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The Walt Disney Company (NYSE:DIS) Q4 2023 Earnings Call Transcript

The Walt Disney Company (NYSE:DIS) Q4 2023 Earnings Call Transcript November 8, 2023

The Walt Disney Company beats earnings expectations. Reported EPS is $0.77, expectations were $0.68.

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 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: achieving significant and sustained profitability in our streaming business; building ESPN into the pre-eminent digital sports platform; improving the output and economics of our film studios; and turbocharging growth in our Experiences business.

We have already made considerable progress on these four opportunities and we will continue to move forward with a sense of purpose and urgency. I've articulated many of my thoughts about our strategic initiative. So today, I want to discuss in more detail these four building opportunities as we enter this next phase. First, is turning streaming into a profitable growth business and I'm pleased to say our recent performance solidifies that we're on that path. In the four years since we launched Disney+, which generated roughly 10 million sign ups in the first 24 hours alone, core Disney+ subscribers have now reached over 112 million as of this end of fiscal 2023, including the nearly 7 million we gained this quarter. What's more, our ad-supported Disney+ product grew by approximately 2 million subscriptions in Q4 to a total of 5.2 million.

In fact, more than 50% of Q4 new US subscribers chose an ad-supported Disney+ product. And over the past six months, these [indiscernible] subs spent 34% more time watching the service. We have the best advertiser technology in the streaming business globally and we have just introduced new tools that will make this an even more attractive platform for advertisers, much as we've done with Hulu. And speaking of Hulu, we were pleased to announce last week that we will acquire the remaining stake in Hulu held by Comcast, which will further Disney streaming objectives. We remain on track to rollout a more unified one-app experience domestically, making extensive general entertainment content available to bundle subscribers via Disney+. That includes critical and audience favorite like Hulu's Only Murders in the Building.

The Bear, Abbott Elementary, as well as titles from our extensive content library built over decade, including adult animation stand-up like Family Guy and long-running hit series like 911, which is moving to ABC for Season 7. We expect that Hulu and Disney+ will result in increased engagement, greater advertising opportunities, lower churn and reduced customer acquisition costs, thereby increasing our overall margins. We will launch a beta version for bundle subscribers in December, giving parents time to set-up profiles and parental controls that work best for their families ahead of the official launch in early spring 2024. Also, we have additional opportunities for improvement in our streaming business that will come from implementing stronger standards around account sharing, although given the timing of our planned rollout, we don't expect a meaningful impact until 2025.

Now that we have realigned our pricing and marketing strategies focused aggressively on getting the technology right, merged our creative and distribution teams and restored creative excellence is our singular motivating priority with the content we create, we are bullish about the future of our streaming business. And as you consider the components in the future of that business, just imagine the opportunities that are further combined Disney+, Hulu and ESPN streaming experience could offer us as a company and our consumers. Another core building opportunity is taking ESPN, which is already the world's leading sports brand and turning it into the pre-eminent digital sports platform, allowing us to reach fans in compelling new ways and fully integrating key features into our primary ESPN offering.

We're already moving quickly down this path, and we are exploring strategic partnerships to help advance our efforts through marketing, technology, distribution and additional content. As we continue to develop our streaming business, the continued strength of ESPN relative to the backdrop of notable linear industry declines, demonstrates the value of sports and the power of the ESPN brand. Overall, our domestic ESPN business grew in revenue and operating income in both fiscal 2022 and in fiscal 2023. This fiscal year also saw the network deliver its best overall viewership in four years and its highest viewership in the key 18 to 49 demographic in the same time period. ESPN viewership was up in each of the four quarters as well, maintaining steady success throughout the entire year.

Across ESPN networks, the company increased its already industry leading share of sports viewership in fiscal 2023 and we continue to see stability in ad sales, despite challenges facing the broader media industry. ESPN BET will launch next week through our agreement with Penn Entertainment and we're excited to bring sports fans this compelling new experience. Regarding our broader linear business. We continue to evaluate options for each of our linear networks with the goal of identifying the best strategic path for the company and maximizing shareholder value. However, our review of the business thus far has uncovered significant long-term cost opportunities which we are implementing, while continuing to deliver high quality content. Speaking of which, I'd like to acknowledge the world-class journalists and producers at ABC News.

