Q3 2021 Walt Disney Co Earnings Call

August 12, 2021

Companys priorities for the future.

As has been the case for Disney's nearly 100 year history. It all begins with great storytelling, which is the foundation of our special connection to audiences and guests.

And our foremost priority will continue to be to tell the world's most original and enduring stories brought to life by the world's most talented creators.

As home to some of the most beloved franchises, we will maximize the synergy of our unique ecosystem to further deepen consumers' connection to our characters and stories.

And we will use the power of our far reaching platforms and emerging technologies to better anticipate what our consumers want and deliver to them a more seamless and more personalized entertainment experience.

We are executing against these priorities and the results clearly speak for themselves.

Looking across the company over the past quarter.

We are pleased with the trajectory we're on as we continue to grow our businesses. Despite the challenges presented by the ongoing ever changing COVID-19 pandemic.

We ended the third fiscal quarter in a strong position with adjusted EPS up 10 fold to 80.

Compared to <unk>.

Last year.

At our parks experiences and products business we're in.

Courage by some of the positive trends, we're seeing and new developments, we have been hard at work on including the brand New Avengers campus at Disney, California Adventure, where guests can team up with their favorite superheroes in thrilling ways.

At our international Parks, Shanghai is celebrating its fifth anniversary this year with great fanfare, and we welcomed the first guests to our re imagine Marvel themed hotel and Disneyland Paris.

Meanwhile, work continues on a wide array of new experiences.

<unk> the one of the time Star Wars themed Galactic star cruiser at Walt Disney World.

And as part of a multiyear transformation of Epcot will soon introduce our extraordinary new nighttime spectacular harmonious.

Last month, we completed our first cruise since the start of the pandemic with the Disney Magic, which is currently sailing short term staycations for UK residents.

And at Disney Dream set sail on its first U S based crews this week.

Future bookings for all of our ships remains strong with bookings in the third quarter in particular, having benefited from the announcement of our fall 2022, itineraries and the successful marketing launch of our fifth ship, the Disney wish, which will set sail in summer of 2022.

As our parks business continues its recovery and we see demand growth, we're now putting into action some of the amazing guest centric services that we have been developing over the last few years.

These include Magic key our recently announced new annual pass membership program at Disneyland.

It provides great value and a variety of options for our guests and will be available starting on August 25.

The reaction to the news from fans has been extremely positive.

Additionally, we've made significant investments and sophisticated technology and tools, creating a revolutionary new multi tiered service, we're calling Disney Jeanie.

That will enable our guests to more easily and efficiently navigate everything our parks have to offer we're very very excited about this new service and will be providing additional details soon.

The goal of Disney G, which will appear in a user friendly app is to create a better more personalized and customized experience for guests putting them in control and providing even greater flexibility and choice.

They'll be able to spend less time waiting in line and figuring out what attractions or dining options are available and more time, having fun.

On the direct to consumer side, we are extremely pleased with the continuing success of our portfolio of streaming services Disney plus.

ESPN, plus and Hulu have performed incredibly well with 116 million $14.9 million and $42.8 million subscribers respectively.

For a total of nearly 174 million subscriptions.

Numerous breakout hits from our beloved brands, including Pixar as Luca and Marvel's Lucky and the Falcon and the winter soldier.

Have contributed to strong engagement and new subscriber growth and core Disney plus markets.

And we have continued to launch Disney plus and new markets around the world, including Disney plus Heartburn, Malaysia, and Thailand in Q3.

Disney plus is also currently available in a limited capacity in Japan and will expand to the full market in late October followed by additional APAC markets, including South Korea.

Taiwan and Hong Kong in mid November.

The launch of Disney plus and Eastern Europe has moved from late 2021. The summer of 2022, primarily to allow for an expanded footprint that will include parts of the middle East and South Africa.

Additionally, we're excited about the launch of Star plus throughout Latin America later this month.

As we've said our direct to consumer business is the company's top priority and among our unique advantages and promoting and growing our DTC service.

