Disney: How to Achieve Double-Digit Profit Growth for Three Consecutive Years? (4Q24FY Conference Call Summary)

The following is the summary of the earnings conference call for $Disney(DIS.US) for the fourth quarter of fiscal year 2024. For the financial report interpretation, please refer to Disney: In addition to the approaching turning point, the management also outlined a three-year "big pie" .

I. Core Information Review of the Financial Report:

II. Detailed Content of the Financial Report Conference Call

2.1 Core Information from Executive Statements:

2.1.1 Business Progress and Financial Performance

1. Overall Financial Performance

After adjustments, the expected earnings per share (EPS) for fiscal year 2025 will achieve high single-digit growth, with expectations of accelerating to double-digit growth in fiscal years 2026 and 2027.

2) Creativity and Content Creation

Disney is refocusing on creativity, with excellent performance in television and general entertainment programs, attracting new audiences and winning a record 60 Emmy Awards.

In terms of movies, "Inside Out 2" and "Deadpool and Wolverine" are the two best-performing films at the box office this year. Highly anticipated films such as "Moana 2" and "The Lion King: Mufasa" will be released at the end of the year.

The content slate for 2025 is strong, including "Captain America: Brave New World," "Lilo & Stitch," "Fantastic Four: First Light," "Zootopia 2," and "Avatar 3."

The movie business's "multiplier effect" continues to strengthen, with increased coverage of content across multiple touchpoints such as streaming, parks, cruises, consumer products, and games, enhancing systemic economics.

3) Experience Business

Disney's experience business remains a leader in the industry. The company has a highly focused investment strategy to ensure operational revenue growth and high returns in projects, locations, and IP.

The expansion of Disney parks and experience business now includes six international tourist attractions, with multiple expansion projects underway. Disney Cruise Line will increase to six ships after the unveiling of the "Disney Treasure" next week, with a seventh ship under construction.

In collaboration with Epic Games, Disney is integrating its brand and IP into a brand new interactive gaming and entertainment universe

4) Streaming Business

The total number of Disney+ core and Hulu subscriptions has reached 174 million. Disney+ has developed into a unique streaming platform with over 120 million core subscribers within five years.

The addition of Hulu to Disney+ has made it a high-quality content platform for family sharing, covering brand content libraries, general entertainment, news, and live broadcasts.

The ESPN module launched on Disney+ on December 4 further enhances the appeal of the streaming service and paves the way for the future launch of ESPN's flagship direct-to-consumer product in the United States, planned for fall 2025.

Disney has acquired multiple long-term sports event broadcasting rights, further strengthening its leading position in the sports live broadcast market and generating significant revenue for the company.

2.2 Q&A Analyst Q&A

Q: The launch of the ESPN flagship version is the last large-scale strategic adjustment towards the streaming transformation, and the adjustment in entertainment content has already been completed. Can you elaborate on what experiences this product will bring to sports fans and ESPN fans? How will it drive the business's growth after 2025?

A: The ESPN flagship version will provide users with an unprecedented experience, including not only basic live events, studio shows, and commentary services but also a comprehensive integration of betting features. Additionally, through technological means, especially the application of AI, we can achieve more personalization in the presentation of sports content. For example, users can customize their own AI-driven personalized SportsCenter, providing them with a tailored viewing experience. This will become the most attractive user service method in ESPN's history.

Moreover, live content, especially sports live broadcasts, is highly attractive to advertisers. By combining our existing advertising technology and its potential in application scenarios, this not only brings value to viewers but also significantly enhances advertising effectiveness. Therefore, the ESPN flagship version will be a highly customized, portable, and multifunctional premier sports product.

Q: Can you briefly discuss your expectations for accelerated growth in the experience business's EBITDA in 2025?

A: Regarding the experience business, we expect a growth rate of 6%-8% for the entire year of 2025. Due to the costs associated with two hurricanes and the pre-launch costs of the new cruise ship Disney Treasure, Q1 profitability will be impacted; however, it will gradually turn positive from Q2 and continue to strengthen throughout the year. The main growth drivers include the launch of the new cruise ship Treasure, gradual improvement in labor costs at Disney parks, and increasing consumer demand. Currently, the booking situation for the second half of the year is good, and we are optimistic about market performance in the latter half of the year. We hope this information is helpful.

