The Walt Disney Company (DIS) Earnings Call Transcript & Summary

Good afternoon, everybody, and welcome back. We could not be more thrilled to have Christine McCarthy here with us today, representing Disney company. Chris is the CFO and Senior EVP of The Walt Disney Company.

So Christine, this has been quite a year for Disney so far. You closed on your acquisition of 20th Century Fox, I guess, 1.5 years ago. And since then, you've assumed full operational control, not financial but full operational control of Hulu. You've launched Disney+; undergone a reorganization of the company management, that was senior management; become a major competitor in online streaming. You have over 100 million direct-to-consumer paid subs, of course, in your trio of services. But at the same time, you faced a number of significant COVID-related headwinds, needless to say, including the complete shutdown of the theme parks, complete shutdown of production activity and retail. Can you give us an update on how COVID is impacting your businesses today? What's changed since Disney reported earnings in August?

Sure. Thanks, Jessica. Well I'd like to say there's never a dull moment in our magic kingdom. But seriously, COVID has really thrown a wrench into a lot of our businesses. And as you mentioned, parks had to close, cruise ships stopped sailing, productions ceased. Live sports weren't continuing, and so there were no live sports on ESPN. So we really did have quite impact and felt it very, very early on in the COVID world that we're living in now. We're also -- I'd say the one thing that's different -- not different, but I think has just put a real spotlight on it is that management has to be nimble and it has to be flexible and it has to look at new ways of doing things that we did in the past a certain way. I think the flexibility is key. And we continue to do that as we look at restarting some of our businesses and just adjusting the way we're doing business. But just a couple of examples. As you know, parks was -- all the parks were closed globally, and now they have begun opening up. So we have had to implement a lot of social distancing, a lot of precautionary measures for health and safety. We have done those, I would say, very well in the parks that are open. They're not all open, but that will continue. And we continue to work with the governments, state, local, county, national governments, especially overseas, on how we are looking at that business, resuming full tilt. One of the businesses that I just want to mention as probably the last to come back for us will be the cruise business, and that has to do with just the nature of cruising. And when we do get back in, there will be social distancing, whatever is required at that time. But also the booking period for cruise tends to be longer. So that's probably the one that will be the last business to resume for us. Our legacy media businesses, the one thing that I would say COVID has had an impact on is we saw and have seen, as we all know in the media business, a decline in the subscriber base from traditional multichannel ecosystem. And what we saw post-COVID was an acceleration of the decline. And we don't yet know if the acceleration was due to COVID or if that will basically revert to the way it was prior to COVID. So that could be just a secular trend that will continue, but that's another impact that COVID has basically put on our watch list more intensely than before. As you know, direct to consumer is something that Bob Iger really focused on for many years, really starting back in 2015, when I first started as CFO. And we really looked at the changing universe of the way consumers consume media. And we were one of the early movers in addressing those concerns and the subscriber declines. And Bob Chapek has continued with that, our direct-to-consumer emphasis. And one of the things we've done with our direct-to-consumer businesses have adjusted even what we had intended to do specifically on Disney+, and that is that we've moved up the SVOD window for some of our movies. So you saw Frozen 2 and Onward and The Rise of Skywalker come on the service earlier than what they would have necessarily under the old paradigms. We also added some incremental content, things like Hamilton and Beyonce's Black is King. And we also moved some selected titles from the film studio to go direct to Disney+, things like Artemis Fowl, The One and Only Ivan. And of course, you've seen what we recently did, having premier access for viewing Mulan. And we believe that, that was the right thing to do given the COVID environment that we're currently operating in. So we'll continue to adjust our strategies, Jessica, as we need to. But once again, flexibility and being nimble is key.

So we'll get into each one of your divisions, of course, in detail. But outside of the near-term COVID disruption and the march back -- the slow march back to normalization, have your key strategies and financial priorities over the next 3 to 5 years changed at all?