Our powerhouse brands and the vast array of direct consumer touch points, we have across our businesses from our media networks to our theme parks to our consumer products.

This synergy enables us to raise consumer awareness and further increase engagement with our streaming services.

And the power of this synergy will be on full display on November 12, when we celebrate Disney plus day with an unprecedented companywide cross promotional campaign.

Our robust pipeline of content continues to fuel growth and we have an incredible lineup of new programming for Disney plus.

Thanksgiving day, we are thrilled to be premiering the first of Peter Jackson's highly anticipated six episode Eagles documentary get back.

We also have exciting new series from Marvel Star Wars, and National Geographic coming later, this year, including Marvel's Hawkeye, starring Jeremy Renner and Hailee Steinfeld.

<unk> spin off the book of Boba, Fett and National Geographics welcome to Earth with will Smith.

With respect to our current approach to distributing our feature length films.

Last year in light of the prolonged and unpredictable nature of the pandemic, we needed to find alternative ways to bring our moves to consumers while theaters were closed and.

And once they began to reopen there was still widespread reluctance to return.

Therefore, we adopted a three pronged strategy for releasing our films that consisted of theatrical releases.

Correct, Disney plus and a hybrid of theatrical plus premier access as we did with Cruella.

Jungle cruise and Marvel's Black widow.

Performing film at the domestic box office since the start of the pandemic.

Both Bob Iger, and I, along with the leaders of our creative and distribution teams determined. This was the right strategy because it will enable us to reach the broadest possible audience.

And just to reiterate distribution decisions are made on a film by film basis based on a global marketplace conditions and consumer behavior.

We will continue to utilize all available options going forward learned from insights gained with each release and innovate accordingly, while always doing what we believe is in the best interest of the film and the best interest of our constituents.

We have an incredible slate of upcoming theatrical films, starting with free Guy was premieres tomorrow, followed by Marvel's newest action adventure Shaanxi and the legend of the 10 rings on September three the.

The highly anticipated live action musical West side story from Steven Spielberg is set for December as is the King's man.

Prequel in the popular kinsman series.

We have Disney animation studios and content and incredibly heartwarming stories set to magical town in Colombia, and featuring music by the Incomparable Lin Manuel Miranda.

Our Marvel Slate includes four feature films in fiscal 2022, the all new return wells alongside sequels to Doctor Strange Thor and Black Panther.

Our brand New Indiana Jones Adventure, starring Harrison Ford is doing this summer as is the origin story of another intrepid explorer in light year, a spinoff of the beloved toy story franchise.

Widely appealing slate with something for everybody.

Our goal is always to provide guests and consumers with unparalleled entertainment, whether they're visiting one of our parks are watching one of our films in a theater or on our streaming platforms.

And as we continue our recovery. We believe we are taking the right steps to further this goal, while growing our businesses and increasing shareholder value.

Personally I am as optimistic as ever about the future of our company.

We have a robust and growing portfolio of DTC services powered by the world's best storytellers and greatest brands and franchises.

In our parks business, which extend those stories and creates a place where magic comes to life in a more.

Our guest friendly way than ever.

With that I'll turn it over to Christine and she'll talk in greater detail about the quarter and the way ahead.

Thanks, Bob and good afternoon, everyone.

Excluding certain items diluted earnings per share for the third fiscal quarter was 80.

An increase of 72 from the prior year quarter.

I'll walk through our results today by segment, starting with parks experiences and products, where we continued to benefit from improvements and recovery at our parks and resorts as well as that consumer products.

Segment operating income at Deepak in Q3 increased by $2.2 billion year over year.

At parks and experiences we continued to benefit in the third quarter from the reopening of our sites around the world.

We're also Disney World Resorts, and Shanghai Disney Resort were bumped open for the entire third quarter, whereas in the prior year quarter, while at Disneyworld was closed for the entire quarter and Shanghai Disney was open for 48 days.

