the release of Dr. Strange, starring Benedict Cumberbatch. Marvel's Guardians of the Galaxy return next year, along with Thor: Ragnarok. In 2018, we will release three more Marvel movies, Black Panther, Avengers: Infinity War, and Antman and The Wasp. And with more than 7,000 characters in the Marvel universe, you can expect the Marvel storytelling to continue. We're excited about the future of all of our great brands and the opportunity they provide to drive continued growth and value for our Company across our businesses, around the world and through platforms both old and new. Now, I will turn the call over to Christine to walk you through our results in more detail.

Thank you, Tom and good afternoon, everyone. It's worth noting again, FY '16 is off to a phenomenal start. We delivered strong revenue growth, up 14% during the first quarter to a record $15.2 billion. Earnings per share, excluding items affecting comparability, were up 28%, to a record $1.63. Studio entertainment had its most profitable quarter ever and that's following record full year results in FY '15. Operating income was up 86%, to over $1 billion. The growth in operating income was primarily due to the fantastic worldwide theatrical performance of Star Wars: The Force Awakens. Home entertainment and television distribution results were also up in the quarter, demonstrating our studio strategy continues to create value beyond the theatrical window. The success of Star Wars at the box office also drove increased demand for Star Wars merchandise. Operating income at the recently combined Disney consumer products and interactive media segment was up 23% and segment margins were up over 500 basis points, to 45%, driven by the growth in merchandise licensing and games, primarily on the strength of Star Wars. On a comparable basis, earned licensing revenue was up an impressive 23% in the first quarter and that doesn't include the deferred revenue from Star Wars: Episode 7 merchandise sold in the fourth quarter last year. The growth in games was due to higher licensing revenue from Star Wars Battlefront, partially offset by lower Infinity results. The Disney Stores also benefited from sales of Star Wars merchandise; however, the increase in the quarter was offset by very strong sales of Frozen merchandise in Q1 last year. At parks and resorts, operating income was up 22% in the first quarter and reflects the favorable timing of the New Year's holiday period relative to our fiscal calendar which we discussed on last quarter's call. We estimate this shifted about $9 million in operating income into Q1 this year that was recognized in 2Q last year. Our domestic operations had another great quarter. We continue to see strong demand from guests, specifically at our domestic parks and at Disney Cruise Line. Attendance at our domestic parks was up 10% in the quarter, and per capita spending was up 7% on higher admissions, food and beverage, and merchandise spending. Per room spending at our domestic hotels was up 9% and occupancy was up 3 percentage points, to 92%. Our Cruise business had its best Q1 ever, driven by higher ticket pricing and onboard spending. And that's despite a three-week dry dock of the Disney Dream. Growth in domestic operations was partially offset by a decline at our international parks, as a result of lower operating income at Disneyland Paris, which was closed for four days in November, as well as pre-opening spending at Shanghai. So far this quarter, domestic resort reservations are pacing up 2% compared to prior-year levels, while booked rates are up 4%. At media networks, operating income was lower in the first quarter compared to prior year; however, operating income would have grown in line with the 8% revenue growth we delivered when adjusted for the timing of the college football playoffs and an adverse impact from foreign exchange. Results in our cable business were lower in the first quarter, as higher programming and production costs offset increases in advertising and affiliate revenue. The higher costs in Q1 which we discussed during our Q4 earnings call, were due to the timing of the six New Year's Eve and New Year's Day college football playoff bowl games, including the two semifinal games that aired on ESPN. These games aired during the first fiscal quarter this year, whereas they aired during the second fiscal quarter last year. Higher programming and production costs also reflect contractual rate increases for key sports rights, including the NFL and college football, partially offset by the absence of rights costs for NASCAR. Advertising revenue at ESPN was up almost 25% in the quarter, reflecting the timing of the six bowl games, as well as the strong advertising marketplace for sports in general. We estimate that ESPN's ad revenue would have been up about 14% adjusted for the timing of the bowl games and the absence of NASCAR. Underlying ad trends remain very strong; however, due to the timing of the college football playoff, ad sales are pacing down in the second quarter versus prior year. Broadcasting operating income was down in the first quarter, as growth in affiliate and advertising revenue was more than offset by higher programming costs and increased equity losses from our investment in Hulu. Ad revenue at the ABC network was up 8% in the first quarter, due to an increase in units sold, higher rates, and a shift in the timing of New Year's Eve programming to Q1, offset somewhat by lower ratings. So far this quarter, scatter pricing at the network is pacing high teens above upfront levels. Media networks' affiliate revenue was up for 4% in the first quarter, driven by a 7 percentage point increase in rates, partially offset by roughly a 2 percentage point decrease due to lower subs and a 2 point decrease from unfavorable foreign exchange rates. Broadcasting affiliate revenue was up more than the segment average, while cable affiliate revenue, adjusted for FX, was up approximately 3.5%. Recall that we have fully lapped the launch of the SEC network and don't have any major affiliate agreement renewals in FY '16. During the first quarter, we repurchased 21.1 million shares for $2.4 billion. Fiscal year-to-date, we have repurchased about 35.5 million shares for approximately $3.8 billion. Overall, we feel great about the start of the fiscal year. Our strategy of investing in high-quality content, supported by the best brands in media, continues to pay off. We're mindful of the evolutionary changes taking place in our industry and we feel we're well positioned to thrive in this evolving landscape, due to the strength, depth, and diversity of our businesses. And with that, I will now turn the call over to Lowell for Q&A.

