Operator:

Good day and welcome to The Walt Disney Company Third Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After some brief introductory remarks, there will be an opportunity to ask questions. [Operator Instructions] Please note today's event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Vice President, Investor Relations. Please go ahead.

Operator:

Yes, ma'am. [Operator Instructions] Today's first question comes from Jessica Reif Ehrlich with Bank of America. Please go ahead.

Hugh Johnston:

Great. Thanks, Jessica. This is Hugh. Good morning. That was a six-part first question. So I'll try to answer it as best I can. First, just to sort of peel apart Q3 again. I want to emphasize we actually had 2% revenue growth in Q3. The reason, obviously, is the IP is so strong in our parks. It really does attract a strong audience and people are reluctant to cancel vacations. So while we saw a slight moderation in demand, I certainly wouldn't call it a significant change. That said 40% of the Experiences business is actually not domestic parks. It's either international parks or consumer products and that's from an operating income perspective. 60% is domestic parks, including cruise ships. Within that, we saw attendance flat in the quarter and we saw per caps up a little bit. We expect to see a flattish revenue number in Q4 coming out of the parks. And as we mentioned in, earlier in the letter, really just a few quarters. So I don't think I'd refer to it as protracted, but just a couple of quarters of likely similar results. Now, keep in mind, we do have some expenses attached to our ships coming in and that will affect us a bit in '24 and a bit in '25. But overall I would just call this as a bit of a slowdown that's being more than offset by the entertainment business both what we've seen so far and our expectations for Moana 2 as well as Mufasa.

Alexia Quadrani:

Thank you. Next question.

Benjamin Swinburne:

Thank you. Good morning. Maybe for Bob. I wanted to ask you about sort of the outlook for Disney+ both in the context of where the product's going, but also how this becomes a significant earnings contributor to the company as you look ahead. We look at the product, it's really broadening. You've got obviously brought in Hulu. Now you're adding news. A lot of sports, ESPN coming in. You've added the international NBA rights to the product overseas. What's the vision here? And in your mind, does it support both continued subscriber growth and pricing power? I think there's probably some concern out there that the recent price increases might face some consumer pushback. So I'd love to get your thoughts on that big topic. And then just wanted to clarify, Hugh, when you say flattish revenue, Q4, are you talking about at the Experiences segment level or is that just the domestic parks comment? Just wanted to clarify. Thank you.

Hugh Johnston:

And Ben to answer your other question, flattish was a reference to Experiences.

Operator:

Yes, ma'am. Our next question today comes from Robert Fishman with MoffettNathanson. Please go ahead.

Robert Iger:

Well, we obviously are investing significantly in all directions because of the value that it creates and also because of the value that it represents to our future in streaming. We talked about sports, the long-term deals that we've made. Obviously, College Football is part of that. And on top of the NBA, on top of the NFL, on the movie side, we've talked a lot about our the creative improvements that our studio has brought to bear and the quality of the IP and the known quality of our IP. And television, I can't say enough about how great our television businesses have been performing both in terms of the bottom line, but also in terms of creatively. You don't get 183 Emmy Nominations by accident. That's the work of a lot of really great, talented people, meaning on the management side, working with a lot of talented, creative people. So it's a balance, it's a mix and I think it's one that you'll ultimately see really blended together as our streaming platform grows over time.

Alexia Quadrani:

Thank you. Next question, please.

Steven Cahall:

Thanks. So, Hugh, you talked about DTC getting to double-digit margins with the big price increases and the paid sharing efforts coming. I was wondering if you could just update us on your thinking. We'd love to get some timing around double-digit margins if that's something you're comfortable with at this point, but any context would be helpful. And then just on parks, as we think about cruise ship pre-opening costs in there, what's implied in the fourth quarter and as we think about cruise pre-opening costs in fiscal '25, what do those look like? I think you'll sail the Treasure, but you've still got the Adventure and the Destiny. I think the Singapore dock is a little heavier on cost, so we just love to understand that component. Thank you.

Alexia Quadrani:

Thank you. Next question, please.

David Karnovsky:

Hi. Thank you. On Sports, Bob wanted to see if you could update on strategic partner conversations for ESPN. Is this still a priority? And if so, can you refresh on what you're looking for in terms of marketing or content? And then for Hugh, in the exact commentary, there's multiple references to tightly managing costs. So I wanted to see if you could expand on this, where you're realizing savings now, how much opportunities left? Thanks.

Hugh Johnston:

Right. And regarding cost, recall, our original cost estimate was $5.5 billion. We raised that to in excess of $7.5 billion. Look, in big companies, my worldview is there's always opportunity to do more with less. So we're going to continue to go after it aggressively as we can to both deliver the bottom line and to invest back in the business with all the great opportunities we have.

Operator:

Thank you. And our next question today comes from John Hodulik with UBS. Please go ahead.

Hugh Johnston:

Yeah, I'll take that. In terms of the parks business, I've kind of given you a lot of our expectation already. I'm not sure I'm ready to peel it down to attendance versus per caps. I think, again, we're going to be pretty consistent with what we saw in Q3. And we talked about the fact that the lower income consumer is feeling a little bit of stress. The high income consumer is traveling internationally a bit more. I think you're just going to see more of a continuation of those trends in terms of the top line. And then the bottom line will be reflective of the fact that we've got some one-time costs coming in and going out both this year and last year. I do expect to see international strengthen. Disneyland Paris has obviously felt some challenge due to the Olympics. Not a surprise, but something that happens. And the good news is the Olympics are over in a couple of weeks and the booking will certainly look good in that regard. So overall feeling positively on that front.

Operator:

Yes, ma'am. Our next question comes from Michael Morris at Guggenheim. Please go ahead.

Hugh Johnston:

Yeah. To answer the question on ARPU, you hit both points correctly. Number one, bundling has a small effect. And then in addition to that, the shift to the ad model certainly has a small effect as well. From a profitability standpoint, we're pretty happy with whether people choose the ad model or the ad-free model. Regarding visibility, we do have very good visibility, which is why I'm emphasizing. These are really all changes at the margins, daily visitors and late bookers and things like that. Looking forward, we have very good visibility into the book that we're expecting, which is why I've got a good level of confidence in the projections that I'm sharing with you.

Operator:

Our next question today comes from Bryan Kraft at Deutsche Bank. Please go ahead.

Hugh Johnston:

Sure. Happy to talk about it. Ad market is actually very healthy right now. We saw overall advertising grow 8% for the quarter. ESPN was up 17%, DTC streaming was actually up 20%. So certainly feeling very, very positively in that regard. And in terms of the categories, financial services, consumer products doing very well, consumer services doing very well and technology doing very well. Auto is a little bit softer in that regard. But overall, the ad market is really, really strong and healthy for us. And a lot of that is a product of the fact that we have live sports and the fact that our streaming service is doing so well in terms of the IP that we have. It's an attractive audience. We also have a new capability called Disney Streaming that allows us to basically sell across our platforms very effectively. We're selling audiences rather than just selling streaming channels, which enables advertisers to more effectively target the audiences that they're seeking. So from a technology perspective, we're seeing good payback. The second piece was around licensing. Yeah, the licensing numbers that you see are mostly a reality around the fact that we've had so much success at the box office. That's really what's driving things more than anything else. No change in our licensing strategy, which has been pretty clear. The things that we consider core IP to the company, we don't license. There are things that are non-strategic. We'll continue to license tactically. But it's not a big strategy for us. The big strategy is producing our own IP and monetizing it.

Operator:

Yes, ma'am. Our next question comes from Kannan Venkateshwar with Barclays. Please go ahead.

Hugh Johnston:

Yeah. Good morning, Kannan. Two things. One, obviously, the investments that we're making into the Experiences business, we feel very, very good about it. It's been a great returning business for a long time. So while I'm not here to give you long-term guidance in terms of that segment of the business. We wouldn't be making capital investments in an accelerated way if we didn't expect to accelerate growth out of those businesses and that's true of the cruise ships as well. Now, keep in mind, that the lead time on investments in this business are multiple years. So when exactly all of that manifests, we'll share with you as we go along. But, obviously, we're investing because we're looking to accelerate growth and hence the term turbocharge. Regarding the India question, we will share that when we close the deal. I think that's the right time to do it. And we'll lay it out for you all very clearly so that you can model it very, very effectively.

Operator:

Note that a reconciliation of non-GAAP measures that were referred to on this call to the most comparable GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, guidance or expectations and drivers, including future revenues, profitability, DTC subscribers, free cash flow, adjusted EPS and capital allocation, and other statements that are not historical in nature, may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a variety of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors. These factors include, among others, economic or industry conditions, competition and execution risks, including a connection with our business plans, potential strategic transactions and our content, cost savings, the market for advertising, our future financial performance, and legal and regulatory developments. In particular, our expectations regarding DTC profitability, subscriber levels, and ARPU are built on certain assumptions based on the future strength of our content slate, churn expectations, the financial impact of the Disney+ ad tier and ESPN flagship, pricing decisions, bundling and availability of our other streaming services on Disney+, technological advances and paid sharing efforts, our ability to continue to rationalize costs while preserving revenue and macroeconomic conditions, all of which, while based on extensive internal analysis as well as recent experience, provide a layer of uncertainty in our outlook. For more information about key risk factors, please refer to our Investor Relations website, the press release issued today, and the risks and uncertainties described in our Form 10-K, Form 10-Q, and other filings with the Securities and Exchange Commission. We want to thank you for joining us and wish everyone a good rest of the day.

Operator:

Good day, and welcome to the Walt Disney Company's Second Quarter 2024 Financial Results Conference Call. [Operator Instructions] Please note, today's event is being recorded.

Alexia Quadrani:

Good morning. It's my pleasure to welcome everybody to the Walt Disney Company's Second Quarter 2024 Earnings Call. Our press release was issued earlier this morning and is available on our website at www.disney.com/investors. Today's call is being webcast, and a replay and transcript as well as the second quarter earnings presentation will all be made available on our website after the call.

Robert Iger:

Thank you, Alexia, and good morning, everyone. Our strong performance in Q2 demonstrates we are delivering on our strategic priorities while building for the future. Overall, this was another impressive quarter for us with adjusted earnings per share up 30% compared to prior year. And I'm pleased to say this outperformance raises our full year adjusted EPS growth target to 25%.

The key to our success in streaming and what consistently brings consumers back for more is the array of exceptional content we produce that captivates audiences of all ages and backgrounds. Looking at our film studios. We have a number of highly anticipated theatrical releases arriving over the next few months, including Kingdom of the Planet of the Apes, which opens this Friday, as well as Pixar's Inside Out 2, Marvel's Deadpool and Wolverine and 20th Century Studios, Alien:

Romulus, which are all slated for this summer.

Hugh Johnston:

Thanks, Bob. Diluted earnings per share, excluding certain items, for the second fiscal quarter were $1.21 and reflect the second quarter in a row of strong double-digit percentage year-over-year earnings growth. We also met or exceeded all of our financial guidance for the quarter. And as Bob mentioned, we are now targeting adjusted EPS growth of 25% for the full year.

Operator:

[Operator Instructions] Today's first question comes from Steven Cahall with Wells Fargo.

Operator:

And our next question comes from Ben Swinburne with Morgan Stanley.

Operator:

Our next question comes from Jessica Reif Ehrlich with Bank of America Securities.

Operator:

Our next question comes from Robert Fishman with MoffettNathanson.

Operator:

And our next question comes from Kannan Venkateshwar with Barclays.

Operator:

Our next question comes from John Hodulik with UBS.

Alexia Quadrani:

And John, your second question was about our strategy for ESPN+ once we launch flagship? Was that the question?

Robert Iger:

The plan is if you buy ESPN flagship, then you'll get all the ESPN+ programming in it. If you do not want that, then you can buy ESPN+ on its own. In addition, if you -- our current plan is that with the tile that we're putting on, the combined Disney+ Hulu app, the ESPN tile, you'll be able -- if you're an ESPN+ subscriber, you'll be able to get ESPN+ through that tile.

David Karnovsky:

Maybe following up on the studio commentary from earlier. As you noted, your upcoming slate is a number of sequels and that's a strategy where you've had a lot of success in the past. But as you look out over the medium term, how do you think about the balance of leaning on established franchises versus investment in new IP? And then separately, when we look at your summer releases, there are several films from 20th Century Fox IP. So I wanted to see what opportunity you think there is to bring more titles from the Fox library to the forefront?

Operator:

Our next question comes from Michael Morris at Guggenheim.

Operator:

Good day and welcome to The Walt Disney Company's First Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Executive Vice President, Investor Relations. Please go ahead.

Bob Iger :

Thanks, Alexia, and good afternoon, everyone. Just one year ago, we outlined an ambitious plan to return to a period of sustained growth and shareholder value creation. And our strong performance this past quarter demonstrates we have turned the corner and entered a new era. As previously noted, we're focused on transitioning ESPN into the preeminent digital sports platform, building streaming into a profitable growth business, reinvigorating our film studios and turbocharging growth in our parks and experiences. Before we dive deeper into our results, let me start by making a number of significant announcements that represent important and exciting steps forward. First, we announced yesterday the full suite of ESPN's channels will now be available direct-to-consumer as part of a new joint venture with Fox and Warner Brothers Discovery to create a new streaming sports service launching this fall. This brings together content from all of these companies' combined assets, including all the major professional sports leagues and college sports. And in the fall of 2025, we'll be offering ESPN as a stand-alone streaming option with innovative digital features, creating a one-stop sports destination unlike anything available in the marketplace today. ESPN is also adding a sports icon to its lineup with Coach Nick Saban joining the network as an on-air commentator later this year. We're excited to share that in November, we will release a feature-length animated sequel to Moana, which joins a very robust lineup of upcoming theatrical releases. We're also thrilled to share that we're entering into an exciting relationship with Epic Games, acquiring a small equity stake and launching a groundbreaking new games and entertainment universe that brings together Disney's beloved brands and franchises with the hugely popular Fortnite. And I'm pleased to share that Disney's board has declared an additional dividend and will be embarking on a $3 billion stock buyback program in fiscal '24. And one more thing. Next month, ESPN+ will become the exclusive streaming home of Taylor Swift's historic concert film, Taylor Swift

Alexia Quadrani :

Thank you. As we transition to a Q&A, we ask that you please try limit yourself to one question in order to help us get as many analysts as possible today. And with that, operator, we're ready for the first question.

Ben Swinburne :

Thank you. Good afternoon. You guys had a lot of news for us to chew on tonight. I wanted to maybe start, Bob, asking you about sports since you led with that. You guys have a lot going on with ESPN, new channels package, flagship, obviously having conversations. Can you kind of put it all into context for us? And how you're sort of thinking about these different products and whether they address different parts of the market and what your sort of priorities are between the two? And really, what are we -- what is success for Disney shareholders in sport? How do we think about that kind of financially and strategically? And I was just wondering if you had an update for us on expense growth this year. I think you guys guided to slight growth overall in '24 last quarter. It seems like you're on track with your savings program. So any update to that would be appreciated. Thanks so much.

Hugh Johnston :

Right. I'll take the cost side, Ben. You're right, in the past, we've talked about slight growth in operating expenses year-over-year. We obviously have terrific momentum on cost management coming out of the first quarter. And the team is relentlessly looking for further opportunities to drive cost savings, both to reinvest back in the business to continue the growth momentum that we have as well as deliver margin growth to the bottom line. Net, no change in guidance versus what we said previously. We should do at least as well as the guidance we previously committed to, which was slight growth in operating expenses year-over-year.

Operator:

Absolutely. Our next question today comes from Michael Nathanson with MoffettNathanson. Please go ahead.

Bob Iger :

As you know, Hulu Live is more reflects the bigger, fatter bundle of television channels of -- like many other services that are out there. It just happens to be integrated or attached to Hulu if you subscribe to it. So this, in a way, I guess, you'd argue, competes with Hulu Live directly, but it doesn't compete with Hulu because this will be bundled with Hulu. So if you're a Hulu subscriber and you want to get this new sports service, you can buy that as an add-on to Hulu. And as we see it, that's a real positive because if you consider the fact that Disney+ and Hulu will be together once we come out of beta in March already together in beta, and then you add a sports feature with so many sports that this new joint venture will offer, that's very, very compelling in terms of reducing churn for Hulu and increasing engagement. So we look at this as a huge positive for Hulu. We're realistic about Hulu Live in terms of the impact this could have, but that Hulu Live is certainly a nice, important feature of our Hulu business, but the critical part of that business is Hulu itself.

Alexia Quadrani :

Thank you. Operator the next question please?

Jessica Reif Ehrlich :

Thank you. You guys covered so much ground tonight. So I have one question and two follow-ups. You announced -- or Hugh, for the first time, I've heard you say this that in parks, 70% of the $60 billion in CapEx that you outlined over the next 10 years, like -- I'm sorry, that 70% of that will go to incremental capacity, so like over $40 billion in new parks and attractions. Can you give us some color on timing and location? There's been speculation that you may open a fifth gate in Florida. And then just a follow-up to a couple of things you said. One on paid sharing crackdown, which came up twice. Have you sized the number of borrowers? And on the sports JV, how do you plan to attract non-pay TV subs to what sounds like it might be an expensive sports service without a significant decrease in traditional pay TV subs who would actually save money? Like how do you not cannibalize?

Hugh Johnston :

Yeah.

Hugh Johnston :

Okay. And Jessica, I'll handle the paid sharing question. We have sized it. I don't want to put a specific number out there right now because these numbers are obviously rough estimates anyway. Suffice to say that the opportunity that we see on a percentage basis probably isn't all that dramatically different from what our competitor has found in terms of their subscriber base. In terms of getting at it, there's a couple of actions that we've taken in order to do that. Number one, we have some -- made some changes to the user language that we have in the U.S., Canada and certain markets so that we'll actually have the opportunity to act on the paid sharing opportunity. Number two, the accounts that we think are doing unpaid sharing right now will get communication this summer, and we'll give them opportunities to allow their borrowers to start new subscriptions. And then later this year, we'll actually also have account holders who want to allow further individuals to access their accounts from outside that they'll be able to access the account, but they'll be able to do so for an additional fee. So we've got a number of tactical actions to take in order to take advantage of what we think is a pretty good sized opportunity in front of us. And it's one of the things that gives us confidence in our subscriber growth numbers.

Operator:

Thank you. And our next question comes from Steven Cahall with Wells Fargo. Please go ahead.

Bob Iger :

Steven, I feel great about where we are with the studio. Let's not lose sight of the fact that in the last year, the studio had some real success, not to suggest that we didn't have some films that were not successful that we were really disappointed in, but we also had some great success too with the Guardian sequel and Avatar at the end of calendar '22 but part of fiscal '23. One of the things that I've been saying before is that volume sometimes can be detrimental to quality. And in our zeal to greatly increase volume, partially tied to wanting to chase more global subs for our streaming platform. Some of our studios lost a little focus, so the first step that we've taken is that we've reduced volume, we've reduced output, particularly in Marvel. When you fix or when you address these issues with -- in movies, you do three things. You get aggressive at making sure the films you're making can be even better. Sometimes you kill projects you don't believe in. And of course, you put new things in the pipeline that you do believe in that you have much more confidence in. And we're doing all of that. I've also observed over the years that managing creativity sometimes is best done with great partnerships. And I have established great partnerships with the people at our company that really manage their creativity, Alan Bergman with the studio, Dana Walden on the television side, Jimmy Pitaro at ESPN. And the partnership that Alan and I have is a strong one, and we believe that the time that I'm now devoting to this and the attention that the two of us are giving this business not only will bear fruit, but it's already starting to. We're very bullish about the films coming out. We mentioned Insight Out 2, and we talked about Deadpool and the Planet of the Apes film. We feel good about that. Obviously, the end of the calendar year, we've got Mufasa, prequel to Lion King. We are very excited about the addition of Moana, which is the number one streamed movie of -- across all streamers in the U.S. in '23 and is at over 1 billion hours of consumption on Disney+. And that's now going to be released in November. And then I mentioned what we're doing after that. I'd say we're leaning a little bit more into sequels and franchises, some that we feel great about, like Toy Story is -- for instance, obviously, Star Wars, Avatar, we've talked about. Marvel is starting to focus on some of its stronger franchises going forward, but I'll leave it at that. And I think given the environment and given what it takes to get people out of their homes to see a film, doing that, leaning on franchises that are familiar is actually a smart thing. So we've got work to do still. We're not resting on our laurels or sitting on our hands. We're working hard at it, but I feel quite good about the trajectory.

