Disney: Expecting the Experience revenue to maintain flat next quarter (3Q24FY conference call)

The following is a summary of Disney's third-quarter 2024 earnings conference call. For an interpretation of the financial report, please visit " Disney: Park Unexpected Cooling, Can the Reversal Continue? "

I. Review of Core Financial Information:

II. Detailed Content of the Earnings Conference Call

Analyst Q&A

Q: Regarding theme parks, global demand is complex and variable. Over the next 18 months, with the addition of 3 new cruise ships, can demand be boosted? Considering the expected single-digit decline in operating profit for the fourth quarter, should this be used to forecast the 2025 fiscal year?

A: In the third quarter, our Experience business achieved a 2% revenue growth, thanks to the strong intellectual property attraction of our parks. Although demand has slowed down, the change is not significant. In our Experience business, 40% comes from international parks and consumer products, while 60% comes from domestic parks and cruises. This quarter, foot traffic remained stable, with a slight increase in per capita spending. It is expected that park revenue will remain stable in the fourth quarter, possibly showing a similar trend in the short term. It is worth noting that the operation of new cruise ships will incur some costs, which may impact our profits in 2024 and 2025.

However, overall, the slowdown in Experience is offset by our Entertainment business. We are optimistic about the box office performance of "Moana 2" (released on November 27 this year) and "Mufasa" (released on December 20 this year).

Q: As for the NBA, the new rights contract will take effect in the 2026 fiscal year, expected to bring hundreds of millions of dollars in added value. Can new growth drivers such as WNBA growth help achieve profitability early in the new contract?

A: Regarding the NBA deal, this deal will not take effect next year but the year after. We still have one year left on our current contract. Our goal is to maintain what's called the A package, meaning we will continue to have the broadcast rights for the Finals for 12 years, which is very valuable to us. This agreement also reflects the appeal of live sports programming to advertisers and viewers, as well as the growth value of basketball and women's sports, especially the WNBA.

As part of the deal, ESPN's long-term strategy is to secure sports rights, which helps drive our digital transformation, especially as we plan to launch flagship products by the end of 2025. We believe that when the deal takes effect a year later, it will help drive advertising and distribution revenue towards digital development. We have also secured international rights, especially in most markets for the broadcast rights of the Finals, which will bring additional revenue. While not specifying the early profit situation, this deal undoubtedly has tremendous value

Q: Disney+ is gradually enriching its content, having included Hulu, added news and sports content, including ESPN and overseas NBA international rights. What is the vision behind this? Will it help maintain user growth and enhance pricing power? Also, how do you view consumer resistance to recent price increases?

A: The success of our streaming service is attributed to the innovation and quality of our TV shows and movies. For example, our TV shows have received 183 Emmy nominations, and our movie lineup has had a profound impact on the value of streaming platforms. Our intellectual property portfolio, including content from Disney, Fox, Hulu, FX, ABC, and National Geographic, among other brands, has shown increased consumer growth and popularity, providing us with pricing power. Therefore, despite the price hikes, we are not concerned about significant user churn.

Our goal is to increase user engagement by offering more diverse content, such as news and the ESPN section, and actively engaging in bundle sales to make it convenient for consumers to purchase content from all our brands.

We are optimistic about the future of our DTC business and expect good growth in the 2025 fiscal year. We are also enhancing technological features to improve the business's return on investment and profit margins, including the password-sharing plan implemented since June, which has been well-received by users. We are improving recommendation engines and marketing efficiency to further enhance the user experience.

Additionally, our upcoming movie lineup and other highly anticipated films will not only boost box office revenue but also drive the value of our global streaming service. We are confident in the direction of the company's development.

Q: When you mentioned that fourth-quarter revenue was flat, does that refer to the entire Experience business segment or specifically to domestic parks?

A: The Experience business segment.

Q: Regarding Disney's future content investments, especially after the NBA deal, how should the investment balance between sports, scripted TV shows, and movies be maintained?

A: We have made significant investments in sports, movies, and TV content because they not only create immediate value but also lay the foundation for the future of our streaming business. In sports, we have signed long-term agreements including college football, NBA, and NFL. In movies, the creativity and high-quality intellectual property of our studios are evident. As for TV, our performance in both financial and creative aspects has been outstanding, as evidenced by Emmy nominations.

This investment is diversified, and as our streaming platform continues to evolve, you will see these contents more integrated.

Q: Can you provide an update on our expectations for free cash flow for the remaining quarter of this year? Additionally, how should we consider the impact of the 2025 park business and content spending on free cash flow?

A: We previously expected free cash flow to be $8 billion, and there have been no new changes. If there are significant changes, we will promptly update guidance.

Q: Regarding the DTC business, you mentioned achieving a double-digit profit margin through price increases and paid sharing measures. Can you update your time expectations for achieving this goal?