Over the past few months, many have risked their lives to keep our audiences informed during relentless news cycles and made ABC number one in network news for the 11th consecutive year. Next is the need to strengthen the creative output of our film studio, which generates value throughout the entire company. To achieve this, we are focusing heavily on the core brands and franchises that fuel all of our businesses, and reducing output overall to enable us to concentrate on fewer projects and improve quality, while continuing our effort around the creation of fresh and compelling original IP. I'm devoting considerably more of my time to this with the goal of improving returns, always seeking to exceed the level of creative excellence audiences expect from Disney.

Meanwhile, we have four of the top 10 highest grossing films at the global box office this year, including Pixar's Elemental which has grossed nearly $0.5 billion worldwide in addition to being the most viewed film released this year on Disney+. We have more new releases still to come in calendar year 2023 including the Marvels from Marvel Studios, which will be released this Friday and Wish, our newest film from Walt Disney Animation Studios, which marks our company's 100th Anniversary and will be in theaters beginning November 22nd. We're also looking forward to our strong theatrical slate in 2024 with several films tied to popular franchises like Deadpool 3, featuring Wolverine, Kingdom of the Planet Apes and Inside Out 2. Additionally, Mufasa: The Lion King and sequels from our Toy Story, Frozen, Zootopia and Avatar franchises are all in the works.

Finally, we have an opportunity to build Disney Experiences into an even bigger and more successful cash flow generation business. Parks and Experiences overall remains a growth story, and we are managing our portfolio exceptionally well. Even in the case of Walt Disney World, where we have a tough comparison to the prior year when you look at this year's numbers compared to pre-pandemic levels in fiscal 2019, we've seen growth in revenue and operating income of over 25% and 30%, respectively. Over the last five years, return on invested capital has nearly doubled in our domestic parks, and we have seen sizable increases over that same timeframe across the total Experiences portfolio as well. Not to mention the improved guest experience ratings we're now seeing at every one of our parks.

As we announced in September, we plan to turbocharge growth in our Experiences business through strategic investments over the next decade. Given our wealth of IP, innovative technology, buildable land, unmatched creativity, and strong returns on invested capital, we're confident about the potential from our new investments. Looking at the company as a whole, today, we are focused on driving profitable growth and value creation as we move from a period of fixing to a new era of building. We have a strong balance sheet and we expect free cash flow to significantly improve in fiscal 2024, approaching pre-COVID levels. Disney's Experiences business with its expansive offerings around the world is a key differentiator and remains a powerful growth engine, expanding operating margins by nearly 300 basis points over the past five years.

A packed theater of moviegoers watching a blockbuster film produced by the entertainment company.
A packed theater of moviegoers watching a blockbuster film produced by the entertainment company.

As we transition ESPN to a streaming future and more fully integrate general entertainment content into Disney+, we will have a DTC offering unlike any other in the industry. And Disney's leadership and workforce around the world are second to none. When you combine all of that with our unrivaled portfolio of valuable businesses, brands and assets, and the way we manage them together, Disney has a strong hand that differentiates us from others in the industry. Our results this quarter are a testament to the work we've done across the company this past year and I'm bullish about the opportunities we have to create lasting growth and shareholder value and to strengthen Disney's position as the world's leading entertainment company. And with that, I will turn things over to Kevin.

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: Entertainment; Sports; and Experiences. And I'll also provide some color for the year ahead. Starting off with Entertainment. Q4 operating income grew by over $800 million versus the prior year quarter, driven by improvement in our direct-to-consumer business.