Q: There is a polarization trend in advertising: on one hand, the challenges of linear channels, and on the other hand, the growth of entertainment, sports, and streaming. Can you provide an outlook on integrated advertising growth in the coming years?

A: Currently, linear advertising is performing very strongly, mainly due to the advantages of live content and the differentiated audience groups provided by linear television. Additionally, by integrating program content, technology, and advertising, Disney can offer advertisers richer and deeper advertising options, thereby enhancing business leverage In 2024, advertising grew by 3%, and looking ahead to 2025, we expect advertising growth to at least maintain or even exceed this level. We have established a proprietary advertising technology stack that enables Disney to deliver precise advertising to consumers more efficiently, especially in the streaming business, which is our competitive advantage. Therefore, we remain optimistic about the growth of our advertising market share.

Additionally, Disney offers a diverse range of live content across different platforms. For example, ESPN broadcasts NFL Monday Night Football, college football, and NBA games simultaneously through ABC, which not only provides advertisers with differentiated audiences and live experiences but also allows consumers to watch sports content on multiple platforms.

It is worth mentioning that we have also partnered with Google and YouTube to provide advertisers with differentiated audience groups through a trading platform mechanism, further enhancing our advertising technology advantages.

Q: Can you share the priority tasks of Adam Smith, who previously worked at YouTube, and how this will impact Disney+ or other streaming products in the future?

A: Adam has been actively engaged and has made progress in improving the technology of all our streaming businesses. He has several important tasks: First is to ensure the optimization of core products. Additionally, we will launch the ESPN hub on Disney+ on December 4th, and he is preparing for this. Furthermore, in terms of personalization and customization, his goal is to enhance user engagement by improving the recommendation engine on the homepage, and we have already seen an increase in engagement in a short period.

He is also focused on combating password sharing. We just launched related initiatives in Latin America this week, and we are now implementing password sharing prevention strategies in about 130 countries. In addition, we are integrating our technology stack, including a series of measures such as the media services and advertising technology stack for Disney+ and Hulu. The main goal of these initiatives is not only to provide a better experience for users but also to enhance engagement and reduce user churn.

Q: Can you discuss your confidence in achieving a double-digit profit margin exceeding 10% for DTC (Direct-to-Consumer) business in fiscal year 2026? Given that this guidance does not include Hulu Live, can you help us understand the future development of that product?

A: Regarding confidence in achieving a double-digit profit margin, the best way is to review the core factors that will help us reach this goal.

First, we will continue to expand our subscriber base. The DTC business has many similarities with the software business, as each additional subscriber brings a very high associated profit margin and relatively low marginal costs, so subscriber growth is the primary factor.

Second, we will continue to gradually increase pricing based on the value provided to consumers. Much of the current growth comes from the high-quality content produced by our film and television studios, which is unique to us and supports our ability to gradually raise prices Thirdly, as mentioned earlier, Adam's priorities for product updates and feature improvements include enhancing the recommendation engine, which will increase user engagement and reduce churn rates, thereby driving our growth. Additionally, improving advertising monetization capabilities through the advertising technology we have built is also a key factor. Finally, international markets still hold significant growth potential.

Considering the above factors, if we did not have confidence in achieving our goals, we would not provide corresponding guidance.

Q: Is the current financial guidance conservative? Is the expected acceleration in EPS growth from fiscal year 2025 to fiscal year 2026 primarily due to the launch of flagship projects and the base effect of factors like hurricanes?

A: The approach to financial guidance is mainly based on two points. First, we have significantly enhanced our DTC business and invested heavily in developing this product; secondly, our investments in parks, cruises, and consumer products are also substantial and will continue. We believe that while sharing operational results, we should also communicate the expected returns on these investments to investors, hence providing multi-year guidance rather than being limited to detailed data from a single segment.

In terms of investment, given that these projects are essentially long-term investments over several years, it is reasonable to provide financial guidance from a multi-year perspective. We clearly have full confidence in delivering these goals; otherwise, we would not set them.