A: Regarding the progress of achieving a double-digit profit margin, our strategy and tools remain unchanged, and our execution effectiveness is very good. Bundled sales have reduced user churn, helping us achieve growth; the password sharing program has just started and will further drive growth. We are confident in the pricing announced and the value provided to consumers, and we believe the market will recognize this pricing.

We have not updated a specific timetable, but we are pushing towards this goal with a sense of urgency. We used to lose as much as $1 billion per quarter, but now we are profitable and we will continue to strive to not only achieve but surpass a double-digit profit margin.

Q: Regarding the park business, what are the pre-opening costs for the cruise ships in the fourth quarter? How will these costs be in the 2025 fiscal year? You plan to launch the "Treasure" ship, as well as the "Adventure" and "Destiny" ships. The costs at the Singapore dock seem to be relatively high, can you provide detailed information on these costs?

A: We have already disclosed the relevant costs for this year, and the launch costs in 2025 will be more than double this year. Cruise businesses typically have a quick payback period, and we are very confident in these investments.

Q: Can you provide an update on the latest developments in ESPN's strategic partnerships? Is this still a focus for us? If so, can you reiterate our specific needs in marketing or content?

A: Despite mentioning it multiple times, I must say that we are still in discussions regarding ESPN's strategic partnerships. We always believe there is potential to collaborate with others in the content space, which is why we continue to explore. Currently, there is no more information to provide.

Q: Can you provide more details? In which areas have we achieved cost savings so far? What are the remaining cost-saving opportunities?

A: Our initial cost-cutting expectations were $5.5 billion, which later increased to over $7.5 billion. In a large company, I believe there is always room to improve efficiency. We will continue to actively reduce costs while ensuring we can increase profits and reinvest in the business to seize the many opportunities ahead of us.

Q: Regarding the park business, can you share more details on the fourth-quarter revenue flatness and the outlook for 2025? Do you expect a continued decrease or decline in visitor numbers? What are your thoughts or expectations on per capita spending?

A: We have already shared a lot about our park business expectations, and I do not intend to further break down visitor numbers and per capita spending at this time. Similar to the third quarter, low-income consumers are feeling pressure, while high-income consumers are opting for more international travel, and these trends will continue. Our profits will be impacted by some one-time costs from this year and last year.

Additionally, international business is expected to strengthen, although Disneyland Paris faces challenges due to the Olympics, as the Olympics enter the final weeks, booking trends will improve, and we are optimistic about this.

Q: ARPU has declined this quarter, is this related to changes in bundled sales or shifts in the user mix towards ad-supported tiers? If so, can you share some performance insights on CTV platforms?

A: The decrease in ARPU is indeed related to both bundled sales and the shift to an ad-supported model, and we are satisfied with the profit prospects of users choosing either model.

Q: Regarding the experience department, park resorts are usually booked in advance. The slowdown in demand this quarter has been somewhat surprising. Can you explain the visibility of your bookings? Are there quarters where advance bookings are lower than others?

A: As for the booking situation, we have a good predictive judgment, indicating that the changes in demand are mainly marginal, such as daily visitors and last-minute bookers. Therefore, we are confident in the growth expectations we currently share (park revenue flat next quarter).

Q: In the current macroeconomic pressure, have you observed advertisers becoming more cautious, especially in real-time ad sales?

A: The advertising market is currently very healthy, with overall ad growth of 8% this quarter, ESPN growing by 17%, and DTC streaming growing by 20%. Categories such as financial services, consumer goods, consumer services, and technology have performed well, despite a slight softness in the automotive industry.

The strength of the advertising market is mainly due to the attractiveness of our live sports events and streaming services. Our new tool "Disney streaming" allows us to effectively sell across platforms, focusing on audiences rather than a single channel, enabling advertisers to more accurately target their audience. From a technical perspective, we are seeing good returns.

Q: As for content sales and licensing business, the press release mentioned that TV content sales, combined with box office performance, drove the growth of business operating revenue this quarter. Does this indicate that we are starting to see a trend towards increasing content licensing to third parties, or is it just a coincidence or a one-time event?

A: Regarding content licensing, the numbers you see are mainly due to our success at the box office. We have not changed our licensing strategy: we do not license core intellectual property of the company, but strategically license non-strategic content. Our main strategy is to produce and monetize our own intellectual property.

Q: In the coming years, the theme park business is expected to grow through new cruise ships and other capital expenditures. Can you assess the impact of these investments on growth over the next 2 to 3 years, and whether they can offset the current weakness in the park business?

A: We are very optimistic about the investments in the experience business. This is a long-term high-return business. While we do not provide long-term business guidance today, our accelerated capital investment is based on expectations of driving business growth, including the cruise business. The effectiveness of these investments will take years to materialize, and we will share progress in due course. We use the term "turbo charge" because we are committed to accelerating growth through these investments.

Q: Can you share the potential positive contribution to revenue from the India business split?

A: We will provide relevant information after the transaction is completed. At that time, we will provide clear data.

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