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

Okay. Great. Welcome back, everyone. Thanks for being here. Before we get started, I'm in charge of giving The Walt Disney Company forward-looking statements, okay? So certain statements today, including statements about the company's plans, expectations, strategy or business prospects and other statements that are not historical in nature may constitute forward-looking statements under securities laws. The statements are made on the basis of management's current views and assumptions regarding the future, and management does not undertake any obligation to update them. Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from results expressed or implied in light of a variety of factors, including macroeconomic and industry conditions and execution risks. And other factors contained in the company's Form 10-K, Form 10-Qs and other filings with the SEC as well as the legends you see here on the company's IR website. Okay. So with that, I'll do that again later. Thank you.

Okay. So Christine, my first question is a big one. It could take a whole hour, but let's start here. What actions and decisions are you taking today to improve the Disney Company's financial performance going forward?

That is a very good question. Okay. So settle in everybody. So this is a great question, and I know we just had earnings last week, and I would like to clarify a few things. But there are things that we are doing as a management team that are very responsive to the current environment that we're all working in, plus facing some of the challenges we have as a company. Now the things that we have firmly in our control are things like our structure, the way we are structured for managing the company as well as the cost structure. And as I said in our call, we are well on our way to meeting or exceeding the $2.5 billion of SG&A savings that we put out to the market previously, and feel really, really good about what we've done to date and what will still be achieved in the balance of this fiscal year that you'll really see the benefits in '24. So that's something that I just want to lean into a little bit. And then Bob Iger is really addressing the content spend. He's looking at not only what we're spending, but how we're spending and where we're investing those content dollars. So those are things that are firmly in control of the company. And I think the benefits of those, the more immediate one will be the SG&A achievements that we deliver. Content spend will be a little bit longer to really see because of the time it takes for projects to go into development, production, post-production and then go on things. But it's all underway. When we look at our businesses, there's one thing I want to clarify a bit, and that is our sub growth. So we are looking at our sub growth, and I want to differentiate because Alexia Quadrani, many of you know Alexia, she's our Head of Investor Relations. But last year, we talked about -- we were always announcing sub growth as one number. And we broke out Disney core plus -- Disney+ core subscribers versus Disney Hotstar subscribers. And the reason we did that is because there's very, very different dynamics in terms of ARPU and the potential for revenue generation. So we did that. And I think the headline number, and I know a lot of people in this room, you've looked at the numbers, you've looked at our Q, you've gone through the press release. You've looked at the charts, and you know that, that when we broke it down like that, you saw that there was a decline of 4.6 million subscribers in India. And collectively, we lost 4 million subscribers globally, which meant that core plus -- Disney+ core subscribers were actually up. They were up less than 1 million. We wish it was a larger number. We hope to achieve that, but we did a price increase. And you saw some attrition there. Rita will talk about how -- what the prospects for our ad-supported tier look like going forward. But once again, we just started the ad-supported tier back in December. And she's looking at that and things we can do. And we are also looking at pricing overall and pricing for the ad-free, which is really a premium product, in comparison to the ad-supported product, which is at a much more accessible price for if they choose to watch ads. And we know from our research that a lot of people don't mind watching ads. So it's a consumer proposition that people can avail themselves of. But I just want to focus on that core -- Disney+ core subscribers that we believe that, that is something that, especially the second half of the year, the latter part of this second half just based on our really strong content that's coming on the service, both originals as well as some of our theatrical releases, which will then come on Disney+ in the pay one window. And so when you look at what the -- our development teams and our content teams have done, led by Dana Walden and Alan Bergman, we've got some really good content that's coming on. And once again, the timing of the content releases, we're still -- we've been in this business for 3.5 years. We've got content that's releasing later in this fiscal year that we really think is going to drive subscriber growth and also be favorable to our churn metrics. So that's on Disney+, but it's also we're looking at optimizing as Rita will talk about later, that ad tier. And also, we've talked a lot, and Bob has articulated this really looking at our pricing structure. And we don't feel that where we are today, we haven't optimized that pricing algorithm. When you think about the different levers, there are some different markets, but there's also the ad-free and the ad-supported. And looking at the consumer proposition and where you want to lean into the differential there. So I think there are some things we want to refine. When we look at the other elements of the business, Linear has gotten a lot of attention. I know that there is focus on subscriber growth. That is -- or subscriber decline. That is something that's impacting the entire media sector. Advertising is cyclical. And once again, I think everyone is pretty much down on advertising. I mean every media company had to report results that were lower year-over-year. But the fact of the matter is advertising will come back. And just like we did things during the pandemic related to some of our businesses, predominantly Parks because those businesses were -- we had to really address some structural things there. On the ad side, Rita and her team and Aaron LaBerge, who runs our technology, that team is looking at, once again, leaning into more refinements on our ad stack technology and data platforms. Rita can really address this in detail. But I think there's going to be some really exciting developments and refinements that when the ad market does become more robust, we are very, very well positioned. And once again, we just had our upfront yesterday I think the reception from the advertising community was very positive, and I feel really good about where we are in terms of what we can deliver in the platforms that Rita can sell into. I'd also like to address our Parks business. Parks, I've said this before, this is a management team that has really delivered strong results. This is a management team that had to deal with businesses that were shut down for the better part of, call it, 2 years. Disneyland was closed for over 400 days. The parks in Asia were closed for a significant periods of time. We looked at the cost structure of that business. And that cost structure is one that has allowed us to really come back out of the pandemic very, very strongly. We've looked at our offerings. We continue to invest in our parks. We continue to look at the guest experience. We've had very, very strong results, and we continue to look at that as a growth business and a business in which we will still continue to invest. And where we will be investing is going to be very consistent with what really makes Disney a unique business in this industry. And that is that we have ways that we can use our intellectual property, our franchises, the ones that really resonate with our consumers, and we have more data than we had before on -- we know in something previously before we were in the direct-to-consumer business. Take, for instance, our theatrical films that we released. We could rely on Box Office to know whether it did well relative to a comparable film in that genre. Now we have much more rich data because we have Box Office for those films that do go theatrical, but we also have the consumer data that we get off of primarily Disney+ on how often are people watching it. When they go on, is this a movie that they -- or a franchise that they're going into for the first time that they're on the service? Do they watch it multiple times. And that better informs our creatives and our imagineers to lean into things that we can really exploit in our theme park business where if we know something is truly resonating, something that we didn't have this advantage of that direct consumer data would be something like Frozen. So Frozen was a few years ago. We had tremendous Box Office performance. We knew it resonated. We had incredibly strong consumer products coming out of that franchise as well. And you remember, we were always comping against Frozen for, I don't know, 3 or 4 years, it seemed. But we have -- Frozen now that's in Paris, it's coming to Paris. It's -- there's tractions in our domestic parks. And we also will have more Frozen attractions around the globe. Now we base that on what we had at the time. But now with new franchises and strong IP we can also incorporate that consumer data to know how deep it is and in what parts of the world, it's most significant in.

