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

This event may include forward-looking statements. see the company's securities filings for related risks. Also, a reconciliation of certain non-GAAP measures referred to today to the most comparable GAAP measures is on our IR website.

Great. Well, hello, everybody. Welcome to the Disney fireside chat at the Goldman Sachs Communacopia and Technology Conference. My name is Mike Ng, and I cover Disney and media cable telco here at the firm. And I have the privilege of introducing Hugh Johnston, who is the Chief Financial Officer at Disney. First and foremost, thank you so much for being here, Hugh. It's an absolute pleasure.

Thank you. Nice to be here with you all. .

Great. To kick things off, I was just wondering if you could walk through the overarching strategic priorities, driving Disney's momentum this year and into next. What are some of the key strategic shifts that we may see with Josh's appointment as CEO. It seems like there's a greater focus on embracing technology and operating collaboratively under One Disney. So would just love to hear your thoughts about all that.

Yes. Happy to talk about that. Thank you for highlighting the momentum. We do feel like we have very good momentum in the business right now. When Josh took over as CEO, and it's been less than 6 months at this point. So it's still relatively early on. He articulated 3 things that were going to be priorities for the company. Number one was continuing to and further investing in IP. As you know, that's the core competitive advantage of Disney and that's what enables us to reinvent ourselves and drive growth in compound earnings on a continual basis. Toy Story is a great example of that. Toy Story 5 was obviously a very successful movie. But in addition to that, it drove strong performance in terms of consumer products. We had our highest growth rate in CP in 20 years. In addition to that, very successful on the streaming service. And obviously, refreshing that story is beneficial to us in the parks and cruises where that IP appears fairly often. The second focus or priority for Josh and the organization, is embracing technology. And we're not doing that just to embrace technology. We're doing that to increase our ability to create new products and to increase monetization of all that great IP that we have as a company. So certainly leaning into that, I think, makes a tons of sense and in a world of AI even more so. And then the last focal point, Josh, brought in was really trying to reach out and both expand our relationship with existing consumers and acquire new consumers over time. And the focal point there is this notion of a One Disney model. In a lot of ways, Disney was sort of broken up into various businesses, and they all tended to communicate with consumers somewhat independently. We're trying to sort of create that single relationship with consumers. And by virtue of doing that, we think we can reduce the friction that we have in terms of engaging consumers and over time, be able to monetize that more and more effectively. So overall priorities are very clear. The organization has embraced them tremendously, and I think they're going to deliver enhanced results for us over time.

I mean one thing that the company teased that last quarter's earnings call was just this long-term vision of Disney+, right, something that's going to encompass not only video, but also gaming and merchandise and other experiences, and we would get a flavor of what that looked like in spring of 2027. I was just wondering if you could give us a little bit of a sneak peek into what we should expect.

Well, maybe just a little bit. If you think about Disney+, we tend to think about it in 2 ways. Number one, we want to create essentially the best streaming service out there in terms of product, in terms of consumer engagement, that is sort of the core proposition of Disney+. But in addition to that, we really want to bring our services to consumers under the Disney+ banner and created, essentially, an integrated ecosystem where we can touch consumers in a variety of ways, almost creating a membership-like ecosystem for our fans. Now what might that look like? Certainly, it's the normal things like film and TV and video. But in addition to that, you could easily see things like consumer products, you could see parks and cruises on there. You could see interacting with our talent, interacting with our IP in a more substantial way, and even potentially gaming at some point in the future. So the goal there is to increase the frequency of use of Disney+ because we know when people increase their frequency of use they tend to churn less. Retention is higher and we get better outcomes. So more to come on that, both in the spring of 2027. But in addition to that, it's a digital product. We're going to be enhancing it, I would say, forever.

Great. One other element of DTC that Disney has been making a lot of progress and has been the integration of Hulu into Disney+. As you look towards this next phase, what consumer-facing, advertising, personalization and back-end technology enhancements remain to be completed? And how should investors evaluate the impact of this integration on the KPIs that we all care about engagement, churn reduction, bundle adoption and that sort of thing.

Yes. So if you think about what we're trying to do essentially with all of these improvements, it's to drive engagement and to reduce churn and to increase the fandom. And we have, based on the moves we've made over the last year, 1.5 years, made good progress on that. We've seen an impact in terms of churn reduction. A couple of other things that are sort of either in the near term or have already been accomplished. Number one is profile linking. We had Hulu profiles. We had Disney profiles. We've now created that one fan one account ecosystem. In addition to that, the things you'll likely see are live TV on the Disney+ app, which we know drives engagement in a more substantive way. And those members tend to churn less. In addition to that, we have Hulu add-ons and bundles and things like that, that will also be further integrated into Disney+. If you sort of look at medium term, what is it we're really trying to do? It's really 2 things. One, making the recommendation engine sharper and better so that you get more of the content that you want to get because we know there is a limited amount of time from when a consumer opens your app until they actually will decide not to pursue it because they don't see anything interesting. And in addition to that, really the user experience. So adding things like a cleaner UI in addition to that, things like vert. So people can watch on mobile more easily. So those are the types of things that you're going to see on. In terms of what should investors be watching for, it really is the basics of streaming. It's churn, it's retention, which we know increases lifetime value. And at the end of the day, the real metric is enhanced revenue growth.

