The Walt Disney Company
Q1 2023 Earnings Call Transcript

Published: 8 Feb 2023

[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.

[Alexia Quadrani:]

Good afternoon. It’s my pleasure to welcome everybody to the Walt Disney Company’s first quarter 2023 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 being webcast and a replay and transcript will also be made available on our website. Joining me for today’s call are Bob Iger, 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. We have a lot to get through today, but we will do our best to answer as many questions as we can. So with that, let me turn the call over to Bob to get started.

[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

[Christine McCarthy:]

Thank you, Bob. It’s great to have you back on these calls and good afternoon, everyone. Excluding certain items, our company’s diluted earnings per share for the first fiscal quarter of 2023 was $0.99, a decrease of $0.07 versus the prior year as continued strength at our Parks, Experiences and Products business was more than offset by a year-over-year decline at our Media Entertainment and Distribution segment. You heard earlier that we are embarking on a significant company-wide cost reduction plan that we expect will reduce annualized non-content-related expenses by roughly $2.5 billion, not including inflation. In general, we anticipate these reductions will be comprised of approximately 50% marketing, 30% labor and 20% technology, procurement and other expenses. Around $1 billion of this target was included in the guidance we gave last quarter. That fiscal 2023 segment operating income should grow in the high single-digit percentage range, which is still our current expectation. The bulk of the efficiencies we are realizing this year are related to reductions in marketing and headcount at DMED. The remaining portion of the target represents incremental SG&A and other operating expense savings, which will fully materialize by the end of fiscal 2024. Longer term, we also expect to realize additional efficiencies in our content spending with an annualized savings target of approximately $3 billion of future spending outside of sports. We will share additional details with you as we move forward on realizing these efficiencies. Bob also gave you some details earlier on the company’s reorganization. The new structure and leadership roles are effective immediately and we expect to transition to financial reporting under this structure by the end of the fiscal year, at which point we will provide recast financials under our new segments. Until then, I will be walking through our results under the existing segments. Turning to Parks, Experiences and Products, we are thrilled with the results we achieved this quarter with operating income increasing 25% versus the prior year to over $3 billion, reflecting increases at our domestic and international parks and experiences businesses. At domestic parks and experiences, significant revenue and operating income growth in the quarter was achieved despite purposefully reducing capacity during select peak holiday periods by approximately 20% versus pre-pandemic levels in order to prioritize the guest experience. Per capita guest spend at our domestic parks also showed strong growth. Quarter-to-date, park attendance at both Walt Disney World and Disneyland Resort are pacing above prior year. And based on reservation bookings, we expect to see this trend continue. Disney Cruise Line was also a meaningful contributor to the year-over-year increase in domestic operating income, reflecting higher occupancy in the existing fleet as well as the Disney Wish, which generated positive operating income in its first full quarter of operations. Domestic parks and experiences operating margins improved versus the prior year despite increased cost from inflation, operation support and new guest offerings, pressures, which we expect will persist into Q2 and beyond. At international parks and experiences, higher year-over-year results were due to growth at Disneyland Paris and higher royalty revenue from Tokyo Disney Resort, partially offset by a decrease at Shanghai Disney Resort. At Disneyland Paris, we remain pleased with the positive results we’re seeing from the substantial investments we’ve made. And at Shanghai, results reflect the fact that the resort was closed for roughly a month during Q1 of fiscal 2023. Moving on to our Media and Entertainment Distribution segment, operating income in the first quarter decreased by over $800 million versus the prior year, driven by year-over-year declines across direct-to-consumer, linear networks and content sales, licensing and others. However, we delivered a significant improvement on a quarter-over-quarter basis at our direct-to-consumer business as we progress on our path towards profitability with Q1 operating losses improving sequentially by over $400 million from Q4. The sequential improvement at DTC was driven by higher revenue and lower SG&A costs, partially offset by higher programming and production costs. Notably, in the first quarter, we meaningfully reduced DTC marketing expenses across all three categories

[Alexia Quadrani:]

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

[Operator:]

Thank you. [Operator Instructions] Today’s first question comes from Jessica Reif Ehrlich with BofA Securities. Please go ahead.

[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?

[Bob Iger:]

Jessica, thank you for welcoming me back. Let me take the second part of your question first. We are going to take a really hard look at the cost for everything that we make, both across television and film because things in a very competitive world have just simply gotten more expensive. And that’s something that is already underway here. In addition, we’re going to look at the volume of what we make. And with that in mind, we’re going to be fairly aggressive at better curation when it comes to general entertainment because when you think about it, general entertainment is generally undifferentiated as opposed to our core franchises and our brands which because of their differentiation and their quality have delivered higher returns for us over the years. So we think we have an opportunity to, through more aggressive curation, to reduce some of our costs in the general entertainment side and in general, in volume. In addition, the structure is now designed to place responsibility of all international programming and investment in content in the hands of one unit so that they can better decide the balance between what we make for global distribution and consumption and what we make for local distribution and consumption with an eye toward possibly reducing expenses there as well as we balance better. Obviously, all designed to deliver the profitability that we talk about delivering by the end of ‘24. In terms of your first question, I mean, indeed, it is times have changed, although in retrospect, looking back at it, not in an extraordinary way. Obviously, it’s gotten more competitive. The forces of disruption have only gotten greater. And there are certain things, certainly, as a residual of COVID, they have just gotten tougher from a macroeconomic perspective. That said, we’re still a company that is focused on creativity at its highest form. I love the fact that we are relinking the creative side of our business with the distribution and the monetization side of our business. And I think by doing that, we will see the impact of that reorganization fairly quickly. But when I think about the secular change that we’re going through, generally speaking, I like our hand. We have an ability to balance how we take our product to market with legacy platforms, whether it’s movie theaters or multichannel TV with, of course, the streamers. We have – and by the way, that helps us in a number of fronts, including advertising, monetization, stronger marketing. And so, I think that when you focus on the company’s assets, in terms of our brands and our franchises. Yes, it’s a tough environment, but the combination of the restructuring and the fact that we’ve got these core brands, which when we get right creatively as we’ve seen time and time again, not only differentiates us, but enables us to deliver fairly strong returns.

