The Walt Disney Company
Q3 2023 Earnings Call Transcript

Published: 9 Aug 2023

[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.

[Alexia Quadrani:]

Good afternoon. It's my pleasure to welcome everybody to The Walt Disney Company's third 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 Kevin Lansberry, Interim Chief Financial Officer. Following comments from Bob and Kevin, we will be happy to take some of your questions. So with that, let me turn the call over to Bob to get started.

[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

[Kevin Lansberry:]

Thanks, Bob. It's good to be here and good afternoon, everyone. Our fiscal third quarter diluted earnings per share, excluding certain items were at $1.03, a decrease of $0.06 versus the prior year. In the coming months, we will be presenting recast financials in line with our new reorganized segments

[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.

[Operator:]

Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Phil Cusick from JPMorgan. Please go ahead with your 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.

[Robert Iger:]

Clearly, if we are to do anything significant in terms of, call it, strategic direction to the linear nets, we have to keep in mind the need for content to ultimately fuel our DTC businesses, notably and as you mentioned Hulu. So anything that is to be done would be done with an eye toward maintaining a rich flow of content to fuel our growth business, and that will be streaming. There's obviously complexity as it relates to decoupling the linear nets from ESPN, but nothing that we feel we can't contend with if we were to ultimately create strategic realignment.

[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.

[Alexia Quadrani:]

Thank you. Next question, please.

[Operator:]

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

[Jessica Reif Ehrlich:]

Thank you. Bob, maybe just a follow-up on your prepared remarks and film being core strategic. Can you share with us how you plan to improve the movie performance and maybe the time frame or create more original content? Just give us more color. And then a follow-up to something you said on DTC and password crackdown, is this a fiscal '24 full year? Like will you be done by the end of the year and is it on a global basis? How many password shares do you think there are on your platform?

[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

[Alexia Quadrani:]

Operator, next question please.

[Operator:]

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

[Benjamin Swinburne:]

Thank you. Good afternoon. Bob, we've -- the press is out with the price increase information for later this year tonight. I'm just wondering now that you've been through one Disney+ price increase here in the U.S. and multiple Hulu and ESPN increases sort of how you're thinking about the pricing power of the product as you go into these even more significant increases and whether you think you can hold your customer base as you raise prices. And obviously, some big news with ESPN Bet. Why now and why PENN? Can you just talk about your vision or Jimmy's vision for the ESPN product over time that stems from this announcement and other thoughts on ESPN's future?

[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.

[Benjamin Swinburne:]

On ESPN?

[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.

[Benjamin Swinburne:]

Thank you.

[Alexia Quadrani:]

Operator, next question please.

[Operator:]

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

[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

[Robert Iger:]

Michael, on the first part, I'm not going to comment on the future structure of the company or the asset makeup of the company. As I've said, we're looking at strategic options both for ESPN and for the Linear Networks, obviously, addressing all the challenges that those businesses are facing. I'm looking forward to reading your thesis on it. Maybe you'll give us some ideas about it, but I'm not going to make any comments about it right now. Regarding the second question and ESPN, the strategic partnerships that we're looking to create and that we're actually in discussions about are aimed at accomplishing a few things

[Michael Nathanson:]

Okay. Thanks, Bob.

[Alexia Quadrani:]

Operator, next question please.

[Operator:]

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

[Steven Cahall:]

Thank you. Bob, you said you're now on track to exceed that initial goal of $5.5 billion in cost savings, and DTC came in ahead in the quarter. As you think about the future of this business long term and getting to kind of the price and cost structure that you're aiming for, do you have any expectations for longer-term DTC margins? It just seems like you're meaningfully below where Netflix was at a similar revenue scale. So I'm wondering how you think about that 15% or 20% margin level as that business gets above $20 billion in revenue this year. And then just secondly, as a follow-up, given that you have the Hulu put coming up next year, what are your thoughts on your ability to fund that transaction as we head into that time horizon? Thank you.

[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.

[Kevin Lansberry:]

And Steven, I'll answer the question with respect to Hulu put. So I'll remind everyone that the floor to that put is about $9.2 billion. We're very comfortable with our current liquidity position. We've got about $11.5 billion of cash on our balance sheet, got about $10.5 billion worth of revolving credit facilities and commercial paper. And so we -- and we're going to have plenty of future cash flow to help fund all of this going forward. I would also like to note that from a balance sheet perspective, we've got a strong single A credit rating that reflects the strength that we see in our balance sheet. We made significant progress recently, deleveraging coming out of the pandemic. We're prioritizing free cash flow as a company. And we're being really disciplined and smart about how we go about allocating capital across the company. And last but not least, as I noted in my prepared remarks, we hope to still be in a position – or we plan to still be in a position at the end of this year to recommend to the Board of Directors that we put a modest dividend out.

[Alexia Quadrani:]

Next question, please.

[Operator:]

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

[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.

[Robert Iger:]

Kannan, we're not necessarily looking for cash infusion when it comes to partners. We're looking for partners that are going to help ESPN successfully transition to a DTC model. And that, as I've said, can come in the form of either content or distribution and marketing support or both.

[Alexia Quadrani:]

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

[Kannan Venkateshwar:]

So in terms of the guidance for high-single digit OI growth, just triangulating between the trends in the first three quarters and some of the segment guidance in the quarter, it seems to imply growth in the fourth quarter will be higher for OI. And so I just wanted to understand what the drivers of that acceleration.

[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.

[Alexia Quadrani:]

Operator, next question please.

[Operator:]

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

[Brett Feldman:]

Thanks. So I'm curious how your experience with Disney+ Hotstar shape your view on your long-term international streaming strategy. Are you thinking about maybe exiting those markets or any markets and maybe focusing more on content licensing or partnerships? And is it essential that you reshape that international strategy in any way to meet your long-term profitability objectives?

[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.

[Alexia Quadrani:]

Operator, we have time for one more question.

[Operator:]

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

[Michael Morris:]

Thank you very much. Good afternoon, guys. So on the theme of considering options for Disney, there was an article published recently that speculated that the entire company could be sold to a larger technology company. So Bob, my straightforward question is, do you see a plausible scenario where the entire company would be sold? Maybe a bit more broadly, though, when you think of maximum value of the Disney enterprise, do you think that can be achieved by being more aligned with a single technology partner or is that value maximized through partnering with a variety of tech platforms? And if I could just sneak one in on the PENN Gaming announcement. Does it -- will you forego advertising partnerships with all other betting or sports gaming partners? And if so, how much impact will that have in exchange for building value in this partnership?

[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.

[Kevin Lansberry:]

Great. And then, Michael, with respect to any foregone economics or no longer accepting advertising from other gaming companies, I don't see us in a position where we'll ever be in that situation. So...

[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:]

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. Thank you for joining. You may now disconnect your lines