I would say no, with the exception of we're looking at more investment in direct to consumer because we have announced that we are accelerating our launches and are going deeper faster. But in general, we're still investing in our businesses the way we always have. We're investing in -- we'll continue to invest in theme parks. We believe that those investments globally have really driven strong returns on capital for us. And you know that business, how well it's performed. Not in the COVID world, but for the last several years, that business performed extremely well in terms of not only revenue growth but operating income growth and improved margins. So we'll continue to invest there. And then we'll continue to invest in the direct-to-consumer initiatives because they're working out so well for us right now.

Yes. So let's go through the divisions because there's a lot to talk about. So as you said -- I mean this is just unprecedented having the parks shut down, but you have a number of parks open now, Shanghai, Paris, Tokyo, Orlando. COVID cases have gone down finally in Florida. Are you seeing a change in consumer behavior there?

Well the consumer behavior that we looked at -- we do a lot of surveying ourselves as well as we look at the other consumer research done on habits and consumer behavior, what people did before COVID, what they intend to do as they would now when we don't live in a world with a vaccine -- an effective vaccine and what the intent to do things like go to a theme park, go to a movie theater, go to restaurants. So in Florida, we're not going to update more than we did on the earnings call in early August. But we have seen -- we're opening up and people are coming. As we mentioned, there was a spike in July in Florida, and that had an impact on the visitation that we had expected because people couldn't -- didn't choose to necessarily travel to Florida. So what we did was we shifted to more local visitation as well as opening it up more fully to annual pass holders. So we continue to, once again, adjust the business, depending on what issues we're dealing with. And once again, this is such an unpredictable virus that we have to stay flexible.

And how is the reopening of hotels -- the Disney hotels progressing in Orlando?

Well we're going to adjust -- we're really looking at maximizing -- really utilizing that yield strategy. So we're not going to be opening up things if we don't have sufficient demand. But by the end of this fiscal year, we expect to have a little over 50% of our hotels -- resorts opened. And that also includes hotels, DVCs that are being utilized currently with the NBA for housing the NBA for operating in the bubble down in Orlando.

Right. And when do you expect the 3 new cruise ships that were originally scheduled for 2021 through 2023 to be delivered?

Well the cruise ships -- COVID has had an impact on lots and lots of businesses and lots and lots of supply chains. And the shipyard we utilize for our cruise ships, MEYER WERFT, was impacted and we encountered a delay. We're in negotiations and discussions with the shipyard to finalize dates. But as soon as we have those, we'll let -- we'll make an announcement when we expect the fifth ship, which is the first of the 3 to be delivered. But it is delayed from what we had originally anticipated.

Of course. And probably, as you said, it's going to be the last business to come back. You lowered your CapEx guidance for fiscal 2020 to roughly $4.2 billion, and that's largely due to lower spending at the theme parks and resorts. When you think about the next few years, have your investment plans for new rides and attractions meaningfully changed?

Well what we've done, Jessica, is we've really prioritized some of our investment spending. Things that were -- I call it in-flight but they were in construction, some of those we continue to finish out even during this period. But the ones that we're really focused on are things like the Star Wars hotel that we've discussed publicly that will be in Walt Disney World, that's a priority; completion of the Avengers campus in Disneyland; as well as Mickey & Minnie's Runaway Railway, which is also in -- it's a priority project for Disneyland. There's one in Florida that recently opened just before COVID hit, and it's been very, very well received. The interesting thing is, Mickey & Minnie's Runaway Rail is the first Mickey attraction that has been in a park. When you think about Mickey's all around the place but having a designated attraction, this is the first one. And it's once again -- for true Disney fans, they like it very, very much.

Right, right. Let's move on to direct to consumer because we still have a lot of businesses to cover. As we said earlier, you have achieved a groundbreaking milestone, 100 million direct-to-consumer paid subscriptions. And Disney+ alone surpassed 60 million in less than a year. I mean it's just astounding really how quickly you've grown. So what led to the strong performance relative to your -- maybe not internal expectations but your public expectations? And based on the acceleration, how are you thinking about DTC subs? How are you thinking about breakeven?