Okay. Let me go to Parks. We'll go through some divisions. And I think you found it is interesting that investors are worried about the parks business is over-earning. Quote "over-earning", at this point in time, mostly due to pricing actions. What examples can you offer that Parks segment is now in structurally stronger footing than maybe previously and it's just not all about price right now.

Yes, there's been a lot of attention on our parks. And that concept of over-earning as a CFO, I've done this for many decades in this industry and others. Over-earnings, a kind of odd concept, but I get it. I think the -- 1 of the things I'd like to just point out is that we are in an inflationary environment and the macroeconomic environment we are in, we're very aware of that. So as inflation impacts everybody's life, whether you live on a budget or don't. The inflationary impact of day-to-day living is something that we're very much aware of. So when we look at things in our parks, the one that gets the most attention, Michael, is admission price. And when you go back and look at the pricing increases that we have taken in our admission price, on a CAGR basis, they're pretty much around inflation. So if there's a perception that there is -- when you look at our per cap growth, which has been extraordinarily strong in the last couple of years, when you compare it to the last kind of base year, which we look at as fiscal '19. When we look at that, the per cap growth was great. It still will be growing, but it's going to be at a much smaller percentage because we're comping off of higher numbers. But where we've seen the real contributors to that, that per cap growth, sure, a little bit of it is in admissions. But it's also in experiential things that people do in our parks like experiential food. I know that sounds like the kind of weird concept. But if you go to our parks and you go to Galaxy's Edge, there's, there's unique product offerings for food and beverage and that will be Star Wars related or they may be Avengers related and Avengers campuses. But there are really things that people want to Instagram and post, and they're very exciting to -- it's part of the experience overall. Merchandise is also something that has -- I think we've really upped the game and things like, you can buy your T-shirts and in your hats and things like that, plush animals, but you can also do things like the lightsabers. And that's part of an experience. It's not cheap. People spend the money, but that's all -- whether it's food and beverage, whether it's merchandise, those are things that are consumer choice as well as availing yourself of if you want to spend a little bit more to get more in, in a given day, so you can use things like Genie+. Yes, you pay for it. But some people, they have a limited amount of time. They're not going to be back for X amount of months or years. So they want to get as much and as they can. So that's also driving those per caps up, but that's consumer choice. When they're in the gate, they're spending their money as they choose to.

