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

Thanks for being here for day 2. And a special thanks to Bob Iger. We really appreciate it, Bob.

My pleasure.

I have been talking to you for a long time. And every few years, we check in and this is a great time to come back and talk to The Walt Disney Company and Bob Iger. Last time we had a chance to talk at our conference, it was 2019. It was right after you bought Fox and you were about to launch Disney+. And you spent some time talking about how you were thinking about the structure of the company at that point to maximize the assets you had. I wonder now 5 years later, when you think about the structure of the company, what have you done to think about the maximization of the assets you now have in place to meet the objectives that you have. So what's changed for you?

Well, first of all, back then, I was laying the foundation for a structure or an organization that was really designed ultimately to serve streaming. And so I had a content division, not one but components of it, which included sports and films and television. And then I had essentially a distribution division, which was mostly focused on the management of the platform that was streaming as well as other forms of monetization because I wanted to, basically, the people that were making content, to concentrate on that; the people that were monetizing, particularly in newest form of media, to concentrate on that. I did not take P&L responsibility away from the content creators because they were spending a fortune. No, no, it was money well spent, but I wanted them to be accountable. And then Bob came in and decided to move P&L under the, basically, the distribution arm of the company or the revenue-generating arm. And when I came back, it was clear to me that, that structure was not working because we're moving accountability from those that were basically investing the most capital was a mistake. And I wanted -- there needed to be direct linkage between the monetization side and the creative side to basically help guide what was being made, when it was being made, where, meaning internationally. So I -- and there was also an us-versus-them mentality that had developed at the company between the distributors monetization side and the creative side. That's not healthy. And it does need to be a creatively led company because that's really where the value begins. Almost every transaction of the company emanates from some form of creativity. The structure that we have now actually I feel great about because as I look at it and as I manage it, it is the most efficient and most effective and most accountable structure that we've ever had since I became CEO in 2005. First of all, it's very clean. We report 3 operating units, Experiences, which is parks and resorts and cruise, et cetera; Entertainment, which is streaming, movies and television; and then Sports. So that's very clean. And those that are investing the most capital in content, which are basically television shows, movies and sports, are directly responsible for how that content is monetized on every platform globally, which is critical because then they can make decisions better than anyone because they're so accountable for those decisions on where their content goes, meaning what platform; when it goes there; and also what content is made on a global basis, meaning how much do you invest in, what I'll call, global content, content that's made typically in the West for distribution across the world versus content that's made market by market, what markets are important, where these -- is there a better return on investment in the content that you make. So for me, I really have 4 direct reports in terms of these operating units: television and film, which together manage streaming; sports; and experiences. So it's clean as can be. And the other thing I think that's really important is for decades at the company, technology -- the investments in technology were primarily aimed at serving content, serving storytelling. It was, by the way, investments in parks technology, investments in animation technology, et cetera. Now what we really need to do is invest in technology to serve the user because it's very, very clear that in order for us to turn streaming into a profitable business, it has to have a user-first mentality and we can get into it.

Yes. That's -- yes. The reason I asked Bob about organization is because when you read your book, one of the first things you did when you first became CEO was change the organizational structure. I know how important that was to you back then. That's why I keep asking the organization structure. One of the questions we have is, obviously, Disney at its core is about great and evocative storytelling. But I wonder, have changes in either culture or technology challenged the company's ability to be as consistently strong as prior periods of storytelling?

Well, I think look, we obviously have a huge history or a legacy in storytelling. Company was 100 years old last October. I think as we got into the streaming business in a very, very aggressive way, we tried to tell too many stories. Basically, we invested too much, way ahead of possible returns. It's what led to streaming ending up as a $4 billion loss, for instance. And the combination of spending more than was truly monetizable, but also spending more that resulted in volume and not quality was -- turned out to be a mistake. You need a certain amount of volume, and we'll get into that as we talk about a path to true growth in streaming for engagement, but there's a very fine line that you can cross and get in trouble if your volume ends up diluting management's attention to what is being made. And that's where we -- that's what happened to us. So I've pulled that back in a variety of ways.

Well, that's one of the questions I have here following this, was like it seems to us by observing Netflix, that's a volume play. It's your shot on goal from all over the court. So how do you balance in streaming the need to continually refresh content versus your drive for quality, right? So how do you talk about...

