Disney: Disney: Crackdown on Free Account Sharing to Begin This Summer (Earnings Call Summary)

Here is the summary of the earnings conference call for the first quarter of 2024 for $Dominion Energy(D.US)isney.US. For the interpretation of the earnings report, please refer to "Disney: Still in pain, but the turnaround is on the way" (link: here).

I. Review of Key Financial Information:

II. Details of the Earnings Conference Call

2.1. Key Points from Management's Statements:

1. Business Overview:

a) The company announced yesterday that all ESPN channels are now available directly to consumers. This is part of a new joint venture with Fox and Warner Brothers Discovery, set to launch this fall.

b) By the fall of 2025, ESPN will be offered as an independent streaming option with innovative digital features, creating an unprecedented one-stop sports destination in the market.

c) When the standalone ESPN service is launched, the company will also provide access to Disney Plus for bundled subscription users.

d) Disney has successfully expanded its services beyond the United States, including EMEA and Canada, and has attracted over 1,000 global advertisers in the first quarter, a tenfold increase since its launch.

e) A partnership has been established with Epic Games, acquiring a small stake, combining Disney's popular brands and franchises with the highly popular "Fortnite."

f) The Disney Board of Directors has announced additional dividends and will carry out a $3 billion share repurchase plan in the 2024 fiscal year.

g) Next month, Disney Plus will become the exclusive streaming platform for Taylor Swift's historic concert film.

h) In Q1, segment revenue increased by 27%, adjusted earnings per share increased by 23% compared to the same period last year. Entertainment streaming revenue improved significantly by 8.6% YoY and is expected to achieve profitability for the overall streaming business by the end of the 2024 fiscal year. Expected to achieve or exceed $7.5 billion in cost savings.

i) The next semi-annual dividend will be paid in July, with a 50% increase compared to the dividend paid in January. The Board has also authorized the company's first share repurchase since the 2018 fiscal year, with a target of $3 billion at the beginning of this fiscal year.2) Financial Highlights: Diluted earnings per share increased by 23% YoY to $1.22, and operating profit margin of the division improved by 350 basis points.

a) Direct-to-Consumer (DTC) Entertainment Business: Operating revenue doubled, mainly driven by improvements in direct consumer-facing services. Hulu gained 1.2 million subscribers, while Disney Plus experienced a decrease of 1.3 million core subscribers.

It is expected that DTC entertainment business revenue will continue to grow in the second quarter, with operating losses remaining flat compared to the first quarter. The goal is to achieve profitability in the comprehensive streaming media business by 2024.

b) Linear Network Entertainment Business: First-quarter operating revenue declined, primarily due to decreases in advertising and affiliate revenue, partially offset by lower program production costs. Domestic affiliate revenue in the entertainment sector decreased by 5% compared to the same period last year, with the increase in fees being offset by a decrease in subscribers. Content licensing and other operating revenue in the second quarter are expected to remain stable.

c) Sports Business: Operating revenue improved, mainly driven by ESPN's strong performance. Domestic advertising sales for ESPN decreased compared to the same period last year but showed growth after adjustments. Domestic affiliate revenue in the first quarter remained consistent with the previous year, as the 6% growth from increased contract fees was offset by a corresponding decrease in subscribers. Domestic advertising sales for ESPN decreased by 2% in the quarter but showed an increase in mid-single digits after adjustments. The demand for sports market advertising is expected to remain healthy in the second quarter.

d) Experiences Business: Strong performance in the first quarter, with operating revenue from parks and experiences growing by 10% and consumer products growing by 4%. The business segment's profit margin expanded by over 50 basis points. This was mainly driven by the performance of Shanghai and Hong Kong theme parks, the continued strength of Disney Cruise Line, and the success of the game "Marvel's Spider-Man 2" in the gaming business. Strong revenue growth is expected for the full year. The company plans to invest approximately $60 billion over the next 10 years, with 70% of the investment aimed at increasing global capacity and expected to generate substantial returns.

e) Overall Financials and Plans: As planned, the company expects to achieve or exceed the $7.5 billion annualized cost savings target by the end of the fiscal year 2024. Total expenses in the first quarter decreased by 4% compared to the same period last year, with key efficiencies being the main driver of this progress.

