Disney: Focusing on Profit, Implementing Cost-Saving Measures (4Q22FY Earnings Call Highlights)

The following is the incremental information of Disney.US 4Q22FY conference call minutes, financial report review can refer to Giant rotates the hammer, can centenary Disney hold on?

Key contents of management speech

I. DTC/streaming business

This quarter, a total of 14.6 million subscribers were added, of which 12 million were Disney+ subscribers and over 9 million were Core Disney+ subscribers. Disney+ has become the industry leader in just 3 years, thanks to the strategic decision made at the launch of the business, which was to invest heavily in products directly facing consumers. At the time of decision-making, the company knew that this would result in rapid growth, as well as short-term losses.

Building a streaming powerhouse requires a lot of investment, and now, with its scale, content, and global influence, Disney+ has achieved long-term profitability.

The company reached the peak of DTC operating losses this quarter, which is a turning point. It is expected that losses will decrease in the future for the following three reasons:

(1) price hikes and the launch of Disney+ ad next month.

(2) adjustment of marketing expenses.

(3) iterative content sections and distribution modes based on accumulated experience, which will effectively promote user participation and acquisition.

The company expects Disney+ to achieve profitability in 2024 and begin to decrease losses in 1Q23FY.

II. Advertising plan

A Disney+ ad-supported subscription service will launch in the US domestic market one month later, providing new choices for Disney+, Hulu, ESPN+ and Disney bundle subscribers to flexibly choose the options that suit them.

In addition, this plan is also an important part of the company's advertising business, which has attracted many advertisers. The company has always been a leader in streaming advertising. Based on years of experience, leading advertising technology and relationships, Disney+ has attracted more than 100 advertisers covering different fields in the US domestic launch window. The company has more than 8,000 existing relationships with advertisers, all of whom will have the opportunity to advertise on Disney+.

III. 1Q23 guidance

1. Streaming

In terms of performance, based on the following three reasons, the company expects the DTC streaming business to improve by at least $200 million compared to 4Q22, and even greater improvement in 2Q23:

(1) Price increases for US DTC products are expected to gradually increase ARPU and subscription revenue from 1Q23. Since the price increase for Disney+ is effective at the end of the first quarter (1Q23FY), this revenue will be more fully realized in the second quarter (2Q23FY). (2) It is expected that Disney+ad will be launched in December, with a positive financial impact expected later this fiscal year.

(3) Cost control allows the company to effectively expand investments. In particular, although DTC program and production costs will increase from 4Q22 to 1Q23, content and operating expenditure growth will gradually slow down as the company continues to adjust costs and business models, and marketing costs decrease.

As for user growth, it is expected that ESPN+ and Hulu users will continue to increase in 1Q23. However, core Disney+ user growth is only expected to show a small increase this quarter because user growth will not be linear and will be influenced by factors such as content release and promotional activities. It is expected that core Disney+ user growth will accelerate in 2Q23, mainly driven by the international market. Meanwhile, Disney+Hotstar will experience a decline in users in 1Q23 due to the absence of IPL copyright, but the company hopes to stabilize in the second quarter.

1. Overall

Total revenue and segment revenue for 2023 are expected to grow by high single-digit percentages compared to 2022.

(Dolphin Analyst: Currently, according to Bloomberg's unanimous expectations, the market is expecting too much for the 2023 performance-a year-on-year revenue increase of 13% is expected.)

Analyst Q&A

I. Streaming

Q: In terms of streaming, investors are more concerned about profitability than user growth. How will the company monetize user growth?

A: In the future, the company will focus mainly on improving profitability, and revenue growth is a key component of overall profitability. There are mainly three ways to increase revenue:

(1) Marketing cost management and cost control of content spending.

(2) Increase pricing to increase ARPU. Historical data shows that price increases do not lead to higher churn rates.

(3) Advertising revenue.

Q: How will the consumer experience be affected by the price increase plan one month later? The company offers consumers many plan options and is confident they can choose the most suitable plan.

A: Hulu+Live TV, with and without ads, is running very well domestically in the United States, and we believe it will achieve the same effect internationally. Disney+ and ESPN+ will also be able to replicate Hulu's experience.

As coverage expands, we will continue to offer consumers different business and pricing models to increase penetration rates. At the same time, as the number of platforms increases, plan selection will decrease. We already have a good model that simplifies consumer choice and allows them to choose the subscription plan that best suits them.

Q: How is the monetization of ESPN (Entertainment and Sports Programming Network) sports event broadcasting rights on streaming platforms?

Q:

ESPN is a very powerful brand. The company's cable network has already benefited. In the future, it will expand into the wireless field and lead the company into areas it couldn't previously enter. Personally, I believe ESPN is an important component of the company's overall investment portfolio, creating strong synergies. Due to its strong brand influence, the company has the opportunity to expand its development path and will focus on the flexibility of development speed in the future.

As the company has multiple platforms, Live advertising is an important factor for the company to attract advertisers. Whether it is Live advertising on cable or wireless networks, it will become an important component of the company's business in the future.