Well, first, I'll get to that. I think when you -- to drive quality in a company and it's -- you can look at the history of the company, it's kind of interesting, I happen to believe that demanding excellence from the top is really important. And having the senior leader of the company, it's not like I'm -- never mind. I was going to say a government official in a certain country, but I won't do that. But having me demand a level of quality and paying attention to it drives other people to deliver as much -- close to perfection as possible. And if you look at the history of the company, when the CEO of the company had a deep creative background, the company thrived. And the three eras really were Walt's era; and Michael Eisner's era, which began, the first 10 years were tremendous in terms of growth returns and quality; and I have to say, in my tenure from '05 to 2020. And I think the reason for that is because the entire organization knows there's some guy in a corner office that's watching everything carefully. And there's also -- it goes both ways. They want to perform. They want to deliver. But it's constantly reminding everybody of the need to do that. Lately, I've been telling everybody, "Good isn't good enough. It has to be great." Just keep driving that. But if you force them to make too much, then that becomes almost impossible to do. So there's that dynamic. I think in terms of how much you make and how much you need to make, to your comment about Netflix, we're learning a little bit -- a lot more actually in terms of how do we turn streaming into a growth business. And it's clear that in order for us to lower churn rates, which is obviously a major factor in our ability to increase margins and ultimately create growth, you have to have enough engagement by the audience. How many times does a subscriber open an app? How many times do they open an app and actually watch something? And by monitoring that in a very granular fashion, well, first, it gives you an opportunity to be in touch directly with that consumer. But you can obviously then measure, do you have enough engagement? Are you causing people to open the app more often and use it? Because if they don't on a monthly subscription basis, they're going to disconnect. So what we see happening now is -- and look, when we launched Disney+, there was good news/bad news to that. The good news was we signed up 10 million subs in 24 hours and we hit 100 million faster than anybody imagined was even possible. Our guidance for when we launched it was 60 million to 90 million subs in 5 years, and I think we hit 100 million subs in 15 to 18 months. It was an incredible accomplishment, really with not that much content and not that much that would create the kind of engagement that would keep churn rates low. We were neophytes at this, by the way. We didn't -- we had -- we wanted to launch it. We wanted to launch it, look and make sure that it was navigable and elegant-looking and that there was quality there and then it represented our company and its brands well. But -- and we wanted the video to be stable at scale, meaning -- and we needed that because of how much -- how many subs we signed up quickly. We got all that. We didn't know about other -- all the other factors that contribute to turning it into a real positive business like Netflix has done. And I've said in our earnings call last week, they're the gold standard. So it was clear that we needed more -- we had the quality and we had the library, but we needed more engagement. And by the way, series television provide that. So we now hit a nice rhythm with Disney+ in terms of engagement. But we've added to that engagement by combining it with Hulu. And I won't get into too many details there, but if you are a Disney+ subscriber, for an extra $2 you can get Hulu, advertiser-supported. And then that experience is a seamless experience with your Disney+ content. The combination of those two is an engagement play more than anything else. And we're seeing some nice trends there, without getting into too many details because it's still relatively new. And then ultimately, we mentioned on our earnings call last week that there'll be an ESPN tile as there is a Hulu tile on the app. And starting in December, there'll be -- it will start with, I'll call it, lite -- ESPN Lite. And ultimately, when our so-called flagship product of full ESPN suite of services launches in '25, that will be there, too. And if you look at Disney+ and Hulu and ESPN, you increase engagement to an extraordinary level. That is probably in terms of all the things we have to do to turn it into a profitable business is the first and biggest step.

Right, right. Okay. I'm going to touch on that stuff later. But it feels, just in your explanation, that this is just this iterative process that you all learned from 2019 to today, what has to be done to get there. It feels like it's all coming together now.

Yes. And Hugh Johnston, who's our relatively new CFO who's in the audience and I must say I was extremely fortunate to talk him into -- first to be meeting with me and then joining Disney. And he covered this well on earnings, there are 5 or 6 critical steps we have to take to get to -- to turn streaming into a growth business. The good news is we know exactly what they are and we've actually started to execute against them, but we're just in the early stages. But we know exactly what we have to do. And he covered it well, but one of them is engagement we just talked about. The other clearly is password sharing. We covered this a bit on the call. It will start this June meaning going after password shares that shouldn't be sharing without paying. And then ultimately, in September, it will start rolling out far more aggressively across the globe. So that's a second one. A third one is our marketing expenses are too high. And the reason they're too high is because we didn't build in the technology to have not only the algorithms, but the ability to send very, very highly customized messages to our subscribers when we believe they're potentially at risk. And Netflix is brilliant at this. So that's -- they -- if they detect that someone has opened an app and hasn't found anything, boom, then you ping them with what you -- what -- actually the algorithm knows that they would like and so on and so on. So that's another step. And then we're going to get far -- so we'll reduce our marketing spend, there'll be an increase in some technology investment, which is necessary, but we'll reduce our marketing spend. And then we have to look at the way we're distributing, too. We -- unlike Netflix, we distribute largely through third-party app, basically app stores. And there's obviously advantage to that to some extent, but there's a cost to that, too. We're looking at that.

