Disney: DTC short-term drag from India, global crackdown on password sharing in September (2Q24FY conference call minutes)

Minutes of Disney FY24Q2 Interpretation Meeting:

The following is the summary of the 2024 second quarter financial report conference call for $ Disney(DIS.US), for a detailed interpretation of the financial report, please refer to Disney: Don't be scared by the downturn, hope is on the way 》

I. Review of Core Financial Information:

II. Detailed Content of the Financial Report Conference Call

2.1. Key Points from Executive Statements:

1. Business Highlights:

① The Parks, Experiences and Products segment and the Media Networks segment are the main drivers of revenue growth.

The Parks, Experiences and Products segment continues to perform strongly, with the Disneyland Forward initiative as part of the expansion of Disney theme parks, having received preliminary approval from the Anaheim City Council. Plans to introduce Avatar to Disney parks are expected to further attract visitors and increase revenue.

The entertainment segment of the Media Networks business achieved profitability for the first time this quarter, marking a significant turning point for the business, successfully launching Hulu on Disney+ to enrich the platform's content.

② Content Production:

Disney plans to release a series of highly anticipated films, including "Planet of the Apes: New World," "Inside Out 2," "Deadpool and Wolverine," among others.

In terms of TV series, FX's "Shogun" has been successful globally, becoming one of the most-watched programs on streaming platforms.

③ Sports Broadcasting: ESPN achieved significant viewership success in multiple sports events, with sports content continuing to be an important draw for a large audience.

1. Future Outlook:

① Full-year adjusted earnings per share growth target raised to 25% (from 20% to 25%).

② The third quarter is expected to face some challenges in the Media Networks business due to seasonal changes in Indian sports programs; plans to achieve profitability in the combined Media Networks business in the fourth quarter.

③ Plans to add an ESPN section on Disney+ by the end of the year, expanding coverage of sports content.

④ The company continues to advance its cost efficiency plan, with annualized targets expected to exceed $7.5 billion (unchanged).

⑤ Expects to generate over $8 billion in free cash flow for the fiscal year (unchanged).

⑥ Plans to launch an enhanced version of the standalone ESPN streaming service in the fall of 2025.2.2 Q&A Analyst Q&A

Q: How do you think the flow of visitors to the park business will change as we gradually emerge from the rebound period of the epidemic? Do you think that by 2025, the situation will remain stable, or is it possible to see an annual decline?

A: The number of visitors entering the park is gradually returning to normal compared to the peak period after the epidemic. This quarter, Disney theme park business achieved a 10% growth, which is a very impressive number. In addition, we still see healthy growth signs in future bookings.

Q: Hugh previously mentioned a double-digit operating profit margin for DTC as a target. Can you explain when we can expect to reach this target, and discuss the basic performance of DTC, especially after the cancellation of the merger with Hotstar?

A: Regarding the operating profit margin, we expect some one-time expenses to impact the third quarter, but excluding these factors, we expect the profit margin in the third quarter to be in the mid to high single digits range, and in the fourth quarter to reach double digits.

As for the DTC profit margin, our goal is to achieve double-digit growth and healthy profits in the business. We have various ways to achieve good growth prospects, such as providing quality content, increasing user engagement, reducing distribution costs, using technology for marketing, and strengthening international business. I will not make predictions on a specific timeline, and from a competitive perspective, I am also unwilling to disclose specific plans to achieve our profit targets.

Q: What are the prospects for ESPN in the next 12 to 18 months and in the coming years? Do you think we can achieve growth in operating profit in the current sports rights environment where inflation still exists?

A: First, considering the development in the next 12 to 18 months and from the perspective of operating profit, ESPN has achieved great success in sports broadcasting, especially in the digital business transformation process. We have seen record high ratings in prime time in April, indicating that sports broadcasting is still very popular in the world today.

By the end of this year, we will launch an ESPN feature on Disney+, providing sports programs to subscribers on that platform. Looking ahead, we are very optimistic about ESPN's digital transformation, but we will also retain linear TV channels to meet the needs of different audiences. We have signed long-term agreements with important sports organizations, securing sports rights for the next decade, providing us with a stable source of content. Therefore, we look forward to continuing our success by providing high-quality sports programs to consumers through multiple channels.

Q: I would like to hear your thoughts on studio intellectual property. How do you feel about the pipeline of Marvel projects? Do you think these intellectual properties are experiencing the revival you hope for?

A: Regarding studio intellectual property, I feel good about the upcoming programs, including "Planet of the Apes" this weekend, followed by "Inside Out 2," which is a great movie; and then the Marvel projects you mentioned, which will be released in JulyFinally, at the end of this year, we have "Gorilla" and "The Lion King".

We have been working hard to reduce output and focus more on quality. Especially in terms of Marvel, we are gradually reducing the output of TV series, possibly from four per year to two per year, and limiting the movie output to a maximum of three per year, we are working hard to determine this path. In '25 fiscal year, we have some great movies, and we will release more "Avengers" movies.

Q: First, regarding DTC advertising. In the presale market, what is your opinion on the impact of Tradesk and Google DV360 integration on advertising? Also, what is your view on password sharing? When will it be applied to multiple users or sharers?

A: In terms of advertising, the advertising market is currently quite healthy, especially performing well in live events and sports. We are satisfied with the content we provide, especially in sports and Disney+. Despite competitors entering the advertising market, increasing market supply, overall, we feel more competitive than a year ago. There is a high demand, and as we gradually absorb the increase in market supply, we expect to be in a good position next year.