Thanks, Christine. Operator, we're ready for the first question.

Two questions, one, Bob, you outlined the record results at Film, Consumer Products, and Theme Parks. And I think investors are wondering, can it get any better than this? If you could help us understand what the drivers of growth going forward in that business might be. Tom ran us through all the content that's coming. But are there particular initiatives that increase efficiency or is this just you think content in the future will continue to be better and better? And then any clarification on the cable network affiliate fee growth, 3.5% ex FX, are you guys confident as you look for that revenue growth in the cable network business will be in line to ahead of operating expenses on a go forward basis, if that makes sense?

Well, we're not going to give guidance, Doug. But I will start by saying, as a response to the second part of your question, that we fully expect our media networks, including ESPN, to continue to deliver bottom line growth, which means that revenue growth is going to outpace spending. Obviously, we're not going to give guidance on Film and Parks and Consumer Products, but I think you should look at a few things. First of all, the intellectual property cycle is not only robust, but in some cases, really still growing. If you look at Star Wars and you look at Marvel as examples of that. But we've got an incredible pipeline, as Tom outlined earlier, of Pixar and Disney animated films and Disney live-action. And we also know that those films drive a lot of business across Parks and Resorts and Consumer Products. So I would say that the studio will continue to provide more growth opportunities for the Company and that includes growth internationally, because China continues to grow as a market. Consumer Products is really a great story for this quarter, because that is one business that while it did benefit significantly from Star Wars, we also saw continued success from other franchises and growth, notably Marvel which is a great sign. We expected that Star Wars was going to cannibalize some of our other franchises more and it didn't materialize. And lastly, on the Parks front, we have, obviously, plans to build out. Domestically, we're building Avatar Land and we're breaking ground, in fact soon, on Star Wars Lands in the two domestic parks. And with Shanghai coming on board in June, while there are start-up costs this year, you can expect that that's going to drive growth for Parks and Resorts for many years to come. So we feel really good about how all four of our businesses are positioned. And then I think you have to also consider what the media landscape looks like and that is that there is a voracious appetite for high-quality intellectual property, especially branded. And there isn't a new platform that launches that is not interested in licensing or gaining access to our channels or to our intellectual property. And we believe that we're going to see continued expansion across the world in new platforms and that will create opportunities for us to grow.

I have two for Bob. First one is on ESPN. Bob, could you go back and clear up the differences in an answer you gave in August about what you thought the source of ESPN subscriber clients were versus what Skipper said in the Journal about skinny bundles? We want to understand, how much do you think the decline is from cord cutting versus skinny bundles? I wanted to put those two comments together.

It was a timing issue. When I made my comments last August, we observed some subscriber decline from both skinny bundles and an overall decrease in total subscribers. At that time, based on Nielsen's data, we believed that most of the decline was simply due to a loss of subscribers. However, once Nielsen adjusted those figures, indicating a decrease of about 2 million subscribers or households, we determined that our subscriber loss was mainly because ESPN was not included in the newly launched skinny bundles.