A:

The reason for the continuous decline in streaming revenue, especially Disney+'s ARPU, is due to the drag of foreign exchange and lower pay-per-view viewing.

(1) Foreign exchange and ARPU

Foreign exchange caused a 50% decline in ARPU.

The company conducted hedge accounting and successfully controlled the impact of the strong US dollar. However, due to the company's business covering global markets, they did not hedge on foreign exchange due to high cost or lack of liquidity.

(2) Pay-per-view

ESPN+ has UFC ultimate fighting events, which are charged on a per-view basis, and revenue fluctuations depend on the company's event schedule.

Q:

How do you view the entry of companies such as Netflix and Amazon into the sports broadcasting field?

A:

First of all, based on the breadth of the company's participation in sports projects and the trading terms it has, the company is in a very strong position.

Secondly, the company is looking for more different platforms to broadcast rights to gain flexibility in switching between traditional cable and forward-looking wireless platforms. One of the upcoming major events is the NBA games, and the company is very willing to work with the NBA on a mode that guarantees financial revenue.

Overall, the company is satisfied with the acquired broadcasting rights and the strong position it currently occupies.

Topic Parks

Q:

What are the cost factors for the profit margin of theme parks to drop sequentially, and what is the outlook for 23 years?

A:

This quarter, the DPEP (Disney Parks, Experiences and Products) business profit margin is about 20.4%, which is lower than the first three quarters of this year, mainly due to two aspects on the revenue and expense sides:

(1) Revenue side

First of all, Q4 is the traditional off-season affected by back-to-school season.

Secondly, the income of $65 million was affected by typhoons.

In addition, compared with Q4 2019 (before the epidemic), the performance of international parks has been poor.

(Dolphin Analyst: The profit margin level of international parks is much lower than that of domestic parks. The increase in the proportion of revenue repair and structural decline has dragged down the profit margin.)

(2) Expense side (main factors) First, the increase in expenses comes from providing consumers with more services, such as nighttime performances. Secondly, hard ticket events were held (paying performers part or all of the ticket revenue), which increased costs. In addition, the new ship, the Wish, began operations; as well as other minor one-time expenses.

Q: Theme Park Cost Reduction Plan

A: Currently under active evaluation, it will include short-term cost-cutting measures and long-term structural adjustment plans.

Structural reforms were carried out during the pandemic, making the theme park better, but these adjustments did not change the cost structure.

Q: What measures will be taken to maintain/increase theme park revenue if the US economic growth slows down?

A: Compared to the last economic slowdown, there are now more tools and leverage to manage the theme park business.

Firstly, discounts are a very effective means of revenue management, which will continue to be used this time, but in a different way from the last economic recession.

Secondly, new measures will be applied: reservation customization, which allows for flexible seat and ticket arrangements based on real-time ticket reservation tracking; tiered pricing and annual passes, making management more flexible.

In addition, there are many technological innovations in cost management, such as mobile ordering and contactless check-in, which are effective levers for managing costs.

It should be reiterated that because the company seized the opportunity during the pandemic to permanently reduce most of its operating expenses, it can now achieve better positioning in an unstable economic environment.

III. Overall Performance

Q: Performance Outlook

A: (1) DPEP

DPEP will maintain strong growth.

(2) DEMD (Disney Media and Entertainment Distribution)

DCT (Direct-to-Consumer): Focus on improving profitability; this quarter is at a low point and will improve in the future.

CLS&O (Content Sales/Licensing and Other): There are challenges and quarterly changes.

Linear Networks: Declined due to industry downturn, but this is an industry issue that the company will handle properly.

Q: Reasons for YoY Capital Expenditure Growth This Year

A: Generally, the company provides capital expenditure guidance at the beginning of the year, but there will be some remaining at the end of the year, resulting in a slide from one year to the next. Also, due to supply chain and labor shortages around the world, the delay in DPEP projects will be even greater. Currently, these projects are continuing, some as planned and some sliding towards 2023. At the enterprise level and DEEM, there are technical expenses, some of which are for consumers and some are for long-term internal efficiency improvement.

Q: Reasons for being optimistic about the macroeconomic situation in 23 years

A: On the one hand, the company has business in the content sector that is not affected by the economic situation. When perfecting the value proposition, we focus on providing bundled offerings.

On the other hand, the company's penetration rate in international markets continues to increase, and the development of international market business depends on a stable economic environment. Therefore, I personally believe that increasing ARPU (Average Revenue Per User) by raising prices will also be affected by changes in the economic environment.

In addition, Disney+ ad was launched this year and the monetization of advertising has been realized, indicating strong growth.

Overall, the company pays great attention to the investment and return on sensitive business to the economy, and remembers the rights and interests of consumers when setting goals for 23 years.

Q: Is the 24-year Disney+ profit guidance for one quarter rather than the whole year?

**A:**Yes.

(Dolphin Analyst: Core investment banks expect to be profitable in the last quarter of 2024FY)

Risk disclosure and statement for this article: Dolphin Disclaimer and General Disclosure