The Walt Disney Company
Q4 2023 Earnings Call Transcript

Published: 8 Nov 2023

[Operator:]

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

[Alexia Quadrani:]

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

[Kevin Lansberry:]

Thank you, Bob. I appreciate your kind words at the outset of the call. It's been an honor serving as Interim CFO these past few months. We are excited to welcome Hugh to the Walt Disney Company and I look forward to working with both of you on all of this ahead. Now to dive into this quarter's results. Diluted earnings per share, excluding certain items, increased versus the prior year to $0.82 in the fiscal fourth quarter, and $3.76 for the full fiscal year. This past year has been marked by both transformation and execution. And we are pleased with the momentum we are building and the results we've realized, including meeting our guide of high single-digit percentage growth in both revenue and operating income for fiscal 2023. Total company revenues for the year increased 7% and segment operating income grew by 8%, excluding the impact of accelerated depreciation from the Galactic Starcruiser. And free cash flow for the year increased substantially, totaling close to $5 billion, driven by the work we've been doing on the cost efficiency front and by improvement in our underlying financial results. A few weeks ago, we published our recast financials, aligned to our newly reorganized segment structure. Today, I'll be walking through the fourth quarter's financial results for each of our three segments

[Alexia Quadrani:]

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

[Operator:]

The first question will come from Michael Nathanson with MoffettNathanson. You may now go ahead.

[Michael Nathanson:]

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

[Robert Iger:]

Thanks, Michael. Regarding Charter, first of all, as we said when we did the deal, we think it's a great deal for us. Also I think it's a great deal for Charter. It doesn't really change things much in terms of our strategy, because when you look at the deal, it actually ended up reflecting exactly what our strategic priorities are, that is streaming and the distribution agreement for Disney+ as part of the overall Charter deal does just that. So it leans into our streaming priorities, and that strategy doesn't change things much. Having the opportunity to consolidate a bit on the channel side is, I think, a good thing at this point. In terms of the studio, nice of you to mention just our great run. First of all, let's put things in perspective. Recently, we did have four really strong titles and four of the top 10 in the past year, led by Avatar, of course. But there were other successes, too. That said, as I've looked at our overall output, meaning, the studio, it's clear that the pandemic created a lot of challenges creatively for everybody, including for us. In addition, at the time the pandemic hit, we were leaning into a huge increase in how much we were making. And I've always felt that quantity can be actually a negative when it comes to quality. And I think that's exactly what happened. We lost some focus. And so, working with the talented team at the studio, we're looking to and working to consolidate, meaning, make less, focus more on quality. We're all rolling up our sleeves, including myself to do just that. We have obviously great assets, great stories to tell from the assets that we either have or that we purchased. And I feel really optimistic about the slate going forward, which is going to be a balance between some really strong sequels to some very, very popular titles, as well as some good original content, starting with Wish, which comes out Thanksgiving weekend. So I feel good about the direction we're headed, but I'm mindful of the fact that our performance from a quality perspective wasn't really up to the standards that we set for ourselves.

[Alexia Quadrani:]

Thank you. Next question, please.

[Operator:]

Our next question will come from Steven Cahall with Wells Fargo. You may now go ahead.

[Steven Cahall:]

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

[Robert Iger:]

I'll take the second part first. Our plan when we bring ESPN direct-to-consumer, which is inevitable, which is going to happen, and we're planning for it, is to have what I'll call a soft landing, which is continue to make it available as part of the bundle for those people that want to remain in the bundle or people who feel that the bundle still has value to them, and at the same time to make it available on a true [indiscernible] basis in DTC form. So it is our hope that it will serve basically the consumer in two ways, in the traditional way and in a new way. And we'll obviously see in terms of where we end up the blend of basically consumers that stay in the bundle and those that leave. We're not concerned about it. And actually, as we model basically ESPN into the future, we see that in some cases it will continue to be sold as part of the bundle. And the first -- to the first question, the trajectory of DTC, we're not going to get specific and we're not giving any guidance beyond our guidance about becoming profitable at the end of 2024. But the building blocks are in place to turn this into a real growth business for us. And the recent announcement about purchasing the remaining stake in Hulu is just one of those building blocks. On the pricing side, we did take Disney+ prices up for the premium service, the non-advertiser supported by about 27%. It's still really early to tell, but we had taken those prices up significantly a year earlier and churn was de minimis. So we felt we have the room, particularly as we improve quality on the Disney+ service, where overall our strategy regarding pricing is more sophisticated, more coordinated across the world than it had been before. And as we look at growing that business, a smarter approach to pricing is one, bundling is another. I'm going to come back to the bundle between Disney+ and Hulu and then the opportunity to bundle ESPN. Clearly, we've got technology improvements in the works, whether it comes to account sharing, or whether it comes to basically lowering customer acquisition costs and churn, and lowering marketing expenses and growing margins. That's part of it. Advertising is a strong component of that. We did not take pricing up for Disney+ advertiser-supported services and the delta between the advertiser-supported and the premium services wider, because we like the ARPU that we get basically from both sides. So, we feel really good about the potential of this business. And look, if you think about the portfolio of streaming assets that we will have, Hulu, Disney+ and ESPN, that's a very, very strong hand. In December, we launched a beta version of Hulu and Disney+ combined. We feel really good about that. I saw some -- basically some demos of that just yesterday as a matter of fact. We are basically putting it in beta so that we can prepare parents largely to basically implement parental controls, because you'll be able to access Hulu programming on the same app. And then in late March we'll launch it basically in full form. And I think we have opportunities in terms of upsell capabilities, in terms of increasing engagement. We found that where we bundle, we lower churn. And again, these are steps that are all taken to ultimately turn this into a great business. Lastly, in terms of cost reductions, we created basically a one world approach to streaming. We had multiple organizations before. We now have one run globally by Dana Walden and Alan Bergman. They have created an entirely new senior management team across the globe to manage these assets. We're doing so much more cohesively, including, by the way, balancing spending in market, local spending and what I'll call global spending. One thing that we have recently really come to appreciate is the performance of our big title films, the so-called Pay 1 window films on the service. Elemental is one, Guardians of the Galaxy 3 was another, Little Mermaid is third. The numbers are huge. That's a differentiator for us certainly when it comes to competing with Netflix, for instance, which is the gold standard. But by leaning more into some of those films and while we improve the quality of them, gives us the ability to dial back a bit on some of the spending and investment in series. And that blend of spending between films and series, we believe, gives an opportunity to increase our margins and grow the business.