Hong Kong Disneyland Disneyland Paris, we're open for 72 days in 19 days, respectively in the third quarter versus 10 days and zero days in the prior year quarter.

And Disneyland resort was opened for 65 days during the third quarter and was closed for all of the prior year quarter.

At Walt Disney World third quarter attendance levels were generally at or near our daily capacity levels, which increased throughout the quarter.

Disneyland resort also steadily increased attendance and capacity following its reopening at the end of April and particularly after the lifting of California state restrictions on June 15th.

Guest spending at our domestic parks has been exceptionally strong with third quarter per cap up significantly versus fiscal 2019 at Walt Disney World and Disneyland.

<unk> has benefited from pent up demand and favorable guest mix driving higher admissions per caps as well as from spending on products related to Star Wars, Galaxy's edge and Avengers campus.

Looking forward theme parks reservations at both of our domestic parks remain strong.

And we continue to utilize our yield management strategy to deliver the optimal guest experience and provide flexibility to our guests during these dynamic times.

All while driving economic margin for our shareholders.

At consumer products improved results year over year, driven by growth at both our merchandise licensing and retail businesses.

Growth in merchandise licensing was primarily due to higher revenue from merchandise based on several of our key franchises, including Mickey and Minnie Star Wars, including demand Delorean Disney.

Disney Princess and Spiderman the increase in retail was due to higher results at Disney stores, most of which were closed in the prior year quarter as well as a comparison to the impairment of store assets in the prior year quarter.

Moving on to our media and entertainment distribution segment.

Third quarter operating income decreased by about $1 billion versus the prior year as improved results at direct to consumer were offset by declines at linear networks and content sales licensing and other.

At linear networks operating results were lower at both our domestic and international channels.

At domestic channels, both cable and broadcasting operating income decreased in the third quarter versus the prior year.

The decrease in operating income at cable was due to higher programming and production costs and higher marketing costs, partially offset by higher advertising and affiliate revenue.

As we called out last quarter the increase in Q3 programming and production costs was due to the return of live sports at ESPN, driven by the MBA and major League baseball.

In the prior year quarter, a significant number of live sporting events were canceled or delayed due to COVID-19.

At broadcasting lower results from the ABC television network were only partially offset by growth at our owned television stations.

The decrease at ABC was largely due to higher programming and production costs, partially offset by higher advertising and affiliate revenue.

The increase in programming and production costs was due to an increase in the average cost of programming and the shift in timing of the Academy Awards, which aired in the third quarter compared to the second quarter in the prior fiscal year.

Domestic advertising revenue increased year over year at both cable and broadcasting driven by favorable comparisons versus the prior year due to COVID-19.

A table the increase was driven by ESPN, where third quarter advertising revenue increased by $400 million versus the prior year, reflecting the return of live sporting events.

Q4 to date domestic cash advertising revenue at ESPN is currently pacing above prior year, but bear in mind that this comparison is complicated by various COVID-19 and timing impacts from the prior year.

We're not going to provide a forecast for the quarter, but the underlying sports AD marketplace remains strong for us, particularly in a quarter in which the Olympics were held.

At broadcasting higher advertising results were primarily driven by increased rates and the timing of the Academy Awards, which benefited both the owned television stations and ABC.

Total domestic affiliate revenue increased 4% in the quarter. This was driven by a benefit of eight points of growth from higher rates offset by a three point decline due to a decrease in subscribers.

Results that international channels declined due to higher programming and production costs, partially offset by higher advertising revenue.

Both of these factors were impacted by the return of live sporting events and in particular, the Indian Premier League, which held cricket matches from April 9th until the season was postponed on May four versus no matches in the prior year quarter due to COVID-19.

Turning to direct to consumer Q3, operating income improved by over $300 million versus the prior year, driven by Hulu, partially offset by a higher loss at Disney plus.

The increase at Hulu was due to growth in subscription and advertising revenue, partially offset by higher programming costs related to Hulu live.