And Genie+, one of the questions is utilization of the parks, how it's changed because Genie+, you talk a bit about maybe previous times, pre-Genie+ and how maybe the park capacity utilization has been different.

Yes. So you really have to look at pre and post pandemic on this. And once again, when you're really looking at structural changes, and how you're looking at the business, when you're running a park 365 days a year, which is what we do globally around the world, you can't -- it's harder to make changes. But when your parks are shut down, so you have to look at the silver lining of COVID. And for us, in the Parks business, it was taking the opportunity to look at things like addressing capacity. And because when we got back into allowing people into our, our theme parks around the world, we couldn't do it just open the gates. We had to do it with a reservation system because we were limited. So you had 10%, 25%, 50% capacity, depending on what jurisdiction you're in. And that allowed us to utilize to develop a reservation system, but it also allowed us to more, I would say, adequately look at load and demand. And it allowed us to balance labor. It allowed us to look at peak periods, and we've got a lot more information on what people were doing when they were there. So as we were able to allow more and more of our guests into our parks -- that is something that we've been able to cut off those big peaks, the days when it was really crowded when the parks had to not allow any more guests in. We know we try to balance those periods and spread them around some days of the week and times of the year. And we can do some of those things through promotional pricing, and just sort of packaging, but it's spreading that demand a little bit better and having it be a better guest experience when our guests are in the park.

Okay. Last Parks question, then go to networks, for sec is, the recovery of international parks and international visitation in Orlando has lagged domestic measures, it just come back faster. But you start to see some signs of life last quarter. Can you talk a bit about how those factors could be meaningful drivers of future growth for the Parks.

Sure. For the last few years, our Parks results have largely been driven by strength in domestic parks. It was not our -- international locations were not contributors for a few reasons, one of which was we have Shanghai, Hong Kong and also Tokyo, which we have a royalty agreement Oriental Land company in Tokyo. Those parks were closed for significant time, much longer than our domestic parks. Paris also had on and off with COVID, allowed to -- what was going on in Europe COVID impacted their recovery. But the recovery that we've now seen, as we're kind of looking in the rearview mirror for COVID, has been very rewarding to see it. Because consumers had the same pent-up desire to be in our parks as they did domestically. So as we have been able to open the parks and keep them open, we have seen very strong visitation and spending and utilization of our hotels in all of the international parks. Paris, I'll just like -- I'd love to say this because before we restructured Paris several years ago to eliminate the third-party debt, and the third-party equity owners. We had a lot of constraints. We had to operate under. We took care of that in the mid-20s. And now we fully own that park, and we're operating it like we do our domestic parks, and that park is doing incredibly well, and it is its 30th anniversary. And it's really wonderful to see the performance there because it is significant in attendance per caps and per caps across the board for merchandise, and food and beverage. In the Asia parks, they're doing very, very well. And once again, we look -- we can look at it forward bookings. And those are very strong as well. So we feel really good about our international park business being an additional contributor, not just relying on our domestic park performance. The other business that is incredibly -- has rebounded. And I will say, I admit, far better than I thought it would just because it had been shutted for so long is our cruise business. So as you know, Michael, we launched a fifth ship last fall, the Wish. And with that, I think a lot of consumers looked at our cruise business again, those who could get a booking on the Wish. The book -- Wish has been very significantly high occupancy since its launch. But all of our other cruise ships have their utilization, and their capacity is quite high. And we're looking at that, and it's really -- I would use the word snapped back this year. And it's very, very strong, and that's a contributor to our Parks business as well.