Cracking down on password sharing will begin in some very limited markets next month, and is expected to be fully rolled out globally in September. Netflix's success in password sharing gives us confidence, and we are building similar technology to improve the profitability of the business. We have performed well in terms of program content, providing quality content on ESPN, Disney+, and Hulu.

Q: What are the reasons for the decrease in ESPN Plus users? You have expressed confidence in obtaining a long-term NBA contract, but people generally expect you to pay higher fees for fewer games. What is your view on the profit prospects of the new contract? And will the end of NBA negotiations bring opportunities for strategic investments?

A: We have always believed that the NBA is not only a high-end sports product, but also a sports product with growth prospects, and we are confident in this. As for the issue of ESPN Plus, I think this is a normal seasonal factor.

Q: Regarding investment in sports rights, how important do you think ensuring global rights are to ESPN or even Disney+'s international growth? To offset the increase in sports rights fees to improve returns?

A: We are selectively acquiring sports rights in the international market, mainly targeting our licensed projects in the United States. We also have a range of sports rights in Latin America, many of which were acquired with the purchase of 20th Century Fox. Currently, our investment in international rights is relatively conservative, unless we can acquire international rights along with licensed projects in the United States, which lays the foundation for ESPN's growth in markets outside the United States, and is in the experimental stageQ: Previously mentioned about theatrical film works, can you help investors understand the profit potential of Disney Studios?

A: As for the studio's profitability, we are very pleased with the upcoming film works. Although the studio business has a certain cyclicality, we believe this business will return to profitability and become a healthy profit business in the future. However, I do not intend to delve into quarterly guidance for a specific segment.

Q: Regarding the theme park business, can you discuss the growth framework, which is crucial for your capital expenditure plans. This business has been growing at a mid-single-digit rate for a long time. How much growth potential do you see in this growth trajectory in the future investment cycle?

A: Regarding investments in theme parks, we know that this business has performed very well financially, with stable profit margins and high return on investment. We believe that by investing in this business, we can continue to increase park attendance domestically and internationally, and achieve excellent returns in the future. The cruise business is also a huge growth opportunity, and we will pay more attention to this area.

Q: From the perspective of succession planning, can you talk about your goals in the transition process? What do you hope to achieve during your tenure before the next CEO takes over?

A: Regarding the successor issue, the board has been actively involved in this process and has established a succession planning committee that meets regularly. I believe they will choose the right person at the right time and ensure a smooth transition.

Q: Disney+'s engagement has declined, although there may have been an increase on Hulu recently. Can you talk about the efforts you have made to increase platform viewership? When can we see the benefits of these technological improvements? Can you provide information on user engagement on the new Disney+ Hulu platform?

A: First of all, we believe that excellent content is the main driver of engagement. The recent programs we have launched, including "Shogun" and TV programs for the coming years, as well as the exciting lineup of upcoming movies, when introduced into the streaming service, we believe will greatly boost engagement.

In addition, the recommendation engine is also one of the factors that increase engagement, as it can provide personalized recommendations based on user preferences. We also see opportunities for bundled services, especially sports bundling. In Latin America, we have consolidated all content into the Disney+ application. In short, we are focused on increasing engagement, as this can improve subscriber satisfaction and reduce churn rates.

Q: Regarding ESPN Plus, your subscribers decreased again this quarter. What are the plans for this service once the flagship platform is launched next fall?

A: If you purchase the ESPN flagship version, you will get all the ESPN Plus programs included. If you do not want that, you can purchase ESPN Plus separately. Additionally, our current plan is that if you are a subscriber of ESPN Plus, you will be able to access ESPN Plus through the ESPN tile placed in the merged Disney+ Hulu appQ: In the mid-term outlook, how do you balance between relying on existing series and investing in new intellectual property?

A: We will strike a balance between sequels and original works, especially in the animation field. In the current highly competitive movie market, sequels hold higher value as they are more familiar to audiences and have lower marketing costs. As for Marvel, we will release some original works, such as the upcoming "Thunder Warrior", while also having sequels like this summer's "Deadpool". We believe maintaining this balance is the right choice.

Q: Several of your summer releases are based on intellectual property from 20th Century Fox. How do you see the opportunity of bringing more works from the Fox library?

A: Regarding 20th Century Fox, as I mentioned before, there's "Alien". We also discussed the upcoming "Avatar 3", and of course, the "Planet of the Apes" series. If these movies are successful, there may be more opportunities. We will carefully select potential opportunities, not overly relying on the library but keeping a close eye.

Q: Can you provide an update on the partnership with Charter? We are interested in the performance of this new structure in the first quarter, including engagement and churn rates. Additionally, do you plan to adopt similar models more frequently in the future?

A: Our deal with Charter is still in the early stages, but we are pleased with its performance. We have attracted more subscribers, with low churn rates and good engagement. As for whether this will be a template for the future, we are not considering it at the moment, as each deal needs to be customized based on the partner and our own needs.

Q: What is your view on licensing content to other platforms? Do you believe licensing content to other platforms could bring growth opportunities, or do you prefer to retain content on your own platform to create a Netflix-like effect?

A: We have started some licensing agreements with Netflix and are carefully considering other possibilities. While we see value in keeping content exclusively on our platform, we are also monitoring cases where other movie companies license content to third-party streaming platforms. Therefore, we are open-minded but not heavily adopting this approach.

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