Q: Regarding the launch costs of the ESPN flagship product, how do we view the startup costs in the first year, the ARPU of the product, and when we expect to achieve breakeven?

A: Regarding the flagship product, while it is still early to discuss ARPU (Average Revenue Per User), we believe it will bring gains to the company in 2026, and we expect this investment to take place in 2025, but costs will be quickly recouped by 2026.

We have considerable predictability regarding our future content release plans, and some recent data is encouraging. For instance, when a movie is expected to perform well, the viewing numbers for that series or related films on the platform significantly increase. For example, with the release of the trailer for "Inside Out 2," the viewership for "Inside Out" on the platform surged, and similar situations have occurred with "Moana" and some Marvel works. Therefore, we are confident in the future performance of our content.

Looking ahead to 2025, we will release films like "Zootopia" and "Avatar"; in 2026, we expect to release "Star Wars," "The Mandalorian," and "Avengers" films, as well as a live-action version of "Moana." We are not only confident in the quality and commercial performance of these films but also believe they will significantly enhance the performance of our streaming business.

Q: Regarding the potential spin-off of cable networks, considering that Comcast may plan to advance the spin-off of its cable networks, will Disney explore similar initiatives in traditional entertainment? More broadly, will changes in government affect Disney's view on merger and acquisition opportunities? A: Regarding asset divestiture, I focused on assessing whether there is a possibility of creating value through asset divestiture. After detailed analysis, I found that there is no such opportunity for Disney. First, from a financial perspective, while it is possible to show value enhancement through model adjustments, the reality is different. There are two key factors to consider: first, the potential returns from selling these assets, and second, the operational costs of asset separation. After weighing these two aspects, I concluded that this is not a value-adding opportunity for Disney. As for other companies, they may have different opportunities depending on their specific asset situations.

Regarding mergers and integrations, we have actually completed integration in many aspects. When we announced the acquisition of 21st Century Fox's assets at the end of 2017, our goal was focused on streaming. We anticipated that the development of streaming would require more content and distribution channels, so this acquisition not only brought a wealth of content, such as "Avatar" and multiple Emmy-winning works, but also included control and eventual ownership of Hulu. These assets combined with Disney+ have given us approximately 174 million global subscribers, and we are confident about the future of streaming. From this perspective, we have achieved integration. Currently, we do not urgently need additional content or distribution assets to adapt to the changing media environment.

Q: Regarding the impact of accelerated growth in the parks business, especially with Epic Universe set to open in early summer, how will this affect the acceleration of Disney's parks business in the middle of the year?

A: Regarding Epic, we have indeed incorporated it into our expected guidance for the experience business. As mentioned, early booking trends for next summer are positive. Additionally, we have analyzed historical data on the opening of new attractions at other parks in Florida, which typically has a positive impact on us, so this has been included in the guidance we provided.

Q: Regarding the growth of future content production expenditures, how do you view the pace of content growth in 2025 and beyond?

A: We believe we have high-quality content assets, but in the process of expanding our streaming business, particularly in the EMEA and APAC regions, we plan to make some selective investments. We have slowed our investment pace in these markets and are cautiously adjusting overall investments until technology optimization is in place, as reducing user churn through technology is already yielding results, thereby improving the return on content investment. Therefore, we are not in a hurry to increase spending on content until we ensure investment returns.

Looking ahead, prioritizing investments in producing local content in markets outside the U.S. will become part of our strategy as we expand our streaming business. However, these investments will not be very large, as much of the content we produce has global appeal. For example, several films we launched have performed well in most markets without the need for high expenditures like some competitors. At the same time, as these contents succeed in global markets, brand value will further drive their returns.

At the same time, we have indeed reserved moderate growth space for content spending, but it will not have a significant impact on the company's overall cash flow or financial model. We view international markets as a huge opportunity, so we have incorporated this into our planning Q: Regarding the experience business, the company has multiple business expansions in the United States and other regions. Will the long-term investment returns mainly come from increasing reception capacity to accommodate more visitors, or will they be driven by the introduction of new high-quality attractions that push up ticket prices?