Alexia Quadrani :

Thank you. Operator, next question please?

Bryan Kraft :

Hi, good afternoon. Since there's so much discussion about bundling and distribution, I was wondering if I could ask you if you could share any observations related to Charter integrating Disney+ into its pay TV programming tiers. Is there anything you could say about the percentage of customers actually using it or engagement levels relative to the average Disney+ subscriber? And maybe lastly, do you think that this is a model that you'd like to replicate with other pay TV distributors over time as your agreements come up for renewal? Thanks.

Bryan Kraft :

Thank you.

Operator:

Thank you. And our next -- our final question today comes from Michael Morris with Guggenheim. Please go ahead.

Bob Iger :

Sure. Let me take the second part of the question first. Yes, you're right. We've tried our hand at video games in a number of different directions. And actually, the one that ended up being the most successful for us was the license. And in fact, we've licensed, I think, $9 billion franchises, including the Spider-Man franchise, which is the most successful video game last year. After I came back, I sat down with Josh D’Amaro, who runs our experiences business and his executive who actually manages games, Sean Shoptaw. And one of the things they showed me -- actually, the first thing they showed me were demographic trends. And when I saw Gen Z and Gen Alpha and even millennials and I saw the amount of time they were spending in terms of their total media screen time on video games, it was stunning to me, equal to what they spend on TV and movies. And the conclusion I reached was we have to be there, and we have to be there as soon as we possibly can in a very compelling way. We knew through our relationship with Fortnite that there was already success when some of our characters and franchises were expressed or showed up in Fortnite. And we knew Tim Sweeney at Epic because we were involved -- he was involved in our Accelerator program, I think in 2017. And so, I met with Tim, and Josh and his team started a discussion about what if we create a gigantic Disney World a la Fortnite that could live next to Fortnite and be completely interconnected with it, a world where people could play games that we create, could create their own games, could watch. You can imagine the creation of short-form videos or may -- we may even use the platform to actually distribute some of our content, also the people that could interact with one another, and ultimately, some form of shopping as well and other forms of creation. Obviously, there'll be some -- there are the opportunities to buy digital goods, but maybe even at some point, physical goods. And I just think that given the demographic trends and given the success of Fortnite -- and by the way, they're experiencing really a great era of both customer satisfaction and growth as they return to some of their roots. The numbers at Fortnite have been really compelling. And we just think this is -- just as we take our IP from our movies and our television and have them expressed in our parks, this is a great way to do it in games. And for us, it's a way to have skin in the game with them with the investment of $1.5 billion, strengthen a partnership because we have skin in the game, but also build a world where we're actually not creating too much risk for the company. So as we see it, this is the best of all worlds in many respects from a business venture perspective and certainly great for consumers who love to interact with our characters already in video game format. So I'm actually really thrilled about it. And the second -- or the first part of your first question, accelerating cord-cutting. Understand that we're going to get paid in this new joint venture for our channels at a level that's commensurate with the level that we get paid for those channels in the multi-channel ecosystem. And so if a consumer moves out of that and then into this, then what we get paid for our -- certainly, these channels that are in it is equal to where we get paid there. We have some other channels that are not part of this new bundle. But frankly, if you look at our company and you look at what we've done with FX on Hulu, with the Disney Channel on Disney+, with National Geographic on Disney+, we're really very well positioned to withstand, basically, the continued challenges that the multi-channel ecosystem will have. And while there might be some de minimis economic impact on us with more cord-cutting for those channels, we're backstopped in all of those channels with the content that exists or that we ultimately put on Hulu and Disney+. So it's -- for us, it's very low risk and actually, as I talked earlier, potentially quite accretive to us in terms of signing up sports fans that have never signed up for the bundle where they may no longer want it.

Operator:

Good afternoon, and welcome to The Walt Disney Company Fiscal Full Year and Q4 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Executive Vice President, Investor Relations. Please go ahead.

Robert Iger:

Thanks, Alexia, and good afternoon, everyone. Before we begin, this week we announced that Hugh Johnston will be joining the Walt Disney Company as Senior Executive Vice President and Chief Financial Officer after 34 years with PepsiCo. It's great to have Hugh joining Disney at this important moment for our company. I'd also like to thank Kevin Lansberry, who stepped into the CFO role on an interim basis earlier this year and has provided strong leadership in the month since. Kevin is returning to his role as CFO of our Disney Experiences segment and you'll hear more from him in just a bit. Now let's turn to the quarter. Our results this quarter speak volumes about the underlying strength of our company and the remarkable amount of work we have accomplished this past year. Q4 adjusted earnings per share nearly tripled over the prior year. And all three of our businesses, Entertainment, Experiences, and Sports saw significant increases in fourth quarter operating income compared to Q4 of fiscal 2022. The thorough restructuring of our company has enabled tremendous efficiencies and we're on track to achieve roughly $7.5 billion in cost reductions, which is approximately $2 billion more than we targeted earlier this year. Our new structure also enabled us to greatly enhance our effectiveness, particularly in streaming, where we've created a more unified, cohesive and highly coordinated approach to marketing, pricing and programing. This has helped us to improve operating results of our combined streaming businesses by approximately $1.4 billion from fiscal 2022 to fiscal 2023. And we remain confident that we will achieve profitability in Q4 of fiscal 2024. And most importantly, our new structure has restored creativity to the center of our company and we certainly know from our now 100 year history that nothing is more important or critical to our success. Indeed, our strong creative accomplishments helped drive impressive growth in core Disney+ subs with nearly 7 million added in the quarter. This reflects the success of numerous popular titles to hit the platform, including Guardians of the Galaxy Vol. 3, The Little Mermaid and Elemental, continuing the trend of our theatrical releases being some of the most watched content on Disney+. Key originals also performed incredibly well across all our platforms, including Ahsoka on Disney+, The Kardashians, which is now our most viewed unscripted Hulu original series ever and the spectacular Korean original series, Moving, which has become a breakout hit. As I reflect on our achievement this past year, I'm mindful of the fact that a lot of time and effort was spent on fixing, both contending with certain decisions made in the recent past and addressing the numerous challenges brought on by disruption and the pandemic. And while we still have work to do to continue improving results, our progress has allowed us to move beyond this period of fixing and begin building our businesses again. As we look forward, we are focusing on four key building opportunities that will be central to our success. And they are

Alexia Quadrani:

Thanks, Kevin. As we transition to Q&A, we ask that you please try to limit yourself to one question in order to help us get to as many analysts as possible today. And with that operator, we're ready for the first questions.

Michael Nathanson:

Thanks. Hey, Bob, I have two quick one’s for you. This is your first earnings call post the Charter-Disney Agreement. So stepping back, what are the most important impacts to Disney after that agreement? And then how would you imagine company differently now that that is kind of the template going forward for new deals? And secondly, on film studio, your first said you had the most amazing content cycle on film we've ever seen. So I wonder, what do you think is ailing the film slate this time around and what are your priorities to fixing this as you lay out one of your top three priorities? But what are you doing in particular to fix the film slate going forward? Thanks.

Alexia Quadrani:

Thank you. Next question, please.

Steven Cahall:

Thank you. So first on DTC, I mean, pricing is about to step up. You announced the cost-cutting program. Some of which might be at DTC or Hulu. And Bob, I think for a couple of quarters you've just been talking about how confident you are in streaming profitability. So I'm not asking for guidance, but is there any way for us to just frame what DTC can look like beyond breakeven, since that's really the biggest driver of earnings growth and value creation? And then on the ESPN side, just as we think about that, preeminent sports platform that you're looking to build, so many folks have already voted with their feet to be outside of the bundle. How do you think about putting something into the market more quickly, maybe at a high price point that doesn't disrupt the bundle, just to see if the cord cutters or cord nevers have some demand? Thank you.

Alexia Quadrani:

All right. Next question, please.

Benjamin Swinburne:

Thanks. Good afternoon. I want to come back to the free cash flow commentary because that's pretty interesting and new. And also ask you, Bob, about your US sports business and ESPN. So on cash flow, $8 billion of free cash flow, $6 billion of CapEx, getting the $14 billion of cash from operations. You haven't done a number like that, I think, since 2018. So I'm just trying to understand if you think you can sustain and grow your company at that level of cash content spent. I think Kevin said 2025, because that certainly allows you to really grow free cash flow from a base that's already higher than people were expecting in 2024. Hopefully, that made sense. And then on the sports side, Bob, people think about ESPN as a network facing cord cutting, et cetera. You clearly have a vision there that you think can grow over time. Can you talk a little bit about how you think about growing the sports business? Do you think you can, between linear and digital and other ancillary services, sort of grow your sports business over time? Because that would be another area where you'd certainly outperform expectations. Thanks so much.

Kevin Lansberry:

Yeah. With -- Ben, with respect to cash flow, we do feel good about where we are ending up in 2024 from a content spend perspective. And when you take a look at how we're getting to that year-over-year, lower content spend is clearly part of it. But continued growth and improvement of our underlying business is also a huge component of that, as is the annualized efficiency targets that we have all implemented. So those things are driving a significant amount of year-over-year improvement in our cash flow.

Operator:

Our next question will come from Jessica Reif Ehrlich with BofA Securities. You may now go head.

Robert Iger:

Jessica, first of all, in India, our linear business actually does quite well. It's making money. But we know that other parts of that business are challenged for us and for others, and we are looking, I'll call it expansively. I know I've said this before. It always gets me in trouble. But we're considering our options there. We have an opportunity to strengthen our hand. It is, I think, now that maybe the most populous country in the world, or maybe just still second to China and about to pass them. We'd like to stay in that market. And -- but we also are looking to see whether we can strengthen our hand, obviously, improve the bottom line. In terms of advertising, we are actually finding that linear is a little bit stronger than we had expected it would be. It's not back as much as we would like. It's still challenged, but it's not as bad as it had been. So we've seen some slight improvement. Actually, the tech sector is still somewhat weak. But in general, overall, advertising has improved. We're finding, obviously, great demand for addressable advertising. I noted on an interview I did earlier that we've now put tools in place, or we're using tools on Disney+ to provide advertisers with better targeting. They're starting to work. And in general, sports has been very, very strong. So as we look at the advertising marketplace right now, while it's not as strong as we would like it to be, it's certainly not as bad as some people think it is. And it's working for us. On AVOD, look, it's very, very clear that the tools that the new platforms provide to advertisers are exactly what the advertisers are looking for. Those platforms are an advertiser's dream. And we know that the more data, the more detail, the more context, the more targeting we can provide, the better off we'll be. Hulu had an extremely robust advertising engine. We actually -- we've got one of the best in the business, if not the best. And so, actually, that combination of Hulu and Disney+ with some of the tools that we put in place, is going to give us the ability to have a blended CPM, grow engagement, grow advertising. So we're quite bullish about our position, media-wise in an advertising marketplace.

Operator:

Our next question will come from John Hodulik with UBS. You may now go ahead.

Robert Iger:

Good questions, John. Thank you. We've actually been licensing content to Netflix and are going to continue to. We're actually in discussion with them now about some opportunities, but I wouldn't expect that we will license our core brands to them. Those are real, obviously, competitive advantages for us and differentiators, Disney Pixar, Marvel, Star Wars, for instance, all doing very, very well on our platform, and I don't see why, just basically to chase bucks we should do that when they are really, really important building blocks to the current and future of our streaming business. Regarding local sports, the technology that we will have for ESPN DTC will give us the ability to provide local sports in a pretty robust way, basically what the RSNs are doing. But we're not really aiming to do so by taking on significant risk. So if we can find the right kind of business arrangements and partnerships, I think we'll look very seriously at providing local sports as part of that platform. But again, not if it results in us taking on too much risk.

Operator:

Our final question Phil Cusick with J. P. Morgan. You may now go ahead.

Alexia Quadrani:

First question was on the conversation [Multiple Speakers] A - Robert Iger Oh, thank you. Sorry. Sorry, Phil, I was kind -- I was listening to your second question. I forgot your first one. Senior moment. What basically we've been saying and what we've been exploring is that, as we prepare to take ESPN in the direct-to-consumer direction, we believe that we have opportunities to strengthen our hand with entities that either provide us with technology, marketing support, for instance, or companies or entities, I should say, that can provide us with more content. We feel we have an excellent hand, by the way, and could do it without that. But why not explore strengthening our hand? And so, since I noted that we were interested in this back in July, we've engaged with a number of different entities. I can say that there's significant interest out there. There are obviously complexities to it, but not complexities that were -- not hurdles that are so high that we can't jump over them. And we're going to continue to explore it. And I would imagine we'll have more to say about this in the coming months. But I don't want to say much more right now. Except again, there's serious interest out there, and I think there's a path or path to deals, but we're working through them. And obviously, as soon as they're completed, we'll let everybody know. You want to take the consumer demand question?

Phil Cusick:

Thanks, Kevin. Thanks, Bob.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Operator:

Good afternoon and welcome to The Walt Disney Company Third Quarter 2023 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After the speakers’ presentation, there will be a question-and-answer session. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to Alexia Quadrani, Executive Vice President of Investor Relations. Please go ahead.

Robert Iger:

Thanks, Alexia, and good afternoon. In the eight months since I returned, we've undertaken an unprecedented transformation at Disney and this quarter's earnings reflect some of what we have accomplished. First, the company was completely restructured, restoring creativity to the center of our business. We made important management changes and efficiency improvements to create a more cost-effective, coordinated and streamlined approach to our operations. We aggressively reduced costs across the enterprise and we're on track to exceed our initial goal of $5.5 billion in savings. And perhaps most importantly, we've improved our DTC operating income by roughly $1 billion in just three quarters, as we continue to work toward achieving DTC profitability by the end of fiscal 2024. I'm pleased with how much we've gotten done in such a short period of time, but I also know we have a lot more to do. Before I turn the call over to Kevin Lansberry, our Interim CFO, I'd like to elaborate on the state of our company and the transformative work we are still undertaking. As I've said before, our progress will not always be linear. But despite near-term headwinds, I'm incredibly confident in Disney's long-term trajectory because of the work we've done, the team we have in place and because of Disney's core intellectual property foundation. Moving forward, I believe three businesses will drive the greatest growth and value creation over the next five years. They are our film studios, our parks business and streaming, all of which are inextricably linked to our brands and franchises. Looking to Disney Entertainment studios, we're focused on improving the quality of our films and on better economics, not just reducing the number of titles we release but also the cost per title. And we're maximizing the full impact of our titles by embracing the multiple distribution windows at our disposal, enabling consumers to access their content in multiple ways. For example, Avatar

Alexia Quadrani:

Thanks, Kevin. As we transition to the Q&A, we ask that you please try to limit yourself to one question in order to help us get to as many as possible today. And with that, operator, we're ready for the first question.

Philip Cusick:

Hi. Thank you. Bob, the linear business is clearly under pressure and you made it clear recently that all options are being considered. I'm curious, though, what the practical considerations are of separating assets like ABC, National Geographic or others from both ESPN or sports or integrated or from Hulu, which is kind of the next-generation distribution platform. Can you talk about that? And then second, can we assume that most of those TV assets have been fully depreciated? Thank you.

Kevin Lansberry:

And Phil, this is Kevin. With respect to the assets, these have been around for quite a while at this point and we're not going to comment specifically on where they sit from a depreciation standpoint.

Operator:

Our next question comes from Jessica Reif Ehrlich from BoA. Please go ahead with your question.

Robert Iger:

So the second part of your question, Jessica, regarding password sharing, we are -- we already have the technical capability to monitor much of this. And I'm not going to give you a specific number, except to say that it's significant. What we don't know, of course, is as we get to work on this, how much of the password sharing as we basically eliminate it will convert to growth in subs. Obviously, we believe there will be some, but we're not speculating. What we are saying, though, is that in calendar '24, we're going to get at this issue. And so while it is likely you'll see some impact in calendar '24, it's possible that we won't be complete or the work will not be completed within the calendar year. But we certainly have established this as a real priority and we actually think that there's an opportunity here to help us grow our business. Regarding our studio performance, let's put things in perspective a little bit. The studio has had a tremendous run over the last decade, perhaps the greatest run that any studio has ever had with multiple billion-dollar hits and including, by the way, too, that were relatively recent were one, in particular, Avatar

Operator:

Our next question comes from Ben Swinburne from Morgan Stanley. Please go ahead with your question.

Robert Iger:

Ben, as you know, I think as we've said before, we took a pretty significant price increase at Disney+ sometime late in calendar '22. And we really didn't see significant churn or loss of subs because of that, which was actually heartening. It's important to note, though, that the price increase that we've just announced is a price increase for the premium product or the non-advertiser-supported product. We're actually keeping the advertiser supported product flat in terms of prices. That's being done for a reason. Obviously, as has been noted by Kevin in his remarks, the advertising marketplace for streaming is picking up. It's more healthy than the advertising marketplace for linear television. We believe in the future of advertising on our streaming platforms, both Disney+ and Hulu. And we're obviously trying with our pricing strategy to migrate more subs to the advertiser-supported tier. It also should be noted, as I think I mentioned in my remarks, that a substantial amount of new subscribers to Disney+ are signing up for the ad-supported tier, which suggests that the pricing is working for us in that regard. So we're looking at this very carefully. One thing I think that I should also note is that we grew this business really fast, really before we even understood what our pricing strategy should be or could be. And we're really just getting at, and I'd say in the last six months, the pricing strategy that's really aimed at enabling us to improve the bottom line ultimately to turn this into a growth business and as a component of that, obviously, to grow subs.

Robert Iger:

On ESPN Bet, you say why now? Well, we've been in discussions with a number of entities over a fairly long period of time. It's something that we've wanted to accomplish, obviously, because we believe there's an opportunity here to significantly grow engagement with ESPN consumers, particularly young consumers. And PENN, why PENN? Because PENN stepped up in a very aggressive way and made an offer to us that was better than any of the competitive offers by far. And we like the fact that PENN is going to use this as a growth engine for their business. And we actually believe and trust in their ability to – in this partnership to grow their business nicely while we grow ours.

Alexia Quadrani:

Operator, next question please.

Michael Nathanson:

Thanks, Hey, Bob. I have a few, if you could. One is, given the thinking you've done about the future of Disney, why does it make sense to create two Disney companies

Michael Nathanson:

Okay. Thanks, Bob.

Operator:

Our next question comes from Steven Cahall from Wells Fargo. Please go ahead with your question.

Robert Iger:

Our streaming business is still actually very young. In fact, it's not even four years old. It launched in November of 2019. And we love to have the margins that Netflix has. They've accomplished those margins though, over a substantially longer period of time and they've done so because they figured out how to really carefully balance their investment in programming with their pricing strategy and what they spend in marketing. Because we're new at all of this, we actually have not really achieved the kind of balance we know we need to achieve in terms of cost savings and pricing and money spent on marketing. And of course, all the other things that we're looking at from a technological perspective that grows engagement with our customers, for instance, recommendation engines would be one example of that, that have the ability to improve performance or obviously grow consumption. So I would say that -- and I obviously have to -- I can't emphasize enough the time that we spent and the effort that we spent on managing costs. We've done a tremendous job in a very, very short period of time of exceeding the cost reductions that we said we were going to achieve and that's obviously a major step in the direction of improving our margins. Pricing, as we've talked about earlier on this call and in our comments, is another way to do that. Password sharing is another way to do that. Getting the technology in place to grow engagement, the advertising side of this business is another. So I'm reasonably optimistic and hopeful that we will be improving our margins in this business significantly over the next few years. But I'm not going to make any further predictions in that except -- the good news is that we know how much work we have to do. We know the work that we have to do as well.