<unk> ended the third quarter with $42.8 million paid subscribers up from $41.6 million in Q2 inclusive of the Hulu live digital Mvpds service pay.

Paid subscribers to who live decreased slightly to $3.7 million from $3.8 million at the end of Q2.

And Disney plus operating result decreased versus the prior year due to higher programming and production marketing and technology costs driven by the ongoing expansion of the service.

These higher costs were partially offset by increased subscription.

Revenue, reflecting subscriber growth and increases in retail pricing as well as premier access revenue for Cryolife.

Note that Disney plus Premier access revenue is included in our DTC operating results, but is excluded for the purposes of calculating our Peru.

As Bob mentioned earlier, we ended the third quarter with $116 million global paid subscribers to Disney plus up from approximately $104 million in the second quarter.

Disney plus Hot Star accounted for the majority of our net subscriber additions between Q2 and Q3.

Making up a little less than 40% of our total Disney plus subscriber base as of the end of the third quarter. However.

However, subscriber growth was also solid at our core Disney plus markets, excluding Disney plus Hot star with total quarter over quarter net ads in those markets consistent net adds from Q2.

Disney Pluses overall <unk> this quarter was $4.16.

Excluding Disney plus hop Star It was $6.12.

Or an increase of about 50 versus the second quarter, reflecting a benefit from the recent price increases both domestically and abroad.

Disney plus <unk> also increased from Q2 to Q3 due to higher AD revenue per subscriber, reflecting the roughly four weeks of IPL matches that were played in Q3 versus none in Q2.

At ESPN plus operating results in the quarter were comparable versus the prior year ESPN plus ended Q3 with $14.9 million paid subscribers, reflecting over 1 million net subscriber additions versus the second quarter.

Content sales licensing and other operating income at <unk> decreased in the third quarter versus the prior year due to lower home entertainment and theatrical distribution results.

The decrease in home Entertainment results was due to lower unit sales of new release titles, reflecting the performance of riot in the last Dragon and so in the third quarter compared to Star Wars. The rise of Skywalker frozen two onward call of the wild and forward versus.

Ferrari in the prior year quarter, along with lower catalog sales.

The decrease in theatrical distribution results was primarily due to higher marketing expense for future releases and lower operating income from titles in release.

Looking ahead, there are a handful of items I would like to mention as you think about our fourth quarter.

At linear networks, we expect fourth quarter operating income to decline versus the prior year, reflecting incremental marketing and programming costs at ABC and FX. In addition to an adverse comparison to last year's benefit from the 50 <unk> week.

The increase in marketing and programming expenses at ABC and FX is driven by more than two fold increase in the number of series premiers versus the prior year quarter as productions in the prior year were impacted by Covid.

As it relates to the 50 <unk> week recall that last year, we estimated a benefit of approximately $200 million to the company, which primarily impacted our linear networks.

Our content sales licensing another we are expecting an operating loss in the fourth quarter, driven by a number of items, including higher marketing and distribution costs in the theatrical window due to more titles being release versus the prior year. In addition to lower results from home Entertainment and third party content life.

Sensing.

We now expect our capital expenditures in fiscal 2021 to be approximately $200 million lower than our fiscal 2020 capex of $4 billion due to lower spending at our domestic parks and resorts, partially offset by increased spending for facilities across the enterprise.

And technology for our DTC services.

And finally in light of the ongoing recovery from the COVID-19 pandemic as well as our continued prioritization of investments that support our growth initiatives. The board decided not to declare or pay a dividend for the first half of fiscal 2021.

Longer term, we do anticipate that both dividends and share repurchases will remain a part of our capital allocation strategy. However for the time being we don't anticipate declaring a dividend or repurchasing shares until we return to a more normalized operating environment and our leverages.

Back to levels more consistent with a single a credit rating.

And with that I'll now turn the call back over to the level and we would be happy to take your questions.

Okay. Thanks, Christine and once again as we transition to the Q&A. Let me note that since we are not physically together. This afternoon I'll do my best to moderate the Q&A by directing your questions to the appropriate executive.