[Alexia Quadrani:]

All right. Next question, please.

[Operator:]

Our next question will come from Ben Swinburne with Morgan Stanley. You may now go ahead.

[Benjamin Swinburne:]

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

[Robert Iger:]

I'll take the question about ESPN first. Interesting, I just saw statistics. ESPN is the number one brand on TikTok. Not the number one sports brand, not the number one media brand, the number one brand with about 44 million followers, which is an incredible statistic. ESPN is a very popular, high demand -- high in demand product in the United States, and unique, we believe, and we feel leaning into it is the smart thing to do because of its unique quality, how popular it is and how profitable it has been. We believe we have an opportunity there as we bring it in the direct-to-consumer direction. To strengthen our hand when we do that by partnering with either tech companies that can provide us with marketing technology support, customer acquisition help, or sports leagues that can provide us with more content. It's that simple. We're quite -- we are actually quite bullish about it. And frankly, if we were to just sit back and leave ESPN alone, kind of as part of the linear bundle, we know ultimately where that would bring us. It certainly wouldn't bring us in a growth direction because of the -- basically the continued decrease in multichannel subscribers. So this is a way to really buck that trend, continue to allow it to be part of the multichannel bundle, but also make it available on an [indiscernible] basis, basically taking a very popular product, in fact, and make it available and possibly strengthening it by doing what I described earlier. It's that simple. And we think about the building blocks of the company, which right now we believe there are four. One of them obviously is streaming overall. Another one we've talked about, which is Parks and Resorts and turbocharging that growth. The third I talked about earlier, which is returning the studio to basically the level of success that we became used to before the pandemic. And the fourth is turning ESPN into a preeminent digital sports platform. Kevin, you take the cash flow.

[Kevin Lansberry:]

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

[Alexia Quadrani:]

All right. Operator, next question, please.

[Operator:]

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

[Jessica Reif Ehrlich:]

Yes, thank you. Excuse me. Thank you. Bob, I was wondering if you could give us your sort of holistic view on advertising and what's going on. I mean, we know money is going into like retail, media networks and things like that, but how much can you as a company make up on AVOD versus what's going on with linear? And maybe you can give us your view on what is going on with linear for you. And then on India, it’s been notably challenging market consistent money loser. Can you talk about how -- your view of kind of ultimately where that winds up? Do you own it? Do you JV it? Do you exit the market?

[Robert Iger:]

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

[Alexia Quadrani:]

Operator, next question, please.

[Operator:]

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

[John Hodulik:]

Great, thanks. Maybe first, a follow up to Ben's question. Is there an opportunity for ESPN to add local sports rights, given what's happening to the RSN model, or potentially add sports rights to be distributed outside the US? That's the first question. And then second question is, Warner Brothers basically made some news recently by licensing some of their -- what would be considered some of their tentpole content, their DC Universe to Netflix. Is that something you think that Disney can do or can lean into, more -- at least more of that -- so than you're doing now without diluting the Disney brand or the Disney+ growth prospects? Thanks.

[Robert Iger:]

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

[Alexia Quadrani:]

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

[Operator:]

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

[Philip Cusick:]

Hi, guys. Thank you. Bob. first follow up on ESPN, clearly a big priority. Can you give us some update on types of potential ESPN partners and what the hurdles might be to get those partnerships announced? And then second, maybe if you could dig into the recent trends of Parks. There's been some noise on pricing, but what have you seen from consumer demand, both in Orlando and around the country? And how do you think that Walt Disney World is doing versus the overall Orlando market? Thanks very much. A - Robert Iger The first question.

[Alexia Quadrani:]

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

[Kevin Lansberry:]

Yep. So with respect to the Parks, and I think we've talked about it in our prepared remarks with respect to Walt Disney World, and just we're lapping the 50th there. So we're going to continue to have a little bit of that lapping effect that will continue for a little bit as we go through Q1. But as I look out at the other domestic businesses, especially Disneyland continues to look exceptionally strong, as does Disney Cruise Line. So bookings at all of those continue to be very, very strong going forward. So domestically, we feel good and internationally we feel pretty good. So we're not really seeing anything in terms of an economic hangover.

[Phil Cusick:]

Thanks, Kevin. Thanks, Bob.

[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 the 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, 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. These factors include, among others, economic or industry conditions, competition and execution risks, including in connection with our business plans, organizational structure and operating changes, cost savings, future financial performance, including expectations and drivers of growth and our DTC content and how it has made available on our platforms, 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 recent work stoppages, return expectations, the financial impact of 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 recent experience provides 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, the risks and uncertainties described in our Form 10-K, Form 10-Q and other filings with the Securities and Exchange Commission. We want to thank you for joining us and wish everyone a good rest of the day.

[Operator:]

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