We continue to make headway on our path to profitability in streaming with fourth quarter operating losses at our Entertainment D2C services improving by nearly $1 billion versus the prior year or $85 million sequentially to $420 million. Note that our Entertainment direct-to-consumer results exclude ESPN+. Including ESPN+ our combined streaming businesses and an operating loss in the fourth quarter of $387 million, a year-over-year improvement of a little over $1 billion and a sequential improvement of $125 million. As Bob noted earlier, we added nearly 7 million Disney+ core subs over the past quarter, reflecting strong content performance and our global summer promotion. Disney+ core ARPU increased sequentially by $0.12, driven by pricing increases and higher advertising revenue, partially offset by the impact of the summer promotion.

The Disney+ ad tier added approximately 2 million subs during the fourth quarter and ended the fiscal year with 5.2 million subscribers. We anticipate core Disney+ subscribers in fiscal Q1 will decline slightly versus Q4 due to the expected temporary uptick in churn from the recent US price increases, as well as from the end of the summer promotion. However, we expect to see sub growth rebound later in the fiscal year. Growth in Entertainment D2C advertising revenue of 4% in Q4 versus the prior year, partially offset linear ad declines. The growth reflects an increase at Disney+ while Hulu results declined due to lower political and technology category advertising. We continue to expect to reach profitability at our combined streaming businesses in Q4 of fiscal 2024.

Although as we have mentioned in the past, we don't expect linear progress from quarter to quarter. While we expect Entertainment D2C operating losses in Q1 to be generally in line with Q4 due to higher sports rights costs at ESPN+ aligned with the start of the NHL season, we anticipate a modest sequential decline in Q1 for the combined streaming business. Whereas we have also said previously, we anticipate upward momentum later in the fiscal year to be driven by realizing the full impact of price increases, the launch of the ad tier internationally and subscriber growth. At linear networks, which now excludes our sports channels, fourth quarter operating income was flat to the prior year, reflecting lower advertising and affiliate revenues which were generally offset by a decrease in marketing and programming and production costs.

Advertising revenue declines were driven by our domestic business, primarily at ABC and our own TV stations. Domestic entertainment affiliate revenue decreased by 4% in the fourth quarter versus the prior year due to a 6 point decline from fewer subscribers, and a 1.5 point adverse impact from the Charter blackout, partially offset by roughly 4 point impact from higher rates. As Bob mentioned, we remain focused on driving additional cost efficiencies in this business over the long term. Content sales, licensing and other, lower operating results versus the prior year were due to lower theatrical results, partially offset by higher home entertainment results. We currently expect that first quarter operating income will be roughly breakeven and comparable to the prior year.

Moving to our Sports segment. Q4 operating income increased by 14% versus the prior year. Results were driven by our domestic ESPN business from lower programming and production costs. Growth in subscription revenue at ESPN+ due to both pricing and sub growth and lower marketing costs, partially offset by lower affiliate revenue. The decrease in programming and production costs reflect the absence of the Big 10. And domestic ESPN linear advertising revenue increased by 1% in the fourth quarter versus the prior year, despite the absence of the Big 10, the charter blackout and a highly competitive marketplace. Domestic affiliate revenue decreased by a little less than 5% in Q4 versus the prior year as 5.5 points of growth from higher rates were offset by adverse impacts of approximately 7.5 points from fewer subscribers and two points from the charter blackout.

As Bob referenced earlier, it's worth noting that ESPN's domestic business grew both full year revenue and operating income in each of the last two years. These results give us confidence in our belief that sports has the power to drive value for the company even in the face of challenging industry headwinds. Finally at Experiences. Fourth quarter operating results increased by over 30% versus the prior year quarter and 27% versus fiscal 2019. Operating margins at the segment were 22% in Q4, an increase of three percentage points versus the prior year. Our international operations continued their strong performance trend in the quarter with significant growth across all sites versus the prior year. Disney Cruise Line, Disney Vacation Club and Disneyland Resort also all saw strong year-over-year growth in both revenue and operating income, while Disney World operating results decreased, driven by the accelerated depreciation from the closure of the Galactic Starcruiser along with inflationary impacts and the continued comparison to the 50th Anniversary celebration in the prior year.