Great. Disney+ seems like it's making a lot of progress into becoming what could be a daily app for a lot of consumers. And one of the potential drivers could be this TikTok partnership that was announced. So maybe you could just expand a little bit about that, talk about the strategy? Is this something that drives the top of funnel, does it present an advertising opportunity? How do you think about the TikTok partnership...

We're excited about the Tiktok partnership for a variety of reasons. Number one, it really introduces a different type of consumer into Disney+. It tends to be a little bit younger, wants to interact more as opposed to being a passive watcher and by virtue of with the TikTok relationship, being able to interact with our IP, that really engages the younger audience in a significant way. In addition to that, as you pointed out, it does present to us a top-of-the-funnel opportunity because we are drawing in new consumers into it. In addition to that, somewhat underrated, but we're pretty excited about we will actually create a creative ambassador program and really no other company can do that the way Disney is doing it right now and build closer and closer relationships with those creators. And then last but not least, TikTok, as you know, is very much a vertical format. By virtue of doing that, Disney+ vertically on mobile is relatively small. But this will create the opportunity, we think, to penetrate mobile in a much more significant way and then allow consumers to discover other aspects of what we have on Disney+ on mobile. So we think it's an engagement opportunity for sure.

Great. And if we could tie it back to the financials, there's been a lot of focus on the trajectory of SVOD margins. So could you talk a little bit about the margin outlook beyond subscriber growth and pricing? What are some of the other operational levers that the company can pull? And then maybe you can also just loop in some of the comments the company has made around investing more in local content, and how that may impact SVOD margins, if at all.

Yes. So to do that, you must have to sit back to where we were just a couple of years ago, we were losing a couple of billion dollars a year on Disney+. And that was the time where there was heavy investment going on. And we sort of set out back toward the end of '23, a goal that said, look, we want to get to double-digit margins in this business because if you're losing a lot of money investing in the business, there's not necessarily a lot of point in doing that. The returns just aren't there. So we felt like we needed to demonstrate that we could get to double-digit margins. And in fact, we have gotten to that. The last quarter, in fact, we had 13 margins, and we'll certainly finish the year with double-digit margins. So I think we've kind of crossed that threshold and proven to the investment community as well as to ourselves, this is a business worth investing in. Now from this point, the opportunity that we see is the opportunity to grow the business faster. And we think we have the right capabilities. We think we've invested in product. We do need to invest more in content. International is a big opportunity for us because our penetration is substantially lower than the leader in that regard. And what we're going to focus on is driving revenue growth and driving absolute OI dollar growth rather than just be focused on margins. Margins are important. We're not looking to go backwards in a material layer or grow below double digits or anything along those lines. But we're going to focus more on driving growth because achieving higher OI dollars, I think, is a more important variable than achieving a margin percentage. So as we do that, we think we'll increase the value of the business and we think it will create a more exciting proposition for investors.

Great. One strategic pivot that was mentioned on last quarter's call was just the adoption of a free offering for Disney+ and FAST channels, free ad-supported TV has certainly become a growing category for the industry at large. So could you just talk a little bit about the role of FAST within the Disney portfolio and how you introduced a free tier without diluting what's a very premium brand?

Yes. So FAST is another example of, we've talked about trying to reach new consumers and broaden our consumer base. There's obviously a subset of consumers that are more price sensitive. And by virtue of introducing a free channel, it offers us an opportunity to bring those people in, essentially more people going into the top of the funnel. It's got a couple of other benefits as well, though. If you look at our advertising, unlike most of the AVOD competitors that we have, we pretty well sell out our advertising. So we actually need more inventory and a FAST channel would offer us the opportunity to bring more inventory into our ecosystem. So we're certainly excited about that. It also represents an opportunity if someone is thinking about churning out to keep them in the ecosystem by downgrading and offering us the opportunity later to sell and upgrade them back into Disney+ the primary. Now I've heard a little bit of concern about cannibalization if you look at ESPN, essentially, we've done that for years, managing a free app and then basically selling people up over time, whether it was in to Select or now into Unlimited. So from that perspective, I think we've got pretty good skills at doing that. And I would expect us because the FAST channel can evolve over time, if we see it cannibalizing or we see it's creating an issue, we can adjust the content to make sure that it doesn't do that. So we're going to be [indiscernible]. It's early days on this, but it's certainly something that we're excited about. And I think it's going to be a terrific addition to the portfolio.

