Walt Disney Co (The) (DIS) — Q4 2021 Earnings Call Transcript

Good afternoon. It's my pleasure to welcome everyone to the Walt Disney Company's fourth quarter 2021 earnings call. Our press release was issued about 25 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and we'll post a transcript of this call to our website. Joining me remotely today are Bob Chapek, Disney's Chief Executive Officer, and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Following comments from Bob and Christine, we'll, of course, be happy to take some of your questions. So with that, let me turn the call over to Bob to get started.

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: Direct-to-Consumer, sports, and Parks, Experiences, and Products. On the Direct-to-Consumer side, we are extremely pleased with the success of our portfolio streaming services. Disney+, ESPN+, and Hulu continue to perform incredibly well with 118.1 million, 17.1 million, and 43.8 million subscribers, respectively, for a total of 179 million subscriptions. To put this growth in perspective, in the past fiscal year alone, we have grown the total number of subscriptions across our DTC portfolio by 48%, and Disney+ subs in particular by 60%. I want to reiterate that we remain focused on managing our DTC business for the long-term, not quarter-to-quarter. And we're confident we are on the right trajectory to achieve the guidance that we provided at last year's Investors Day, reaching between 230 million and 260 million paid Disney+ subscribers globally by the end of fiscal year 2024, and with Disney+ achieving profitability that same year. This Friday, we will celebrate the 2-year anniversary of the launch of Disney+ with our first ever Disney+ Day of global, company-wide celebration. We are enormously proud of all that we've accomplished with the service in just the first 2 years. It has exceeded our wildest expectations, and we are so excited for what's to come. With this in mind, we have numerous activations planned across the entire Company for Disney+ Day, including the streaming premiere of Marvel's Shang-Chi and The Legend of the Ten Rings, which has already surpassed $430 million at the global box office. Other content coming to the service on Disney+ Day includes the highly anticipated Disney+ original movie, Home Sweet Home Alone, the epic adventure, Jungle Cruise, and a hilarious new short from The Simpsons, and the first 5 episodes of season 2 of the fantastic National Geographic series, The World According to Jeff Goldblum. And there's more great content in the pipeline. On the heels of Disney+ Day, we'll premiere 2 amazing new original series, Marvel's Hawkeye on November 24th, and the latest Star Wars adventure, The Book of Boba Fett on December 29th. And of course, we're extremely excited about the Thanksgiving holiday weekend debut of The Beatles: Get Back, Peter Jackson's highly anticipated 3-part documentary. Additionally, Marvel's Eternals, which has reached more than $161 million at the global box office in less than a week and Disney's Encanto, which premieres in theaters on November 24th, will come to the service after their exclusive theatrical runs. In total, we are nearly doubling the amount of original content from our marquee brands, Disney, Marvel, Pixar, Star Wars, and National Geographic coming to Disney+ in FY '22, with the majority of our highly anticipated titles arriving July through September. This represents the beginning of the surge of new content shared last December at our investor conference 2.0. We recognize that the single most effective way to grow our streaming platforms worldwide is with great content. And we are singularly focused on making new, high-quality entertainment, including local and regional content that we believe will resonate with audiences. Of note, we have 340-plus local original titles in various stages of development and production for our DTC platforms over the next few years. As you know, we announced at our last Investor Day that we expect our total content expense to be between $8 and $9 billion in fiscal 2024, and we will now be increasing that investment further with the primary driver being more local and regional content. We are expanding our global reach by introducing Disney+ in additional markets around the world. The service is now available throughout Japan and we're thrilled to be launching it this Friday on Disney+ Day in South Korea, Taiwan, and Hong Kong on November 16. In just 2 short years, we're now in over 60 countries and more than 20 languages. And next year, we plan to bring Disney+ to consumers in 50-plus additional countries, including Central, Eastern Europe, the Middle East, and South Africa. Our goal is to more than double the number of countries we are currently in to over 160 by fiscal year '23. Turning to Sports, we continue to build out ESPN+ with exclusive sports content that makes our DTC offering the perfect complement to the ESPN linear experience. And with every new sports rights deal, we have considered both linear and DTC. In fact, all 7 of the major deals we made in the last year-and-a-half included a streaming component. Among them is our historic 10-year NFL rights agreement, which begins in 2023. We also recently signed a 5-year deal with the league for the Monday night Wild Card game, which runs through 2025. Another example is our 7-year rights deal with the NHL, where 75 of the League's live national games are and will be available exclusively on ESPN+ and Hulu. And ESPN+ is the sole home for more than 1,000 out-of-market NHL games. By the way, this is another reason that the Disney Bundle is proving highly appealing to consumers. Because live sports are a key element and a key differentiator of our Disney ecosystem. Some 90% of the most-watched telecasts last year were sports, and they continue to perform extremely well. For example, the NHL's opening night games on ESPN last month marked the highest viewed season opening doubleheader on record, with an increase of 54% over the 2019/2020 season opening day letter. And we are particularly pleased with the NHL's Direct-to-Consumer performance on ESPN+ and Hulu. Likewise, the hugely popular UFC, fresh off a strong card at Madison Square Garden last weekend, continues to be a top performer for ESPN+ with 6 of the top UFC on ESPN+ pay-per-views coming in the past year. At the same time, we continue to expand our original sports programming with innovative broadcasts like the hugely popular Monday Night Football with Peyton and Eli, which airs on ESPN2, and reached 1.9 million viewers by its second week, as well as highly anticipated new shows like Man in the