Okay. So if we worry about Parks over-earning, we're going to switch to Linear Networks when that's concerned about, hey, when is this going to stabilize. So we're even struck by the margin compression in Linear Networks this year. What factors are driving that weakness? And can you differentiate between maybe the ESPN networks and the non-ESPN networks, right, because it's just all put into one bundle right now as of the [ reporting ] bundle?

Yes. There's a couple of things here and there was one -- some nuances in our quarterly earnings. But one of the things is some of the timing of sports rights this past quarter. So we had a step-up in some sports rights that had to do with -- and those of you who are big college football fans know that when our quarter ends at the end of the year, and you probably hear this, and I -- it just flows off when I say it now in earnings calls, but the college football playoff season. Sometimes, we have more games in December, the December quarter. And other times, we have more games in the March quarter, that starts on January. And because of the way that we close our quarters, sometimes those aren't on December 31. It can be before or after just because of the way we close our books. So this year, there was some college football playoff timing that increased expenses. And there's also the new NFL contract that just had some shifts in some expenses. One of the things I would like to note is that Jimmy Pitaro and his team, when they renewed the NFL contract last year, they structured it very well, but we also will not because of the ending of one contract, we're kind of at a bridge year. So the ending of one contract going into the new contract, you're not going to see a sharp step-up in that. It's going to be more gradual. But you did see some of that in this first quarter.

This is a weird year because you were with 1-year contract came out on.

Yes, yes. And so it's what we call a bridge year. And so there is some noise in that. We try to break it out a little bit, but I just want to -- that because sports rights are a significant cost driver in Linear, which sits in the ESPN, but I just wanted to call out that. But the other thing in Linear is advertising. Advertising and Rita is going to address it.

That's a segue.

As soon as I stop talking, but she's going to address it, but when we look at real strength in advertising, yes, addressable, programmatic digital is a growth area. But the other area that we are fortunate to have the sports rights we have and to have the brand that we have in ESPN. Advertising for live sports is strong. And Rita can address that. Fortunately, and I'm from Boston. So I was thrilled to see the [indiscernible] make it as far as they did, but 7 games. I like 7 games better than 6 games or 5 game series. It's a little nail biting, but that's okay. And so anyway, I just think these long series are great for us in the short run, but it's really the strength of -- these are, series can come and go. It's a strength in the demand for live sports that is something that Rita can really lean into with her sales team.

Okay. Well, thank you, Christine. Rita a segue to you. Great. Thanks for being here. I can for those who don't know. You had your upfront last night. I'm sorry I missed it. We had a conflict. But can you give us an update, as Christine was just laying it out of the current landscape and the health of the ad business as you see it right now?

Yes. Well, Christine touched on it, right? We have leaned into sports and streaming for the last 12 months, it's where you see the marketplace moving. I'm still very bullish on our Linear business, by the way. I think when advertisers come to The Walt Disney Company and especially in a marketplace like this where you have such dynamic conditions, people are going to do fewer, bigger things with the right partners. And so The Walt Disney Company has the best of broadcast, the best of cable, the best of sports, and the best of streaming, coupled with the best investments around data and technology that really enable advertisers to buy in as close as they want to, to make sure that they're spending the right money around the right KPIs that they're looking for. And so you're seeing that in the dynamicness of the marketplace right now. It really resonated yesterday when we talked about owning our tech stack and our data stack because especially on the addressable side of the business, the dollars come in through the channels they want it to. And sometimes that's direct. And sometimes that's through the various DSP relationships that we have. Sometimes, it's data enabled. Sometimes it has audience guarantees. A lot of times it has targeting. We also rolled out targeting on Disney+ recently around audience and geo. And we plan to have full targeting like we do on Hulu. Those investments that have been years in the making really pay off in marketplace like this. And so as Christine talked about, it is a dynamic marketplace. It will come back, and we've made the investments around the right portfolio of assets to make sure that we can come out the other side better and stronger.

Okay. So to that point, it's your second year with us, when you look back in the past 12 months, what have been your biggest accomplishments? And are there any meaningful changes to either the market structure or how you've gone to market in the past 12 months.