So I think it's fair to say that we are thrilled with the way Disney+ was received and adopted by many consumers and the number of subscriptions that we had. But that result that we achieved early on and continued to grow subscribers, that exceeded our expectations, too. We weren't sandbagging. We weren't sandbagging and just tended to blow away the guidance that we had provided. But I think it really speaks to what Disney is really known for, and it's really known for quality content. It's known for its brands, its franchising and great storytelling. Now we had planned to do -- and once again, COVID threw a wrench in this, but we had a lot of really great content that was queued up to be produced and have a nice cadence as it was put on to the service. And that has slowed a bit because we haven't been able to do a lot of those productions. But what it shows is that -- but we have a big library, too. And the library, a lot of people haven't seen a lot of the content for years and years and years, and we do have some new content. And we are -- one thing, I think people certainly loved at the beginning when we first launched Disney+ was The Mandalorian, and we just announced recently that Mandalorian 2 will be available at the end of October on Disney+. So we're still able to do some things and finish them out. But once again, we will continue to invest in content for the service because it's a combination of this great, rich library that we have but also being able to provide new original content.

Yes. What have you seen so far in regard to churn on Disney+? And then, I guess, besides that -- what have you seen with regard to churn?

Well churn is inevitable and we watch it. Now one of the nice things that we have that we have not been able to avail ourselves before we went -- have these direct-to-consumer relationships is we have a lot of data. We have a lot of data on how people are consuming, when they consume. We know if someone is churning, is it because they just don't use it. But our -- the churn that we have experienced is in the range of what we had expected, and we're pretty pleased. And we know that there are certain things that we're going to focus on to try to mitigate some of the churn. And a lot of that will have to do with some of the new programming that we'll be focused on and really targeting to keep some consumers and some subscribers who may have been more likely to churn. But once again, having that data is really, really critical because, once you have it, you can sort of address the concerns and really fulfill the needs to keep a subscriber on the service.

Absolutely. But how much more investment are you planning to contribute or invest in the next few years based on early indications of customer lifetime value?

Well I think we're not going to update that now. We will give an updated number at our Investor Day for what the investment spending will be. But we're committed to having programming that's going to be produced across our content engines and our content productions, entities that will fulfill the -- basically, the needs of our subscribers or the desires of our subscribers. So we're not going to update that investment number now, Jessica, but we will be giving more guidance on that in the upcoming Investor Day.

Okay. How much traction are you seeing for Disney+ in major markets where you recently launched, markets like India, parts of Western Europe and Japan? I mean these are markets that -- where you have a huge consumer following like a real affinity to Disney brands. And Japan, of all markets, I always think of as like -- is one of the highest like Disney -- I don't know, how do you say, Disney affinity, I guess, is the way to say it. But once you fully roll out the service, will it be bundled with other telcos besides NTT DOCOMO?

In Japan? Well Japan is an interesting case. So the -- we did a limited launch in Japan, which was through NTT DOCOMO. And we still have it on our launch road map for doing a full launch outside of just NTT DOCOMO. And you're right, Japan, the Japanese culture, it -- Disney resonates extremely well. If for -- whatever it taps into in that culture, the classic characters, just the Disney folklore, it really does resonate well. But that, we will continue. But in general, when you asked about our international launches, I think it's fair to say that we have been -- all of the launches have exceeded our expectations, just like the U.S. exceeded expectations. Once again, the U.S. is such a large market, and we're based here and everybody knows Disney if you're living in the U.S. But all of the international launches have exceeded expectations thus far.

And then what can you say about the upcoming launch of the Star-branded -- or the Hulu version now being called Star, in international markets? Like just -- you said you're going to launch in 2021. Will you launch in all of the same markets as Disney+? And can you talk about the plans for pricing or potentially bundling the service?

