Walt Disney Co (The) (DIS) — Q3 2022 Earnings Call Transcript

Good afternoon. It's my pleasure to welcome everybody to The Walt Disney Company's third quarter 2022 earnings call. Our press release was issued about 25 minutes ago and is available on our website. Today's call is being webcast and a replay and transcript will also be available on our website. Joining me for today's call 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 will be happy to take some of your questions. So with that, let me turn the call over to Bob to get started.

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. 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 distribution 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. 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 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. Additionally, 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, enhanced by a distribution strategy that maximizes reach by taking advantage of the strength of both our linear and streaming channels. 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. 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: Love and Thunder, which premiered on July 8 has grossed over $700 million at the global box office and is the highest domestic grossing film of the Thor franchise. Pixar's Lightyear marked the studio's return to the big screen and the film debuted on Disney+ last week. Speaking of Disney+, which is now available in 155 markets after recently launching in 53 new territories, we released content with appeal across demographic groups including Obi-wan Kenobi and Ms. Marvel, as well as feature films like Disney's Chip n' Dale: Rescue Rangers and Disney Nature's: Polar Bear. As you know Disney+ is still a young business and we are learning more every day about the service's ability to attract new fans to our powerhouse franchises. For example, in addition to driving engagement among tens of millions of existing Marvel fans, we have seen each new Disney+ original Marvel series attract incremental viewership and new subscribers that hadn't previously engaged with Marvel content on the service, thanks to the episodic format. The value of expanding the fan base is tremendous, and this new audience can then experience Marvel across our other offerings from consumer products to games to theme parks. Looking ahead Q4 will feature a fantastic Disney+ content slate. Given the global nature of Disney+, we are thrilled to bring international music sensation BTS to the service with an exclusive cinematic concert film and docuseries following the band's incredible journey. We continue to step up our investment in international local originals, including bringing the seventh season of Coffee With Karan, one of India's most popular talk shows exclusively to Disney+ Hotstar. On the theatrical side, we have a robust slate debuting later this year, including the highly anticipated Avatar: The Way of Water. Our innovative NHL deal has been a difference-maker across platforms with the Stanley Cup playoff viewership up 60% over 2021 across cable and broadcast. Pay TV distribution in India continues to be a robust business. Given the results of our recently completed Upfront, it is clear that our unmatched portfolio continues to be highly sought after by advertisers. This approach, coupled with strong advertiser demand translated into Disney+ earning industry-leading CPM rates. Turning to our parks, we continue to see strong revenue and profit growth, and we celebrated three major milestones for our Parks and Experience business this quarter. First, the innovative roller coaster, Guardians of the Galaxy: Cosmic Rewind opened at Epcot. Second, we expanded the Disney Cruise Line fleet with a Disney Wish which sailed its maiden voyage on July 14. And finally, Disneyland Paris opened Avengers Campus completing the first phase of our ambitious expansion plan. I am incredibly pleased with our performance this quarter and look forward to celebrating the second annual Disney+ Day. With that, I'll hand it over to Christine.

Thanks, Bob, and good afternoon, everyone. We are pleased with our strong financial results this quarter with diluted earnings per share, excluding certain items, increasing to $1.09 versus $0.80 in the prior year quarter. At Parks, Experiences and Products, third quarter revenues increased by more than $3 billion and operating income increased by $1.8 billion versus the prior year. Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels. Even while the average daily attendance at our domestic parks was slightly below 2019, we have delivered significantly higher revenue and operating income over that same time period. Per capita spending at our domestic parks remained strong increasing 10% versus Q3 of fiscal 2021 and over 40% versus fiscal 2019. Looking ahead, domestic demand at our theme parks continues to look robust. Improvement at our international parks in the third quarter was driven by Disneyland Paris, where both revenue and operating income exceeded 2019 levels. At the Media and Entertainment Distribution segment, third quarter revenues increased by over $1.4 billion versus the prior year, and operating income decreased by $645 million as an increase at linear networks was more than offset by declines at direct-to-consumer and content sales. At Direct-to-Consumer, lower operating results across Disney+, Hulu and ESPN+ reflect increased programming and production costs as we continue to strategically invest in our streaming businesses. At Disney+, we crossed the 150 million subscriber milestone, ending the third quarter with more than 152 million global paid subscribers, a net addition of more than 14 million subs versus Q2. We expect Disney+ core net additions in the fourth quarter to accelerate modestly versus Q3 and particularly in the domestic market. Cash content spend across the company is now expected to total approximately $30 billion for fiscal 2022. As it relates to foreign exchange, note that the overall impact to the company's segment operating income was only modestly negative in the quarter. Our new expectation for 2022 capital expenditures is roughly $500 million lower than our previous guide. Finally, we remain confident that Disney+ will achieve profitability in fiscal 2024 and look forward to several upcoming catalysts. With that, I'll turn it back to Alexia.