A: Regarding the experience business, especially in terms of pricing and visitor numbers for theme parks, we have balanced both in our forecasts, so we do not limit ourselves to simply achieving growth through price increases or increased visitor numbers. We will adjust flexibly based on actual conditions, but the overall forecast is relatively conservative.

Q: What is the future outlook for the linear network business, and how will this business be managed in the coming years? Can you share the significant impact of this agreement on Disney? Also, can the structure of this agreement serve as a template for future collaborations, and how does it differ from past agreements similar to Charter?

A: Regarding the forecast for cable business, we expect it to continue declining. Currently, we have about 175 million streaming users, so we have a certain natural hedging mechanism in our business portfolio. In other words, as some users shift to streaming, we have the ability to bring them onto our platform and effectively monetize them. Therefore, whether consumers choose to continue using linear networks or shift to streaming, we are in a favorable position. At the same time, as more high-quality content is launched on our service, we are becoming an indispensable platform in most households.

As for the agreement with DirecTV, each collaboration is tailored to the specific circumstances of the partner, so we do not recommend directly comparing this agreement with others. We are satisfied with the outcome of this agreement and believe it is beneficial for both parties, but similar agreements are usually customized.

Q: The continued growth of the streaming business is exciting. Can you provide more details to understand the contribution ratio of subscriptions and pricing in the growth expected in 2025 and beyond?

A: Regarding the streaming business, we expect growth to come from a balance of subscriptions and pricing, possibly slightly leaning towards pricing. We will adjust based on market dynamics, but the current expectation is that both will contribute, with pricing growth being slightly more significant.

Regarding pricing, it is not just about simply raising prices but also about transitioning users to ad-supported streaming platforms. Currently in the U.S., about 60% of new subscribers choose our ad-supported service (AVOD). Among the overall existing users, 37% of total subscriptions are AVOD subscriptions, while globally it is 30%. Our recent pricing strategy is actually aimed at encouraging more users to choose the AVOD model, as we understand that advertisers are increasingly interested in streaming ads and that the average revenue per user (ARPU) is growing.

Q: Does the company plan to invest more in localized content in international expansions to enhance user stickiness?

A: As for local content, we do believe it has value. We have already produced a considerable amount of localized content in the Asia-Pacific region, especially some Korean dramas, and there are similar contents in Latin America as well. However, we will not over-invest until the product reaches an ideal state and the churn rate is effectively controlled This year, we have two films that reached a box office of $2 billion, which are currently the only two in the entire industry. Box office revenues from around the world have contributed to these films, indicating that they have resonated in different markets. In contrast, some competitors have not achieved films of equivalent quality or success, so they must invest more in local content due to their lack of this advantage.

Q: Can you talk about the asset divestiture in India? Additionally, what will our business in India look like after the divestiture or sale?

A: We will hold just over 30% of the shares in that business, while Reliance will manage the business based on their shareholding. Regarding the specific impact on Disney's financial situation, we have anticipated the completion of this transaction in our guidance.

Q: Regarding theme parks, has the domestic market's period of weakness passed? And internationally, there seems to be some new signs of weakness in international parks in the fourth quarter. Based on this, how should we view growth in the international market?

A: First, for the U.S. market, we do feel that consumer purchasing power is increasing. We have seen growth in our U.S. park business and are optimistic about the future, expecting consumer spending power to gradually strengthen.

As for the international market, there are two factors to consider. The first is the Paris Olympics. Whenever the Olympics are held in cities where we have parks, we typically see a certain negative impact on visitor numbers, which is what we mentioned in our expectations during the third-quarter conference call. Additionally, we have observed some weakness in consumer demand in Shanghai. Frankly, we believe this is temporary and expect a rebound, with no concerning impact on the long-term prospects for the parks.

Q: Regarding Disney+, the growth of core international users is quite strong. Is it due to large-scale factors? Is it seasonal?

A: Regarding international user growth, there are no specific large-scale factors; it is a robust user growth. After the end of the third quarter, we successfully added a large number of users in the fourth quarter.

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