[Jessica Reif Ehrlich:]

Thank you.

[Alexia Quadrani:]

Thank you. Next question.

[Operator:]

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

[Ben Swinburne:]

Thank you. Good afternoon. Bob, I’m sure one reaction you’ll get today from all this news is the future of television, I think is viewed as being streamed with linear obviously declining. I’m sure you generally agree with that trend. So how do you think about that about your strategy as you’ve laid out today in the context of that to make sure you’re maximizing the returns globally of the franchises that you’ve built? And then I was just wondering, maybe, Christine, on the Parks business, really strong margins this quarter, really kind of the return to the kind of incremental margins we’re used to seeing, didn’t sound like there was anything one-time. I just wanted to ask if this quarter is sort of emblematic of kind of how you see the rest of the year playing out from a trend point of view? Thank you, both.

[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.

[Christine McCarthy:]

So, Ben, great to hear your voice, and I will address the parks question. So, as I mentioned in my comments, we were really thrilled with the performance of parks in the quarter. There were no one-time items to call out. But the one thing I would mention is in previous quarters, we had mentioned that the recovery from the pandemic and our international parks was lagging domestic. And in this quarter, we had very strong performance, especially year-over-year from Disneyland Paris. We had the opening of Avengers Campus over there in July, and that is incredibly popular in driving attendance. And we also have a new hotel that was actually an old hotel that was redone into the art of Marvel. Again, very popular and attracting a lot of consumers to come out and experience that. The other thing I mentioned was the strength at our royalty stream from Disneyland in Tokyo. And the other thing not to forget is, this quarter, our first quarter of the year is seasonally one of our strongest when you look at it relative to other quarters. But the year-over-year comparison, it was an improvement, and we feel great about our business going forward.

[Ben Swinburne:]

Thank you both.

[Alexia Quadrani:]

Thank you. Next question.

[Operator:]

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

[Michael Nathanson:]

Thanks. Welcome back, Bob. I have two. The first is, when you go back to the second investment day you had for streaming, the company increased their TAM forecast, their investment spending and kind of vision for Disney+. Now that you have returned with more data and time, what’s the vision for Disney+? You don’t want to give us long-term targets, I get that. But what is the product vision? Is it a more narrow vision, any type of long-term size of the investment and awesome profitability case of D+ will be helpful. And then on linear, to Ben’s question, a big part of the cost structure of sports costs, you have signed a ton in lately. But when you think about going forward, can you help us understand what will change going forward on sports rights investment in terms of must-have and not necessarily must-have? Thanks.

[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.

[Alexia Quadrani:]

Thank you. Next question.

[Operator:]

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

[Philip Cusick:]

Hi. Thank you. Bob, following up on Michael, there has been a lot of talk in the last year about whether Disney should keep spin or trade ESPN, and it now as a standalone segment, can you give us your view on the future of Disney and sports in particular, and maybe TV in general? How integral is ESPN to the company’s future? Thanks.

[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.

[Alexia Quadrani:]

Thank you. Next question.

[Operator:]

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

[Doug Mitchelson:]

Thanks so much. Welcome Bob – my welcome back, Bob come in. Bob, there is some investor skepticism that theme park per caps and margins are elevated due to post-pandemic benefits that might expire. I am curious, in your view, does the theme park division still have healthy growth prospects from here, especially after a pretty good quarter, this quarter. And what do you see as the major growth drivers of theme parks going forward? Thanks.

[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.

[Doug Mitchelson:]

Thank you.

[Alexia Quadrani:]

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

[Operator:]

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

[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.

[Bob Iger:]

I will take the second part first, Steve. Yes. The answer to the second part is yes. Now, when you say big, I don’t know yet. I mean we are not really there. But when we bought Fox we greatly enhanced our television production and film production capabilities, bringing into the company great talent in both the movie and the TV side. As I have talked about getting more aggressive at curating general entertainment. By the way, we are not getting out of that business, but we are going to curate it more. We have opportunities using the great talent that we have to create for third-parties, and we are going to look at that very seriously. I actually think there is a nice opportunity to create a growth business for the company, but it’s way too soon to predict what that can be. Regarding ESPN and when we might make the shift, if you are asking me is the shift inevitable, the answer is yes. But I am not going to give you any sense of when that could be because we have to do it obviously at a time that really makes sense for the bottom line. And we are just not there yet. And that’s not just about how many subscribers we could get. It’s also about what is the pricing power of ESPN, which obviously ties to the menu of sports that they have licensed.

[Steven Cahall:]

Thank you.

[Alexia Quadrani:]

Okay. Thanks for the question. I want to thank everyone for joining today. Note that a reconciliation of our non-GAAP measures that were referred to on this call to the equivalent GAAP measures can be found in our Investor Relations website. Let me also remind you that certain statements on this call, including financial estimates or statements about our plans, guidance and expectations, beliefs or business prospects and other statements that are not historical in nature may constitute forward-looking statements under the new 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, 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 economic or industry factors, execution risk including in connection with our organizational structure and operating changes, cost savings and efficiencies, workforce reductions and DTC business plans relating to content, future subscribers and revenue growth and profitability. For more information about key risk factors, please refer to our Investor Relations website, the press release issued today, 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 all for joining us and wish everyone a good rest of the day.

[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.