Alexia Quadrani:

Next question, please.

Kannan Venkateshwar:

Thank you. So Bob, I mean, on the ESPN side, you've spoken about the need for partners. Could you talk a little bit about the priorities when you look at partners? Is it more in the form of direct capital infusion or maybe some kind of reach on the distribution side when it comes to streaming? What are the objectives you're really solving for? And then, Kevin, maybe as a follow-up to the guidance, just triangulating between some of the segment guidance that you just gave and trends in the first three quarters. The full year high-single digit guide in the operation is obviously great. But it will need more acceleration in Q4 than we've seen in the first three quarters of OI. So if you could just talk through what the drivers of that acceleration, that would be helpful. Thank you.

Alexia Quadrani:

And Kannan, can you repeat your second question, please?

Kevin Lansberry:

Yeah, Kannan. There's very significant growth across our direct-to-consumer business and at our Parks and Experiences business also. So those two businesses predominantly are the big growth drivers as you begin to look at relative to the prior year where we’re getting that kind of growth.

Operator:

Our next question comes from Brett Feldman from Goldman Sachs. Please go ahead with your question.

Robert Iger:

We actually have been looking at multiple markets around the world with an eye toward prioritizing those that are going to help us turn this business into a profitable business. What that basically means is there are some markets that we will invest less in local programming but still maintain the service. There are some markets that we may not have a service at all. And there are others that we'll consider, I'll call it, high-potential markets where we'll invest nicely for local programming, marketing and basically full-service content in those markets. Basically, what I’m saying is not all markets are created equal. And in terms of our march to profitability, one of the ways we believe we’re going to do that is by creating priorities internationally.

Operator:

Our next question comes from Michael Morris from Guggenheim. Please go ahead with your question.

Robert Iger:

Michael, I just am not going to speculate about the potential for Disney to be acquired by any company, whether a technology company or not. Obviously, anyone who want to speculate about these things would have to immediately consider the global regulatory environment. I'll say no more than that. It's just -- it's not something that we obsess about.

Alexia Quadrani:

Okay. Thanks for the question, and I want to thank everyone for joining us today. Note that a reconciliation of our non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, guidance or expectations or other statements that are not historical in nature may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time that we make them and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors. These factors include economic or industry conditions; competition and execution risks, including in connection with our business plans, organizational structure and operating changes; cost savings; earnings expectations; and drivers of growth; and our DTC content and how it's made available on our platform; subscriber; advertising; and revenue growth and profitability. In particular, our expectations regarding DTC profitability are built on certain assumptions around subscriber additions based on the availability and attractiveness of our future content, which is subject to additional risks related to ongoing work stoppages; churn expectations; the financial impact of the Disney+ ad tier and price increases; our ability to quickly execute on cost rationalization while preserving revenue and macroeconomic conditions, all of which, while based on extensive internal analysis as well as our recent experience, provide a layer of uncertainty in our outlook. For more information about key risk factors, please refer to our Investor Relations website, the press release issued today risks and uncertainties described in our Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. We want to thank you all for joining us and wish everyone a good rest of the day.

Operator:

Good day and welcome to The Walt Disney Company’s Second Quarter 2023 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Senior Vice President of Investor Relations. Please go ahead.

Robert Iger:

Thank you Alexia, and good afternoon, everyone. Allow me to digress for a moment to congratulate Universal for the tremendous success of Super Mario Brothers. It certainly proves people love to be entertained in theatres around the world and it gives us reason to be optimistic about the movie business. Now turning to our results. We're pleased with our accomplishments this quarter, which are reflective of the strategic changes we've been making throughout our businesses. We're also proud of what we continue to deliver for consumers, from movies to television to sports, news and our theme parks. A few recent highlights include Marvel Studios Guardians of the Galaxy Volume 3, which topped the global box office in its opening weekend with $289 million. The first round of the NBA playoffs was the most watched ever across Disney networks, and we've been averaging 5 million viewers throughout the first 22 games, up 15% versus the comparable point in last year's playoffs. ABC continued its run as the number one entertainment broadcast network for the fourth consecutive season. And at our domestic parks, we continued to improve the guest experience with our recent pricing changes and exciting new attractions, including the Reimagined Mickey's Toontown at Disneyland and TRON Lightcycle Run at Walt Disney World. I've been back at the company for almost six months, and in that time we've embarked on a significant transformation to strategically realign Disney for sustained growth and success. I’m pleased to say that the strategy we detailed last quarter is working. Our new organizational structure is returning authority and accountability to our creative leaders, as well as allowing for a more efficient, coordinated, and streamlined approach to our operations. The cost-cutting initiatives I announced last quarter are well underway, and we're on track to meet or exceed our target of $5.5 billion. We're delivering progress on the number of fronts, including a reduction in streaming operating losses this quarter, and I'm very optimistic about our direct to consumer business longer-term. Combined, our brands, franchises, and robust library are a significant differentiator in the space, and the meteoric subscriber growth we've seen since our launch three years ago only further reinforces that. As I think about our path forward in streaming, we have a number of clear opportunities to further position our DTC business for success. First, as a significant step toward creating a growth business, I'm pleased to announce that we will soon begin offering a one-app experience domestically that incorporates our Hulu content via Disney+. And while we continue to offer Disney+, Hulu and ESPN+ as standalone options, this is a logical progression of our DTC offerings that will provide greater opportunities for advertisers while giving bundles of subscribers access to more robust and streamlined content, resulting in greater audience engagement and ultimately leading to a more unified streaming experience. We will begin to roll out this one-app offering by the end of the calendar year, and we look forward to sharing more details in the future. Despite the near-term macro headwinds of the overall marketplace today, the advertising potential of this combined platform is incredibly exciting. And when you drill down into the details, you can see why. Over 40% of our domestic advertising portfolio is addressable, including streaming, which we expect will continue to grow over time. We're also focused on the growth opportunity in programmatic advertising, and we are well positioned to scale as the market improves and audiences continue to grow. We've added more than 1,000 advertisers over the past year, and now have 5,000 advertisers across our streaming platforms, with over a third buying advertising programmatically today. In addition, we plan to launch our ad tier on Disney+ in Europe by the end of this calendar year, which will drive both increased inventory and revenue over the long-term. The truth is we have only just begun to scratch the surface of what we can do with advertising on Disney+. And I'm incredibly bullish on our longer term advertising positioning. Meanwhile, the pricing changes we've already implemented have proven successful and we plan to set a higher price for our ad-free tier later this year to better reflect the value of our content offerings. As we look to the future, we will continue optimizing our pricing model to reward loyalty and reduce churn, to increase subscriber revenue for the premium ad-free tier, and drive growth of subscribers who opt for the lower cost ad-supported option. Additionally, I'd like to share a few other key areas where we see opportunities for improvements in our streaming business. First, it's critical we rationalize the volume of content we're creating and what we're spending to produce our content. Second, our legacy platforms enable us to expand our audiences and often augment our potential streaming success while at the same time allowing us to amortize our content costs across multiple windows. We also need to strike the right balance between our local and global programming as well as our platform and program marketing. Finally, we must continue calibrating our investments in specific markets, looking at the total addressable market and ARPU prospects and evaluating the profitability potential. All of these factors combined are why we are confident that we're on the right path for streaming's long-term profitability. The strength of our content, the one-app experience, and the enormous advertising potential that comes with it, rationalizing the volume of the content we make and what we're spending, maximizing windowing opportunities, recalibrating our investments internationally, perfecting our pricing model, and consolidating our global streaming business under the leadership of Disney Entertainment Co-Chairman, Alan Bergman and Dana Walden. We're doing the essential work now to position our streaming business for sustained growth and success in the future. Turning to our parks, we see this business as a key growth driver for the company. This past quarter, we've been especially pleased with the performance of our parks internationally. We have several international expansions underway that will allow our parks to continue to build capacity and drive longer-term growth. At Disneyland Paris, our Avengers Campus has been a resounding success in its first year. And we have on-going investment underway there, including a Frozen-inspired land currently in development. Our Zootopia-inspired expansion opens later this year at Shanghai Disney Resort. Arendelle, the World of Frozen expansion, is set to open at Hong Kong Disneyland in the second half of 2023. And Tokyo Disney Resort, which is currently celebrating its 40th anniversary, will be opening the new Frozen Kingdom, Rapunzel's Forest, and Peter Pan's Neverland in the coming year. Regarding our domestic parks, we just announced additional changes coming in 2024 that will improve the experience for guests visiting Walt Disney World, including further expanding access for annual pass holders to visit on certain days without reservations, as well as removing the need for an additional reservation for guests with date-based tickets. This is just another example of how we're continuously listening to our guests and finding ways to improve their experiences. And we have a number of other growth and expansion opportunities at our parks and we're closely evaluating where it makes the most sense to direct future investments. The unyielding popularity of our world-class parks business and our unparalleled content, powered by our brands and franchises, is what sets Disney apart. From the very beginning, 100 years ago, our timeless stories and characters have been the key to our success and hold a special place in the hearts of generations of fans and families. We're leaning into this across every segment of our business, as illustrated with our strong summer slate of theatrical releases, including Disney's The Little Mermaid, Pixar's Elemental, and Lucasfilm's Indiana Jones and The Dial of Destiny. As we've been looking at the structure of the company these past several months, what's become clear is that there is an enormous opportunity to harness our full potential by increasing alignment and coordination in marketing across our businesses. That's why I named Asad Ayaz our first ever Chief Brand Officer in addition to his role as President of Marketing for our studios. For years, our businesses have been incredibly successful in marketing our content, experiences, and products. And now with greater integration of our touch points with consumers, especially streaming, we're able to be more efficient and more successful in reaching the right audiences with the right offerings from across our businesses. Disney means so much to so many people around the world. That's a privilege we take seriously. And I know I speak for our terrific Chairman, Alan, Dana, Jimmy and Josh, when I say that our goal is to continue finding innovative new ways that allow guests and audiences to have even deeper connections with us. And that's why I'm so thrilled to be taking this more proactive approach to our brand and marketing work. With that, I will turn things over to Christine.

Alexia Quadrani:

Thanks, Christine. As we transition to Q&A, we ask you to please try to limit yourselves to one question in order to help us get as many answers as possible today. And with that, operator, we're ready for the first question.

Ben Swinburne:

Thank you. Good afternoon. Bob, I wanted to ask you about what you learned on sort of two topics over the last several months. One is around the price increase on Disney+. You've sort of commented that you think it went well. Obviously, we can see the subscriber trends. And you sound optimistic that the company can continue to drive ARPU over time. Maybe you just talk a little bit about what you've seen in the customer base and reaction and engagement that gives you confidence around pricing power for Disney+ looking ahead. And then a similar question around the cost rationalization and reorg at the company, now that you're sort of deep into that. What have you learned about the opportunity for that to drive better financial results for the company? And Christine sort of teased it, that there might be more opportunities to maybe exceed expectations. But do you think there's more to do, I guess, is the short question on the cost side. Thank you very much.

Christine McCarthy:

Yes. Hi, Ben. I'll just further elaborate on some of the SG&A progress that we've had. And thanks for picking up that I did tease that by saying that we would need to exceed our targets of $2.5 billion. But, as we've gotten into this, there's been great cooperation throughout the entire company, which has been really rewarding, because we're looking at this and, of course, there's the reality of headcount reductions, and we're going through those. But there's also other things that we're finding more and more opportunities on eliminating redundancies, looking at ways to become more effective by utilizing resources, people and other resources across other businesses. But we're really leaning into all the opportunities. There's technology, which we've also seen a lot of good progress. Some of it will be, and I say some, will be realized in the balance of this year, really at the end of the fiscal year. But the real impact is going to help us in 2024. But, once again, since we're all into it, I think, once again, having it be company-wide and having, it be something that all of our business leaders have embraced, we are looking for a real comprehensive look throughout the SG&A buckets.

Ben Swinburne:

Thanks. Thank you both.

Operator:

The next question comes from Phil Cusick of JPMorgan. Please go ahead.

Christine McCarthy:

Hi, Phil. Yes, let me address our results at Shanghai. They were incredibly positive this quarter. We've been really gratified to see the bounce back from the pandemic closures that we had. We're not going to get into too many specifics, but suffice it to say that the business is doing extremely well on both an attendance and a per-cap basis. We see that momentum continuing, and we also have some new attractions. We've talked about Zootopia coming later this year, and we believe that that is going to drive even further attendance and spending at the park. But Shanghai is doing extremely well, and we've been really gratified to see that bounce back. Like I said, it was closed for quite a long period of time during the pandemic.

Philip Cusick:

Thanks, Bob.

Operator:

The next question comes from Michael Nathanson of MoffettNathanson. Please go ahead.

Robert Iger:

Michael, when we launch this service, let me remind everyone, it was only three and a half years ago, so we're still a startup in many ways. The goal was, as you know, global subs, and we wanted to flood the so-called digital shelves with as much content as possible. To achieve, obviously, as much sub growth as possible. And now, as we grow the business in terms of the global footprint, we realize that we made a lot of content that is not necessarily driving sub growth, and we're getting much more surgical about what it is we make. So, as we look to reduce content spend, we're looking to reduce it in a way that should not have any impact at all on subs. We believe that there's an opportunity for us to focus more on real sub drivers. And one interesting example and I should also throw marketing in, too, where when you make a lot of content, everything needs to be marketed. You're spending a lot of money marketing things that are not going to have an impact on the bottom line, except negatively, due to the marketing costs. One thing we also know is that our films, those that are released theatrically, big tentpole movies in particular, are great sub drivers. But we were spreading our marketing costs so thin that we were not allocating enough money to even market them when they came on the service, as witnessed by the ones that are coming up, including Avatar, Little Mermaid, Guardians of the Galaxy, Indiana Jones, Elemental, etcetera, where we actually believe we have an opportunity to lean into those more, put the right marketing dollars against it, allocate more from basically away from programming that was not driving any subs at all. So, I guess this is part of the maturation process. As we grow into a business that we had never been in, we're learning a lot more about it. Specifically, we're learning a lot more about how our content behaves on the service, and what it is consumers want.

Alexia Quadrani:

Operator, next question please.

Jessica Reif Ehrlich:

Thank you. Bob, you mentioned that in the upfront, you will take a bigger share. You'll lean heavily into digital or AVOD. I'm just wondering, in the face of accelerating pay-to-view universe decline, is that enough to offset linear losses, or when will it be enough to offset linear losses and start to drive growth? And in the sub-universe decline thought, I'm just wondering if you can give us your thoughts on ESPN and how it transitions, or when it transitions to ESPN Plus.

Alexia Quadrani:

Operator, next question please.

Kannan Venkateshwar:

Thank you. Bob, on Hulu, the revenues of Hulu make it one of the biggest streaming businesses around, and it's also one of the oldest services around, but it doesn't seem to be profitable despite the scale. And it sounds like you've made up your mind on buying the rest of Hulu based on the announcement of the combination with Disney+. Does this combination allow you to change the cost structure of Hulu by maybe dropping content spending or the number of titles on Hulu and raising price because it's now a single service? So any color on your plans with Hulu would be much appreciated. And, Christine, on the parks, could you help us scale the impact of the recent wage increases in Florida and how that might impact the year? And, historically, the business has delivered mid-single digits for better revenue growth, and EBITDA grows faster than that. You now have a number of cruise ships, more attractions, higher price, but also higher costs. So could you help us think about the growth algorithm going forward more broadly? Thank you.

Christine McCarthy:

Hi, Kannan. Let me address your question on parks earnings growth and the outlook there. So I think the way I would phrase this is we do expect a really solid year overall for our domestic parks. That being said, we also expect increased costs. And we alluded to that in our first quarter earnings call. And they're really coming from a few areas most predominantly. One is wages with the new union contract coupled with inflationary trends. We do have some new guest offerings. So there's some incremental operating expenses that come along with those. And we also have the operational support for adding a fifth cruise ship to our cruise line fleet. I think you all know that we launched the Wish back last fall. So we continue to look at ways to address cost management. The team down there has done a great job throughout the pandemic and then coming out of the pandemic. But they utilize a variety of tactics to mitigate potential margin pressures and downside risk across the segments. And some of the levers that they can utilize to really address it are by looking at capacity in some of our new attractions, they increase the footprint or increase capacity so we can open up the valve a little bit more on attendance. And with some new attractions that are more based on newer IP, so that will get more people not only coming in but wanting to come in and enjoy the experience while they're there. And we also are really continuing to focus on meeting our customer needs there. But we think that, this is a growth business for us. We've said so in the past. And I do just want to give a call out to our cruise business. That business, as you know, was the most impacted. And we had talked about that, that was going to be the last business to come back from the closures during the pandemic. But that business has come back incredibly strongly over the last year, this fiscal year. And even looking out to the balance of our fiscal year, we're very encouraged by what we're seeing there and the reception to not only our new ship but also our legacy ships within the fleet.

Operator:

The next question comes from Michael Morris of Guggenheim. Please go ahead.

Robert Iger:

Not to get cheeky, Michael, I'm looking forward to a time where maybe AI does earnings calls for me. You probably wouldn't know the difference, perhaps. Maybe they'd be better. I don't know.

Robert Iger:

It's pretty clear that AI developments represent some pretty interesting opportunities for us and some substantial benefits. In fact, we're already starting to use AI to create some efficiencies and ultimately to better serve consumers. Getting closer to the customer is something that is a real goal of ours, and we think that AI will provide some great opportunities to do that. But it's also clear that AI is going to be highly disruptive, and it could be extremely difficult to manage, particularly from an IP management perspective. I can tell you that our legal team is working overtime already to try to come to grips with what could be some of the challenges here, and we're certainly not the only ones. I think this is across not only our industry but industries. So I'd have to say overall I'm bullish about the prospects because I think they'll create efficiencies and ways for us to basically provide better services to customers. On the other hand, I think that there's a lot we're going to have to contend with that will be quite disruptive and quite challenging. Getting more specific is not something I really am prepared to do right now.

Alexia Quadrani:

Operator, we have time for one more question.

Robert Iger:

We -- on the integrated app experience that we announced today, that's for consumers that have subscribed to both services for now. So in other words, it's taking what we call the dual bundle and putting it together in one experience, which is obviously good for consumers. Why have to close out one app and open another one? So it becomes a one app experience. We also think that it will benefit basically consumption in general, lower churn, be more attractive. It's just an all-in-one. It's a bigger platform, basically more content than it offered before. Outside the United States, we created that with Star, which doesn't have all the programming of Hulu, but it has a significant amount and it's working quite well. And it's one of the reasons why we're going to launch that as an advertised supported platform, as Christine mentioned. So I think to answer your question, we're bullish about an app that goes well beyond the Disney+ branded content and includes general entertainment, which maybe at one point I called undifferentiated. That was a little harsh. But that includes quality curated general entertainment for the purpose of growing advertising, growing subscriber fees, growing engagement, growing lessening churn, and to address one part of your question, reducing costs.

Doug Mitchelson:

Very helpful.

Alexia Quadrani:

Okay, thanks for the question. I want to thank everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on the fiscal to equivalent GAAP measures can sound on investor relations website. Let me also remind you that certain statements on this call including financial estimates are statements that are planned, guidance, or expectations, or other statements that are not historical nature may constitute forward-looking statements on the security laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, we do not undertake any obligations to update these statements. Forward-looking statements are subject to a number of risk and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors including economic or industry conditions and execution risks, including in-connection with our organizational structure and operating changes, cost savings and DTC business plans relating to content, subscriber, and revenue growth and profitability. For more information about the key risk factors please refer to our investor relations website, the press release issue today, and the risk and uncertainties described in our form 10-K, Form10-Q and other findings for the Security and Exchange Commission. We want to thank you for joining us today and we wish everyone a good rest of the day.

Operator:

Good day and welcome to The Walt Disney Company’s First Quarter 2023 Financial Results Conference Call. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Senior Vice President of Investor Relations. Please go ahead.