Arena: Tom Brady, the multi-part docuseries about the legendary quarterback premiering on ESPN+ on November 16, along with a host of fantastic new social and digital shows and podcasts. We're also moving towards a greater presence in online sports betting, and given our vast scale, we have the potential to partner with third parties in this space in a very meaningful way. Suffice it to say, we continue to see enormous opportunity in sports, and all of this, the right deals, our innovative programming, and the flexibility achieved through our DTC business, which saw ESPN+ subscribers increase by 66% over the past fiscal year alone. All of this is a testament to the clear ambition we have in sports. One of the things that sets The Walt Disney Company apart is our unique access to an incredible number of consumer touchpoints across our businesses. That, of course, includes our parks and resorts, where we've achieved a number of important milestones since our last earnings call, including the first full quarter since the pandemic began with all of our Parks around the world open to guests, albeit with some limits on capacity, and the return of our entire Disney Cruise Line. At the same time, the U.S. government's approval of vaccines for 5 to 11-year-olds, and the reopening of borders to fully vaccinated international travelers are both important steps towards the recovery of our business. But what is perhaps most exciting is the work that we have done during the time our Parks were closed to re-engineer and re-imagine the guest experience. We have introduced a number of exciting new offerings that enable guests to create their best Disney Day. In late August, Disneyland Resort launched Magic Key, the new annual membership program that is resonating strongly with Legacy Annual Passholders, while also attracting new passholders. In fact, about 40% of current sales are to new passholders. Most Magic Key holders have purchased the top 2 tiers, Dream Key and Believe Key, with Dream Key selling out in just 2 months. We're also seeing a great response to the new Annual Passholder program at Walt Disney World, a testament to the demand for our in-park experiences and the success of our yield management strategy. Walt Disney World rolled out its new multi-tiered full service app, Disney Genie, which allows guests to easily and efficiently navigate everything our parks have to offer in order to have the best experience possible. The response to the service in just its first month has been extremely positive. The majority of Genie and Genie+ users have said it improved their overall park experience with nearly 1/3 of park guests upgrading to Genie+, making it possible for them to spend less time waiting in line and more time enjoying attractions, entertainment, dining, and retail opportunities. We are very encouraged by what we're seeing and look forward to launching Disney Genie at Disneyland very soon. Alongside these transformative programs, we continue to invest in our parks and resorts themselves. We introduced a host of new attractions as part of Walt Disney World's 50th anniversary celebration, which kicked off on October 1st. These include Remy's Ratatouille Adventure at EPCOT, which has quickly become one of the parks' top attractions, our new themed restaurant SPACE 220, and two new Nighttime Spectaculars. There's lots more in store in the coming months, including the highly anticipated indoor coaster Guardians of the Galaxy: Cosmic Rewind, and the one-of-a-kind Galactic Starcruiser experience. As part of this immersive 2-night adventure, guests will become heroes of their own Star Wars stories. Reservations went on sale just 3 weeks ago, and the first 4 months of voyages have virtually sold out for this premium experience. Disney Cruise Line continues to be one of the highest-rated guest experiences of any of our offerings. As I said earlier, all 4 of our ships are now sailing and we continue to see tremendous demand for the incredible experiences we offer at sea. We are thrilled to be launching a new ship, the Disney Wish, in June of 2022 and will welcome her sister ships to the fleet in 2024 and 2025. Combined, these 3 vessels will help increase capacity and our footprint in a business that has historically generated a double-digit return on investment, driven by a premium price well above the industry average. Before leaving our Parks and Experiences, I want to mention the continued transformation of our Consumer Products business. We have almost completed the reduction of our physical footprint, which will enable us to pivot our approach with a focus on our e-commerce platform, shopDisney, and on more compelling retail partnerships, such as Disney Store at Target, which will triple its locations by the end of the year. In short, our parks around the globe now have more to offer guests than ever before with our new offerings, and we're making it even easier for them to have the best time imaginable, tailored specifically to their individual needs and preferences in a way only Disney can. Our company is truly unique in that we have a significant presence in the physical world through our parks and resorts, as well as media entertainment assets in the digital world. It is incredible to see how the use of our emerging technology and insights gained through our innumerable consumer touchpoints is enabling us to transform the way people interact with and experience our stories and products in both worlds. The Walt Disney Company has a long track record as an early adopter in the use of technology to enhance the entertainment experience. Steamboat Willie, the first cartoon with synchronized sound, our groundbreaking development and use of Audio-Animatronics; we were the first to distribute downloaded content on the new Apple iPod back in 2005; Pixar has been a pioneer in computer animation. These are just a few examples. Suffice it to say, our efforts to date are merely a prologue to a time when we'll be able to connect the physical and digital worlds even more closely, allowing for storytelling without boundaries in our own Disney metaverse. We look forward to creating unparalleled opportunities for consumers to experience everything Disney has to offer across our products and platforms wherever the consumer may be. As we look ahead to this next frontier, given our unique combination of brands, franchises, physical and digital experiences, and global reach, we see limitless potential, and that makes us as excited as ever about The Walt Disney Company's next 100 years. With that, I'll turn it over to Christine, and she'll talk in greater detail about the quarter and the year ahead.