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.

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.

Sure. Thanks Doug. Our Parks certainly did have a fantastic quarter. The parks team is the same team that managed through the COVID crisis. They were able to ramp back in on a phased basis to recovery and are now positioned for growth. As it relates to levers of demand, we had limited the number of annual passes across some of our parks. Those come with some blackout dates. To the extent to which perhaps you had lightened demand, you could loosen up some of those to bring people into the Park to enjoy and spend money while they're there. Additionally, we have not seen demand abate at all; we still have many days when people cannot get reservations.

Thank you. Next question.

Good afternoon. Bob, can you talk a little bit about, sort of the research and insight you have into your streaming customer base that informs the decision to take 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 whether you are planning to take similar pricing moves outside the U.S. over time? Thanks for the color.

Well, we launched at a compelling price across all the platforms for streaming. Since that initial launch, we've continued to invest in our content. We believe that the increase in investment over the past 2.5 years relative to a very good price point leaves us with plenty of room on price value. We do not believe that there's going to be any meaningful long-term impact on our churn as a result, as evidenced by our recent increases on ESPN+, which had no meaningful impact on our churn.

Thank you. Next question?

Thanks. So the DPEP margins were really spectacular. I'm just wondering, what kind of trends are you 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?

I'll take that one, Steve. The DPEP margins were indeed very strong. International visitation to our domestic parks, primarily Walt Disney World, was non-existent during the pandemic but has made significant progress and we expect it to be additive to margins as those guests tend to stay longer and spend more.

Thank you. Next question?

Thank you. I just wanted to dig a bit on the ad product at Disney+. What's your expectation for ad load or monetization per subscriber and what you've learned from Hulu over the years.

As you know, we've had a lot of experience with this on Hulu and a lot of success. We're going in conservatively upfront. We believe there's likely to be some elasticity in that as we move forward. We're thrilled that we're launching the Disney+ ad tier and expanding our audience access. We believe it will yield strong advertising demand since the launch of Disney+.

Thank you. Next question?

Thanks. Maybe switching gears a little bit to sports. Can you give us your thoughts on what the structure of an NBA renewal might look like?

We've had a great history with the NBA and the past season's ratings have been extraordinary. We are interested in a renewal with the NBA, but we will only do it if it's accretive to shareholder value. The relationship with the NBA remains attractive to us.

On cruise, we welcomed our fifth ship to our fleet. The business is recovering, but historically, the cruise line has been significantly impacted by COVID. However, we expect that business to return to attractive returns that we had previously experienced.

Next question please.

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...

A lot of onlookers try to sum up our park business as just pent-up demand. What we're seeing is far more resilient, longer-lasting demand both in terms of attendance and spending. Our business looks strong with forward-looking bookings at pre-pandemic levels.

As for foreign exchange, we have a hedging policy in place to reduce the impact of changes in foreign exchange rates on our earnings. While we manage our FX risk, the reported ARPU for international Disney+ was impacted by unfavorable exchange rates in the quarter.

Thank you. Next question.

Thank you. So, maybe Bob from a strategic perspective, when you think about sports, it seems like there are a lot of new entrants.

We are enamored by the power of sports in terms of viewership and what it adds to our overall portfolio. We want to proactively prepare for the future of ESPN in a direct-to-consumer fashion while maintaining our valuable cash flow from linear networks.

Pacing in our scatter market continues to be solid across streaming sports, as well as our broadcast network. We plan to launch the Disney+ ad-supported tier on December 8. We're confident in our ability to navigate the international advertising marketplace as well.

Thank you. Next question please.

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.

We have seen net working capital outflows as our businesses are getting back up and running after the pandemic. However, we did generate positive free cash flow in the quarter. We also expect our full year 2022 tax rate to be somewhat elevated above the US statutory rate.

Okay. Thanks for the question. I want to thank everybody for joining us as well.