Bob Iger:

Thank you, Alexia and good afternoon everyone. It’s an extraordinary privilege to lead this remarkable company again, especially at the special moment in its history as we celebrate our centenary. Since I first became CEO in 2005, I have guided the Walt Disney Company through two significant transformations. The first was to confer greater creative control and authority to our creative businesses and to focus on great brands and franchises. It was also aimed at embracing new technologies and expanding internationally. It ultimately led to the acquisitions of Pixar, Marvel and Lucasfilm. Second transformation took place beginning in 2016 when we laid the foundation for Disney to become a true digital company. As we were planning to launch our streaming platforms, the opportunity arose to acquire numerous assets from 21st Century Fox. And that acquisition gave us a bigger library with more franchises, a broader global reach and a talented experienced management team that enabled us to generate even more higher quality content. In 2019, Disney+ launched with nearly 500 films and 7,500 episodes of television from across the world of Disney. Three years later, its meteoric rise is considered one of the most successful rollouts in the history of the media business. Now it’s time for another transformation, one that rationalizes our enviable streaming business and puts it on a path to sustained growth and profitability while also reducing expenses to improve margins and returns and better positioning us to weather future disruption, increased competition, and global economic challenges. We must also return creativity to the center of the company, increase accountability, improve results and ensure the quality of our content and experiences. Now the details. Our company is fueled by storytelling and creativity. And virtually every dollar we earn, every transaction, every interaction with our consumers emanates from something creative. I have always believed that the best way to spur great creativity is to make sure that people who are managing the creative processes feel empowered. Therefore, our new structure is aimed at returning greater authority to our creative leaders and making them accountable for how their content performs financially. Our former structure severed that link and it must be restored. Moving forward, our creative teams will determine what content we are making, how it is distributed and monetized and how it gets marketed. Managing costs, maximizing revenue and driving growth from the content being produced will be their responsibility. Under our strategic reorganization there will be three core business segments

Alexia Quadrani:

Thanks, Christine. [Operator Instructions] Operator, we are ready for the first question.

Jessica Reif Ehrlich:

Thank you so much. Hi, Bob, as Christine said, it’s great to have you back. It seems like a very different company than when you left even though it was only a couple of years ago, given the cyclical, but maybe more importantly, the secular challenges across all of your businesses, Linear Film, content competition, etcetera. So in the restructuring – what do you think are the quick fixes and what will take longer term to see the benefits of some of these actions? And on the $3 billion in cost cuts in content, is that largely fewer titles? And what does it mean for ultimate direct-to-consumer margins?

Jessica Reif Ehrlich:

Thank you.

Operator:

And our next question comes from Ben Swinburne with Morgan Stanley. Please go ahead.

Bob Iger:

Thanks, Ben. Nice to hear from you. I’ve been watching this very carefully for a long time. And what I’m talking about is the impact of technology is basically creating a huge authority shift from the producer and the distributor to the consumer. And as that authority has shifted, it’s made the traditional business more complicated, more to more challenging. And when you think about what streaming is, and we talked about this a lot as it related to multichannel TV, it is the ultimate ala card proposition for the consumer. It gives the consumer so much more authority than they ever had before because in reality, it gives them the ability to watch programs, not channels, not even bundles when you think about it. And because you are signing up in most cases for a 1-month subscription, you can sign up for one program, pay a relatively small amount of money and then end up basically unsubscribing. That’s tremendous change. And I think what’s going on right now is that as the linear business continues to erode, we have been basically eyes wide open on that. Christine commented about some of the challenges related to that, the streaming business, which I believe is the future and has been growing is not delivering basically the kind of profitability or bottom line results that the linear business delivered for us over a few decades. And so we are in a very interesting transition period, but one I think is inevitably heading towards streaming. So, what we are – the way we are basically contending with it, we have alluded to it today already is that – and this, I think is also directly related to our restructuring. We are going to rebalance a bit because those linear channels and movie theaters too still can provide us with significant amount of monetization capability. They enable us to amortize the cost better over multiple platforms and create some marketing cloud. When you think about it, Abbott Elementary airs on ABC, then it goes to Hulu. The demographic difference in age is tremendous. It’s like 60-years-old or around, estimating on ABC and then the 30s on Hulu. That’s a perfect example how the linear platforms, while they still have an audience and could help us monetize can still be used effectively, and we have that ability. And so we are going to monitor it very carefully. We are not in any way stepping away from streaming. It remains our number one priority. It is in many respects, our future. But we are not going to abandon the linear or the traditional platforms while they can still be a benefit to us and our shareholders.

Ben Swinburne:

Thank you both.

Operator:

Our next question today comes from Michael Nathanson at SVB MoffettNathanson. Please go ahead.

Bob Iger:

Well, the second question, as you know, we have locked in a number of deals already, including some of the biggest ones, which is in college football with the SEC as well as with the NFL, the one that’s looming is the NBA. And I know that’s on people’s minds, which is a product that we have enjoyed having and hope to continue to enjoy having, because not only it’s volume, but it’s quality. ESPN has been selective in the rights that they bought. I have had long conversations about this with Jimmy Pitaro, and we have got some decisions that we have to make coming up, not on something – not on anything particularly large, but on a few things. And we are simply going to have to get more selective. ESPN+ actually has grown nicely for us, and it’s shown us that the ESPN brand can be enjoyed and can be expressed well as a streaming brand. And I think that we are going to continue to look at that as a potential pivot for ESPN away from the linear business. But we are not going to do that precipitously. We are not going to do that until it really makes sense from an economic perspective. On the first part of your question, what either – what’s changed or where we headed from what was the second Investor Day. I think a few things. First of all, we were as a company in a global arms race for subscribers. And it was – the number of subscribers that have become kind of the primary measurement of success not only here in the company, but among in the investment community. And in our zeal to go after subscribers, I think we might have gotten a bit too aggressive in terms of our promotion and we are going to take a look at that. I listed a number of things on the call. That’s one of them. I talked about pricing as well. That’s another where we really have to look at are we pricing correctly, it’s interesting, as Christine noted. We took our pricing up substantially on Disney+, and we didn’t suffer any de minimis. We only suffered a de minimis loss of subs. That tells us something. It may also tell us that the promotion to chase subs that we have been fairly aggressive at globally wasn’t absolutely necessary. So, pricing is definitely one thing, promotion, obviously is tied to that. It’s also obvious to us is we can’t get the profitability and turn this into a growth business without growing subs. So, while we are taking off the table sub-guidance, we are still going to look to grow subs. We just want to grow quality subs that are loyal and where we actually have an ability to continue to price effectively to those subs. In addition, we are going to lean more into our franchises, our core franchises and our brands. I talked about curation and general entertainment. We have to be better at curating the Disney and the Pixar and the Marvel and the Star Wars of it all as well. And of course, reduce costs on everything that we make because while we are extremely proud of what’s on the screen, it’s gotten to a point where it’s extraordinarily expensive. And we want all the quality. We want the quality on the screen, but we have to look at what they cost us. So, we are going to continue to go after subs, but we are going to be more judicious about how we do that. We are going to look carefully at pricing. We are going to reduce costs, both in content and of course, infrastructure, there is a lot that we are getting out there. Marketing is another area where we are going to try to rebalance marketing of the platform versus marketing of the programs. Nielsen came out with something a few weeks ago that was stunning to us, and that was that 10 of the top 15 movies streamed in the United States in 2022 were ours. On that list was Moana and Zootopia and Frozen, but also Turning Red and Encanto. That suggests to us that our brands and franchises work extremely well in streaming. I mentioned how Wakanda Forever has done as well. So, core brands and franchises more efficient pricing, getting better in marketing, being a little bit more judicious at promotion, all of those things is how we believe we are going to get to turn the streaming business to a growth business. And one other thing, the streaming business is going to continue to grow, albeit at the expense of linear programming, but consumption of television is not decreasing, is actually going up.

Operator:

And our next question today comes from Philip Cusick with JPMorgan. Please go ahead.

Bob Iger:

Thank you, Phil. We are fairly certain that when we created the structure and broke ESPN out on its own that it would lead to questions like this. We did not do it for that purpose actually. ESPN is a differentiator for this company. It’s the best sports brand in television. It’s one of the best sports brand in sports. It continues to create real value for us. It is going through some, obviously, challenging times because of what’s happened in linear programming. But the brand of ESPN is very healthy, and the programming of ESPN is very healthy. We just have to figure out how to monetize it in disrupting and a continuing or disrupting world. That’s it. But we are not engaged in any conversations right now or considering a spin-off of ESPN. That had been done, by the way, in my absence. And I am told the company concluded after exploring it very carefully that it wasn’t something the company wanted to do.

Operator:

Our next question today comes from Doug Mitchelson with Credit Suisse. Please go ahead.

Bob Iger:

Nice to hear your voice again, Doug. We have been through many of these calls in the past. Well, the answer is yes on the theme parks in terms of their growth. I am very, very bullish about our parks and not just because of the COVID recovery. But to start with, demand on the parks is extraordinary right now. Now, we could lean into that demand easily by letting more people in and by more aggressively pricing. We don’t think either would be smart, because we let more people in is going to reduce guest experience. That’s certainly not what we want. And in fact, if you looked at our results this past holiday season, we actually reduced capacity certainly improved guest experience, and we are able to maintain profit, not just profitability, but a very, very successful or robust bottom line. We are going to continue to look at opportunities like that, which is essentially to simply get more creative in terms of managing the capacity that we have. I am going to come back to that in terms of growth, but let me also address the pricing side. It’s clear that some of our pricing initiatives were alienating to consumers. I have always believed by the way, that accessibility is a core value of the Disney brand. We were not perceived to be as accessible or as affordable to many segments as we probably should have been. So, after basically paying heat to what we were hearing, we started to address it. And the steps that we took were actually were very, very positive. We got really great reaction to it. In addition, and it’s tied to this is that we have put in place just basically more flexibility for the consumer in terms of how much it cost them to go. And interestingly enough, if you look at the increase of the core ticket, let’s say, Disneyland, it has not really increased that much, maybe slightly ahead of inflation over the last few years. But one of the things that was interesting to me and coming in and examining our pricing is, we are making that available to people for only 15 days a year. So, if you look at our new pricing strategy, we made it available, I think was 50 days a year, so we greatly increased accessibility to our lowest price. And it is really well received. So, we are going to manage capacity very, very carefully. Some of that, by the way, has enabled us to essentially shift mix to – from annual pass holders to people who may come just once in a lifetime or once. They tend to be good customers of ours because of their per cap spending when they are there. That’s really helpful. Some of the things that we put in place to manage basically annual pass holders was done to help us manage capacity without having doing too much damage to the bottom line. Lastly, we have learned that when we invest in increasing capacity, the Star Wars lands would be a good example of that, Pandora was a great example of that. We can grow our business. In fact, if you look at the results when we put Pandora and Animal Kingdom from year-to-year, they were stunning in terms of how many more people visited Animal Kingdom. I mentioned on the call that we are going to bring a version of Avatar to Disneyland. We have other opportunities as well. I have talked to Josh D’Amaro about this very recently, like this morning, again, to really look at all the great franchises of the company and see where we can invest in them in the parks to increase capacity while preserving guest satisfaction.

Alexia Quadrani:

Operator, I think we have time for one more question.

Steven Cahall:

Thanks. Bob, I will ask you a question that we have asked Christine a lot over the last year, which is you made the comment about ESPN+ expressing some success in streaming and sports. And there is probably now about 40 million homes who have decided to not be in the bundle. So, what do you need to see out there in the linear world to decide that an ESPN ala carte sports service in streaming should be the big leap for Disney? And then just a small one, you mentioned about how a lot of content can amortize in places other than streaming. You had talked a lot today about cost cutting. Should we think about licensing as also being a potential sort of big profit pool over the next few years? Thank you.

Steven Cahall:

Thank you.

Operator:

Thank you. Today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines, and have a wonderful day.

Operator:

Good afternoon and welcome to The Walt Disney Company’s Fiscal Full Year and Q4 2022 Earnings Results Conference Call. [Operator Instructions] Please also note, today’s event is being recorded. At this time, I’d like to turn the floor over to Senior Vice President of Investor Relations for Walt Disney Company, Alexia Quadrani. Ma’am, please go ahead.

Bob Chapek:

Thank you, Alexia and good afternoon everyone. Fiscal 2022 was a strong year for our company as we continued our journey of telling the incredible Disney stories, utilizing ground-breaking technology in order to further develop our brands and franchises while customizing and personalizing experiences to make magical memories that last a lifetime. Those efforts resulted in truly phenomenal storytelling, record annual results at our Parks, Experiences and Products segment, and outstanding growth at our direct-to-consumer services, which added nearly 57 million subscriptions this year to reach a total of more than 235 million. We are particularly pleased with growth in the fourth quarter, which saw the addition of 14.6 million subscriptions across our suite of services including 12 million Disney+ subscriptions, over 9 million of which were core Disney+. It has taken just 3 short years for Disney+ to transform from a nascent business to an industry leader. That transformation is the direct result of the strategic decision we made at launch to heavily invest in our Direct-to-Consumer offering, a decision made knowing that achieving rapid growth would result in short-term losses. Building a streaming powerhouse has required significant investment. And now with its scale, incredible content pipeline and global reach, Disney+ is well situated to leverage our position for long-term profitability and success. Our financial results this quarter represent a turning point as we reached peak DTC operating losses, which we expect to decline going forward. That expectation is based on three factors

Alexia Quadrani:

Thanks, Christine. [Operator Instructions] And with that, operator, we’re ready for your first question.

Ben Swinburne:

Thanks. Good morning. It’s good afternoon, sorry. Two questions, Bob. Can you talk a little bit about how – what’s the consumer experience going to be like as you roll out this price increase here in a month? You’ve got customers on lots of different plans, different distributors. Can you talk a little bit about your confidence that it’s going to be seamless and that consumers will have the ability to choose the plan that works best for them? And then, Christine, on the Parks margins, U.S. margins this quarter. I think through the first three quarters of fiscal ‘22, margins were up pretty nicely versus ‘19, and they were actually down, I think, this quarter. It didn’t sound like there was anything in your prepared remarks that sort of commented on that. There was a mention of cost inflation in the release. But just wondering if you could spend a little bit of time talking about some of the cost drivers in the U.S. Parks business in the quarter, anything unusual that you would want to call out and how we might want to think about that heading into ‘23? Thank you.

Christine McCarthy:

Okay. Ben, on your question about the Parks margins. So DPEP’s segment margin came in around 20.4% for this quarter, and that is lower than previous quarters this year. Let’s remember that Q4 is historically the lowest quarter of the year for margins. And there is two things going on here, both is on the revenue and the expense side. On the revenue side, it is primarily driven by traditional seasonality, back-to-school time and to a lesser extent, as I called out in my comments, the impact of Hurricane Ian, that was a $65 million drag on the quarter. We have been using 2019 as our base for comparison, pre-pandemic. So when you compare it to fiscal ‘19 Q4 the lower margin is driven by international park performance. And then if you flip to the expense side, the increase in quarter-over-quarter expenses is the continued effect of bringing on some more guest offerings. Those are things like night-time spectaculars. We also have hard ticket events, and they have a lot of cost just in terms of setup and breakdown. We also remember, have a new ship, the Wish that just started operations, and there are some other smaller one-time items, but those are the real drivers of that lower margin this quarter.

Operator:

Our next question comes from Philip Cusick from JPMorgan. Please go ahead with your question.

Christine McCarthy:

Well, I will take that, Phil. So, direct-to-consumer for ‘24 profitability, you should be thinking about it as a quarter, not a year basis. And then on some of the profitability drivers that we talked about that I think answered the question about the economy. We do have things like the steady state of content on the service, that’s independent of the economy. We are focusing on bundled offerings as we refine our value proposition. There is also increasing international core market penetration. Once again, that is somewhat reliant on a stable economy. And increasing ARPU through the pricing increases would also, I think be something that could be sensitive to the economic environment. We do have the Disney+ ad tier launch and ad monetization growth. And the indications that we have so far is that those are very strong. So, we really are looking at sort of the puts and takes on what’s going to be economically sensitive. But we just think in abundance of caution, we really have to keep the health of the consumer in mind when we think about achieving all of our goals this upcoming year.

Philip Cusick:

Thank you. If I can follow-up…

Philip Cusick:

I was just going to say you called out a few – both you and Bob called out G&A and marketing savings on the call. How is Disney thinking about just cost in general? Is there a process going on today to cut costs across the board? And what might the timing of that be? Thanks again.

Alexia Quadrani:

Thank you. Next question.

Operator:

Our next question comes from Michael Nathanson from MoffettNathanson. Please go ahead with your question.

Christine McCarthy:

Yes. So, talking about parks, Michael, what is different is compared to the last time we had a slowdown in the economy for managing our parks business, we have more commercial tools and levers available to us. One of the ones that’s quite obvious is discounting. That’s something that we have used in the past, and we will continue to use it because it is an effective lever for managing your yield, but we are not going to use it to the extent to which we used it during the last recession. Some of the other things that are new would be the reservation system. So, we manage attendance now. We can track it real time. On many days, we are fully booked now, but we can adjust that and be very flexible and real time on adjusting it if we so choose. The other thing is we have a tiered pricing structure that gives us a lot of flexibility. And we also have re-imagined our annual pass business model, and we could also have some more flexibility in using our annual pass program. We also have technology advancements, and this is more on the expense side. That provides us opportunities for cost flexibility. So, we have things like mobile ordering, contactless check-in, so those kinds of things give us levers on the expense side. But we do feel that we have, once again, harkening back to the opportunity we took during the pandemic. We did permanently remove a significant amount of operating expense at the parks, and that better positions us right now as we go into an uncertain economic environment.

Alexia Quadrani:

Michael, do you have a second question?

Christine McCarthy:

Yes. We gave the outlook that was more for the company as a whole, but we are still looking at DPEP being a strong – continuing its strong growth. DMED, we are looking at it in three components. The direct-to-consumer, we are looking at improving profitability, as we have mentioned. We believe that this quarter that we are reporting is the low point, and it will improve for here. CLS&O, that will have some challenges, as we said, so that will be variable quarter-to-quarter. And then we have to look at our linear business. And we do have sub declines that are in line with the industry, and that’s one that is just an industry issue that we are all going to be managing through.

Operator:

Our next question comes from Kannan Venkateshwar from Barclays. Please go ahead with your question.

Bob Chapek:

Our approach going forward is going to be focused largely on profitability, keeping in mind though, that the revenue growth that we have is also going to be a key component towards the overall profitability. If we look at the content that’s going to actually fuel our subscriber growth and our engagement, we are obviously managing that very carefully. Christine talked about some cost management initiatives. That’s not only across marketing, but also on the content spending itself as well. But we have also got an opportunity, I believe to manage that profitability through that pricing power that we believe we have. We launched these services at tremendous values to the consumer. And everything that we have got shows us that we still have some opportunity for continued price value exploration on all of our services. So, we believe that – and our history shows that when we have taken price increases across our streaming businesses that we don’t meaningfully increase churn or cancellations. So, we believe we have still got some headroom there. So, whether it’s cost management or attention to revenue growth through sub ads through our great content additions or through ARPU, we believe that we have got a formula that gives us great confidence that we are going to achieve the guidance that we communicated.

Operator:

Our next question comes from Steven Cahall from Wells Fargo. Please go ahead with your question.

Bob Chapek:

Okay. In terms of ESPN growth, I think we all have to keep in mind that, number one, ESPN is that powerhouse brand. And we certainly, over time, have been able to enjoy the benefits of that brand in a linear world. However, going forward, we have got the ability not only to continue to enjoy those benefits in the linear world, but also began to grow our opportunities in the digital realm and leverage that brand’s growth into other avenues that therefore we have not been able to necessarily tap into. I think it’s also important to look at ESPN in terms of an important part of the overall Disney portfolio or synergy machine. It is an integral part of the bundle itself. So, when you take the fact that it’s a great brand, we have the opportunity to grow it into different avenues. And as I have said before, sort of one foot on the dock, one foot on the boat and be flexible in terms of our speed of evolution, I think it’s going to be an important part of our business going forward. Live advertising continues to be a really important benefit that we sell into our advertising community. We have got multiple platforms, and I believe that it’s going to be a very robust part of our company going forward, whether or not it’s linear or whether it’s digital or somewhere in between.