Thank you, Bob. And good afternoon, everyone. Excluding certain items, diluted earnings per share for the fourth fiscal quarter was $0.37, an increase of $0.57 from the prior year quarter. For the full fiscal 2021 year, diluted EPS excluding certain items was $2.29, or an increase of $0.27 versus the prior year. As a reminder, these results take into account that fiscal 2020 was a 53-week year compared to our usual 52-week year in 2021. We estimate that the additional week in 2020 resulted in a benefit to pre-tax income of approximately $200 million, primarily at the Media and Entertainment Distribution segment, creating an unfavorable comparison for fiscal year '21. I'll now turn to our results in the quarter by segment, beginning with Parks, Experiences, and Products where fourth quarter operating income increased by $1.6 billion year-over-year. A profitable fourth quarter at Parks and Experiences reflects our ongoing recovery from the COVID-19 pandemic. All of our sites were open for the entire quarter, although generally at reduced capacities. In the prior-year quarter, Shanghai Disney Resort was open for the entire quarter, while Disney World Resort and Disneyland Paris were open for approximately 12 weeks. Hong Kong Disneyland Resort was open for approximately 4 weeks, and Disneyland Resort was closed for the entire quarter. Attendance trends continued to strengthen at our domestic parks, with Walt Disney World Q4 attendance up double-digits versus Q3, and Disneyland attendance continuing to strengthen significantly from its reopening in the third quarter. Guest spending at our domestic parks also continued its strong trend, with per cap in the fourth quarter up nearly 30% versus fiscal 2019. Our forward-looking demand pipeline for domestic guests at Walt Disney World and Disneyland Resort remains strong, demonstrating our brand strength, as well as more normalized consumer behavior. Additionally, we're looking forward to the return of international attendance at our domestic parks and resorts. However, keep in mind that due to longer vacation planning lead times, we don't expect to see a substantial recovery in international attendance at our domestic parks until towards the end of fiscal 2022. At our cruise line business, as Bob mentioned earlier, our entire fleet has returned to sea with guest ratings as strong as pre-pandemic levels despite new health and safety protocols. While we expect social distancing restrictions on our ships to remain in place for at least the first half of fiscal 2022, booked occupancy on our ships for the second half of the year is already ahead of historical ranges at significantly higher pricing. We are excited for the Disney Wish to set sail in June 2022, with the inaugural season already nearly 90% booked. At consumer products, year-over-year operating results declined in the fourth quarter, impacted by a tough comparison in our games business due to the prior year performance of 2 titles, Marvel's Avengers and Twisted Wonderland. Turning to our Media and Entertainment Distribution segment, fourth quarter operating income decreased by approximately $600 million versus the prior year driven by lower results at Linear Networks, Direct-to-Consumer and content sales, licensing, and other. At Linear Networks, you may recall that we guided to a decline in Q4 operating income versus the prior year. Operating results at Linear Networks did decrease year-over-year by approximately $200 million driven by a decrease at our domestic channels, partially offset by an improvement at our international channels. At our domestic channels, both broadcasting and cable operating income decreased in the fourth quarter versus the prior year. Lower results of broadcasting were driven by lower results at ABC and the owned television stations. At ABC, the decrease was primarily driven by higher marketing and programming and production costs, reflecting a higher number of series versus the prior year due to last year's production delays as we noted in the guidance we gave last quarter, partially offset by higher affiliate revenue. The decrease at the owned television stations was due to lower advertising revenue, reflecting comparisons to the 53rd week and stronger political advertising in the prior year. At Cable, the year-over-year