Looking towards fiscal 2024, we anticipate robust annual operating income growth at Experiences to reflect continued strong performance at our International Parks and Disney Cruise Line. While domestic Parks and Experiences is expecting solid growth for the full year, that growth will be heavily back-end loaded due to continued challenging comparisons in the first half of the year from the 50th Anniversary at Walt Disney World in addition to wage inflation. We continue to be bullish on the long-term positioning of our Experiences business. As evidenced by our recent announcement, on significant investments we plan to make over the next 10 years to turbocharge growth in this area. We expect those investments to ramp up towards the back half of that 10-year period with more gradual increases in the first few years.

As has been the case historically, CapEx for the parks are largely effectively self-funded, given the strong returns these investments generate over time and I would also note that a portion of the investments in our theme parks in Shanghai and Hong Kong is funded out of joint venture cash flows. Before we conclude and move to Q&A, there are a number of additional items I'd like to share for context on the year ahead. First on capital expenditures, fiscal 2023 CapEx totaled approximately $5 billion, roughly comparable to the prior year and in line with our most recent guidance. And we expect CapEx in fiscal 2024 to total $6 billion, an increase of approximately $1 billion versus fiscal 2023, driven by higher spend at Experiences. CapEx at Experiences in fiscal 2024 will look more comparable to fiscal 2019 levels and includes spend at our Cruise business ahead of the launch of three new ships in fiscal 2025 and 2026.

Our enterprise-wide content spend in fiscal 2023 was $27 billion, in line with our guidance and about $3 billion below the prior year as we significantly reduced our spend on entertainment content. As a result of our continued work to be more efficient in our content spend, in addition to impacts from the strikes and the timing of sports payments, we expect total content spend in fiscal 2024 to be approximately $25 billion, which is a decrease of $2 billion versus 2023. Note that sports rights now account for over 40% of our enterprise-wide content spend. Our annualized entertainment cash content spend reduction target is now $4.5 billion, excluding strike impacts and sports rights versus $3 billion previously. We expect this to be realized on a cash basis in fiscal 2024, although it will take a few years for the bulk of these savings to be reflected in the P&L due to the timing of amortization.

On the topic of cost-savings and streamlining our operations, we have eliminated over 8,000 roles, and while we are not currently planning to make further large-scale reductions to our workforce, we are taking significant concrete steps to continue addressing the cost basis of the overall company. We have increased our annualized efficiency target for total company SG&A and other operating expenses to $3 billion versus $2.5 billion previously, excluding the strike impacts. Approximately $2 billion of these efficiencies were achieved in fiscal 2023. Naturally, we also saw inflation and volume-related cost increases throughout the year, including higher content amortization and costs related to expanded operations at International Parks and Cruise, which were impacted by closures and limited operating capacity in the prior year.

The remainder of these savings are expected to be achieved by the end of fiscal 2024. Our expense base in fiscal 2024 is expected to only increase slightly versus the prior year as these efficiencies and strike savings will mostly offset the year's planned volume-related growth and inflation. Adding the new $4.5 billion cash content spend reduction target to the $3 billion expense target brings our total annualized target to $7.5 billion as Bob announced earlier. All of these factors, in addition to continued growth and improvement across our underlying businesses are expected to come together over the coming fiscal year to result in free-cash flow generation of roughly $8 billion, a significant year-over-year increase and approaching levels we last achieved pre-pandemic.

This continued robust free-cash flow growth alongside our strong balance sheet will position us well to address our investment and shareholder returns goals for the year and going-forward. To that end, we will be recommending to the Board that they declared dividend by the end of this calendar year. While this will be just the starting point, we do see ample opportunity to continue to increase shareholder returns in the future as our earnings and free-cash flow grow in the form of increased dividends or share buybacks, and we look-forward to sharing more as we move ahead. And with that, I will turn the call-back to Alexia for Q&A.

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.

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