Steven Cahall:

Thank you.

Operator:

And our next question comes from Michael Morris from Guggenheim. Please go ahead with your question.

Christine McCarthy:

Yes. I will take the first one, Mike, on the revenue decline. So, there are a couple of things. One is that on the ARPU, the impact of foreign exchange on ARPU was about half of the decline. And we do hedge and we have very successfully managed through this year’s strong dollar for the most part. However, as you know, we are in markets all over the globe and some of the markets in which we have launched their currency, we do not hedge for either extraordinarily high costs or illiquidity. So, that foreign exchange impact was about half of the impact. And the other one is lower pay-per-view and this was at ESPN+. We have UFC, but we had a different game sched – different match schedules. You can tell I am not a UFC fan when I call them games, but a different match schedule and the omission of a key personality in MacGregor. So, that actually were the two primary factors lowering that year-over-year revenue.

Bob Chapek:

Okay. Yes, in terms of the sort of the landscape changing with new entrants, we really like our strong position that we have got going forward, not only in terms of the breadth of the sports that we are engaged in, but also the terms of the deals that we have. So, we have exercised with discipline. I think the college conferences in terms of our negotiation, making sure that we recognize that we don’t need everything. We just need the right things. But also making sure that as we go forward, we are looking at multi-platform rights. We will not do deals where we don’t get multi-platform rights to give us that very flexibility that we talked about toggling between sort of the more linear traditional legacy distribution channels and that of the more digital forward-looking platforms. The big one that’s coming up, obviously, for us would be the NBA. We would love to be in business with the NBA. But again, we are going to do it in a fiscally responsible way and seeking multi-platform rights. So, we feel really good about our position going forward with the rights that we have already got and the one or two that are still in play.

Michael Morris:

Thank you.

Operator:

And ladies and gentlemen, with that, we will conclude today’s conference call. We do thank you for joining. You may now disconnect your lines.

Operator:

And ladies and gentlemen, with that, we will conclude today’s presentation. We do thank you for joining. You may now disconnect your lines.

Operator:

Good afternoon and welcome to The Walt Disney Company's Third Quarter 2022 Financial Results Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Senior VP of Investor Relations. Please, go ahead.

Bob Chapek:

Thank you, Alexia, and good afternoon, everyone. We had an excellent quarter powered by world-class storytelling, outstanding performance at our domestic theme parks, increases in live sports viewership across our linear channels and ESPN+ and significant subscriber growth at our streaming services which added 15.5 million subscriptions in the quarter, including 14.4 million Disney+ subscribers, of which 6 million were core Disney+ and 8 million were Hotstar. As of the close of Q3, we now have 221 million total subscriptions across our streaming offerings. Our results showcase the ability of The Walt Disney Company’s uniquely diversified business to power our ecosystems and explore growth opportunities across industries and distributions channels. I’ll expand on all this and more and then Christine will go through the details of our results and provide additional insight into our fiscal 2024 expectations for Disney+. Creative excellence in storytelling that builds deep emotional connections with audiences is at the root of our success. And I am pleased to say that our creative engines are firing on all cylinders across franchise, general entertainment and sports. In a testament to the depth, breadth and quality of our creative teams, we received 147 Primetime Emmy award nominations this year, including 92 for our streaming platforms and 21 for best program in a genre, recognition across formats and distribution channels with 47 different shows receiving nominations, including titles like Only Murders in the Building. Abbott Elementary, What We Do in the Shadows and The Dropout, right alongside shows from Disney, Marvel and Star Wars. And most recently, we received an additional 71 news and documentary Emmy nominations across ABC News, National Geographic, FX, Hulu and ESPN. In addition to critical and industry recognition, we are thrilled by the audience response to our general entertainment offerings, response that is enhanced by a distribution strategy that maximizes reach by taking advantage of the strength of both our linear and streaming channels. Given the multiple ways, we bring our content to audiences, we take a thoughtful approach to each distribution decision to determine the best strategy for each of our many high-quality titles and platforms. Some like the Buzz-Generating Candy, the Kardashians and The Bear may be best served as Hulu originals. Others like Abbott Elementary and The Old Man have become multiplatform hits by reaching different audience demographics, across both linear and streaming. And when it comes to our key franchise content, I could not be more proud of the teams at Disney, Pixar, Marvel and Star Wars. The hugely successful, Dr. Strange in the Multiverse of Madness has earned nearly $1 billion at the global box office. And Thor

Alexia Quadrani:

Thanks Christine. As we transition to Q&A, we ask you please limit yourself to one question in order to help us get to as many analysts as possible today. And with that operator, we're ready for the first question.

Doug Mitchelson:

Thanks so much. One question, there was so much to ask about. Why don't I go with this and I do appreciate you separating out the guidance between Hotstar and core Disney, but Parks were impressive this quarter. And as you talked about levers of demand were to shift, has the company satisfied pent-up demand from the pandemic at the Parks' point? Should we look at the go-forward basis is relatively normal trends? And I'm guessing you have a different answer for domestic versus international. And Christine I'd be curious if you'd put any meat on the bone regarding the levers if demand were to shift at the Parks? Thank you.

Alexia Quadrani:

Thank you. Next question.

Ben Swinburne:

Good afternoon. Bob can you talk a little bit about, sort of the research and insight you have into your streaming customer base that sort of informs the decision to take these price increases which on a percentage basis are pretty large, without really reducing net adds with from churn spiking as you implement these price increases? And maybe talk a little bit about, how the product that consumers will be paying for next year at these higher prices will compare to this year. And I'm just wondering are you planning to take similar pricing moves at least directionally outside the U.S. overtime? Thanks for the color.

Alexia Quadrani:

Thank you. Next question?

Steven Cahall:

Thanks. So the DPEP margins were really spectacular. I'm just wondering, what kind of trends you're seeing from international visitations. Were those strong in the quarter, or is that a tailwind to either per caps or hotel occupancy as you get into the back half of the year and you see more international traffic?

Alexia Quadrani:

Thank you. Next question?

Michael Nathanson:

Thank you. I just wanted to dig a bit on the ad product at Disney+. What's your expectation for ad load or modernization per sub, given there's a $3 difference between the premium with no ads and the ad product? And maybe what you've learned from Hulu over the years, that informs your expectations on monetization. Thanks.

Christine McCarthy:

And the only other thing I'd add to that Michael is based on our Hulu experience that even current subscribers who have ad-free may choose to stay at the same price point with ads. The Hulu ad-supported tier has more subscribers than the ad-free. In fact, it's well over about – it's about two-third. And that's something that we can't anticipate that we'd have exactly the same behavior because it's a different demo that has Disney+ versus Hulu but that's the best indication that we have. But we expect the ad tier to be popular and we also expect some people to want to stay with ad-free.

Operator:

And that question will come from Jessica Reif Ehrlich from Bank of America. Please go ahead.

Bob Chapek:

I think you want to divide yourself. Okay. I'll talk about the MBA first. As you know, we've had a great history with the NBA, really proud of our partnership there. And the past season and the ratings for the finals have been absolutely extraordinary. So we're interested in a renewal with the NBA. But like all of our decisions that we make in terms of content, we'll only do it if it's accretive to shareholder value. And I think that remains the overall guidance, whether you're talking about India with IPL, whether you're talking about college sports, whether you're talking about Formula 1 racing or you're talking about NBA. So we have an interest to do that. We're really happy with our portfolio of sports rights that we have. But of course, the continued relationship with the NBA would be something that would be very attractive to us.

Bob Chapek:

Yes. Well, in terms of sports betting we are – have been in conversations for quite a long time now with a number of different platforms to add some utility to sports betting and take away some friction for that for our guests. We have found that basically our sports fans that are under 30 absolutely require this type of utility in the overall portfolio of what ESPN offers. So we think it's important. We're working hard on it, and we hope to have something to announce in the future in terms of a partnership there that will allow us to access that revenue stream and also make sure that our guests are being – having their needs met.

Alexia Quadrani:

Next question please.

Kutgun Maral:

Great. Thank you for taking the questions. One on the parks and then a follow-up on FX if I could. First, the parks are going through a particularly innovative and transformative period given your investments in technology, digital tools and improvements in the guest experience. So from the outside, it seems that the business is as well positioned as it's ever been in the face of a potential recession. But I'd love to get your views on the various sensitivities associated with what the consumer is seeing and how you'd characterize the resiliency of the business. I know you talked about different levers at your disposal, but perhaps there's been a structural change in the business compared to prior recessionary periods that you could speak to? And then Christine, if I could follow up on your foreign exchange commentary. Can you share a bit more on how you manage your FX risk? And what was the impact of FX on DTC ARPU? Thank you.

Christine McCarthy:

And I'll take the question on foreign exchange and the way we hedge. So, we do have a hedging policy that is well established and has really served the company well over very volatile foreign exchange markets. So, just level set, we have a program and the goal of it is to reduce the impact that changes in foreign exchange rates have on our current and future earnings. So, we really have an objective of trying to attain earnings and cash flow stability and predictability. So, we try to take out the ups and the downs. So, the hedging program it has significantly reduced the negative earnings impact of the strong dollar that we've seen both in the third quarter as well as the fiscal year-to-date. And so despite being economically hedged as it relates to ARPU, we do not allocate the hedge gains or losses specifically to ARPU in the various markets. So, therefore, the reported ARPU for international Disney+ was impacted by the unfavorable exchange rates in the quarter. Another thing is when you look at content sales and licensing, especially if you go back and look at the transcript, you'll note that there was a reference to that also being impacted by negative foreign exchange. That was just a balance sheet ineffectiveness. We also hedge the balance sheet. And that had to do more with we based our hedging on forecasted plans. And if the plans come in stronger and were underhedged or overhedged, in this case we were it did not benefit us because we were hedged the right way for the dollar strengthening, but that is a one-timer that should not be repeated. But as it relates to ARPU, if you have some volatility, you will see it in the ARPU, but it nets out as a company overall. As I mentioned in my other comments that this is not a material item for us on a consolidated basis. You just saw it spike out, especially in DMED. And the other thing is we do hedging on a multiyear basis. So, we layer in our hedges over a period of time, which has really served us well in the current environment.

Operator:

And the next question is from in Kannan Venkateshwar from Barclays. Please go ahead.

Bob Chapek :

Okay. In terms of the strategy on sports, we're continually enamored by the power sports in terms of viewership and what it adds to our overall portfolio particularly in an advertising type world. As you know, we get strong cash flows on linear and it helps to pay some of the bills in the companies we make some of our significant investments in content, and we also like the proposition of growth and expansion on our DTC.. In terms of the rights, if you look at the college rights, we've got the SEC, we've got the ACC, we've got the Pac-12. We've got the Big 12. We've got the play off. We've got the most comprehensive programming. So if we don't get rights in every single conference, we don't believe that's in any way limiting for us. But what we're all preparing for is the future of what ESPN would look like in a direct-to-consumer -- in a true direct-to-consumer fashion. And I think the way that we're looking at this is that we want to proactively prepare for that future without prematurely disrupting the cash flow that we get from the linear networks right now. And as you know we've negotiated flexibility into our rights agreements across the board for any new rights that we have acquired over the last several years, but we're still bullish on sports. We believe there's tremendous degrees of freedom in terms of what ESPN DTC ultimately looks like. I think we're very proud of what we've done to-date on ESPN+, but that no way limits how we envision what true ESPN DTC proposition would look like going into the future.

Alexia Quadrani:

Thank you. Next question please.

Phil Cusick:

Hi. Thank you. One and a follow-up on DTC. First, Christine, there were higher DTC and Disney+ programming costs than we expected this quarter. Can you give us some direction of where to go in the fourth quarter? And when should we expect those Disney+ operating income losses to peak? And then second, if you could dig into the guidance to acceleration of subs in the fourth quarter. I think that's an acceleration in the total subs and then you set a higher mix of growth toward domestic? Thank you.

Alexia Quadrani:

Thank you. Next question please.

Brett Feldman:

Hi. Thanks. And if you don't mind I'd like to follow up with the question about the ad experience on Disney+. And it's only two things, I was hoping you could comment on. The first is, would you expect to potentially display ads alongside any of the content? Some of that content including some of the kids' content I think historically in a linear world didn't necessarily have ads alongside of it. So I'm just thinking about that element of it. And then secondly, you have a competitor that's looking to layer advertising into their product, they're suggesting that, they're going to somehow do it differently. And I'm just curious, as you think about the experience you've had in streaming advertising. Are you mostly going to look to leverage the formats you've used very successfully with Hulu, or do you actually think there may be an opportunity to use some innovative new formats on Disney+ for ads? Thank you.

Christine McCarthy:

And as it relates to the ad experience Brett, it's not all content on Disney+ being treated equally. There will be no ads in kid's profiles or preschool at least at the launch. And so this is going to be done very thoughtfully and looking at the content and also making sure that the advertiser is consistent with the content.

Operator:

Sure. And that question is from Bryan Kraft from Deutsche Bank. Please go ahead.

Christine McCarthy:

Sure. So on working capital, we have seen net working capital outflows as our businesses are getting back up and running and going back to more normalized operations after they were turned down during the pandemic. And you'll see in this quarter, we did generate positive free cash flow of $187 million in the quarter. On taxes, our effective -- annual effective tax rate has generally been correlated with the US statutory rate. But there are a lot of things on a quarterly basis. We call them puts and takes in any given period. And these can lead to these quarterly variances. But we still expect our full year 2022 tax rate is going to be somewhat elevated above the US statutory rate similar to what you saw. And for Q4 it could even be slightly above Q3. As it relates to fiscal 2023, we're just working now through our annual operating plan. And I don't want to get too specific today but it's one of the factors we keep a close eye on as it relates to our ability to utilize foreign tax credits. And that ability to utilize foreign tax credits has been the source of some volatility that you've seen especially in Q2 tax rate.

Operator:

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Operator:

Thank you for standing by, and welcome to The Walt Disney Company Second Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. Please be advised that this conference is being recorded. After the presentation, we will conduct a question-and-answer session. [Operator Instructions] I would now like to hand the conference over to your speaker today, Alexia Quadrani, Senior Vice President of Investor Relations. Please go ahead.

Bob Chapek:

Thanks, Alexia, and good afternoon, everyone. In Q2, Disney's employees and cast members continued to execute against our strategic priorities of storytelling excellence, innovation and audience focus, and I could not be more proud of what they've achieved. Our strong results this quarter, including fantastic performance at our domestic parks and continued growth at our streaming services, along with the creative achievements of our content teams once again proved that we are in a league of our own. We have entertainment's most iconic brands and the world's favorite franchises, a high-quality creative pipeline that will continue to drive engagement and consumption and an unrivaled synergy machine with touch points that reach audiences across distribution channels, geographies and demographics, all of which come together to create a deep emotional connection with audiences across generations. I'd like to share a few highlights from the quarter that illustrate these strengths, and then Christine will go through the details of our results. As I said, our domestic parks were a standout. They continue to fire on all cylinders, powered by strong demand, coupled with customized and personalized guest experience enhancements that grew per capita spending by more than 40% versus 2019. Response to next-generation storytelling like Star Wars

Alexia Quadrani:

Thank you, Christine. We are happy to be back here in person for this call. But to make it easier, I will help direct the questions. We ask that you please limit yourself to one question in order to help us get to as many analysts as possible today. And with that, operator, we're ready for the first question.

Brett Feldman :

Bob touched on pricing to some degree during his comments. So I thought we could come back to that. One of the questions we've been getting is, how do you think about the right cadence for revisiting pricing on Disney+ really when you can take price higher? It just seems like there's a lot of factors that would go into that, including the fact you'll be launching a new ad-supported tier. You're putting a lot more content onto the service. You've seen some increased competition. And obviously, there's some inflationary pressures, and I'm just not quite sure if you put all that to a pot what that yields in terms of how you're thinking about pricing.

Operator:

Next question is from Ben Swinburne with Morgan Stanley.

Alexia Quadrani :

Bob, why don't you take the first half and then Christine can follow up.

Christine McCarthy :

Great. Ben, your question on net adds for the second half of the year, we still do expect an increase over the first half. However, the first half came in better than expected, so that delta that we had initially anticipated may not be as large. But we still do expect an increase in the second half to exceed the first half.

Michael Nathanson :

I have 2. First would be, Bob, it seems that the equity markets are now focused on kind of the cost to achieve subscriber growth and maybe not just focused on the sub numbers as much as the cost to achieve. So I wonder with you, given the rising content costs you're seeing in things like sports and competition around the globe, how do you measure maybe the need to drive shareholder returns versus attaining those sub targets that were laid out in 2020? And how do you -- and how and when will you determine what the ROIC would be on maybe the next 100 million subs versus the first 100 million subs? And then, Christine, can you talk a bit about any type of incremental margins at the parks? Very strong so far, halfway through the year. Any type of inflation on the parks that could limit maybe the margin growth we've seen at this point?

Christine McCarthy :

Hi, Michael. On the parks margins, as Bob said, we feel really good about the consumer demand and what we're seeing in the forward-looking bookings and everything else in the attendance levels. So we feel good about that portion of margins. The one that is more challenging is what we face with inflation. But we do pay close attention to all the recent inflationary pressures, and it covers everything from merchandise to food and beverage. I'll give you an example of something -- for those, we are actually always looking at mitigating impacts of rising costs. But I'll give you a good example of one that we are executing on, and that is the increased cost in fuel. We have a very robust fuel hedging program at Walt Disney World, and that reduces risk and minimizes volatility, reduces volatility in the cost of fuel. And so that -- while we suspended that program while the parks were shut, we have reopened that program and we are doing what we can to minimize the impact on that particular cost. We do have the labor impacts. Rising wages is something everybody is dealing with and a tighter labor market. On the supply chain, our business isn't immune to the global supply chain challenges. And to the extent we experience any product availability impacts given strong demand that we're seeing, we're working with our suppliers to diversify some of our suppliers, and we're also working with shippers to expedite the time to receive those through shipping. But right now, it's very difficult to accurately forecast the potential financial impact due to the fluidity of the situation. But you can trust that we are fully aware of it, and we're working hard to mitigate any pressure on the margins.

Operator:

From Jessica Rief Ehrlich with Bank of America.

Bob Chapek :

Okay. Let's see. I'm going to take the first part first. We're expecting a very positive reaction from advertisers overall. And as you suggest, this is a combination of our excitement around the Disney+ ad tier. They have been asking for this for years. And we also expect Hulu, as you know, which has been very strong for us at the same time, to be a key contributor of our performance at the upfront this year. The other thing is that sports are going to continue to be in high demand. And so with the advertisers, we focused on the right deals that we've made over the past few years as well as our robust slate of original content shows and our studio shows and original content games. In terms of sort of the growing-the-pie idea, we believe that the value proposition of advertising with Disney+ is only enhanced with our addition of an ad-supported tier on Disney+. So we believe it's good for the consumer because it's going to give us another entry price point, but it's also going to be great for the advertisers. Our advertisers increasingly are looking for multiple platforms to reach a broader reach. And we think that as a company, we're going to provide that given our portfolio of streaming and our linear networks. So I think we're creating more avenues, both for consumer choice and for comprehensive advertising solutions, for our advertising customers at the same time.

Steven Cahall:

Just 2. Maybe first, Bob, what's holding you back from making ESPN a fully a la carte sports network? Disney historically has always been more aggressive in the pivot to streaming than some of the peers. We've already seen some of the peers put a lot of their key sports like the NFL on to streaming. You talked a lot about how much the bundle is working with Disney+ and Hulu. So just really wondering how you're thinking about all the content you've got on ESPN+ and what it would take to make that fully a la carte and drive the DTC strategy even harder. And then Christina, I have asked this before, so I'm just going to try again. Of the $32 billion in content spend, any help in sizing maybe how much of that is either general entertainment or local content?