Well we're in the process of getting -- of refining the launch plans and the investment spending. And we will, once again, at the Investor Day provide a full road map for how that is going to be rolled out in the international markets. But Star will look different in some of the markets. It's not going to be a one size fits all. It's really going to be based on the dynamics of each individual market. And I wouldn't say -- it is not going to be like every market will be different, but there'll be a couple of different versions of Star. And we will -- we intend to have that be a general entertainment, and we'll, once again, get more specific at the Investor Day, along with how we're going to roll it out. But we do think there's a lot of synergy in the markets that we have already launched Disney+. So we think there's some good synergistic value that we'll be able to basically draft behind.

I'll raise one more on DTC, and then I'll move on to another division. How do you think about pricing for your DTC services in general? How much pricing do you believe -- Disney+, Hulu and ESPN+, how much pricing power do you think that they have? And when does it make sense to raise prices? How do you think about it as a company?

Sure. It's clear that we priced Disney+ at a very accessible price point initially. There is pricing power, we believe, but that will come as we put more original content into the services. So more content, more -- just the volume of content. And once again, we've said we're doing it and we had plans, and there would have been a lot more original content on now if we had not been shut down for COVID production -- I mean productions shut down for COVID. But when more content is on the service, we'll have some pricing power. And once again, it's not necessarily every market would be done the same way. We're going to also adjust it for market dynamics in these various markets, especially outside of the U.S.

Okay. Let's move on to the studios. Now that the studio -- sorry, now that the majority of theaters are finally open -- or maybe not open here in New York, but most theaters are open and the first major box office film, Tenet, has finally been released, what is your outlook for the remainder of the year and 2021 with -- in terms of your film slate? I mean obviously, some of the movies have been moved direct to Disney+, but what can you tell us? What's changed?

Well some movies have moved to Disney+. And once again, when all the movie theaters were shut, we made the decision to move a couple, Artemis Fowl and The One and Only Ivan specifically. And as I mentioned before, we did move up the SVOD window to accommodate an earlier placement of Frozen 2, Onward and The Rise of Skywalker. But when you look at the studio, 68% of the country is open. Now what's missing there is some big major markets. California, so you're missing the big Los Angeles market, you're missing San Francisco. You're also missing some big markets in the Northeast, particularly the New York area. So when we look at that, when you only have, call it, 2/3 of the countries' theaters open and you have consumer behavior -- and when we have looked at the consumer behavior, there's probably about 40% that say -- people say they will go to -- into a theater to watch a movie, but you have to look at the demographics that some of our movies appeal to. And especially the family-friendly -- the family movies, I don't believe you have 40% for people with young children. It's probably not 40% for older people or baby boomers, some of whom have a very, very strong Disney affinity. So I think you have to look at: Where are -- what demographic are we targeting? And does it make sense for us to do theatric releases? Or would we do something that is kind of a hybrid? But we look at these on an individual basis. And once again, it's not one size fits all. We're dealing in a world that it changes more frequently than we would like because you do have these surges of infection rate across the country and across the world that it's not steady state. And so we'll once again look at our release slate. But we do have a pretty robust release slate scheduled upcoming. We've got -- for the holiday season this year, this calendar year, we have Death on the Nile. We've got Black Widow. I'm just looking at my release slate here. We've got Soul, Free Guy and West Side Story, which is -- I'm really excited to see West Side Story. It looks fabulous to me. And in '21, we have also some high-profile titles, things like The Eternals from Marvel and the Kingsman, both of those are slated at this point. But once again, things can change. They're slated to come out in February. And then we have Raya and the Dragon (sic) [ Raya and the Last Dragon], that's an animated film, in March. And Shang-Chi and the Legend of the Ten Rings and Cruella in May. And then we also have Luca, which is a Pixar film, that's slated for June. So we've got a pretty robust slate. And once again, we hope that the theaters are open. A lot of our films are films that the people who choose to go to movie theaters, the experience is very different than what they would have at home. So when you look at our box-office numbers over the last couple of years, we have -- we drive a lot of people into theaters to see the Disney films. These tent-pole films become kind of part of zeitgeist of culture, whether it's Marvel, whether it's Black Panther that was a couple of years ago, but these are movies that people like to see in theaters and talk to their friends about. So once again, we hope the theaters stay healthy and can rebound from this COVID world we're living in now.