That's a great segue to just ask about the broader streaming ad environment. Last quarter, the company called out a little bit of a softer U.S. SVOD ad environment because of supply dynamics, right, a lot of supply hitting the market. Could you just elaborate a little bit on what's happening on the supply and demand side in U.S. SVOD? And are there any ad verticals that are doing better or worse that you would call out?

Yes. It's an interesting dynamic right now. As you noted, there is more supply coming into the SVOD environment. And obviously, that has an impact on price. And we saw that a little bit in terms of our pricing. And we expect that a little bit of softness to continue in Q4. That's something we had articulated already on our earnings call. In a lot of ways, it is an interesting dynamic, though, because on the one hand, you had a relatively high amount of supply on the SVOD side. On the other hand, live sports is just on fire. I mean, people just can't get enough of it, and our advertisers can't get enough of it. So we've sort of got this dynamic where we're managing both of those. Overall, the ad environment is healthy for us. It's just different channels are reacting differently at this point. In terms of the individual sort of subcategories of advertisers, technology and AI, as you would expect, are doing very, very well right now. Political, it is the political season. So certainly doing well from that perspective. Health care is certainly doing well right now. On the other side, CPG generally, because the inflation those companies are facing a little bit softer. Restaurants because of discretionary spending a little bit softer. And then the telcos this year were sort of interesting. They really focus their spend on a couple of big tentpole events, specifically World Cup and Olympics. So that generally is a little bit soft because the money all sort of went to 1 or 2 places.

Great. Super interesting. I wanted to revisit just some of the discussion around content investment and local content investment. How do you evaluate the capital efficiency and the ROI for doing more localized international programming versus perhaps investing more in global franchise tentpoles that could resonate around the world.

I mean, as you might expect, we're super rigorous around how we make these investments. The one place that we do see an opportunity to invest in content is in TV streaming because that actually provides better continuity and it tends to lower churn and increase engagement just because of the length and sort of the time line over which TV series tend to get dropped. So we do expect to do more in that. Specifically, international as an opportunity. As I mentioned, the penetration is a significant opportunity for us. And international, the dynamic is kind of interesting. When we have a tentpole release, our international business pops in a fairly significant way. But people stay for the movie, they watch some of the earlier sequels. And then they tend to turn out until there's a new release and then they come back in again. What we're really trying to do with this investment in international content is essentially fill the valleys between the tent poles and to be able to sort of keep that engagement over time. Now we'll do that with international TV shows. We'll do it to some degree internationally with sports as well because that's another way to keep people in the franchise. The way that we tend to think about it is you need one objector in the household. So it could be mom, dad, kids, somebody in the household, maybe grandam but someone in the household objects and then you don't get the churn. If you remember a few years ago, we talked about the fact that we weren't ready to invest in international content because we didn't feel like the product was ready, particularly the recommendation engines. So if we invested in content, we were worried about people churning out because they weren't seeing enough recommendations that were interesting to them. That's where we've made a significant pivot and we do feel like the product is very much ready. So it's worthwhile investing in right now. And we're very optimistic about it. We're going to be smart about it. We're picking markets. We're picking types of local content. We'll do it through licensing. We'll do it through producing our own. So we're going to take a variety of approaches. And then as we see the ROIs, we'll learn and we'll continue to focus the investment in a way that will actually work. Now the one thing to keep in mind is that international content is a relatively small piece of our overall spend right now. And I would expect it to go up by a lot on a percentage basis, but it won't be disruptive to the overall algorithm of the business. In terms of the big tentpoles right now, we really feel like we're spending enough in terms of the films in particular. And a few years ago, Disney had some challenges in that regard by overproducing. And frankly, the outcomes weren't great. So we won't repeat that. We feel like we're in about the right spot with that. It's this targeted area where we feel like there's going to be a very good return, and we've got some early evidence on it in terms of shows in the U.K., in terms of shows in Korea that are returning really nicely right now. So we're very optimistic about that.

Great. That's very clear. And on the topic of content and films, at [ D23 ], I think that was a few weeks ago, we got a lot more visibility into the film slate over the next few years, and I'll just rattle this off, right? Just calendar '27, it's Avengers: Doomsday, starfighter, The Bluey Movie, Frozen 3. And then beyond calendar '27, right, we have titles like Cocoa 2, Tangled live Action, Utopia 3, Lilo & Stitch 2, X-Men, a New Ice Age and list kind of goes on and on. So maybe you could just put that film slate into perspective for investors and talk a little bit about how we should think about the upcoming film slate in the next couple of years, how that might help the Disney flywheel from a CPE and SVOD perspective perhaps?