The Walt Disney Company Q3 2023 Earnings Conference Call Insights

Key highlights from The Walt Disney Company (DIS) Q3 2023 Earnings Concall

Management Update:

• [00:04:59] DIS said it’s expanding its cruise fleet by adding two more ships in fiscal ’25 and another in fiscal ’26, nearly doubling its worldwide capacity.

• [00:05:21] DIS’ international parks had solid performance in 3Q, led by Shanghai Disney Resort and Hong Kong Disneyland. While Walt Disney World saw softer performance from the prior year, but performing well above pre-COVID levels.

• [00:09:33] DIS raised prices in nearly 50 countries around the world and the company will release details regarding upcoming streaming price increases later today.

• [00:24:11] DIS is facing cost pressures in 4Q, mainly from labor wage growth and $150 million of accelerated depreciation for the Galactic Starcruiser. Despite this, DIS expects 4Q operating margins and DPEP to exceed the prior year due to the strong recovery of its international parks and cruise line.

• [00:24:57] DIS currently expect FY23 content spend to be approx. $27 billion, which is lower than the previously guided range due to lower spend on produced content, in part due to the riders and actor strikes.

Q&A Highlights:

• [00:27:13] Phil Cusick from J.P. Morgan asked about separating assets like ABC and National Geographic from ESPN or Hulu. Robert Iger CEO replied that any major changes to the linear networks must consider the need for content to support DTC businesses like Hulu while ensuring a steady flow of content for streaming growth. Separating the linear networks from ESPN is complex but manageable if a strategic change is made.

• [00:28:55] Jessica Reif Ehrlich from Bank Of America enquired how DIS plans to improve movie performance and create more original content, and when will the DTC password crackdown be implemented on a global basis. Robert Iger CEO said that DIS plans to crack down on password sharing on its DTC platforms in 2024, but the completion date is unclear. Disney is also focused on improving the quality and performance of its films, with the CEO personally committed to spending more time on it.

• [00:31:30] Ben Swinburne at Morgan Stanley queried how DIS plans to maintain its customer base as it raises prices for its DTC products. Robert Iger CEO replied that DIS took a significant price increase for Disney+ in late 2022 and didn’t see significant churn or loss of subscribers. The recent price increase is for the premium, non-ad-supported product, while the ad-supported product’s price remains flat due to the healthy advertising market for streaming. Disney’s pricing strategy aims to migrate more subscribers to the ad-supported tier and improve the bottom line.

• [00:31:49]Ben Swinburne at Morgan Stanley also asked about the vision for ESPN’s future with the ESPN+ Bet partnership with Penn National Gaming. Robert Iger CEO answered that DIS has been in discussions with a number of entities about a sports betting partnership for ESPN, and Penn National Gaming made the best offer. Disney is confident that Penn will use this partnership as a growth engine for its business and help Disney grow its ESPN business.

• [00:35:00] Michael Nathanson from MoffettNathanson asked if DIS has a different streaming content vision for ESPN than the current linear one. Robert Iger CEO said that DIS is considering potential strategic partnerships for ESPN, looking at distribution, technology, marketing, and content opportunities. DIS is looking to increase the content that ESPN offers and possibly get distribution and marketing support from another entity.

• [00:37:50] Steven Cahill of Wells Fargo enquired if DIS has any expectations for longer-term DTC margins, given that it’s currently below where Netflix was at a similar revenue scale? Robert Iger CEO replied that DIS’ streaming business is still young and has not yet achieved the same level of profitability as Netflix. However, DIS is confident that it can improve its margins over the next few years by managing costs, pricing its products more aggressively, cracking down on password sharing, and improving its technology.

• [00:38:12] Steven Cahill of Wells Fargo also asked how does DIS plans to fund the Hulu product coming up next year, given that it is an expensive investment? Kevin Lansberry Interim CFO said that DIS is confident that it can fund the Hulu product coming up next year with its current liquidity position, strong balance sheet, and future cash flow.

• [00:41:53] Kannan Venkateshwar from Barclays enquired about DIS’ priorities when it looks for partners for ESPN, and what are the objectives that the company is trying to achieve with these partnerships. Robert Iger CEO said that DIS is looking for partners that can help ESPN transition to a direct-to-consumer model, through content, distribution, and marketing support.

• [00:43:07] Kannan Venkateshwar from Barclays also asked about the drivers of the acceleration in growth for OI in 4Q, given the guidance for high single-digit wide growth and trends in the first three quarters. Kevin Lansberry Interim CFO replied that the significant growth in DIS’ direct-to-consumer and parks and experiences businesses are the main drivers of growth compared to the prior year.

• [00:45:18] Michael Morris with Guggenheim asked if DIS could be sold to a larger tech company and if its value would be maximized by partnering with one or multiple tech platforms. Robert Iger CEO clarified that DIS is not speculating about the potential for it to be acquired by any company, and believes that the global regulatory environment would make such a deal difficult.

• [00:45:52] Michael Morris with Guggenheim also enquired if DIS will stop advertising partnerships with other betting or sports gaming companies after the Penn gaming announcement. Kevin Lansberry Interim CFO said that DIS does not foresee a situation where it would stop accepting advertising from other gaming companies.