The biggest change, I would say, is without a doubt interoperability. We have made sure that we have leveraged that ID graph with every partner, every vendor, all of the DSP relationships, all the agencies to set themselves up to be able to transact with us and cume reach across Linear and addressable with the least amount of frequency possible and the most amount of reach possible. And that has been really, really important in terms of how people consider they're spending their dollars. Every dollar has to work harder for every marketer. Every CMO is under a tremendous amount of pressure to deliver on the sales results that they have. And it's a quarterly watch, right? So when they're committing these dollars in the upfront, they want to make sure that they can execute on those dollars in the way they need to at the time that those dollars have to go to market. So that's been really important. We haven't really changed.

And that's more flexibility than it's been the past.

Absolutely. Absolutely.

So visibility is harder you get in the quarter.

And it's about owning your tech and data stack, which not everyone does. And when you don't own that you don't have the flexibility to react in real time. That's really, really critically important. And it will be a differentiator as we think about the future. But the other thing is we haven't really gone to market differently. We are still going to market as a full Walt Disney company because the same marketers that were coming in through sports are also looking at streaming are also looking at our Linear businesses, and it's really important that we have that flexibility to talk to them on whatever they want in real-time because everyone has changed in their business. They have cyclical things. They need adjustments. All of that's really important, and we're still hyper focused on serving the customer. So we talked about -- a little bit about it last year when I was here. We have a team that focuses on industries and they're experts on financial services, CPG, pharmaceuticals, we still do that because it's really important that clients understand the capabilities and everything that we're doing in that space. And by the way, there's ad products that go across. So when you think of financial services and pharmaceutical, for example, a lot of privacy concerns in those categories. We've developed ad products that work for one that you can take into other categories. So it really helps to connect those bridges. And then servicing the agencies in the way they expect to, right, which is still a very high level, high service every day. Christine about the NBA, and the excitement of having more games. I love having 7 games. Trust me, my entire team does. But that means we're in the market every single week, every Monday, I call Jimmy. I'm like, we got them over 150 units this week. We got to move 150 because we have more games. And by the way, it happens. And so that's really exciting because you have the relationships to be able to do that. It couldn't happen necessarily everywhere, but it happens here because we're in the market every day.

Okay. Something that's funny. On the last quarterly earnings, it was kind of lost was we didn't talk a lot about the ad demand to the opening of Disney+ and has consumer adoption of the ad tier expectations, right? So there's something to talk about. That was a big initiative, but it was lost in the...

Well, we saw a tremendous adoption by advertisers in last year's upfront. We're going to see the same in this year. There's more demand than we've been able to take candidly. But we're seeing growth in that every single day. You're seeing the subscribers coming in. It's a high percentage that are taking the ad tier, which is helpful for us. Supply is growing week over week. And now that we're rolling out targeting, we're going to actually be able to do more with more advertisers in the marketplace. So we're really excited about this impact.

And on the consumer adoption side, maybe you want to talk about what has my expectations, maybe the pricing strategies. Are you talking about how does that change the adoption possibly the ad tier?

Yes. So I think from a consumer perspective, it's really interesting because the more we can marry the back-end technology to really take a look at our streaming services across the board. The more we can really do that. Aaron LaBerge has done an extraordinary job of really looking at the product as well -- he runs product and ad tech, which is super valuable because then you're looking at how consumers come in, how do you want to serve them, what are the right tools and environments that you can create within the app to actually maximize our opportunity to drive engagement, which is a core driver of the advertising time. And then to really roll out the right types of ad products that are the right for that experience. And it's not exactly the same as we talked about last year, then on Hulu, right? The mix of content is different. The type of consumer is different. And so you want to have native experiences on that app that really drive that. And so having that now together in one kind of team has really allowed us to accelerate that.

Anything you'd share about the types of people who've taken the ad tier versus the ad-free tier, anything that you've seen notably on demographics or.

I don't know that I've seen anything specific that would really call out anything different.

Okay. Okay. We mentioned that you guys have teased on this already, is that the pivot of more and more live sports ratings taking over share of non-live. Is there demand for that? Is there incremental ad demand? Or was there just a more limited bucket of people who just want to buy sports, right? We've always thought historically, oh, yes, NFL has a set number of advertisers. But to what you're seeing as sports ratings take a bigger part of the questions in the world.