Okay. And then you mentioned this $3 billion Star Wars Consumer Products. One of the questions we wanted to understand is, what do you think the tail is on Star Wars? Will it look like Frozen, where it gets stronger as consumers become more familiar with the product or do you think it's more akin to tied to the release dates of these movies?

Star Wars has always been one of the most popular franchises globally. When we acquired it in 2012, we saw strong sales of Star Wars merchandise, despite the absence of a film since 2005. We anticipated that releasing a new film would significantly boost merchandise sales, and it surpassed our expectations. It's important to note that we didn't launch new merchandise until September, while the movie was released in December. We are still experiencing considerable sales from Star Wars merchandise this quarter, which is not limited to the U.S. We observed interesting consumer product sales even in markets where the movie underperformed. With 'Rogue One' coming out this year and Star Wars episodes 8 and 9 scheduled for 2017 and 2019, along with another standalone film, we don't expect a constant level of demand, but we believe we are establishing a well-known franchise at a much higher level of global interest and sales.

I just have one on Parks and then a follow-up on Cable. First on Parks, we've seen another great quarter of very strong profit growth at Disney's domestic parks. I'm trying to get a sense of how much longer that impressive growth can continue and any color you can provide on how we should think about profitability for the rest of this year, given all the moving pieces with Shanghai. And then a follow-up on Cable, just wanted to check and make sure that you are still comfortable with the high single digit affiliate revenue CAGR over the next three years' guidance.

Alexia, it's Tom. Let me talk about the Parks. Bob mentioned that we have broken ground on the two Star Wars Lands. And of course, we think that's going to be a nice catalyst down the road. Before that, we will open Avatar at Walt Disney World. So we have a cadence of new attractions here domestically that we think guests will really embrace. I think we also see opportunities, given the strong occupancy of room nights that we see, to consider expanding our hotel capacity down the road. So I think there are many avenues for us to continue to grow that business. Of course, Bob talked about Shanghai and the growth that that will drive for us internationally. And remember that while we open this June, we also have significant room for expansion there over time. So we believe that the good news is that guests continue to really embrace our product. We think there's room to grow that product and continue to expand.

Yes, I will take the second one. Hello, Alexia, it's Christine. In reference to your question about the guidance update that was given in the 3Q call back in August, there is no change to that guidance and we're still very comfortable with it.

Two different questions regarding Theme Parks. U.S. demand appears to be unwavering year after year, largely due to your intellectual property and new attractions. With China opening in four months and your evident excitement about it, how do you anticipate Chinese consumers will differ in the long term, beyond just the initial opening?

Well, Jessica, all of our research tells us that our intellectual property and our guest service and our parks experience will resonate extremely well with our Chinese guests. At the same time, we've taken great care to make sure that we designed Shanghai specifically for that marketplace in terms of the layout of the park, the food that we're serving, the type and scripting of the shows that we're putting on. So we're definitely adapting to that market, but we have real confidence that it's going to be a product that's going to resonate and resonate for generations to come.

And then the second question, ESPN, obviously hyper focused by the market. Can you talk a little bit about the drivers of recent sub growth coming from pay TV? Is it more cooperation between programmers and distributors? And secondly, are you close to your minimum thresholds with pay TV operators, meaning, should we be concerned that in your next cycle of contract negotiations, we heard that you said none this year, but is there any concern that the next go round will be more difficult?

