We believe that Disney’s success in creating shareholder value depends on our continuing to create exceptional entertainment content, experiences, and other products that consumers around the world embrace and on how well we extend and capitalize on our Company's unique set of assets and competitive strengths. These competitive advantages include our strong portfolio of brands, led by Disney and ESPN, and properties like Disney Princesses, Cars, Toy Story, Pirates of the Caribbean, High School Musical, Hannah Montana, and of course Mickey Mouse and Winnie the Pooh. These franchises provide a recurring base of business, as well as content which can be extended into new platforms and technologies and into new markets around the world.
To better capitalize on our brand and content strength, we manage our businesses in an integrated manner. This allows us to both successfully launch new branded content and use our many assets as promotional platforms. We believe that this integrated approach drives higher returns on successful content than our competitors can achieve. We also possess a strong balance sheet that provides us with the flexibility to seize opportunities that can enhance our competitiveness and create superior returns. Allocating capital profitably and managing our day-to-day operations to maximize both our creative and financial success are the most important ways that we serve the owners of our Company.
We use three primary financial metrics to measure how well we are delivering value for our shareholders: earnings per share, return on invested capital (ROIC) and after-tax cash flow. For the fifth consecutive year, Disney delivered solid performance in each of these key measures. An investment in Disney over the past five-year period has yielded a compound annual return of over 19%, roughly 360 basis points better than the S&P 500.1 During the same period, our operating margin increased by approximately 10 percentage points.2
While we strive to achieve near-term earnings growth, we also seek to enhance the Company’s long-term competitive positioning. Since strategic investment can sometimes influence near-term returns, we assess trends in financial metrics over time rather than looking only at short-term results.
Our first priority in allocating capital is to fund strategically attractive investments that can drive future growth and provide strong returns over time. These opportunities can include internal investment in existing and new businesses or acquisitions. Our brands and franchise portfolio provide us with wide reach across different consumer demographics and entertainment platforms. We plan to continue investing to strengthen our creative portfolio by developing high-quality content. We also plan to further build our creative pipeline and strengthen our brands on a global basis to ensure we keep diversifying and growing our established businesses.
These initiatives include investment in Disney and ESPN television, internet, video games, and mobile content and the reach of our distribution around the world. For example, we plan to invest at least $100 million over the next two to three years to produce local, Disney-branded films in key international markets, including China, India, and Russia. We are creating ABC programming for both domestic and international distribution, and we expect to continue investing in our video game publishing activities, with particular emphasis on Disney-branded games.
In addition to continued internal business development, we expect that, over the next 3 to 5 years, we will find additional attractive acquisition opportunities that will meet our financial and strategic criteria.
We recently have made several small acquisitions to enhance our position in key long-term growth areas, including online entertainment and international markets. Our largest acquisition this past year was Club Penguin, a leading online virtual world for kids age 6 to 14. The acquisition of Club Penguin provided us with a great opportunity to significantly strengthen our online capabilities and presence, and the transaction should be accretive to Disney’s earnings in the first year. In addition, we expanded our international TV business by acquiring NASN in Europe and Hungama in India. Smaller acquisitions of online Web sites for ESPN, namely Scrum.com (rugby), Cricinfo (cricket) and Jayski (NASCAR), enhance our coverage and audience reach in key sports.
We also continuously assess whether our portfolio of assets allows us to maximize shareholder value and aligns with our strategic priorities. During the year, we completed the disposition of the ABC Radio assets, as well as the sale of our stakes in E! Entertainment and Us Weekly, which demonstrates our focus on aligning our assets with our growth strategy.
Our success in 2007 was broad-based. I'd like to highlight key activities in each of our four major business segments that contributed to our record earnings in 2007 and position us well for continued long-term growth.
1 As of September 28, 2007
2 Operating margins increased from 12.5% in 2003 to 22.0% in 2007. Operating margin is not a financial measure defined by GAAP and is equal to Aggregate Segment Operating Income as a percentage of Total Revenue. As a reconciliation of this non-GAAP financial measure to an equivalent GAAP financial measure, Income from continuing operations before income taxes, minority interests and the cumulative effect of accounting changes as a percentage of Total Revenue increased by 14 percentage points from 7.8% in 2003 to 21.8% in 2007. The reconciliation of Aggregate Segment Operating Income to Income from continuing operations before income taxes, minority interests and the cumulative effect of accounting changes is available at the end of this Financial Review.