With that we are ready for the first question.

Our first question comes from the line of Michael Nathanson of Moffett Nathanson. Your line is open.

Thanks Lee.

I'll, let you.

I'll, let you choose the speakers share the questions. One is I wanted to understand.

How are the countries thinking about near term theatrical releases.

Given the steep falloff in secondary Fox.

And would you also variant international markets still on open so.

Why not delay or pause release schedules and then secondly on DTC profits I guess more Hulu profit it looks like continually theyre getting better than expected.

I think your term profitable this quarter as Hulu. So I'm wondering why that improvement in why not revisit maybe some of the guidance that we shared earlier on DTC profitability, just given the continual improvement and it looks like Google profitability.

Okay. Michael Thank you for those questions I'll turn the first one over to Bob and then Christine can address the Hulu profitability question.

Michael as you probably recognize we live in a very uncertain world in terms of the recovery of some of our markets in the theatrical exhibition World is certainly part of that we've said from the very beginning that we value flexibility and being able to make as last minute calls as we.

Can given what we've seen in the marketplace and certainly when we planned our schedule that we're executing right now we did not anticipate nor did I think anybody the resurgence of COVID-19 with the Delta variant that would have such a significant impact on the marketplace at the same time when you work.

And an ecosystem, having a lot of partners they need to be able to plan their business too and so at some point, we have to put a stake in the ground and say.

For example, Shane Shang Chi that's going to be a title that we're going to put it in the marketplace or free guy that's going to be a title that we're going to put into the marketplace not knowing again three months earlier when you make that commitment what exactly the marketplace is going to look like but what I do think that says Michael it says that we value and flexibility.

And we value to follow where the consumer is going to go and while some of that is uncertain I think in terms of relative to where the rest of the market as you see that we've got more flexibility in terms of how the program and nothing's in stone because the marketplace is rapidly changing but at some point you've got to put a stake in the ground and say.

This is what we're going to do and that's where we ended up on.

Sean <unk> Frigo, which are next two titles out.

Bob how much follow up why wouldn't you just add from your access given what you saw happen I think successfully black widow today's two titles.

Okay. Good question on <unk>. Obviously this is a title that we acquired under a different distribution assumption incentive agreements. So we don't have the degree of freedom to do that on free Guy Anshan Chi we think it's actually going to be an interesting experiment for us because it's got only.

A 45 day window for us so the prospect of being able to take a Marvel title to the service after going theatrical with 45 days will be yet another data point to inform our actions going forward on our titles, but once again I'll refer back to my previous answer when we play.

<unk> Shaanxi that title was planned on being in a much more healthy theatrical environment and at this point. Unfortunately due to distribution agreements that we have and due to the just the practicalities of last minute changes it wouldn't be possible.

Thanks.

I'll take your question on Hulu Michael.

Youre, absolutely correct, Hulu exceeded our expectations and it was profitable this quarter. There's a couple of things going on here. One is it has had continued to have subscriber growth and also very strong <unk>.

Advertising revenue.

The advertising is coming from higher sell through rates.

A lot of addressable advertising and a significant ramp up in the dynamic AD insertion technology that we have within Hulu live.

Those are things that are driving it and at the same time. They are just like all of our other streaming services that are ramping up their production programming and also marketing expense to two.

To promote those new shows so we're very pleased with what's going on at Hulu, but we're not going to update our guidance yet because we are in the process of doing our.

Fiscal 'twenty two annual operating plan and if we feel that we have to update it. After we complete that we will certainly do it.

Thank you guys.

Hey, Michael Thanks for the questions. Operator next question. Please.

Our next question comes from Alexia <unk> of Jpmorgan. Your line is open.

My question's on the parks side, if I can I.

I guess the first one is we've seen really really much much improved results this quarter and moving forward I am curious if youre seeing any recent impact from the Delta Varian, either domestic or international parks, maybe cause for concern, particularly as you're increasing capacity and then just staying on the parks. Maybe you can elaborate on how we should view sort of longer term.