We are not entirely certain about the factors contributing to the recent increase in subscriber growth. However, we believe that we have gained from the expansion of certain lighter packages that include ESPN, especially on Dish. It is evident that sports remain extremely popular in this country. A significant number of people watch sports on television across various markets and platforms, particularly on ESPN, making it some of the most popular programming available. Studies indicate that for distributors, ESPN has been ranked either first or second in value creation consistently for 16 years. When surveyed, consumers also rate ESPN among the top two most valuable channels they subscribe to. I understand you are interested in the minimum agreements we have, but I firmly believe that the idea that the expanded basic bundle is fading or that ESPN is losing subscribers is simply unfounded. Sports have enduring appeal. Take the Super Bowl, for instance; it’s a pinnacle event, but consistently, live sports are among the highest-rated programs on television. ESPN holds remarkable licensing agreements with major sports, offering an unmatched lineup of live sports. We are optimistic and actively working with traditional platform owners to incorporate ESPN into lighter packages, leveraging Dish's success as a compelling approach. Simultaneously, we are exploring opportunities with new platform providers emerging in the market. While we cannot disclose specifics about our contracts with distributors, it’s worth noting we haven’t approached the minimum aspects of those agreements in about 15 years. We don't anticipate that future negotiations will be particularly challenging for us, as we bring ESPN to the table with a product that is well-loved. Additionally, from an advertising standpoint, ESPN's advertising growth has been impressive, outpacing overall television advertising growth threefold over the past six years. This reflects a product that is beneficial for distributors, consumers, and advertisers alike, and I am confident it will continue to thrive in the evolving media landscape.

So I'm going to surprise you by not asking a question about ESPN. I've got a couple of questions. First, to Bob, if I can and that's on Hulu. I wondered, Bob, if you could just update us on your current thinking on Hulu. How are subs going right now? Where do you think that business can get to in terms of subscribers in the domestic U.S. market? How do you think about potential international expansion? How does it fit into the Disney strategy? I'm interested to hear your thoughts on that. And then the second question, for Christine, maybe. Christine, you mentioned that there were some start-up or pre-opening costs in Shanghai. I wonder if you could just update us on what that number was in the quarter and how we should thinking about perhaps phasing of those costs in the current quarter, as well? Thank you.

We're bullish on Hulu and that's reflected in the level of investment that we and our other partners are putting into Hulu. First of all, we like new platforms, we like their appeal to young people, particularly millennials. Clearly, the user interface and the mobility of these new platforms is really attractive. It's also a great platform to license our product to and we've actually derived a fair amount of revenue from doing that. We believe that we're going to continue to invest in Hulu and that while I don't want to speak for Hulu completely, their investment strategy is going to be to continue to license off-network movies, et cetera, but also to grow their original programming which they're doing nicely. I don't want to speculate where Hulu goes, but it fits well into Disney's strategy in terms of our investment in new technology platforms and our support of new distribution opportunities.

On the Shanghai question, back on our last conference call, we said the pre-opening costs, you should expect them to be in the $300 million range. Now that's an annual number. We've not broken them down by quarter, but you can expect those pre-opening costs to ramp into the open which is going to be in mid-June. And also, given that we'll be only fully operational for a little more than three months during the year, the pre-opening expenses will impact the full-year results.

Christine, can you help us think about expense growth at cable through the rest of the fiscal year? You mentioned that you've now passed the college football peak growth is now behind us. But how should we thinking about that the rest of the year? And then related, Bob, I'm trying to square the subscriber growth comment with the subscriber headwinds in the queue. And I think part of this may be we're talking Nielsen and then paid subs. But are you saying you expect the subscriber headwinds to abate as we move through the next few quarters, given what you're seeing or am I reading too much into that?

I'll take the second part of the question, then Christine can take the first. What I was talking about in terms of an uptick was recent. So the uptick that we talk about really didn't have much of an impact on this quarter. So what we believe we've seen or what we have seen, recently is that subscriber trends going in the negative direction have abated somewhat. We're not making any predictions about them going forward, because we really don't know. We just feel great about the product and we believe that, again, the protections that many have made are more dire than they should be.

Okay. Ben, on the cable programming costs, as we said on the last conference call, we expect FY '16 cable programming and production costs to be up low to mid-single digits and we're managing, outside of the programming costs, we're managing aggressively other costs at ESPN.

First, for Christine, Christine or Bob, just thinking about the Disney balance sheet, it's the strongest in the media industry, it's stronger than most companies in the United States. When you look at what's going on in the economy and the media economy broadly, do you think about your balance sheet as a competitive advantage in any way? And more specifically, what are the things that you can do to utilize the Disney balance sheet, not only financially, but also strategically, whether it be more acquisition of IP, whether it be incremental capital spending on positive ROI projects, or whether it be being opportunistic with stock buybacks, given some of the dislocation in the market? Thank you.