decrease in operating income was primarily driven by three factors: 1. Lower affiliate revenue, primarily driven by the prior-year benefit of the 53rd week; 2. An increase in marketing cost for more titles premiering in the current quarter, which we also discussed last quarter; and finally, to a lesser extent, lower advertising revenue. These impacts were partially offset by lower programming and production costs, which generally reflect COVID-19 related timing impacts from the prior year. Cost decreased for the NBA and MLB programming versus the prior year, partially offset by increased cost for college football games. Domestic Linear Networks advertising revenue decreased in Q4 versus the prior year, driven by our Cable networks and owned television stations. Both of which were impacted by the prior-year benefit of the 53rd week. ESPN advertising revenue in the fourth quarter was comparable to the prior year, as higher rates were offset by the prior-year benefit of the 53rd week. First quarter to date, domestic cash advertising revenue at ESPN is currently pacing above the prior year, benefiting from increased ratings for college football and the NFL. Total domestic affiliate revenue decreased by 6% in the quarter. This was driven by a benefit of 6 points of growth from higher rates, offset by a 7 point decline due to the 53rd week adjustment and a 3 point decline due to a decrease in subscribers. International channel results increased versus the prior year driven by lower programming and production costs and higher advertising revenue, partially offset by lower affiliate revenue. At Direct-to-Consumer, our fourth quarter operating results decreased by $256 million year-over-year, driven by higher losses at Disney+ and ESPN+, partially offset by improved results at Hulu. At Disney+, the higher loss versus the prior year quarter was driven by higher programming, marketing, and technology costs. These higher costs were partially offset by increases in subscription and Premier Access revenue. Higher subscription revenue reflects subscriber growth, and increases in retail pricing. The increases in costs reflect the ongoing expansion of Disney+. Higher Premier Access revenue was driven by Black Widow and Jungle Cruise in Q4 compared to Mulan in the prior year quarter. As Bob mentioned earlier, we ended the fourth quarter and the fiscal year with over 118 million global paid Disney+ subscribers, reflecting over 2 million net additions from Q3 in line with the subscriber guidance we gave in September. Subscribers across our domestic and core international markets, excluding Disney+ Hotstar grew by almost 4 million from Q3 to Q4. Disney+ Hotstar subs decreased versus the prior quarter and accounted for about 37% of our total Disney+ paid subscriber base as of the end of the fourth quarter. Disney+'s global ARPU in the fourth quarter was $4.12. Excluding Disney+ Hotstar, it was $6.24 or an increase of about $0.12 versus the third quarter continuing to benefit from recent price increases. At ESPN+, we ended the fourth quarter with over 17 million subscribers versus nearly 15 million in Q3, the decrease in operating results year-over-year was driven by higher marketing and sports programming costs, partially offset by subscription revenue growth. At Hulu, higher operating results in the fourth quarter versus the prior year were due to subscription revenue growth, and higher advertising revenue, partially offset by increases in programming, and to a lesser extent, marketing costs. Hulu ended the fourth quarter with 43.8 million paid subscribers, inclusive of the Hulu Live digital MVPD service. Hulu Live subscribers increased to 4 million from 3.7 million at the end of the third quarter. Moving on to Content Sales, Licensing, and Other, results decreased in the fourth quarter versus the prior year to an operating loss of $65 million, driven by lower theatrical and TV/SVOD distribution results, both of which we noted as drivers in the guidance we gave during the last earnings call. While theaters have generally reopened, we are still experiencing a prolonged and gradual pace of recovery in this business. Lower theatrical results were driven by higher operating losses from more titles and release, as well as higher marketing expenses for future releases. Lower