Profitability given the improvements you have to make in terms of automating many aspects of the parks during COVID-19 are while they were closed.

But now maybe with you now.

Heightened cleaning expenses, perhaps staying for a while and other expenses relates to come on stream for a while given how this varian has.

<unk> continued to kind of make conference still very much part of our lifestyle.

All right Alexia. Thanks for the question so Bob maybe.

Can you talk about.

Doses impact on parks and you may want to talk about <unk> second question some of the yields.

Joining me Christine you'd probably want to follow up on the second part.

Okay in terms of impact of the Delta very we see strong demand for our parks continuing and the.

Primary noise that we're seeing right now are really around group a convention cancellations in other words.

Large groups that are coming in relatively short term, but on the whole we see really strong demand for our parks in fact, our park reservations now are above our Q3 attendance levels and as you just saw with our earnings announcement, our Q3 attendance levels were pretty darn. Good. So we're still bullish about our park business.

Moving forward I May also suggest as a bridge to the second question that we've implemented a reservation system, that's going to enable us to spread our demand increase our yield and improve our guest experience at the same time and in terms of the long lasting impacts that you mentioned.

I think some of the cost implications that we need to do for hygienic purposes are going to be relatively short lived and frankly in the Grand scheme of operating our parks not all that material, but will be the long lasting impact is the improvements that we're making with guest personalization and guest choice therefore affecting the tremendous.

This yield benefits that we've been able to.

Extract over the last few quarters, and that's only going to grow in the future with our ability to really do world class yield management systems through our new reservation system.

Hi, Alexia and I'd add to that a couple of things one as well.

We have seen very very strong per caps. In addition to all the yield management things Bob mentioned.

But the per caps in my comments I referred to them is exceptionally strong and I would not use that word were it not for the fact that they were exceptional last quarter I said that they were up.

Strong double digits.

And this quarter was even stronger.

If you look at par.

Park is closed for a long period of time as Disney land was at Paris was when they reopen the per caps really shoot up and we still have even though Walt Disney World has been open now for over a year, we're still seeing extremely strong per cap growth continue.

At that parks. So in addition to all the technology things that we're implementing as Bob mentioned reservation systems. The dining apps, we're just seeing the consumer behavior.

Be very favorable and the guest experience is something that we're going to be focused on especially as we continue to reopen.

Thank you.

Alexia Thanks for the questions today, operator next question. Please.

Our next question comes from Ben Swinburne from Morgan Stanley. Your question. Please.

Thank you good afternoon.

Couple of probably for Kristina Kristina I'm wondering if you could give us the hulu advertising growth.

In the quarter I think you are given to us in prior quarters and then also.

Just are you expecting.

IPL to come back.

In September at this point and any update on the Latin American sports situations. Since that's part of your launch there and then if I can ask Bob Parks question, just on technology, you mentioned that Disney Jeanie.

How substantial.

Sort of an improvement or evolution in the guest experience are you expecting to bring to market and the my magic plus is pretty it's been around for a while and I'm. Just wondering if you think theres a real transformation ahead for the business as you take advantage of the last year plus of downtime.

To reinvent the experience just maybe add some context would be helpful.

Okay. Ben Thank you. Thanks for the questions. Thank you Dan.

I think we'll start with Bob if you want to talk a little bit about some of the technology at the parks and then we'll go to Christine you talked about new AD growth IPL and watch it.

Okay. Then you use the correct word transformational my Magic plus was us basically sticking our toe in the palm of this type of transformational work Disney Genie, though is that program on steroids. This is going to revolutionize our guest experience guests are going to spend less time waiting.

And more time, having fun in our parks with a dramatically improved guest experience.

Going to make their navigation of their day and their planning of their day much easier essentially what it's going to do is take the consumer preferences that we know from our consumers given what we know from them and blend that with.