It is expected to generate approximately $8 billion in free cash flow for this fiscal year. Earnings per share (excluding certain items) for the fiscal year 2024 are expected to increase by at least 20% compared to 2023, reaching approximately $4.60.

2.1 Q&A Analyst Questions and Answers

Q: How do ESPN's different products meet different market demands, and what is the priority among these products? From a financial and strategic perspective, what contributes to Disney's success in the sports field? How is Disney's expense growth expected to be in 2024?

A: Linear television is highly competitive, not only in terms of capturing people's time but also specifically in the sports field. Despite these challenges, ESPN performed well in 2023, with viewership continuing to rise, and sports remaining a focus for advertisers. ESPN has successfully achieved its primary goal of effectively reaching sports fans, which has made advertisers, distributors, sports leagues, and organizations feel that they must collaborate with ESPN.Taking ESPN to DTC is inevitable, and the launch of ESPN+ is the first step, which has been quite successful. Now, we are looking for partners to distribute multi-channel sports center-level content through applications, which is the second step. This new distribution method is more modern, app-based, rather than traditional cable TV and satellite services.

This is an important progress for ESPN because it attracts many people who have never subscribed to multi-channel TV and offers this service at a more attractive price. This new distribution strategy not only serves existing sports fans but also attracts new audiences and keeps in touch with those who have already left the traditional TV ecosystem.

The company has mentioned that operating expenses have slightly increased year by year, and the team is constantly looking for opportunities to further save costs. The cost savings will be reinvested in the business to maintain the current growth momentum and improve profitability. The guidance has not changed compared to previous forecasts. The company should at least achieve the goal of slightly increasing operating expenses year by year as previously promised.

Q: How does the current strategy align with long-term planning? What is the impact of ESPN's announced direct-to-consumer streaming service and sports bundle on future products? Is there a specific timeline for the proposed double-digit streaming profit margin target? What factors will drive the achievement of the double-digit profit margin target?

A: Hulu Live is a service that integrates more and richer TV channels, similar to other similar services, but it is combined with Hulu or added on Hulu. The new sports service can be purchased as an add-on service to Hulu, which is a real advantage for Hulu subscribers who already want to access this new service.

Disney Plus and Hulu will officially merge after the beta testing in March, and they have already been together in the beta version. The new joint venture will provide a large amount of sports content, which will greatly help reduce user churn and increase user engagement on Hulu. The company has a realistic attitude towards the potential impact of the new service on Hulu Live.

The company will achieve the double-digit profit margin target through increasing user growth, adjusting pricing strategies, and more effectively utilizing marketing, content, and technology expenses. Specific measures will be taken to increase user growth, including leveraging paid sharing opportunities, reducing user churn, and expanding international markets. There is no specific timeline set to achieve the double-digit profit margin target.

Q: Within the next 10 years, 70% of the $60 billion capital expenditure will be used to increase the incremental capacity of new parks and attractions. Can you provide specific information on the opening time and location of these new parks and attractions? How to attract non-pay TV users to subscribe to potentially expensive sports services without significantly reducing traditional pay TV users and actually saving money?

A: The company is working on conceptualizing and constructing these projects and plans to start opening some projects in 2025, followed by a series of additional investments and increased capacity every year. Regarding paid sharing and pricing of sports services, the company believes that sports services will be much cheaper for consumers than buying the same channels in large bundles on cable and satellite TV.The company has two goals in designing this sports service: first, to attract sports fans who want to watch TV sports programs but do not want to subscribe to large cable TV and satellite bundles; second, to attract consumers who have already left or may leave bundled packages.