TV/SVOD results were due to lower third-party content licensing of film content, driven by the ongoing impact of COVID, as well as our strategic shift towards distribution on our DTC services, partially offset by higher income from sales of episodic content due to lower write-offs versus the prior year. To conclude, as we progress into fiscal 2022 and beyond, there are a number of items I would like to mention. Our capital expenditures in fiscal 2021 were $3.6 billion or approximately $400 million lower than our fiscal 2020 CapEx of $4 billion. CapEx for the year came in lower than the previous guidance we gave primarily due to spending delays across the enterprise. For fiscal 2022, we expect CapEx to increase by $2.5 billion versus 2021, driven by the delivery of the Disney Wish, as well as other increased spending at DPEP incorporate. At DPEP, we expect that per cap spending at our domestic Parks in fiscal 2022 will continue to significantly exceed pre-pandemic levels, and we are particularly encouraged by the early response we are seeing to Genie at Walt Disney World. However, we also expect that while we continue to pursue strong cost mitigation efforts, certain costs will be elevated in fiscal '22 versus pre-pandemic levels, including for example, inflationary pressure on wages, costs related to new projects and initiatives such as Star Wars: Galaxy's Edge, Avengers Campus, and the EPCOT expansion and a ramp up of expenses in support of our cruise ship expansion. As we think about fiscal '22 results at DMED, there are a few things worth noting. First, we are excited about the 9 theatrical releases we have slated for the first quarter of fiscal '22. However, we expect that the prolonged recovery we're seeing in the theatrical market, paired with the marketing costs associated with each release, may adversely impact theatrical operating results in the first quarter by approximately $300 million versus the prior-year quarter, which had only 2 releases. At Linear Networks, we expect that first quarter operating income will decrease by nearly $500 million versus the prior year, reflecting factors including higher contractual sports rights costs for college football and the NFL and the timing of cricket expenses at Star India, alongside an adverse comparison to the prior year's political advertising revenue. Finally, as it relates to our expectations for Disney+, looking at fiscal '22, we are thrilled about the quality of the content coming in the first 3 quarters of the year. But we will not yet be at our anticipated steady-state cadence of content releases. The fourth quarter will likely be more indicative of what our slate could look like once we have content flowing steadily from all of our industry-leading creative engines. Q4 will be the first time in Disney+ history that we plan to release original content throughout the quarter from Disney, Marvel, Star Wars, Pixar, and Nat Geo all in one quarter. This includes highly anticipated titles such as Ms. Marvel, Andor, and Pinocchio. As Bob mentioned earlier, we are also increasing our local content offerings in Asia, India, Europe, and Latin America in fiscal 2022, with the majority of those titles also releasing in the back part of the year. As we've discussed before, we don't anticipate that sub-growth will necessarily be linear from quarter to quarter. So putting this all together and also taking into consideration the timing of our planned international launches in 2022, we expect Disney+ subscriber net adds in the second half of fiscal 2022 will be meaningfully higher than the first half of the year. Additionally, we now expect that Disney+ will reach its peak year of losses in fiscal 2022 instead of in fiscal 2021, as better-than-expected revenue and lower content expenses due to production delays contributed to lower-than-expected losses in 2021. As Bob mentioned, we are increasing our overall long-term content expense for Disney+. We believe we are well-positioned to achieve the subscriber target of 230 million to 260 million by fiscal 2024 that we laid out at last year's Investor Day. We also remain confident in our expectations that Disney+ will achieve profitability in fiscal 2024. With that, I'll now turn the call back over to Tammy, and we would be happy to take your questions.