So a subject that's near and dear to your heart is the Disney premium content flywheel, right? And that -- during your first tenure, the flywheel was perfect. You talk a bit about your confidence level of what's upcoming theatrically and how you feel about the '24-'25 outlook and potential kind of restarting the flywheel that works so well?

Yes. And I think, if you don't mind, when I came back and I settled in and we reorganized the company and we really focused on what our most critical needs were, but also what our most critical opportunities were, which is very tied to the flywheel, one was a turning the movie studio around. They had been in a period that was not nearly as successful as it had been and as it needed to be to serve the so-called flywheel well. And I really feel great about that, and I'll get more specific. But the second what we want to do is turn streaming into a profitable business and a growth business. I've talked about that to some extent. The third was, which is tied to the flywheel, is I looked at the return on invested capital in our Parks and Resorts unit over my tenure really, and it was extraordinary. And I asked about how much we were planning to invest over the next decade. And I realize that if we believe we're going to basically turn things around from a cash free -- a free cash flow generation perspective, which we've done and we're doing, then we have an opportunity to invest. Why not invest in the business that has the highest returns? So turbocharging Parks and Resorts with investment but using the flywheel, using the content that I just talked about to do that. And then the fourth was to really enable ESPN to become a preeminent digital sports destination, which I'm sure you want to get into. And that's basically enabling ESPN to migrate very successfully to a streaming business. Now on the flywheel. We were just in Shanghai a couple of weeks ago. It was my 50th trip to China, by the way, so I got feted with a cake, which I didn't really need. But -- and it was my second visit since we opened Zootopia Land. Now Zootopia was the #1 animated movie in China. And so we decided, I don't know, 5 years ago or so in thinking about what we would invest in, in Shanghai in terms of IP, why not lean into Zootopia, which is such a popular film. We built a huge land there. It's tremendous. And the success is -- I can't really even describe it, but almost -- like 90% of the people who show up are aware that Zootopia is there. We built a big enough land, so we're serving -- and I think about 50% of the people who visit actually go through Zootopia Land. It's just a great example of that flywheel. And if you look at the films that we have coming up, which include Moana in November where we're starting to lean into investment in the Parks for that IP, also happened to have been the #1 streamed movie in America across all streaming platforms last year and the film came out in 2016. Obviously, we're leaning in more to Star Wars. We have a Mandalorian film the end of '26. We have a Toy Story film, Toy Story 5, coming up and that has this Toy Story presence. And I believe every one of our locations around the world, although I got to remember whether there's one in Tokyo, but I know Hong Kong, Paris, Orlando and Anaheim. And so if we get things right film-wise, and I feel really good about where we are, then that should start to pay off more in terms of combining it with the turbocharge concept that I described at the Parks and investment. And interestingly enough, if you look -- if you analyze carefully how we achieve those returns on invested capital in the Parks, it was all about the IP. So for quite a long time, new attractions in lands at the Parks were based on essentially either very old IP or no IP, just an attraction. And starting really with Cars land and Toy Story and a few others, I can't remember all the specifics, we decided that almost all of our investment in the parks in terms of attractions on lands would be using that IP. And it's very, very clear what that delivers.

Right. Can I ask a question on that? When you think about more and more of the human experiences happening in virtual and remote locations, do you think that your position in creating live experiences in Parks and even sports sellers become more valuable to consumers? As we all spend more time behind screens, does a place to gather become more valuable?

Yes. I think -- first of all, I don't think the popularity of, I'll call it, collective outside physically immersive experiences is in any way going to wane. If anything, it may increase. Hopefully, it will. Whether that's because people are tired of being basically umbilical to their devices or inside or not, I don't know. But it's very, very clear that the experience that we deliver, whether it's in a park or at a cruise ship is an extraordinary experience that I think where the value is not going away, showing no signs of ebbing at all. And what's fascinating to me and it's obviously heartening is that it's multigenerational. It doesn't wane even for older people. And interestingly enough, a number of people who visit -- a number of people who go on our cruises are without kids because their connection to the brand and the IP is extraordinary and their kids and their children's children and so on and so on. So I think we shouldn't take it for granted at all because it's a very -- it's a popular vacation destination and it's an important experience for people to have. And there's something about that immersive experience when it's shared with others, particularly if you're engaging with stories and characters that you know that is not just memorable but is just really valued.

Okay. After last week's earnings call, we received a lot of questions about some commentary on the call. And the question we have you is, how do you think about the drivers of Park growth after 2024? There was a comment about post-COVID normalization. But just -- I think it was misinterpreted, but why don't I give you a chance to talk about that.