The company has evaluated the user base, although these numbers are only rough estimates and specific figures are not currently being disclosed. The company believes that the opportunities seen on a percentage basis may not differ significantly from the subscription user base opportunities identified by competitors. The company has made some modifications to user language in the United States, Canada, and certain markets to take advantage of shared page opportunities.

Currently, notifications are being sent to unpaid sharing account holders, giving them the opportunity to start new subscriptions this summer. Later this year, account holders who allow external access to their accounts will be able to do so, but at an additional cost.

Q: Do you think there has been a turning point in content production? When will we see results? How much is expected to be paid for Hulu in the end? Where does the cost savings of over $7.5 billion come from?

A: While there were some unsuccessful movies from the studios last year, there were also successful blockbusters like "Guardians Sequel" and "Avatar". Quantity can sometimes have a negative impact on quality, and the studios, in pursuit of more global streaming subscribers, increased output excessively, causing some studios to lose focus.

The first step taken is to reduce the quantity of output, especially in Marvel, by addressing issues in movies through three approaches: actively improving to ensure better movies; sometimes abandoning projects that are not believed in; incorporating new and more confident projects into the pipeline. There is great optimism about upcoming movies, especially "Marijuana," which will become the top movie on all streaming platforms in the United States in 2023 and surpass 1 billion hours of viewing on Disney Plus, set to be released in November. Regarding Hulu, there is a clear process expected to be completed by the end of the year. The sources of cost savings include content and SG&A (sales, general, and administrative expenses).

Q: Regarding Charter integrating Disney Plus into its pay-TV programming, what is the actual percentage of customers using it or the level of engagement compared to the average Disney Plus subscriber? Is this a model you want to replicate when renewing agreements with other pay-TV distributors?

A: Charter only started promoting the integrated service of Disney Plus to its subscribers in January 2023, so the current data is still in the early stages and should be viewed with caution. Some encouraging statistics have been observed so far, but it is uncertain whether these trends will continue. This collaborative arrangement may serve as a model for future collaborations with other multi-channel distributors as it benefits both parties. It is expected that this collaboration model will be applied more in the future, but it is still too early to tell, and Disney will provide more information in the next quarter after gaining a better understanding of the situation.Q: How can you ensure that the sports joint venture's services will not accelerate users' cord-cutting behavior, thus avoiding economic drag on your business and the broader industry? How do you expect this to impact discussions on contract renewals with distribution partners? Why is the investment in Epic Games the right move? Possible products? When will they be launched?

A: Regarding the issue of accelerating cord-cutting behavior, we understand that in the new joint venture, our channels will generate revenue comparable to what they currently generate in the existing channel system. If consumers transition from the existing system to the new system, our revenue will remain unchanged.

While we have some channels that are not included in this new bundle, considering our success with FX on Hulu, Disney Channel on Disney Plus, and National Geographic on Disney Plus, we have confidence in addressing the challenges that the multi-channel ecosystem will continue to face. For channels that may be less economically impacted by cord-cutting, we have already provided support through content on Hulu and Disney Plus. Therefore, for us, this is a low-risk strategy that has the potential to attract growth from sports enthusiasts who have never subscribed to a bundle or no longer need one.

We have explored different directions in the video game space, and the licensing model has proven to be the most successful. For example, we have licensed the rights to games, including the Spider-Man series, which generated $9 billion in revenue last year, making it the most successful video game. The time that Gen Z, Gen Alpha, and even millennials spend on video games is comparable to the time they spend on TV and movies.

Therefore, it is crucial to enter the gaming market in an appealing way as soon as possible. We have started discussions with Epic to create a massive Disney world that can coexist and be fully interconnected with Fortnite. In this world, people can play games we create, as well as create their own games, watch short videos, and we can even use this platform to distribute some of our content. Through a $1.5 billion investment, we have established a closer partnership with Epic Games, which provides us with a tangible stake in the gaming industry and reduces risks for the company.

This collaboration is the best approach from a business perspective and is also great for consumers who enjoy interacting with our characters in the form of video games.

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