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.

Thank you. Good afternoon. Bob or Christine, I believe there are two areas where expectations have likely been misaligned with reality this year, specifically regarding the stock. One area is the Disney+ net additions, and the other more recently pertains to Parks margins, both of which you've discussed in detail in your prepared remarks. Could you take a moment to address both topics? Regarding Disney+, it appears we should anticipate net additions being higher in 2023 and 2024 compared to 2022, following the programming surge you mentioned, Bob. It would be helpful if you could clarify this to align expectations appropriately. On the Parks side, Bob, you spoke extensively about Parks margins, mentioning the potential to return to or exceed prior peak revenues. However, there isn't a straightforward increase on the margin front either. Could you elaborate on how expenses will return to the business over time as it recovers relative to revenue, so that we can properly understand that business in the context of the unusual circumstances we are navigating post-pandemic? Thank you.

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. 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. 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. Yet we identified the need for 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, a third 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 per caps, but also in margins. So we're very bullish about both our Disney+ business, both in terms 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 what we expect to be long-lasting benefits in terms of yields. Christine?

Thank you, Bob, and thank you, Ben, for your question about Parks expenses. For those who are newer to following Disney, it's important to note that Parks expenses fall into three categories: fixed, semi-fixed, and variable. During COVID, we were able to make significant adjustments to the variable expenses. However, fixed and semi-fixed costs are ones we must continue to manage regardless of our operating environment. As we resume operations, we have operationally revamped our business practices on both revenue and cost sides to improve margins. In the fourth quarter, the overall margin for the global business and DPEP was slightly below 12%, which is notably lower than our pre-COVID levels. I remain confident that we will not only return to those levels but have a strong chance of surpassing them due to our new initiatives. We are implementing date-based pricing and strategically managing attendance, along with promotional offers that help balance yield with daily or weekly demand. On the cost efficiency front, we have enhanced both expenses and the guest experience through innovations like mobile food ordering, contactless check-ins at our hotels, and virtual queues for select attractions. We're also looking into physical improvements in the Parks for better guest flow. Although margins will be affected while we operate with limited capacity, we believe these foundational changes will ultimately lead to higher margins in the long run. Additionally, I wanted to address Bob's mention of Genie. We have launched it at Walt Disney World and are yet to introduce it at Disneyland. I believe once we do, the response from Disneyland visitors will likely be as strong, if not stronger. Thank you.

Thank you both.

Thank you, Ben. Next question, please.

Thank you. I have a couple of questions. First, the average revenue per user on Hotstar is noticeably lower than that of core Disney+. Can you discuss the potential to bridge that gap over time and whether it could ultimately become a profitable asset, as well as the level of investment required for that property in the long run? My follow-up question is regarding your choice to bring back the Asheboro releases for now, despite the potential for initial losses. What leads you to believe this is a better approach? Is it related to piracy or something else? Thank you.

Okay. As you know, we have preached flexibility in terms of making decisions on distribution as we recover from the pandemic and in the mix of changing consumer behaviors. The extent to which we had a number of titles release going to theatrical will eventually go to Disney+, but what we're seeing is some recovery of the theatrical exhibition marketplace, which is a good thing, by the way, for not only Disney but also for the industry because most of the franchises that we've had as the Walt Disney Company have been built through the theatrical exhibition channel of distribution. At the same time, we're watching very, very carefully different types of movies to see how the different components of the demographics of that market come back. We're watching our family films as they are released over the next couple of months to make sure that that market will come back to theatrical exhibition as the general entertainment with films that appeal to a younger target audience. We're sticking with our plan of flexibility, because we're still unsure in terms of how the marketplace is going to react when family films come back with a theatrical first window. You'll notice that the films that we are putting into the marketplace, in theatrical that are family films have a fairly short window, at least in terms of any reference point to what history might have been. We're doing that so that we can get our films quicker to Disney+, but at the same time see if the theatrical market can kick back into full gear as we prime the pump with these films. We're going to do what's best for our shareholders ultimately. We don't announce our films that far in advance, like we used to, because we know that we're in a time of flux and change still. While COVID will be in the rearview mirror, God willing, I think changing consumer behavior is something that's going to be more permanent. We're reading that on a weekly basis and making our decisions going forward accordingly.

Thanks, Alexia, for your question on Hotstar ARPU. Just to make something very clear, Disney+ Hotstar is included in our overall Disney+ guidance that we reiterate to be profitable in 2024. 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. 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 matches, I believe the number was 29 or so in Q3. There was a linked-quarter reduction in games, therefore lower subscriber advertising revenue. When we think about ARPU overall, there are several levers here. There’s a price-value relationship over time, high quality content. The content in India is really two things. It's not only the IPL but other key sports like Beyond Cricket. So you have things like the English Premier League and so on. There's also 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. They also have over 18,000 hours of original local programming that is produced every year. So once again, I think the upside potential is when all things are working, we'll be able to take price up as the market allows.

Thank you. Thank you, Alexia. Next question, please.