Yes, when you look at the Disney balance sheet, it is the strongest in the media space. There's no question about that. We do view it as an asset. And when we look at the things that we could do with it, your list of acquisitions, investing in our own businesses, having the flexibility to increase buyback, my answer to that would be all of the above. So we do look at the leverage that we have, which is a little over one time, the credit rating that we have which is a single A rating, as all being very beneficial for us to be flexible for all sorts of opportunities, as you indicated.

Thank you, Christine. And then one for Bob, given the divergence in maybe the narrative, at least, between the non-media side of Disney and the media network side, would Disney ever consider separating its businesses into two, with Cable and Broadcast on one side and the Studio, Parks, Consumer Products, and Interactive on the other? I guess what the question is getting at is maybe you can just remind us of the synergies between the media networks and the non-media businesses at Disney. Thank you.

I'm not going to talk about separating those assets. We fully expected that our media assets are going to continue to contribute to our growth. We also are designed, as a Company, to leverage intellectual property across a lot of our businesses or to leverage the collection of brands nicely in the marketplace. And that also is reflected in the way we operate the businesses from an expense perspective, with consolidation in many different areas. So if you look at the profile of the Company, interestingly enough, since 2009, look at the growth profile, the Company has grown on a compounded basis by 14%. The media networks have driven about 8% compounded a year and the rest of the Company grew 23%. So 8% a year is pretty strong. 23% is extraordinary. 14% is pretty damn strong, too. I think that what that says is really is that over the period of time, we've actually diversified our ability to generate growth and profitability and that was very purposeful. These investments that we made in Pixar, Marvel, and in Lucasfilm and the investments that we've made in our parks were designed for us to diversify our bottom line or our growth. And that was not just across businesses, but really across the world, because a lot of these businesses are global in nature, unlike some of our media assets.

A quick question for Ms. McCarthy, when I look at the buybacks, I think it was a record dollar amount last quarter and second highest, the quarter you just printed. Should investors view that decision to buy back as much stock as you are a function of what you think the intrinsic value of your equity is relative to what it's trading at or is it more a function of the very lean balance sheet and the lack of M&A opportunities, i.e., other, better uses for your cash?

The way we buy back our stock, we do keep an eye on our intrinsic value. So obviously, the amount of stock we bought is an indication that we believe that our stock is a great investment and it is well below that intrinsic value. The strength of the balance sheet does afford us a lot of flexibility, so we're able to react to these opportunities, especially when the market dislocates in our name or the market overall. So we have taken opportunities to be aggressive so far this year and we intend to do it going forward for the balance of the year.

Bob, I want to pick up on the comment you just made, if you don't mind. I was actually playing with the math myself. You talked about the 14% growth since 2009 and the different components of that. Is it wrong to think then that when you talked about an organic growth rate, I'll call it singles and then obviously great contributions from both organic investments in the Parks and M&A delivered something like 14% total growth for the Company. So thinking forward from here, should we think about the Company as a high single grower or do you think the assets you've put in place get you to that double-digit rate that you've had for the past 5-plus years or will more M&A investment be required? How should we think through the natural growth rate from here? Thank you.

You should think nothing but happy thoughts about this Company. I don't know what else to say. We're not going to give any guidance whatsoever. We believe that we've distinguished ourselves in the media sector, not only with our growth these last number of years but with the assets that we've collected and with the growth potential that we've created for this Company going forward. And we will leave it at that.

All right. I didn't mean to ask an unfair question. I understand.

I didn't view it as unfair, but as you know, we won't discuss that. However, I believe it's crucial to mention that the Company has four businesses driving growth: Parks and Resorts, Media Networks, the Studio, and Consumer Products. Not too long ago, we were primarily seeing growth from only a couple of them, and some, like the Studio, experienced inconsistent performance, with profitable years and less profitable years based on the content slate. I’m not implying that we will see growth every year, as there will naturally be fluctuations. However, the contributions from these businesses are expected to be more stable and consistent than what has been observed in the past. No, I don't think there's anything I can add to that. Sorry.

Barton, thank you for the question. And 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 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 Securities and Exchange Commission. This concludes today's call. Have a great rest of the day, everyone.