Well, I think -- I don't know if it was misinterpreted or not. But I think what has -- what you have to realize is that we've had double-digit revenue growth in that business for quite some time. And that's extraordinary, really. But I think we're being realistic, too, in that delivering double-digit revenue growth into the -- well into the future is not necessarily that achievable. It doesn't mean that we're not going to have growth. But I think maybe, I don't know whether the market got ahead of us too much or whatever, but -- so I think that's one point I'd like to make. It does -- again, I want to emphasize that we believe we will be able to grow these businesses nicely over the near term, meaning next few years. The other thing is that if you just look at the second quarter, we had record revenue at all of our parks. We had record per capita spending. We had record attendance in every one of our parks except Disney World, which was still strong. We had tremendous double-digit growth to the bottom line. And we've said that, save for onetime-only issues and expenses or timing, that we'll end up with mid- to high single digits in the third quarter and back to double digits in the fourth quarter. And again, we're talking about off incredible success post COVID. So I just think we'd just be realistic about it. We're not in any way concerned about not being able to grow that business. It's just a question of how -- what is possible. Now all of those investments over time certainly will help. The other thing I think you have to look at is that we -- in expanding that business over the last decade or so, we really have created a portfolio approach just to that business. We're in six locations around the world. Finally, we have Shanghai profitable, Hong Kong is profitable, Paris is profitable. That's a major accomplishment. We have five cruise ships that have been enormously profitable and three more being built, one will be launched at the end of this year. I think it's two that will be launched in calendar '25, including one that will be based in Singapore so that we can really start to open up a family cruise market in Southeast Asia. So if you look at the entirety of the business, even if there's softness in the U.S., then we have these incredible growth engines outside the United States and on the sea. So I'm bullish on the business, but I'm also realistic about it.

Right. And when you say turbocharge, what are those two or three priorities in the portfolio? But when you think about where you're putting incremental capital, what are the areas that you think you can turbocharge?

Well, I mentioned cruise where we're building three, including one that will be a 7,000-passenger ship that will be based in Singapore. We have gotten approval from the city of Anaheim for the biggest expansion of Disneyland really since we opened California Adventure in 2001, so in over 2 decades. And it's a huge expansion. We haven't been specific about what will be in it except for Avatar, which going back to the flywheel, by the way, is an extremely successful land in Orlando. So that's one example. We have 1,000 acres of land to develop. We have plenty of opportunity. We're opening up actually a big expansion next month in Tokyo. And so we haven't announced the specifics behind it all nor do we have to over 10 years. We're not going to say we're going to build in years 8, 9 and 10 because we'll be opportunistic if new IP emerges but -- or if we want to lean into a given market. But I'm bullish about what it is we will be investing in, whether it's the additional ships or whether it's in the lands and the attractions and the hotels and the Vacation Club, which is our timeshare business that we're building out. Again, it will be portfolio expansion.

And it feels like those international parks, Shanghai and Paris, have really turned a corner, right? Those were assets that you long invested in. Talk a bit about like just what you're seeing on the ground in terms of the dynamics...

Sure. Well, Paris, we have been investing nicely in the second park that opened there, which was called Studios, which ultimately will be renamed. And we've opened up a significant amount of new attractions there and there are a lot more being built that will open in the next 2 to 3 years. So I feel great about that. Shanghai opened in 2016, obviously affected negatively by COVID, which hit them hard. And what was really hard is their openings and closings and openings and closings. But having now been there as much as I have and twice -- I've actually been there three times since I came back. It's an extraordinary thing to see because of its popularity. It's the #1 tourist destination in Shanghai. It has had a huge impact on brand affinity in -- of Disney in the country, which is what my intention was when we decided to build, plant the brand flag deeply and in a significant way. So demand is huge. And also high-speed rail serving basically that specific area of Shanghai is growing enormously and so just people's ability to get there. And we had -- we ended up with 7 square kilometers of land. I believe we developed 4 of that. So there's opportunity at some point there as well. And we've done some nice expanding in Hong Kong. I mentioned Tokyo, talked about Paris, plenty of opportunity.

So before I leave Parks, I'd be remiss not to ask you about competition that's coming in Orlando as Universal rolls out their new park. We saw a video of it yesterday. Brian was here to show it. What do you think the impact is going to be to Disney? And what attractions will you be adding to potentially compete with that?

Well, first of all, if you look at the last 6 or 7 years, we've opened up a lot in Orlando, including a gigantic -- we call it Galaxy's Edge, which is Star War Land with 2 e-ticket attractions, which has also been enormously successful. There's a relatively new Guardians of the Galaxy coaster. In Epcot, there's a TRON attraction, which is enormously successful in Shanghai.