Yes, I think it's both, right? So I do think that there are advertisers. We talk about it all the time. The -- there's clear advertisers who associate themselves with certain leagues. And they, by the way, come in multiyear on those types of relationships. College football is a big driver of that. NFL and NBA, all the big ones. But there are advertisers who are seeing the growth of sports and want to be there. It's interesting what you talk about live. Live was a big part of what we talked about yesterday in our upfront because if you look across our broadcast network today, about 70% of our content is live when you look across all day parts. It's really important. It's a really important driver of audiences coming together and brands want to be in moments and live creates moments. It creates moments for integration of brands. It creates moments for bigger scale of audiences. And so it's a really important strategy for us as well.

Something that we asked -- we talked about last year, right? As the mix of dollars move more and more to SVOD and DTC, how are buyers viewing the overall inventory, right? Are they looking at that as reach extension? Or is it more direct response programmatically bought. So just what is -- this has been a debate we've all had with our clients, really a discussion. What does that open up? Is that just a reach extension? Or is that a different type of advertiser? Was trying to [indiscernible] More targeted pinpointed advertising.

It's both.

It's both.

It's both. It's both. So we have advertisers. We talked about it at our upfront yesterday as well because when you cume reach, nobody cume reach faster than The Walt Disney company and it's partially to do with the incredible platforms that we have when you think of the scale of sports and the scale, no one has the reach of ad-supported streaming that The Walt Disney Company has with -- just -- it's not available in the marketplace today. And so when you look across our platforms, you can cume reach with the least amount of frequency at the best price. No question. And yet at the same time, what we're seeing in the scatter marketplace, we talk about it a lot as a team. There is no more scatter in streaming. It's really a programmatic, it's moving to a programmatic business because you buy in real time with the data that we have across the platforms to be able to leverage the outcomes you want, target the audiences you want and across our entire portfolio of streaming. So that's ESPN+, Disney+ and Hulu in addition to our owned and operated TV everywhere else, right, which are a big piece of our business.

And then in terms of client mix, the growth of SMBs are you talking about this last year. So television has always been national has always been Fortune 500. So what's going on in terms of the mix shift of more SMBs.

We're seeing a lot more of that. Obviously, our stations is part of what we do. And so we combined our station business with our Hulu local business a couple of years ago. And it's really proved to be really powerful and valuable in terms of how we talk to advertisers. We also talked last year about rolling out self-service and so our self-service platform is now moving to be the underpinning of our local business to drive that SMB growth. It's high volume, low deal size business. And so it was really important to create automation so that we can actually talk to and service the scale of advertisers that are looking to be on the platforms. You'll see more of that as we continue to evolve our business, but it's really -- it's a really core component of what we're doing to grow that.

Something you've mentioned on the stage this year and last year is the investment you've made and capabilities. I know it's central to the competitiveness of where you stand. So we spend a lot of time telling people what you've done, what you invested in? And how long is that taking to get to where you thought at this point?

Years.. It's taken -- listen, -- there are so many streaming platforms in the marketplace today. And you and I talked about it last year, when you come into this business, I think people underestimate the investment and technology that is required to service clients the way they expect to be serviced. There are so many technology platforms out there and competitors out there who have their own tech, and those have been able to move and innovate faster because it's in their wheelhouse. They don't have to get in a queue to be able to do that. They can make the changes in real time and the dynamicness and the velocity of change that is happening in our business, you have to own your own tech. On the data side, we have a data graph today that is 250 million identifiers, represents 112 million households and I can't even tell you the amount of signals that come from that, that allow advertisers to really take and hyper target the segments they want on the platforms they want. And that ID Graph has been really an underpinning of all the relationships we have with all the vendors, the agencies we set up clean rooms to be able to do privacy compliant because that's extraordinarily important as well. Privacy-compliant matches in clean rooms where we can really use that for not only planning but buying and then measuring the outcomes on the other side.

Okay. And you've kind of led to my next question is, we all wonder what's the impact of new entrants okay? And some of the names into this industry. What has that been in terms of the impact on the market of people moving in either SVOD, new SVOD ad tiers or the AVOD tiers, the fast channels, how has that impacted the marketplace?