The Walt Disney Company held a conference call to discuss their third quarter 2023 financial results. Alexia Quadrani, Executive Vice President of Investor Relations, welcomed the participants and Bob Iger, CEO, and Kevin Lansberry, Interim Chief Financial Officer, gave comments. Bob Iger reported that the company had restructured, made management changes, reduced costs, and improved their DTC operating income. They are continuing to work towards achieving DTC profitability by the end of fiscal 2024.

Disney is focusing on improving the quality and economics of their films, while maximizing the impact of their titles by embracing multiple distribution windows. They are focusing on big franchises and tentpole films to generate interest in their existing library, and are able to reach consumers with stories and characters they love through their parks and resorts.

Disney is expanding its Parks and Experience segment with new Frozen and Avatar theme lands at various locations, as well as two more cruise ships in the near future. In the third quarter, Disney saw strong performance at its international parks and Asia parks, particularly Shanghai Disney Resort and Hong Kong Disneyland, which had stronger-than-expected recoveries from the pandemic. Walt Disney World, however, experienced softer performance due to post-COVID pent-up demand leveling off and a strong dollar affecting international visitation to the state. Despite this, Walt Disney World is still performing well above pre-COVID levels.

Disney has seen positive guest experience ratings in its theme parks and strong demand for their annual passes. They are making investments to grow their parks business over the next five years. For their direct-to-consumer business, they have reset the business around economics designed to deliver significant, sustained profitability. This includes prioritizing their strength of their brands and franchises, rationalizing content, perfecting pricing and marketing strategies, maximizing advertising potential, and creating a more unified one-app experience domestically.

Disney+ has seen success in international markets and is optimistic about the long-term advertising potential of the business. They have raised prices in nearly 50 countries and will be releasing details regarding upcoming streaming price increases. They will also be offering ad-supported Disney+ and Hulu subscriptions in Canada and Europe, while a bundled subscription plan featuring Disney+ and Hulu will be available in the US. They are also exploring ways to address account sharing and will roll out tactics to drive monetization in 2024. Finally, they are also looking to extend their DTC ambitions to their sports business.

ESPN is looking into taking their flagship channels direct-to-consumer, considering pricing and timing. Ratings are increasing on ESPN's linear channel despite cord cutting, which increases advertising potential. ESPN has also entered into an exclusive licensing arrangement with PENN Entertainment to extend the ESPN brand into the sports betting marketplace. Disney is considering strategic partnerships for ESPN and other linear business options due to cord cutting. They also have a variety of television studios providing exceptional content, but are dealing with ongoing strikes.

Bob Iger has expressed deep respect and appreciation for those who are vital to Disney's creative engine, and has agreed to stay on longer to ensure a successful transition for his successor. He is confident in the company's leadership team and their ability to steer the company through this moment of great change. The company has improved their direct-to-consumer operating results by $1 billion in just three quarters.

Disney+ core subscribers grew by nearly 800,000 during the third quarter, with domestic growth being offset by international growth. Disney+ core ARPU increased due to higher advertising revenue and price increases in certain international markets. Disney+ Hotstar subscribers declined due to a shift in product focus, but this business is not a material component of overall D2C financial results. Hulu and ESPN+ subscribers remained roughly comparable to Q2, with Hulu remaining profitable due to higher advertising revenue. Operating losses improved by approximately $150 million and $550 million versus the prior quarter and year, respectively.

D2C ad revenue is expected to continue to improve in Q4, but profitability by the end of fiscal 2024 is not expected to be linear. Content sales line of business is expected to generate operating losses up to $100 million worse than last year's fourth quarter. Linear Networks operating income declined by $580 million due to lower advertising and affiliate revenue and higher programming and production costs. ESPN domestic linear cash ad sales are pacing down due to the absence of the Big 10, but the absence of the Big 10 is expected to drive overall operating income favorability in Q4. Additionally, there will be one additional Monday night football game in the fourth quarter.

Linear advertising continues to be affected by market softness, with D2C advertising expected to partially offset declines in the fourth quarter. Sports pricing is up single digits, while Domestic Linear Networks affiliate revenue decreased due to fewer subscribers. International channels operating income decreased due to lower advertising revenue and foreign exchange impact. The Parks, Experiences and Products portfolio of businesses saw revenue and operating income increase by more than 10%. Domestic Parks and Experiences saw operating income increase 24% versus pre-pandemic results, but declined 13% versus the prior year due to inflationary cost pressures, headwinds at Walt Disney World, and an accelerated depreciation charge related to the closure of the Galactic Starcruiser.