Christine McCarthy :

Okay. Steve, to answer your question on that $32 billion of content spend and where it's going, remember back when we talked about that initially, we talked about it being about 1/3 in sports. That still remains. And when you think about the balance of that $32 billion, a meaningful amount of it will be enterprise-wide content budget that will be dedicated into investments into the general entertainment content that we can leverage across all of our various distribution platforms. When we say that, we mean linear, theatrical as well as direct-to-consumer. And as I mentioned earlier, our world-class creative teams are focused on creating content that will drive subscriber growth in targeted segments and deeper engagement across the platform. This includes leveraging our existing intellectual property. Also, we're intent on creating new franchises. You saw that in Encanto and investing in general entertainment, local language content and sports rights. I just want to -- even though you didn't ask about local language content. I do want to give you some perspective because we haven't provided this previously. But as Bob mentioned, we have about 500 shows in the pipeline for local content outside of the U.S. or English speaking. When you look at that 500, I'll give you some broad breakdowns. In the Asia Pacific region, including Southeast Asia, of that 500, 140 is in that region; in EMEA, it's 150; in India, it's 100; and in Latin America, it's 200. So we haven't given that before, but I think that also kind of breaks it up in the various regions that we are in outside of the U.S.

Operator:

Next question is from Kannan Venkateshwar with Barclays.

Bob Chapek :

Okay. I'm going to start with China. And the situation there has been very fluid, and as you probably guess, very complicated both from a business standpoint and from a political standpoint. But as you know, we've got a long record of success and a strong fan base for our brands and franchises in this market. And our most recent releases were Death on the Nile and Encanto. And we'll continue to submit our films for release. And it's worth noting, I think, though, that at the time that we're having some difficulty in getting our films in China that Doctor Strange did extraordinary. We've just crossed $500 million in less than a week without this market. So we're pretty confident that even without China, if it were to be that we continue to have difficulties in getting titles in there, that it doesn't really preclude our success given the relatively lower take rate that we get on the box office in China than we do across the rest of the world. Christine, do you want to talk about streaming?

Alexia Quadrani:

Operator next question?

Philip Cusick :

A couple of follow-ups, if I can. On parks, can you talk about where the parks are -- the U.S. parks are in terms of staffing at parks as well as the potential for upside or not in those domestic attendance numbers for customers? And then, Bob, if I can go back to your comment on ESPN going all online someday, I think most of us expect us to happen eventually. Clearly, that will be a huge change in the P&L at both DTC and linear. When that happens, does the overall profitability of the company take a hit for a year or 2? And how does the long-term sports on ESPN+ model work? And what's the structure of that versus what we've seen in the past of a purely linear model?

Christine McCarthy :

Sure. On our parks business, we're obviously extremely pleased with our domestic parks operations and how they have come back robustly. But on domestic attendance, we are -- we could, but we're choosing to limit attendance using our reservation system. And once again, that goes back to us trying to balance demand and attendance throughout the year, not have days when consumers in the parks aren't enjoying the experience. So attendance is something that we're controlling, but we're doing it to have a better consumer experience. And some of the things that we've brought back, we will continue to with additional capacity. But some capacity that we just brought back in April were things like the character meet-and-greets at our domestic parks. And we also brought back in April our Nighttime Spectaculars at the Disneyland Resort. And we'll also be opening a new attraction at Walt Disney World Guardians of the Galaxy

Alexia Quadrani:

Operator next question please?

Douglas Mitchelson :

So I guess 2 questions, if I could. Bob, you've continued to suggest a lot of confidence in Disney+ guidance. Can you talk about trends for churn and engagement for Disney+? And I'm not sure if you're willing to share how much of Disney+ viewing is new content versus library, just thinking as more and more new content starts to show up and ramp. And then separately, and maybe this is for Christine, Alexia, you'll let me know. But I'm just curious what you think the international fee park margin potential as it peaked at 16% in fiscal '19. I think we're getting a pretty good idea that the domestic theme parks is going to be very, very profitable. But international is still a bit of a mystery. I know you've got some parks closed and there's some disruption, but you also have a good idea of what you're seeing in the U.S., how you could apply that overseas and what you've done with the cost structure during the pandemic. And also, if you look back at fiscal '19, sorry for making the question a little bit longer, but Hong Kong was shut down for part of the year; china was, what, in year 3. So I'm just curious if those international margins, do we think about them getting closer and closer to U.S. margins over time?

Bob Chapek :

Okay. In terms of our confidence in Disney+ guidance, as you probably know, we have a tremendous amount of data that we get on our DCC platforms, things like the first view, what's the first view that somebody watches when they first come on to our platform, which is a pretty good proxy for maybe why they signed up. There's also the amount of time spent, the engagement scores and then, of course, the churn information that you sort of look at. And we've said this before in past earnings calls, but we're extraordinarily pleased with the low churn that we see, particularly given the bundle. The bundle is really efficient in terms of churn. And that gives us a lot of bullishness when it comes to the idea of bigger offerings from Disney. So as we sort of take each of these elements, when we get a new piece of content, we'll look at first view, we'll look at engagement, we'll look at the amount of time they spend on it. And we can model. We can do a lot of modeling. And that modeling suggests that in addition to things like local market content, new content coming online, both in terms of general entertainment and from franchises as well as new markets being added, that, that Disney+ guidance is going to be very achievable for us both in terms of the sub adds and in terms of the operating performance.

Douglas Mitchelson :

If I could just follow up, maybe the simple way to put it is, you've talked about the potential for higher park margins than previous peak. Would that apply to both domestic parks, and separately, international parks longer term?

Alexia Quadrani:

Operator we have time for one more question.

Michael Morris :

I have a couple on this advertising tier we're talking about for Disney+. My first is, can you share anything else on what remains to be done prior to the rollout, the implementation of that advertising tier? Are there assets you need to acquire? Or what are you building or anything like that given the pieces that you do already have in place through your ownership of Hulu, et cetera? So I'm curious about the advertising infrastructure. And then the second, you touched on this a little bit, Christine, but I'm curious if you can share any more relative sizing of the ARPU potential of the ad-supported service. Given that Disney+ is still half the price of Netflix domestically, I'm curious if ad-supported ARPU could actually be higher than where you are right now and if this does present a catalyst for you to raise price on the ad-free service?

Bob Chapek :

Okay. We're in really good shape in terms of being able to meet our timing with our Disney+ ad tier. And that's largely because we're already doing it. The combination of our ESPN+, streaming tech stack and our experience in Hulu and the software, we think that our current advertising capabilities really substantially prepare us to already bring this tier into operations. So there's nothing that we need to go acquire or, frankly, even in any significant way developing anything new. And that's due to the ongoing investments in technology that we've made over time to increasingly automate much of this process. And we've been looking forward to this for a while. So this is something that's well-greased, if you will. And our teams are hard at work at making that become a reality.

Alexia Quadrani :

Okay. Thanks for the question, and I want to thank everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, guidance, expectations, beliefs or business prospects or other statements that are not historical in nature, may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors. For more information about such factors, please refer to our Investor Relations website and the press release issued today as well as the risks and uncertainties described in our annual report on Form 10-K, quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. We want to thank you for joining us today and wish everyone a good rest of the day.

Operator:

Good day, and thank you for standing by. Welcome to The Walt Disney Company's First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference may be recorded. [Operator Instructions] I'd now like to hand the conference over to Jenn Kettnich, Vice President of Investor Relations for The Walt Disney Company. Please go ahead.

Bob Chapek:

Thanks, Jenn, and good afternoon, everyone. As we begin the final year of The Walt Disney Company's first century, I am pleased to share our results for the first quarter of fiscal 2022, starting with the highlights. Our adjusted EPS of $1.06 is up from $0.32 a year ago. Our Domestic Parks and Resorts achieved all-time revenue and operating income records despite the Omicron surge. And our streaming services ended Q1 with 196.4 million total subscriptions after adding 70.4 million in the quarter, including 11.8 million Disney+ subscribers. I'll share more about those items shortly. But first, I want to talk about this unique moment in the history of The Walt Disney Company. It is perhaps fitting that our 100th anniversary comes at a time of significant change for us and our industry. In the midst of a global pandemic, fast-changing consumer expectations and a leadership transition, we reimagined our Parks business, substantially increased our investment in content creation and executed a reorganization that will facilitate our ongoing transformation. Each of those actions has helped set the stage for our second century, and as we approach that remarkable milestone, I am filled with optimism. We have the world's most creative storytelling engine, an unmatched collection of brands and franchises and an ability to tell stories that form deep emotional connections with audiences. We have a portfolio of distribution platforms, including powerful and growing streaming services. We have diverse revenue streams that span business models and industries, but which all are interconnected to create entertainment's most powerful synergy machine. We have the country's top news organization and the most trusted brand for following sports and our theme parks continue to be the most magical places on earth. In short, our collection of assets and platforms, creative capabilities in unique place and the cultural zeitgeist give me great confidence that we will continue to define entertainment for the next 100 years. To carry through on that promise, we will be guided by three strategic pillars

Jenn Kettnich :

Thanks, Christine. As we transition to the Q&A, let me note that since we are not physically together this afternoon, I will do my best to moderate the Q&A by directing your questions to the appropriate executive. [Operator Instructions] And with that, operator, we're ready for the first question.

BenSwinburne:

Thanks. Good afternoon, and thank you for the additional disclosure. Bob, I wanted to ask you about Disney+. The U.S. subscriber base or the, I guess, the U.S. and Canadian subscriber base is larger than we would have thought. You guys have gotten to, I think, almost -- probably more than 1/3 penetrated of total broadband homes. And it's, I guess, interesting to me because it's a narrower service than the international product, which has the Star tile. So I'm just wondering if you could talk a little bit about how you see the runway still ahead in North America for that product. And then when you look at the international business, so leaving Hotstar aside, what does your research tell you about what the company needs to do to drive that business meaningfully higher? Because it deliver on your '24 guidance, that's really probably the biggest key is to get that sub base going. So I'm just curious, as you look at the plan, what are the things you think really can make that happen? Thank you.

Ben Swinburne:

That's super helpful, Bob. And just curious, as a follow-up, of those 300 productions or the local originals, will we see a lot of that in fiscal '22 come on the service?

Ben Swinburne:

Thank you.

Operator:

Our next question comes from Michael Nathanson with MoffettNathanson.

Bob Chapek:

The sports proposition internationally really varies by market. As you know, in Europe, it's not a big component for us, but in Latin America, it actually is. And our -- the way that we've gone to market in each territory, one of the differences between how we go to market in Asia versus how we go to market in Latin America versus how we go to market in Europe is a function of sports. That's a really big piece of it. And where you see like in Latin America where we've got a very big percentage of our consumers that are subscribing to our services because of sports, it's a bigger component to that. Sports for us are -- it's a very important strategic offering because the fandom and the passion is so deep. If you look at India, we're certainly going to try to extend our rights on the IPL. But we're very confident that even if we were not to go ahead and win that auction that we would still be able to achieve our 230 to 260. So it's an important component for us around the world. Obviously really important in India, but not critical to us achieving the 230 to 260 number that we've guided to.

Jenn Kettnich:

Thanks, Michael. Operator, next question, please.

Kannan Venkateshwar:

Thank you. So Bob, if I could just follow-up on that comment on IPL. Hotstar was about 40% of your long-term guide and without cricket, getting to that number seems like a little bit tougher to do, just given the popularity of the sport in the country and also the fact that Hotstar has been in the country for a long time as a localized service. So just wanted to see what bridges that gap to your guidance if -- in the scenario that you don't end up getting Hotstar? And then beyond that, maybe -- sorry, go ahead, Bob.

Kannan Venkateshwar:

So Christine, from a guidance perspective, I guess the other variable is just a breakeven guidance in 2024 for the streaming service. And you did talk about content spend being at least $8 billion to $9 billion in that year last quarter. So just given the growth in entertainment content locally around the world as well as some of the investments in sports in Latin America and potentially an increase in cost in India, could you just frame what kind of upside we could see to that content spend budget? Any framework in terms of how to think about it would be useful? Thanks.

Bob Chapek:

Sure, sure. So while the IPL obviously, is an important part of the Disney+ Hotstar content offering, it's really one component of a broader portfolio of entertainment and sports. In addition to, obviously, the original content and the library content from Disney, Pixar, Marvel, Star Wars and Nat Geo, our Disney+ Hotstar offering does have a massive collection of local content, and we add over 18,000 hours of original programming every year. So while certainly it's an important component, that local content that we're developing really will mitigate the impact of us if we were not to win the auction on IPL. So an important component, but it's not like we see that business evaporating if we don't get it. Christine?

Operator:

Next question comes from Jessica Reif Erlich with Bank of America Securities.

Bob Chapek:

Christine, do you want that one on the margins?

Jenn Kettnich:

All right. Thanks for the question, Jessica.

Brett Feldman :

I believe we're going to be coming up on an anniversary of the first price change that you had for the Disney+ service. And so I was hoping you could give us some insight in terms of how you're thinking about pricing strategy for the product going forward? And what are the key things that influence that in terms of timing, when you bring new content on, distribution partners or anything else we should be thinking about as we model out ARPU?

Christine McCarthy:

Brett. The only other thing I would add to that is that we are still only less than 2.5 years into this business, and we're learning a lot about what consumers are watching, consumption patterns, repeatability and all of those things will factor into when we look at the -- as Bob mentioned, the price value equation going forward. So as we learn more, we'll continue to refine the business model.

DougMitchelson:

I'd echo Ben's appreciation of the extra streaming details. I guess a couple of questions. Latin America was not mentioned. And I know on the last conference call, there was a discussion of working with distributors on Star post launch to improve traction there. Is there any story as to why there was pretty good success here in Europe and Asia Pac, but a little bit less so in Latin America? And then probably for Christine, but on the Direct-to-Consumer programming cost increase that you highlighted for fiscal 2Q, I'm not sure if there's more context there, but also can we think about the next couple of quarters thereafter to be something in a similar range? Certainly, the fourth quarter was already highlighted as a quarter where we're going to see a lot of fresh original programming. Anything that could sort of help us shape out the year on that regard would be helpful.

Bob Chapek:

Yes, I will. I'll talk about LatAm because it kind of goes back a little bit to this live sports story that was questioned earlier. We're actually encouraged by what we see in LatAm, especially given the straight of that Live Sports calendar and a growing pipeline of local original productions. I mean, the reason why we're doing so many local productions because we know what their power is in those localized markets. And we're also encouraged that we're seeing a dynamic that we also see in the U.S., which is the vast majority of the sign-ups that came this quarter came from the Combo Plus. In other words, it's the bundle. And so we're starting to see LatAm sort of pick up some of the same characteristics that we see in domestic. When we started off in LatAm, just like we did with Disney+, it was a little bit slower, but they always seem to keep -- kind of a catch-up, if you will. And we believe in the strength of our local originals and those 2,000 live sporting events that we program each month. Our growing wholesale footprint, you talked about partnerships. That's an important part, particularly in Latin America, that wholesale footprint and new promotional offers that we are testing in the marketplace. So we think that the combination of those things plus our ability to migrate our customers from our linear channels to their digital channels really gives us reason to be fairly bullish in Latin America right now. And Christine.

Operator:

Our next question comes from Michael Morris with Guggenheim.

Jenn Kettnich:

Bob, do you want to start off on parks then Christine can touch on Hulu SVOD ARPU?

Christine McCarthy:

Great. And Mike, your question on the Hulu SVOD ARPU. Let me just start with advertiser demand because I think this is an important concept. It's incredibly robust for advertising on Hulu. We're able to use our data. We offer targeted advertising. Some people call it addressable. We've built a unified ad platform across all of our businesses that do utilize advertising. So we're seeing that as being a growth business for us and are very, very pleased with it. On this particular question on the ARPU for Hulu. In the quarter, we benefited growth from some high-impact promotional offers during the quarter on Black Friday. There was one that went into the market. Those particular subscribers are showing high rates of engagement and the conversion of them from the promo to the full price, we're pretty optimistic of that given their engagement levels. So while it was down, you could view it as this was an offering to get people to sample the product. And the -- it seems like the product is being certainly appreciated. And we're hoping for those to once again convert to full paid subscribers

Jason Bazinet:

I just had one long-term question. You guys have done so well over the years in terms of running theme parks world-class and storytelling as you alluded to. The one area where I think Disney has sort of struggled a little bit has been with software development. And as you think about sports betting and the metaverse, it just seems like strategically, that's going to become potentially a more important piece of your core competency going forward. Is that sort of top of mind? Or do you think that's sort of not a correct way to think about sort of the muscles that you guys need to build over the next 5 years?

Bob Chapek:

Yes, yes. I think I got the gist of it. It is top of mind. It is absolutely top of mind because we realize that in the future, you can call it what you want. You want to call it metaverse, you want to call it the blending of the physical and digital experiences, which I think Disney should excel at for all the reasons that you said in your opening. We realize that it's going to be less of a passive type experience where you just have playback whether it's a sporting event or whether it's an entertainment offering and more of an interactive lean forward, actively engaged type experience. And this is a very top of mind thing for us because we are continuing over time to augment our skills and the types of people that we attract into The Walt Disney Company to reflect the aggressive and ambitious technology agenda that we have. You probably noticed that one of my 3 pillars is innovation and specifically technological innovation because we realize that this is going to be an important part of telling story in that third dimension that lean forward Interactive dimension. So it is absolutely top of mind.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Thank you for standing by and welcome to the Walt Disney Company's Fiscal Full Year and Fourth Quarter 2021 Financial Results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Tammy Munsey, Vice President of Investor Relations. Please go ahead.

Bob Chapek:

Thanks, Tammy, and good afternoon, everyone. As we close out the fourth quarter, I'm pleased to say that it's been a very productive year for The Walt Disney Company. As we've made great strides in reopening our business, while also taking meaningful and innovative steps to position ourselves for continued long-term growth. Despite the many ongoing challenges of the pandemic, we ended the quarter with adjusted EPS of $0.37 compared to a loss of $0.20 last year. Christine will go more in-depth on the quarter and the coming year in her remarks. Last quarter, we talked about our strategic priorities for the future. And as we head into fiscal '22, we remain keenly focused on advancing them to drive our continued growth. First and foremost, telling the world's most original enduring stories. Second, maximizing the synergy of our unique ecosystem to deepen consumers' connection to our characters and our stories. And lastly, using the power of our far reaching platforms and new technologies to give consumers the best entertainment experience possible. I'll briefly talk about how we are executing against these priorities in 3 key areas

Tammy Munsey:

Thanks, Christine. As we transition to the Q&A, let me know that since we are not physically together this afternoon, I will do my best to moderate the Q&A by directing your questions to the appropriate executive. And with that Jonathan, we're ready for the first question.

Ben Swinburne:

Thanks. Good afternoon. Bob or -- and/or Christine. I think there's 2 areas where expectations have probably been out of line with reality this year, that's a on the stock. One of them is the Disney+ net adds, the other is probably more recently on Parks margins and you talked a lot about both of those in your prepared remarks. But maybe you could just spend a minute, on both topics. On Disney+, it sounds like we should think about net-adds being higher in 23 and 24 than in 22 based on the surge that I think you mentioned, Bob, on the programming side. So I'm wondering if you could help us with that. I think that would help set the expectations in the right spot. And then on the Parks front. Bob, you talked a lot about Parks margins, when you get back to prior peak revenues being at or maybe even higher than before, but obviously there is also not a linear ramp on the margin front either. So if you could talk a little bit about how expenses come back into the business over the course of time as it recovers relative to revenue, so we make sure we're thinking about that business the right way in this set of unusual circumstance coming out of a pandemic. Thank you.

