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The Walt Disney Company (DIS) Q3 2023 Earnings Call Transcript

The Walt Disney Company (DIS)

Q3 2023 Earnings Conference Call

Company Participants

Alexia Quadrani - SVP, IR

Robert Iger - CEO

Kevin Lansberry - Interim CFO

Conference Call Participants

Philip Cusick - JPMorgan

Jessica Reif Ehrlich - BofA Securities

Benjamin Swinburne - Morgan Stanley

Michael Nathanson - MoffettNathanson

Steven Cahall - Wells Fargo

Kannan Venkateshwar - Barclays

Brett Feldman - Goldman Sachs

Michael Morris - Guggenheim

Presentation

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: The Way of Water, which is now the third highest grossing film of all time, is also on track to be the biggest ever electronic home video release for Disney domestically. Certain other titles will be sold in the download-to-own window as well.

By focusing on big franchises and tentpole films, we're able to generate interest in our existing library. For example, we're seeing tremendous engagement on Disney+ with the previous Guardians of the Galaxy films, the original Avatar and the first four Indiana Jones movies. But the value of our Disney entertainment studios and the reason this will be a key growth business for us extends far beyond our library and new releases.

What sets Disney apart are the numerous ways we're able to reach consumers with the stories and characters they love, including in our parks and resorts. We'll be opening new Frozen theme lands at Hong Kong Disneyland and Walt Disney Studios Park in Paris as well as the Zootopia theme land at Shanghai Disney Resort. And later down the road, we will be bringing an Avatar experience to Disneyland, reinforcing the unrivaled worldwide appeal of our brands and franchises.

Our Parks and Experience segment overall has had an impressive streak and will continue to be a key growth engine for the company, even as we navigate the cycles that come with operating this business. Our Cruise Line in particular showed strong revenue and operating income growth in the third quarter. Current Q4 booked occupancy for our existing fleet of five ships is at 98% and we will be expanding our fleet by adding two more ships in fiscal '25 and another in fiscal '26, nearly doubling our worldwide capacity.

In addition to our Cruise Line, strong segment results for the quarter were driven by solid performance at our international parks, and we also saw continued strength at Disneyland Resort. Our Asia parks have been doing exceptionally well, reinforcing a clear opportunity for continued growth. Both Shanghai Disney Resort and Hong Kong Disneyland have experienced stronger-than-expected recoveries from the pandemic. And in Q3, they both grew meaningfully in revenue, operating income and attendance.

We saw softer performance at Walt Disney World from the prior year, coming off our highly successful 50th anniversary celebration. Also as post-COVID pent-up demand continues to level off in Florida, local tax data shows evidence of some softening in several major Florida tourism markets. And the strong dollar is expected to continue tamping down international visitation to the state. However, Walt Disney World is still performing well above pre-COVID levels, 21% higher in revenue and 29% higher in operating income compared to fiscal 2019, adjusting for Starcruiser accelerated depreciation.

And following a number of recent changes we've implemented, we continue to see positive guest experience ratings in our theme parks, including Walt Disney World and positive indicators for guests looking to book future visits. This includes strong demand for our newly returned annual passes. We're making numerous investments globally to grow our parks business over the next five years, and I'm very optimistic about the future of this business over the long term.

The third area that will drive growth and value creation for Disney is our direct-to-consumer business. When you consider our path to profitability in streaming, it's important to remember where we started and how we've adapted based on what we've learned. We overachieved with massive subscriber growth for Disney+ out of the gate and we leaned into a spending level to fuel subscriber growth, which had been the key measure of success for many. All of this happened while we were still determining the right strategies for pricing, marketing, content and specific international market investments.

However, since my return, we've reset the whole business around economics designed to deliver significant, sustained profitability. We're prioritizing the strength of our brands and franchises. We're rationalizing the volume of content we make, what we spend and what markets we invest in. We're deploying the technology necessary to both improve the user experience as well as the economics of this business. We're harnessing windowing opportunities, perfecting our pricing and marketing strategies, maximizing our enormous advertising potential and we're making extensive Hulu content available to bundle subscribers via Disney+.

As I announced last quarter, we're moving closer toward a more unified one-app experience domestically to pair high-quality general entertainment with content from our popular brands and franchises for our bundle subscribers. It's a formula for success that we have already proven in international markets with our Star offering on Disney+. We see a future where consumers can access even more of the company's streaming content all in one place, resulting in higher user engagement, lower churn and greater opportunities for advertisers.

We're also very optimistic about the long-term advertising potential of this business. Even amid a challenging ad market, this quarter, we began seeing early signs of improvement. And I'm pleased to announce that as of the end of Q3, we've signed up 3.3 million subscribers to our ad-supported Disney+ option. Since its inception, 40% of new Disney+ subscribers are choosing an ad-supported product. On our pricing strategy, this year alone, we've raised prices in nearly 50 countries around the world to better reflect the value of our product offerings, and the impact on churn and retention has outperformed our expectations.

Later today, we will release details regarding upcoming streaming price increases. And I'm pleased to share that our ad-supported Disney+ subscription offerings will become available in Canada and in select markets across Europe, beginning November 1, while a new ad-free bundled subscription plan featuring Disney+ and Hulu will be available in the U.S. on September 6. Maintaining access to our content for as broad an audience as possible is top of mind for us, which is why pricing for our stand-alone ad-supported Disney+ and Hulu offerings will remain unchanged.

I'd also like to note that we are actively exploring ways to address account sharing and the best options for paying subscribers to share their accounts with friends and family. Later this year, we will begin to update our subscriber agreements with additional terms on our sharing policies and we will roll out tactics to drive monetization sometime in 2024. Our DTC ambitions also extend to our sports business. Taking our ESPN flagship channels direct-to-consumer is not a matter of if but when. And the team is hard at work looking at all components of this decision, including pricing and timing.

It's interesting to note that ratings continue to increase on ESPN's main linear channel even as cord cutting has accelerated. This rating strength creates tremendous advertising potential across the board. Our total domestic sports advertising revenue for linear and addressable is up 10% versus the prior year adjusted for comparability, which speaks to the fact that the sports business stands tall and remains a good value proposition.

We believe in the power of sports and the unique ability to convene and engage audiences. Yesterday, it was announced that ESPN has entered into an exclusive licensing arrangement with PENN Entertainment to further extend the ESPN brand into the growing sports betting marketplace. This licensing deal will offer a compelling new experience for sports fans that will enhance consumer engagement. We're excited to offer this to the many fans who have long been asking for it.

Overall, we're considering potential strategic partnerships for ESPN, looking at distribution, technology, marketing and content opportunities where we retain control of ESPN. We've received notable interest from many different entities, and we look forward to sharing more details at a later date when we're further along in this process....

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