Disney World saw a decrease in year-over-year results, but operating income was higher when adjusting for accelerated depreciation. Attendance grew slightly year-over-year, with contributions from pricing and higher food and beverage spend. Operating margins were slightly below the prior year, and there is expected to be a moderation in demand due to the 50th anniversary celebration and elevated travel costs. Despite this, the company still expects revenue and segment operating income to grow at a high-single digit percentage rate for the year. Content spending is expected to be lower than previously guided due to the writers' and actors' strikes, and capital expenditures are expected to total $5 billion.

Bob Iger has made it clear that all options are being considered for the linear business which is under pressure. Practical considerations for separating assets like ABC, National Geographic, ESPN, Sports, Integrated, and Hulu have to be taken into account. Additionally, it can be assumed that most of the TV assets have been fully depreciated.

Robert Iger discussed the need for content to fuel their direct-to-consumer (DTC) businesses, such as Hulu. He then discussed the complexity of decoupling linear networks from ESPN. Kevin Lansberry mentioned that they would not comment on the assets' depreciation. Alexia Quadrani then moved to the next question. Jessica Reif Ehrlich asked about improving movie performance and creating more original content. Iger then discussed their technical capability to monitor password sharing, though they do not know how much of the password sharing will convert to subscription growth.

Bob Iger discusses the studio's success over the last decade, including the performance of Avatar: The Way of Water and Guardians of the Galaxy 3, but acknowledges the disappointing performance of some recent films. He is personally committed to spending more time and attention on improving the quality and performance of future films. He then addresses the upcoming price increases for Disney+, Hulu, and ESPN, and explains why they have decided to launch ESPN Bet with PENN.

Robert Iger explains that Disney+ recently increased its premium product prices, but the advertiser-supported product prices remain flat. This is to encourage more subscribers to move to the ad-supported tier, as the advertising marketplace for streaming is more healthy than linear television. He also notes that Disney+ has been growing rapidly and they are now looking to improve the bottom line and turn the business into a growth business. Finally, Iger explains that ESPN has been in discussions with various entities for a long time about launching ESPN Bet.

Bob Iger declined to comment on the potential future structure of the Disney company, but mentioned that they are looking at strategic options for ESPN and their linear networks to address the challenges they are facing. He also mentioned that they chose to partner with PENN because they made the best offer and they believe PENN will be able to grow their business alongside Disney.

Bob Iger of ESPN is looking to create strategic partnerships to increase content and provide distribution and marketing support for their direct-to-consumer business. He is encouraged with the interest they have received and believes that adding more content in economical circumstances might be a wise move. Their cost savings are ahead of their initial goal of $5.5 billion.

Robert Iger discussed the company's streaming business, which is still relatively young. He acknowledged that they have not yet achieved the same margins as Netflix, which is due to their lack of balance between investments in programming, pricing strategy, and marketing. However, Iger emphasized that the company has done a great job in reducing costs and that pricing is another way to improve margins.

Bob was asked about the priorities for ESPN partners. He discussed the need for partners, as well as the company's strong single A credit rating, its deleveraging progress, and its plans to put a modest dividend out at the end of the year. He also noted the company's current liquidity position with $11.5 billion of cash on the balance sheet and $10.5 billion worth of revolving credit facilities and commercial paper.

Robert Iger states that when it comes to partners, Disney is not looking for capital infusion, but rather, partners that will help ESPN transition to a DTC model, which could come in the form of content, distribution, and/or marketing support. Kevin Lansberry then states that significant growth is seen in the direct-to-consumer business and the Parks and Experiences business, which is driving the high-single digit OI growth. Brett Feldman then inquires about how Disney's experience with Disney+ Hotstar has shaped their long-term international streaming strategy.

Robert Iger discussed the company's plan to prioritize certain markets and invest in local programming, marketing, and content in those markets. Michael Morris asked whether the entire company could be sold to a larger technology company and if the value of the company is maximized through partnering with a variety of tech platforms. He also asked if Disney would forego advertising partnerships with all other betting or sports gaming partners due to the PENN Gaming announcement.

Robert Iger and Kevin Lansberry both responded to the question of if Disney could be acquired by a technology company, with Iger saying that it is not something they obsess about and Lansberry saying that they would never be in a situation to forfeit economics or stop accepting advertising from other gaming companies. Alexia Quadrani then reminded everyone that certain statements on the call may be considered forward-looking statements, and that they are subject to a number of risks and uncertainties that could cause actual results to differ from the expectations.

DTC profitability expectations are based on assumptions about subscriber additions, churn, the financial impact of Disney+, cost rationalization, and macroeconomic conditions. However, these assumptions are subject to risks, which are described in the company's SEC filings. The call then concluded.

This summary was generated with AI and may contain some inaccuracies.