Bob Chapek:

Okay. Thank you, Ben. On the Disney+ side, as Christine had said, we're real pleased with where we're sitting. But again, it's not going to be a linear rate quarter to quarter. I think the recovery that you mentioned in terms of getting the growth rate back up to where it's been historically, is really going to come in the third and the fourth quarters. The third quarter will be powered, not necessarily by the content, but by the number of ads that we have in terms of markets. Our number of markets that we're going to add will essentially double to more than 160 by FY2023, and that will propel us in the third quarter. And the fourth quarter will be more of a function of that. Finally, the dam will break in terms of the content that we announced last December that will be substantial, and will lead to a cadence of content throughout the quarter that will look more like what we expect to see from an ongoing standpoint. Obviously, we're only in year 2 of the Disney+ launch, and the hunger for content, for the service is extraordinary. And when you have that happen at the same time that you have a pandemic, and you have to shut down production. That's not a good combination. And yet we identified the need for the content way-back exactly a year ago, and have prepared a very strong cadence of content which will now hit the pipeline in the second half of this year. In terms of the park situation, we are very bullish. We're seeing incredible 30% increases in per caps, as I think was referenced in the earnings letter. And so we're not only seeing strong demand, but it's at per caps that are much higher than we've traditionally seen. There was a reference and I am not sure if everyone appreciates the gravity of this to the Genie+ success, 1/3 of our guests at Walt Disney World, are buying the Genie+ upgrade at $15, that's per guest, per day. And that is a very, very material increase for in per-caps, but also in margins. So we're very bullish about both our Disney+ business, both in terms of of guidance that has been given today. But additionally, in terms of where our Parks business is going to go from a demand standpoint once we completely clear the pandemic, but also in terms of the what we expect to be a long lasting benefits in terms of yields. Christine?

Ben Swinburne:

Thank you both.

Operator:

The next question comes from the line of Alexia Quadrani from JPMorgan. Your question, please.

Tammy Munsey:

Bob why don't you start with exclusive theatrical releases and then Christine can talk about Hotstar ARPU?

Christine Mccarthy:

Thanks, Alexia, for your question on Hotstar ARPU. Just to make something very clear, the Disney+ Hotstar is included in our overall Disney+ guidance that we reiterate to be profitable in 2024. So I just want to make sure that everyone understands that. But as it relates to ARPU specifically, there's been a lot of noise in the Indian market, a lot of which has been around sport. So when you look at the ARPU for Hotstar on a linked quarter basis from Q3 to Q4 this year, it actually decreased, and that was a result of lower per sub advertising revenue because there were fewer IPL matches this year. In Q4, there were only 18, and I believe the number was 29-ish in Q3. So you had a linked-quarter reduction in games, therefore lower subscriber advertising revenue. And when we think about ARPU overall, there's several levers here. There is a price value relationship over time, high-quality content. And the content in India is really 2 things. It's not only the IPL, but other key sports like Beyond Cricket. So you have things like the English Premier League and . And also there's a big general entertainment component. We have all of our Disney+ content over there for all the different labels that we have, Disney Pixar, Marvel, Star Wars, and so on. But they also have over 18,000 hours of original local programming that is produced every year. So once again, I think the upside potential as when all things are working, also cylinders are working and we'll be able to take price up as the market allows.

Operator:

Our next question comes from the line of Michael Nathanson from MoffettNathanson. Your question, please.

Tammy Munsey:

Thank you, Michael. Bob, how about if you talk about the Disney+ sub grows in the U.S. and Christine can talk about inflation?

Christine Mccarthy:

Thanks, Bob. Hi, Michael. I think you asked a question that's on the minds of every CFO and every senior management team of companies out there. Inflationary pressures are something we are all looking at and trying to assess, and think about how do we manage through it. This is also one that -- I just mentioned, we've already experienced in some parts of our business. So over the past year or so, we've talked about the increase in the price of content. You see the content, that because of just the competition for talent for everything that's involved in productions, content costs have gone up. Where we see it directly in our parks business is primarily through the hourly wage inflation that we've seen through contact -- contract renegotiation in our commitment to paying our park workers well. And then we have things on the cost of goods side and it's interesting -- just last week maybe it was -- just last week I was talking to our Parks Senior Team about things we could do there, and there are lots of things that are worth talking about. We can adjust suppliers, we can substitute products, we can cut portion size which is probably good for some people's waistlines. We can look at pricing where necessary, but we aren't going to go just straight up across an increased prices. We're really going to try to get the algorithm right to cut where we can and not necessarily do things the same way. As I mentioned, we're also using technology to reduce some of our operating costs, and that gives us a little bit of headroom also to absorb some inflation. But we're really trying to use our heads here to come up with a way to kind of mitigate some of these challenges that we have. It's a great question, and I'm sure it's one that you could ask every single Company in your coverage universe. Thanks.

Tammy Munsey:

Thank you Michael. Operator, we have time for one more question.

Jessica Reif Ehrlich:

Thank you. 2 of course. First, could you talk about the advertising outlook? There's a lot of moving pieces here between strong upfront, good sports ratings, but supply chain issues affecting some categories. And within advertising, if you could talk a little bit more about Hulu advertising, what's going on there with your aired light service versus pure premium subscription. And then the second question is -- I know Bob mentioned in prepared remarks -- sports betting. Can you frame or give us any color on the opportunity? Obviously, it's an area of growth as more states are approving it and it effects advertising, which should be good for the stations. But how can you participate in a bigger way while still protecting the ESPN brand?

Bob Chapek:

Okay. Will do. Jessica, you're right. We do believe that sports betting is a very significant opportunity for the Company, and it's all driven by the consumer. It's driven by the consumer, particularly the younger consumer that will replenish the sports fans over time and their desire to have gambling as part of their sports experience. It's not necessarily a lean-back, it's a little bit of a lean-forward type experience that they're looking for. And as we follow the consumer, we necessarily have to seriously consider getting into gambling in a bigger way. And ESPN is a perfect platform for this. We have done substantial research in terms of the impact to not only to ESPN brand, but the Disney brand in terms of consumers changing perceptions of the acceptability of gambling. And what we're finding is that there's a very significant isolation. Gambling does not have the cache now that it had, say 10 or 20 years ago. And we have some concerns as a Company about our ability to get in it without having a brand withdrawal. But I can tell you that given all the research that we've done recently, that that is not the case. It actually strengthens the brand of ESPN when you have a betting component, and it has no impact on the Disney brand. Therefore, to go after that demographic opportunity plus the, of course, not insignificant revenue implications, that is something that we're keenly interested in and are pursuing aggressively.

Jessica Reif Ehrlich:

Thank you.

Operator:

Thank you for your participation in today's conference. This does concludes program. You may now disconnect. Good day.

Operator:

Thank you for standing by, and welcome to The Walt Disney Company Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your host, Lowell Singer, Senior Vice President of Investor Relations. Please go ahead.

Bob Chapek:

Thanks, Lowell, and hello, everyone. Today, I’d like to start off by talking about our Company’s priorities for the future. As has been the case for Disney’s nearly 100-year history, it all begins with great storytelling, which is the foundation of our special connection to audiences and guests. And our foremost priority will continue to be to tell the world’s most original and enduring stories brought to life by the world’s most talented creators. As home to some of the most beloved franchises, we will maximize the synergy of our unique ecosystem to further deepen consumers’ connection to our characters and stories. And we will use the power of our far-reaching platforms and emerging technologies to better anticipate what our consumers want and deliver them a more seamless and more personalized entertainment experience. We are executing against these priorities, and results clearly speak for themselves. Looking across the Company over the past quarter, we are pleased with the trajectory we are on as we continue to grow our businesses, despite the challenges presented by the ongoing everchanging COVID-19 pandemic. We ended the third fiscal quarter in a strong position, with adjusted EPS up tenfold to $0.80 compared to $0.08 last year. At our Parks, Experiences and Products business, we’re encouraged by some of the positive trends we’re seeing, and new developments we have been hard at work on, including the brand-new Avengers Campus at Disney California Adventure, where guests can team up with their favorite superheroes in thrilling ways. At our international parks, Shanghai is celebrating its fifth anniversary this year with great fanfare, and we welcome the first guests to our reimagined Marvel themed hotel at Disneyland Paris. Meanwhile, work continues on a wide array of new experiences, including the one-of-a-kind Star Wars themed Galactic Starcruiser at Walt Disney World. And as part of a multiyear transformation of EPCOT, we’ll soon introduce our extraordinary new nighttime spectacular Harmonious. Last month, we completed our first cruise since the start of the pandemic with the Disney Magic, which is currently sailing short-term staycations for UK residents. And the Disney Dream set sail on its first U.S.-based cruise this week. Future bookings for all of our ships remain strong, with bookings in the third quarter in particular, having benefited from the announcement of our fall 2022 itineraries and the successful marketing launch of our fifth ship, the Disney Wish, which will set sail in summer of 2022. As our parks business continues its recovery and we see demand grow, we are now putting into action some of the amazing guest-centric services that we have been developing over the last few years. These include Magic Key, our recently announced new annual pass membership program at Disneyland. It provides great value and a variety of options for our guests, and will be available starting on August 25th. The reaction to the news from fans has been extremely positive. Additionally, we’ve made significant investments in sophisticated technology and tools, creating a revolutionary new multi-tiered service, we’re calling Disney Genie, that will enable our guests to more easily and efficiently navigate everything our parks have to offer. We’re very, very excited about this new service, and we’ll be providing additional detail soon. The goal of Disney Genie, which will appear in a user-friendly app, is to create a better, more personalized and customized experience for guests, putting them in control and providing even greater flexibility and choice. They’ll be able to spend less time waiting in line and figuring out what attractions or dining options are available, and more time having fun. On the direct-to-consumer side, we are extremely pleased with the continuing success of our portfolio of streaming services. Disney+, ESPN+ and Hulu have performed incredibly well with 116 million 14.9 million and 42.8 million subscribers, respectively, for a total of nearly 174 million subscriptions. Numerous breakout hits from our beloved brands, including Pixar’s Luca and Marvel’s Loki and the Falcon and the Winter Soldier have contributed to strong engagement and new subscriber growth in core Disney+ markets. And we have continued to launch Disney+ in new markets around the world, including Disney+ Hotstar in Malaysia and Thailand in Q3. Disney+ is also currently available in a limited capacity in Japan and will expand to the full market in late October, followed by additional APAC markets, including South Korea, Taiwan and Hong Kong in mid-November. The launch of Disney+ in Eastern Europe has moved from late 2021 to summer of 2022, primarily to allow for an expanded footprint that will include parts of the Middle East and South Africa. Additionally, we’re excited about the launch of Star+ throughout Latin America later this month. As we’ve said, our direct-to-consumer business is the Company’s top priority. And among our unique advantages in promoting and growing our DTC service are our powerhouse brands and the vast array of direct consumer touch points we have across our businesses, from our media networks to our theme parks to our consumer products. This synergy enables us to raise consumer awareness and further increase engagement with our streaming services. And the power of this synergy will be on full display on November 12 when we celebrate Disney+ Day with an unprecedented Company-wide cross-promotional campaign. Our robust pipeline of content continues to fuel growth, and we have an incredible lineup of new programming for Disney+. On Thanksgiving Day, we are thrilled to be premiering the first of Peter Jackson’s highly anticipated six-episode Beatles documentary, Get Back. We also have exciting new series from Marvel, Star Wars and National Geographic coming later this year, including Marvel’s Hawkeye, starring Jeremy Renner and Hailee Steinfeld; The Mandalorian Spin-Off, The Book of Boba Fett and National Geographic’s, Welcome to Earth with Will Smith. With respect to our current approach to distributing our feature-length films, last year, in light of the prolonged and unpredictable nature of the pandemic, we needed to find alternative ways to bring our movies to consumers while theaters were closed. And once they began to reopen, there was still widespread reluctance to return. Therefore, we adopted a three-pronged strategy for releasing our films that consisted of theatrical releases, direct to Disney+ and a hybrid of theatrical plus premier access as we did with Cruella, Jungle Cruise and Marvel’s Black Widow, the top-performing film at the domestic box office since the start of the pandemic. Both, Bob Iger and I, along with the leaders of our creative and distribution teams, determined this was the right strategy because it would enable us to reach the broadest possible audience. And just to reiterate, distribution decisions are made on a phone by phone basis based on global marketplace conditions and consumer behavior. We will continue to utilize all available options going forward, learn from insights gained with each release and innovate accordingly, while always doing what we believe is in the best interest of the film and the best interest of our constituents. We have an incredible slate of upcoming theatrical films, starting with Free Guy which premiers tomorrow, followed by Marvel’s newest action adventure, Shang-Chi and the Legend of the Ten Rings on September 3rd. The highly anticipated live-action musical, West Side Story from Steven Spielberg, is set for December as is the Kingsman, a prequel in the popular Kingsman series. We have Disney Animation Studios’ Encanto, an incredibly heartwarming story set into magical town in Colombia and featuring music by the incomparable Lin-Manuel Miranda. Our Marvel slate includes four feature films in fiscal 2022, the all-new Eternals, alongside sequels to Doctor Strange, Thor and Black Panther. A brand new Indiana Jones Adventure starring Harrison Ford, is due in the summer, as is the origin story of another Intrepid Explorer in Lightyear, a spin-off of the beloved Toy Story franchise. It’s a widely appealing slate with something for everybody. Our goal is always to provide guests and consumers with unparalleled entertainment, whether they’re visiting one of our parks or watching one of our films in a theater or on our streaming platforms. And as we continue our recovery, we believe we are taking the right steps to further this goal while growing our businesses and increasing shareholder value. Personally, I am as optimistic as ever about the future of our Company. We have a robust and growing portfolio of DTC services powered by the world’s best storytellers and greatest brands and franchises, and the parks business, which extend those stories and creates a place where magic comes to life in a more guest-friendly way than ever. With that, I’ll turn it over to Christine and she’ll talk in greater detail about the quarter and the way ahead.

Lowell Singer:

Okay. Thanks, Christine. And once again, as we transition to the Q&A, let me note that since we are not physically together this afternoon, I will do my best to moderate the Q&A by directing your questions to the appropriate executive. And with that, we are ready for the first question.

Michael Nathanson:

Thanks. Lowell, I’ll let you choose the speakers, but here are the questions. One is, I wanted to understand how the Company is thinking about near-term theatrical releases, given the steep fall-off in second week box, rise of the Delta variant, international markets still not opened. So why not delay or pause release schedule? And then, secondly, on DTC profits, I guess, more Hulu profits, it looks like continually they’re getting better than expected. I think you turned profitable this quarter with Hulu. So, I’m wondering why that improvement and why not revisit maybe some of the guidance that we shared earlier on DTC profitability, just given the continual improvement in it looks like Hulu profitability? Thanks.

Bob Chapek:

Michael, as you probably recognize, we live in a very uncertain world in terms of the recovery of some of our markets in the theatrical exhibition world. It’s certainly part of that. We’ve said from the very beginning that we value flexibility in being able to make as last-minute calls as we can, given what we see in the marketplace. And certainly, when we planned our schedule that we’re executing right now, we did not anticipate, nor did I think anybody, the resurgence of COVID with the Delta variant that would have such a significant impact on the marketplace. At the same time, when you work in an ecosystem, having a lot of partners, they need to be able to plan their business, too. And so, at some point, we have to put a stake in the ground and say, for example, Shang-Chi, that’s going to be a title that we’re going to put in the marketplace or Free Guy, that’s going to be a title that we’re going to put into the marketplace. Not knowing, again, three months earlier when you make that commitment, what exactly the marketplace is going to look like. But, what I do think that says, Michael, it says that we value flexibility and we value to follow where the consumer is going to go. And while some of that’s uncertain, I think, in terms of relative to where the rest of the market is, you see that we’ve got more flexibility in terms of how we program. And nothing is in stone because the marketplace is rapidly changing. But at some point, you’ve got to put a stake in the ground and say, this is what we’re going to do. And that’s where we ended up on Shang-Chi and Free Guy, which are our next two titles out.

Bob Chapek:

Okay. Good questions. On Free Guy, obviously, this is a title that we acquired under a different distribution assumption and set of agreements. So, we don’t have the degree of freedom to do that on Free Guy. On Shang-Chi, we think it’s actually going to be an interesting experiment for us because it’s got only a 45-day window for us. So, the prospect of being able to take a Marvel title to the service after going theatrical with 45 days will be yet another data point to inform our actions going forward on our titles. But once again, I’ll refer back to my previous answer. When we planned Shang-Chi, that title was planned on being in a much more healthy theatrical environment. And at this point, unfortunately, due to distribution agreements that we have and due to just the practicalities of last-minute changes, it wouldn’t be possible.

Christine McCarthy:

I’ll take your question on Hulu, Michael. You’re absolutely correct. Hulu exceeded our expectations, and it was profitable this quarter. There’s a couple of things going on here. One is, it has had -- continued to have subscriber growth and also very strong advertising revenue. The advertising is coming from higher sell-through rates, a lot of addressable advertising and a significant ramp-up in the dynamic ad insertion technology that we have within Hulu Live. So, those are things that are driving it. And at the same time, they are just like all of our other streaming services, they’re ramping up their production, programming and also marketing expense to promote those new shows. So, we’re very pleased with what’s going on at Hulu, but we’re not going to update our guidance yet because we are in the process of doing our fiscal ‘22 annual operating plan. And if we feel that we have to update it after we complete that, we will certainly do it.

Lowell Singer:

And Michael, thanks for the questions. Operator, next question, please.

Alexia Quadrani:

My questions are on the parks side, if I can. I guess, the first one is, we’ve seen really, really much improved results this quarter. And moving forward, I’m curious if you’re seeing any recent impact from the Delta variant in the domestic or international parks may be cause for concern, particularly as you’re increasing capacity. And then, just staying on the parks, maybe you can elaborate on how we should view sort of longer-term profitability, given the improvements you’re able to make in terms of automating many aspects of the parks during COVID or while they were closed. But now, maybe with heightened cleaning expenses perhaps staying for a while and other expenses related to COVID staying for a while, given how this variant has continued to kind of make COVID still very much part of our lifestyle. Thank you.

Bob Chapek:

Okay. In terms of impact of the Delta variant, we see strong demand for our parks continuing. And the primary noise that we’re seeing right now are really around group or convention cancellations. In other words, large groups that are coming in relatively short-term. But on the whole, we see really strong demand for our parks. In fact, our park reservations now are above our Q3 attendance levels. And as you just saw with our earnings announcement, our Q3 attendance levels were pretty darn good. So, we’re still bullish about our park business going forward. I may also suggest, as a bridge to the second question that we’ve implemented a reservation system that’s going to enable us to spread our demand, increase our yield and improve our guest experience at the same time. And in terms of the long-lasting impacts that you mentioned, I think some of the cost implications that we need to do for hygienic purposes are going to be relatively short-lived. And frankly, in the grand scheme of operating our parks, not all that material. But what will be the long-lasting impact is the improvements that we’re making with guest personalization and guest choice, therefore, affecting the tremendous yield benefits that we’ve been able to extract over the last few quarters. And that’s only going to grow in the future with our ability to really do world-class yield management systems through our new reservation system.

Alexia Quadrani:

Thank you.

Operator:

Next question comes from Ben Swinburne of Morgan Stanley.

Lowell Singer:

Okay. Ben, thanks for the questions. Thank you, Ben. I think, we’ll start with, Bob, if you want to talk a little bit about some of the technology at the parks, and then we’ll go to Christine to talk about Hulu ad growth, IPL and LatAm.