Thanks. Hey, Tammy. I have two. One is I appreciate your view that the content side would get better, and it will drive some growth. But I really want to focus on the U.S. What gives you confidence that that is the reason for the slowing growth? Are there any cohorts, any demographics that you're underpenetrated? Perhaps the widening out of content is an issue versus just more new content? That's one. And then two is we have covered Disney a long time, but I've never seen this much inflation before, and I don't think any of us have in 30 years. I wonder how will you mitigate that inflation, and at what point it would start becoming a meaningful drag on the margin recovery that you identified? Thanks.

So Michael, your first question was about the supply chain of new content coming into the service and its impact on our net sub adds. As you can probably suspect, in a world of Direct-to-Consumer, we have a lot of information, a lot of data, and we have a pretty good idea of what the marginal impact of a particular title might be to our service, and we always say that library titles tend to increase engagement and minimize churn. But new titles, new content, whether the movies or series, actually add new subs. That is the reason why we're pretty confident that the increase in content flow towards the second half of fiscal '22 will lead to the results that we're anticipating. We’ve got data suggesting that this is the case, given our history. While we only have two years, that period has represented a number of titles, and you can start to build models. Every time we have a title, we have a pretty good idea of what its impact will be, both from a retention and addition standpoint. So we're confident that once we get a more normal content flow in the second half of the year, the vacuum we’ve had over the last couple of months will not be the case. Christine, you want to handle that?

Hi, Michael. You've raised a question that many CFOs and senior management teams are considering. We're all evaluating how to manage through inflationary pressures, which we've already begun to experience in certain areas of our business. Over the past year, we've discussed the rising costs of content due to competition for talent and other production-related factors. In our parks business, we particularly see this through the increase in hourly wages resulting from contract renegotiations, as we're committed to fairly compensating our park workers. There are various aspects to consider regarding goods costs. Just last week, I spoke with our Parks Senior Team about potential adjustments, such as changing suppliers, substituting products, or reducing portion sizes, which might actually be beneficial for some. We will review pricing, but we won't implement blanket price increases. Instead, we aim to find a balanced approach to reduce costs where possible without sticking to the same methods. We're leveraging technology to lower some operating expenses, which provides us room to absorb inflation. We're working creatively to address these challenges. This is an important question, and it's one that could be posed to any company in your coverage universe. Thank you.

Thanks.

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

Thank you. First, could you discuss the advertising outlook? There are many factors at play with strong upfronts and good sports ratings, but supply chain issues are impacting some categories. Within advertising, could you provide more insight into Hulu advertising, particularly regarding your aired light service versus pure premium subscription? Additionally, Bob mentioned sports betting in his prepared remarks. Can you elaborate on the opportunity in that area? It's clearly a growth sector as more states are approving it, which should positively impact advertising for the stations. How can you engage more significantly while still safeguarding the ESPN brand?

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 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. As we follow the consumer, we necessarily have to seriously consider getting into gambling in a bigger way. ESPN is a perfect platform for this. We've conducted substantial research in terms of the impact to not only the ESPN brand, but the Disney brand in terms of consumers changing perceptions of the acceptability of gambling. What we're finding is that there's a significant isolation. Gambling does not have the cache it had 10 or 20 years ago. We have some concerns as a Company about our ability to get in it without brand withdrawal. But I can tell you that given all the research we’ve done recently, 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. To go after that demographic opportunity plus the, of course, not insignificant revenue implications, is something we're keenly interested in and pursuing aggressively.

Okay. I'll take the advertising question, Jessica. Overall, the ad market is strong across our entire DMED portfolio, and the sports market is strong, primarily driven by football at both the college and professional level, NHL, and the NBA. We are seeing some impact from supply chain issues impacting sales categories, particularly autos and technology, and those are for obvious reasons that we all know about, the chip shortage. On Hulu specifically, we're pleased with the advertising demand we've seen for Hulu. We believe the overall addressable market in the U.S. will continue to grow. Hulu also has some real strategic advantages in this space. We've got a great slate of premium content and we've developed the ability to use our data to offer targeting advertising that advertisers really desire. We also have a purpose-built and unified ad platform. I mentioned this last quarter, but that's really helped us grow in addressable advertising. We'll continue to make investments in technologies that allow us to exploit this advertising that we see on Hulu. We're automating the sales process with programmatic, and advertisers self-service channels that we think will show good growth. We expect advertising will continue to be an important driver of Hulu revenues going forward. Thanks.

Thank you.

Jessica, 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 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 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.