Christine McCarthy:

Okay. Ben, I’ll try to go through your -- hope I can remember them all. So, Hulu. Hulu did have very strong advertising growth in the quarter, and we continue to see that growth quarter after quarter. We haven’t specifically quantified it, but I would say that it is driven by higher impressions as well as rates. And as I mentioned, the ability for us to use the dynamic ad insertion in Hulu Live is also a benefit. I think, the advertising sales team, if they had more inventory, they could certainly sell it. There’s that much demand for it. Just to put some context around it, because I think it’s a precursor of what the upfront showed is that the -- we came out of a very strong upfront but we had about 40% of the total upfront dollars into streaming and digital. And a lot of that is not only across Hulu, but also across our other entertainment and sports platforms. So, I think that just shows that the kind of advertising that’s going through Hulu is certainly a growth driver. The IPL is coming back. It’s scheduled to come back on September 19, and it will run through, I believe, the last final match is scheduled for mid-October, around October 15. When you think about Disney+ Hotstar, IPL is certainly a very, very important component of the offerings, but it’s only one because we also have a very broad portfolio of general entertainment as well as other sports. It has a lot of original content, library content in it from all of the Disney+ brands and IP. And we added over 18,000 of original local programming every year. So, we feel really good about not only the IPL but also Star -- Hotstar+. In LatAm, we will be -- LatAm, the launch for LatAm is in later this quarter. But I don’t have any updates to anything new on the sports side.

Doug Mitchelson:

So, two questions. It’s certainly nice to see the U.S. parks profitable in fiscal 3Q. And I note that operating expenses are back at 81% of 2019 fiscal 3Q levels, while revenues about 60% of 2019 levels. And that seems consistent with commentary that you made in the past that you have to ramp overhead in advance of consumers coming back to the park. So, my question is, is the overhead now sort of re-ramped at the Parks? Should we look at this as the right overhead level? And from here, it’s variable cost growing with consumers continuing to come back, and that’s how we should think about modeling the parks going forward? And then, the second area is just on streaming. I hope you could discuss the health of Disney+. How was engagement trending in the quarter? How was churn playing in the quarter? What was the impact of Star as you merged in with Disney+ in Europe? And anything else you want to note on the health of Disney+ would be appreciated. Thank you.

Bob Chapek:

Okay. In terms of the health of Disney+, we feel really great about our sub trajectory. We’ve got world-class content from the world’s best storytellers, plus our international launches, plus the power of the Disney bundle. And you asked the question about churn. We’re really pleased with churn. We’ve taken some price increases over the past few quarters. And what you’re seeing is that our churn has declined, including in Latin America where we went up -- I mean by -- in Europe, sorry, by €2 when we added Star brand as a sixth brand tile. So, our retention is very healthy across the globe. We’re really, really pleased with that. And I think, again, it really goes back to the price value that we’re offering our guests. When you take out Luca, Loki, Falcon and the Winter Soldier. There’s something essentially new each week. You blend that together with a tremendous local investment that we’re making in our international territories. And it’s really a price value proposition that is really great. So, the fact that our churn is so low, our engagement is so high, our retention is so high amongst the local corridors where we’re taking price increases, I think, says everything about it. In terms of -- and I’ll start this off, Christine, on the cost side and what we expect to see in terms of our parks profitability. But right now, you can use a lot of different metrics to look at our business. In California, we’ve got all three of our hotels open, for example. We’ve got 70% of our available rooms open in Walt Disney World. So, you can see that we’re not quite 100% available at this point. But, I think that a lot of the costs from here on out are variable. Obviously, as we scale our business and we get up closer and closer to 100% capacity, our efficiencies and operating become much, much higher. So, I think you’ll see disproportionate benefit as we go from here on. Christine, I don’t know if you want to elaborate.

Lowell Singer:

Doug, thanks for the questions. Operator, next question, please?

Jessica Reif Ehrlich:

Thanks. I have one on Disney+ and one of film. You mentioned that you’re opening in Japan, fully opening in Japan in October. It’s such a big country with a huge affinity for everything Disney. I mean, the Parks are doing really well there, and it’s a very affluent country. So, just wondering if you could give us any color on market size and ARPU. And then, on film, the industry has undergone such massive change over the last two years towards streaming. But obviously, the pandemic has had a big impact, but it was moving in that direction anyway. With the jury out on like how much the box office will come back to pre-COVID levels, how do you think about the success of a film in today’s environment? And how does that impact the way you attract talent, the way you compensate talent? And what changes do you expect to make, if any, in your film strategy from here?

Bob Chapek:

Okay. Obviously, this world has been disrupted by COVID, and we’re all reacting to a very fluid situation in terms of the marketplace. We’re very grateful for the fact that we had the ability to take out a lot of titles, both not only in the theatrical marketplace for those that prefer to watch a film that way, but also at the same time through our Disney Premier Access, and that was a winning strategy for us to give consumers the choice for those that decided that going back to a theater was not for them at the same time. That said, these films, Jessica, were really conceived under a time when we did not know what was going to be happening with consumer behavior three, four years later and certainly didn’t know about COVID at the time. So, we’re dealing under a different sort of set of conditions than we thought. What I will say is that just like we’ve done many times before, as the business has evolved and transformed, we’ve figured out ways to fairly compensate our talent, so that no matter what the business model is that we have to go to market with, everybody feels satisfied. And I will say that since COVID has begun, we’ve entered into hundreds of talented arrangements with our talent. And by and large, they’ve gone very, very smoothly. So, we expect that, that would be the case going forward. Certainly, this is a time of anxiety the marketplace as a lot has changed recently. And again, these films that we’re releasing right now were imagined under a completely different environment than unfortunately, the fate has delivered us. But, we’re trying to do the best thing for all our constituents and make sure that everybody who’s in the value chain, if you will, feels like they’re having their contractual commitments honored, both from a distribution and a compensation standpoint. What I’ll say before I turn it over to Christine on Japan is that remember that heretofore, as we’ve launched Disney+ around the world, in Japan, we’ve done it with a fairly limited distribution system and that’s about the change going forward. But at the same time, that market is under, as they call it, a state of emergency. And that certainly has disrupted that marketplace as we go from a fairly limited distribution now to a much more broad distribution. Christine?

Operator:

Next question comes from Jason Bazinet of Citi.

Lowell Singer:

So, Bob, do you want to take that? Thanks, Jason, for the question, by the way.

Operator:

Our next question comes from Brett Feldman of Goldman Sachs.

Lowell Singer:

Brett, thanks for the questions. I’ll turn them over to Bob.

Lowell Singer:

Okay. Thanks, Brett, for the questions. Operator, given the time, I think we will take our final question.

John Hodulik:

Maybe the 2024 guide, I think, included 30% of subs coming from Hotstar. I mean, given the strength in Hotstar, does that guidance still hold? And then, given the content release schedule that we have in the second half of the year, do you expect the net add trends in what I’d call the core Disney+ markets to improve in the back half? And then lastly, just anything you could tell us on just Disney+ Day in November in terms of how you expect to promote? Is it global or U.S. or just -- or any new content that could be launched that day, anything you could tell us on that would be great?

Bob Chapek:

Okay. Disney+ Day will be a balanced approach between global and local product. We’re going to have a real exciting lineup, as you might guess, as we approach those consumers who have not yet signed up for Disney+ with a really attractive group of titles to be announced. But, I think it gives us an opportunity to provide a focal point for consumers that have not yet tripped over to Disney+. And I think it’s going to give us a focal point of excitement and energy that will not only pay benefits in the U.S., but globally as well. In terms of the net add question and how that’s going to improve, first half versus second half, again, we feel really great about our sub trajectory. As we learn, though, we’re finding out there’s tremendous seasonality in this business that we may not have known about before we really got into it, or at least in terms of above expectations. Also, I want to caveat that our sub adds aren’t necessarily going to be linear. I think a lot of the marketplace expects these things to sort of be a straight-line math, and it’s not really turning out that way. And as we’ve indicated before, we do believe our first half adds this fiscal year will be stronger than the second half adds. That said, we really feel great about our trajectory. Christine, do you want to take it from there?

Lowell Singer:

Okay. Thanks for the question. And I want to thank everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, expectations, beliefs or business prospects and other statements that are not historical in nature may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K, quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission. We want to thank everyone for joining us today. Hope you have a good rest of the day.

Operator:

Good day, and thank you for standing by. Welcome to The Walt Disney Company's Second Quarter 2021 Financial Results Conference call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Lowell Singer, Senior Vice President of Investor Relations. Please go ahead.

Bob Chapek:

Thanks, Lowell, and good afternoon, everyone. It's been a busy few months and we've been pleased to see more encouraging signs of recovery across our company. We ended the second fiscal quarter with adjusted EPS of 32% to $0.79, compared to $0.60 last year. And since then, we've continued to make progress across our businesses as we remain laser-focused on our ongoing recovery, while also fueling long-term growth. Our strategic focus continues in three key areas. First is direct-to-consumer. We successfully launched our streaming offerings, Disney+ and Star, in a number of markets internationally. And we've been pleased with the growth and engagement in those markets to date. Our steady cadence of new high-quality branded content, along with our robust collection of library titles, allows us to continually attract new subscribers and retain existing ones. At the same time, we are also closely monitoring the recovery of theatrical exhibition, as consumers begin to return to theatres, and I'll talk more about the specifics later. Finally, we are focused on the ongoing recovery of our parks business and the resumption of Disney Cruise Line. There have been some encouraging developments in recent months, particularly with the ongoing rollout of the vaccine and the gradual lifting of government mandated restrictions. And through this time, we've taken advantage of the opportunity to make improvements to our operating procedures to enhance the guest experience through the use of technology innovations, new ticketing strategies, and other offerings. We are especially excited that after being closed for 412 days, we welcomed our first guests back to Disneyland two weeks ago and the response has been overwhelmingly positive. Bob and I stood on Main Street USA on opening day, and it was so wonderful to see the joy on our cast and guests' faces and feel the excitement in the air. It's been fantastic to see cast members back at work. Most recently at Disneyland, we were able to quickly recall more than 10,000 furloughed cast and retrain them to be able to operate to the State of California's new health and safety requirements. We continue to see strong growing demand from consumers as we are at or near our reduced capacity levels at both Walt Disney World and Disneyland for the current quarter. It's clear our guests are excited to get back to experiencing the magic of Disney and they also have extraordinary confidence in our safety protocols. At Shanghai Disney Resort, where they just kicked off their year-long 5th anniversary celebration, the park is operating at or above FY 2019 levels. We're also encouraged by what we're seeing at Hong Kong Disneyland, and we are hopeful we will be able to announce a reopening date for Disneyland Paris soon. Despite the pandemic, we continue to make progress on a number of highly anticipated projects at our parks around the world, including the all new Avengers Campus, which is set to open at Disney California Adventure on June 4. I had a chance to visit recently and the attractions and multiple state-of-the-art experiences are truly phenomenal. We recently unveiled our newest cruise ship, the Disney Wish to the public with a virtual live stream presentation that has been viewed nearly 1.2 million times. The ship is amazing and it includes the AquaMouse water ride, the first ever Disney attraction at sea. The Disney Wish will set sail on its maiden voyage in 2022 and bookings open to the general public on May 27. On the studio side, we are pleased to be nearing full production levels, and we are also significantly ramping up content creation at our studios consistent with the guidance we provided at Investor Day. An example of this is 20th Century and Searchlight Pictures, where they are gradually increasing output and will reach a steady state of 15 and 20 films, respectively, to fuel our general entertainment offerings across all of our distribution platforms. We're incredibly proud that Searchlight's Nomadland took home Oscars for best actress, best director, with Chloé Zhao becoming the first woman of color to win the award and best picture. That's five best picture wins since 2009 and 43 Academy Awards in total. Additionally, Pixar's stellar record of award-winning films continues with the Studio's animated masterpiece, Soul, which took home Oscars for Best Animated Feature and Best Original Score. And I'm happy to say that now millions are able to enjoy Soul on Disney+ and Nomadland on Hulu. As we have consistently stated, flexibility is a key component of our distribution strategy. And we have outlined three approaches for distributing our films. Releases in theatres with a simultaneous offering via Disney+ Premier Access releases straight to Disney+ and traditional exclusive theatrical releases. Here's how this translates to our tremendous upcoming film slate. Cruella will be released in theatres and via Disney+ Premier Access on May 28, followed by Pixar's Luca, which will be released exclusively at Disney+ on June 18. The highly anticipated Black Widow will be in theatres and on Disney+ via Premier Access on July 9, and Disney's Jungle Cruise, hilarious adventure filled expedition, will be available in theatres and on Disney+ via Premier Access on July 30. I'm pleased to announce today that amidst recent signs of increased consumer confidence in movie going; two films, 20th Century's exciting comedy, Free Guy; and Marvel's action adventure, Shang-Chi and the Legend of the Ten Rings, will be released with a 45-day exclusive theatrical window on August 13 and September 3, respectively. And of course, regardless of where they originate, all of our films and episodic series will end up as part of the robust library of content on our DTC platforms. Like our films, our Disney+ original series have become must-watch events. Starting with the success of The Mandalorian followed by Marvel's WandaVision and The Falcon and the Winter Soldier. These not only became immediate hits, but part of the cultural zeitgeist. And the anticipation for Marvel's newest series, Loki, which debuts on June 9 has been through the roof. The second season of High School Musical, The Musical, The Series, the all new The Mysterious Benedict Society based on the popular young adult book series, and the animated series Monsters at Work are also coming to Disney+ in the next couple of months, just to name a few. We are uniquely positioned with the most compelling brands and franchises in entertainment. And we continue to deliver the high-quality, one-of-a-kind content that consumers want. That's clearly reflected in the success of Disney+, which amassed nearly 104 million paid subscribers as of the end of the second fiscal quarter. We are on track to achieve our guidance of 230 million to 260 million subscribers by the end of fiscal 2024. Looking at our entire portfolio streaming services, we expect that as full production levels resumed and we get to a more normalized cycle, the increased output will help fuel additional sub growth across Disney+, ESPN+, Hulu and Hotstar. Hulu and ESPN+ had 41.6 million and 13.8 million paid subscribers, respectively, at the end of the quarter. On Hulu, buzz-worthy content continues to boost performance, including the award-winning Hulu original film, the United States vs. Billie Holiday, and Season 4 of The Handmaid's Tale, which premiered to the biggest audience ever for a Hulu original. And there's lots more coming to Hulu, including Marvel's new animated series, M.O.D.O.K.; Season 2 of the hit series, Love, Victor; and Season 10 of the wildly popular anthology, American Horror Story on FX on Hulu. In March, we launched ESPN+ on Hulu and we are very pleased with its early progress. Viewers who subscribe to both Hulu and ESPN+, are able to watch and engage with the great content that's available on ESPN+ without leaving the Hulu environment. ESPN+ programming includes thousands of live sporting events, original shows, series and documentaries with the UFC lightweight Championship by airing live on ESPN+ pay-per-view on May 15. The final match of the FA Cup also on May 15, followed by the PGA Championship, Wimbledon, and the highly anticipated third UFC matchup between Dustin Poirier and Conor McGregor on pay-per-view, July 10. Not to mention the incredible additions to our lineup, including NHL and more college football in the fall. Live sports are a very important component of our content business. And even admits the challenges of the past year, we have continued to build our unrivalled portfolio of sports rights in a disciplined way. While our overall strategy is still very supportive of our linear business, given the important economic value address for the company, we're also building out our ESPN+ direct-to-consumer offering and with every deal we make, we are considering both the linear and DTC components. With this strategy in mind, we've reached a number of long-term accretive deals that each play a very specific role as part of our sports portfolio. Some are weighted more towards linear with a significant digital component, such as the NFL and SEC deals, others reflecting an emphasis on direct-to-consumer. These include agreements with the UFC, the PGA Tour, Bundesliga, and the NHL. For example, as part of a 7-year rights deal with the NHL, 75 of the leagues live National Games will be available exclusively on ESPN+ and Hulu. And ESPN+ will be the sole home for more than 1,000 out of market NHL games, further submitting the service as a must have for hockey fans. And today, I'm excited to announce two additional sports rights deals. We've reached a renewal deal through 2028 with Major League Baseball with 30 exclusive regular season games, which include 25 Sunday night baseball games, and opening night annually. Coverage of the highly anticipated potential expanded Wild Card Series and the option to simulcast all live MLB coverage from ESPN networks on ESPN+. We've also signed a historic rights agreement with the top division in Spanish club football, La Liga. La Liga is one of the world's best and most popular soccer leagues, including a number of the top clubs in the world, and one of the best players in the world, Lionel Messi. And this 8-year deal, covering both English and Spanish language rights, brings 380 La Liga matches and a host of La Liga two matches per season to ESPN+, beginning in August. And this deal bolsters ESPN+'s position as a top destination for soccer in the U.S., offering fans more than 2,900 matches per season. When you combine the unparalleled assets of the Walt Disney Company, ESPN, ESPN+, ABC and Hulu, plus our highly engaging digital and social content, it's clear that Disney is the absolute leader when it comes to serving our sports fans in the most effective way possible. We believe in the power of live sports, and are confident our multi-platform rights deals we've made will provide us tremendous value now and into the future. Overall, we are pleased with the encouraging signs of recovery across our businesses, and we are confident we continue to move in the right direction for our future growth. And with that, I'll now turn it over to Christine and she'll talk more in depth about our results for the quarter.

Lowell Singer:

Okay. Thanks, Christine. And as we transition to the Q&A, let me note once again that since we are not all physically together this afternoon, I will do my best to moderate by directing your questions to the appropriate executive. And with that, operator, we are ready for the first question.

Ben Swinburne:

Thanks. Good afternoon. Maybe just starting on the direct-to-consumer side, for -- maybe for Bob, could you talk a little bit about how the price increases have landed relative to your expectations, both internationally with Star, but also in the U.S kind of the impact on churn and how that might inform your decision-making process going forward on price? And then I just wanted to ask, I think you guys generated maybe $700 million or so of free cash flow in the quarter. Normally, we don't talk a lot about quarterly free cash flow. But it's been a while, I’m just wondering, Christine, if you think at this point, we're back in free cash flow positive mode going forward and expect to generate free cash flow for the year. Thank you both.

Bob Chapek:

All right. Of course, these were our first price increase since we launched. I have to say that we're extremely pleased with how the market reacted to both. In the U.S., we've not observed any significantly higher churn rate since the price increased in EMEA. As we added Star as a six-brand title, we've actually seen an improvement in our churn rate. So we seem to be fairly resilient to those price increases. And as such, I think it makes us feel relatively bullish going forward that we still offer a tremendous price value relationship across the world for Disney+.

Ben Swinburne:

Thanks a lot.

Operator:

Our next question comes from Alexia Quadrani with JPMorgan. Your line is open.

Lowell Singer:

Okay, Alexia. Thanks for both questions. Bob, do you want to take both of those?

Alexia Quadrani:

Thank you.

Michael Nathanson:

Thanks. Well, I have two. One is on the gross addition side of Disney+. We heard from Netflix that may have been a pull forward and maybe perhaps the reopening is impacted gross additions. Can you talk a bit about what you're seeing in some of the more mature or I guess develop markets on the gross addition side? And then you guys have consistently beat us OI profits, or lack of losses, I'd say, on DTC. Which of the platforms is providing the biggest surprise? And does it make you rethink maybe some of the guidance you gave around breakeven, given how strong the year has been so far on limitation of losses? Thanks.

Bob Chapek:

Okay, I'll take the first one. In terms of the additions, we've really seen it across our geographies. When you look at it from a mature versus new, every single market that we've launched in has exceeded our expectations so far in terms of the new. But in terms of mature, keep in mind that we added 30 million households in the first six months of the fiscal year, which is in line with our expectations, and domestic continues to contribute to that. The addition of the Marvel content and not only the Marvel content, but how strong it's been and the cadence of additions, and as you know, we'll soon be announcing our -- soon be launching Loki. That is a tremendous catalyst for growth for us. And in the future, as we get to more new content and serial content coming from Star Wars, we're really, really encouraged by what that's going to mean in terms of engagement, because as you know, engagement is sort of the precursor for net sub adds. And so we're very pleased with both our domestic as well as our, let's call, more mature markets, those that we've been in the marketplace for at least a year, but also our new markets as well.

Michael Nathanson:

Thanks, Christine.

Michael Nathanson:

My other question was -- sorry, Lowell. Thanks.

Michael Nathanson:

And does that make you rethink your guidance on breakeven timelines, given how strong Hulu has been?