Basically industrial engineering data that we've got in terms of how our parks operating that day and meld those together to make suggestions on the fly that not only will lead to that improved guest experience, but at the same time lead to substantial commercial opportunities for us as the guests navigates there Dave.

So.

It certainly qualifies in my mind for both materiality and transformational impact on our business from a yield standpoint.

Great.

Okay, then I'll try to go through yours.

I can remember them all so Hulu Hulu.

Who did have very strong advertising growth in the quarter and we continue to see that growth quarter. After quarter, we haven't specifically quantified it but I would say that it is driven by higher impressions as well as rate.

And as I mentioned, the ability for us to do.

Use of the dynamic AD insertion and Hulu live is also a benefit.

I think the advertising sales team if they had more inventory that could certainly solid there's that much demand for it.

Just to put some context around it because I think it's a precursor of.

Of what the upfront showed is that the U.

We came out of a very strong upfront, but we had about 40% of the total upfront dollars into streaming and digital and a lot of that is not only across Hulu, but also across our other entertainment and sports platforms. So I think that just shows that the kind of advertising that's going through Hulu.

It.

Is certainly a growth driver.

The IPL is coming back it's scheduled to come back on September 19.

And it will run through I believe the last final matches scheduled for mid October around October 15th.

When you think about Disney plus hotspot, our IPL is certainly a very very important component of the offerings, but it's only one because we also have a very broad portfolio of general entertainment as well as other sports.

It has a lot of original content library content in it from all of the Disney plus.

R&D and IP.

We added over 18000 of original local programming every year. So we feel really good about.

Yes.

Not only the IPL, but also star Hot Star plus.

In Latam, we will be.

Let let him to launch for Latam is in later this quarter.

But I don't have any updates to anything new on the sports side.

Thank you.

Okay, Ben Thanks for the questions. Operator next question. Please.

Question comes from Doug Mitchelson of Credit Suisse. Your line is open.

Thanks, so much.

Two questions. It's certainly nice to see the U S parks profitable in fiscal <unk> and I would note that operating expenses are back at 81% of 2019 fiscal <unk> levels, while revenues about 60% of 2019 levels and that seems consistent with.

Commentary you've made in the past that you have to ramp overhead in advance of consumers coming back to the parks. So my question is is the overhead now sort of re ramped at the parks can we look at this as the right overhead level from here.

Variable costs growing with consumers continuing to come back and Thats, how we should think about modeling the parks going forward and then the <unk>.

Second area is just on stream and I Hope you can discuss the health of Disney plus how was engagement trended in the quarter, how has churn training in the quarter or what was the impact of star as you merged in with Disney plus.

In Europe, and anything else you wanted to or the health of Disney plus would be appreciate it. Thank you.

Hey, Doug. Thanks. Thanks for the question Bob You May want to start on the streaming question in younger children make some comments on kind of parks cost ramp and then Christine you may want to jump in on that as well.

Okay in terms of the health of Disney plus we feel really great about our sub trajectory.

We've got world class content from the world's best Storytellers, plus our international launches plus the power of the Disney bundle and you asked the question about churn, we're really pleased with churn we've taken some price increases over the past few quarters and what Youre seeing is that our churn is.

Mind, including Latin America, where we went up I mean by in Europe, sorry by two euros. When we added star brand as a six brand tile. So our retention is very healthy across the globe. We're really really pleased with that and I think again, it really goes back to the price value that we're offering our guests when you take out.

Luca loci Falcon and the winter soldier Theres, something essentially new each week, you blend that together with a tremendous local investment that we're making in our international territories and its really a price value proposition that is really great. So the fact that our churn is so low our engagement so high our retention is.

So hi al.

The local quarters, where we're we're taking price increases I think says everything about it in terms of and I'll start this off Christine on the cost side.

And what we expect to see in terms of our parks profitability, but.

Right now you can use a lot of different metrics to look at our business in California. We've got all three of our hotels opened for example, we've got 70% of our available rooms opened in Walt Disney World. So you can see that where we're not quite 100% available at this point, but I think that a lot of the cost from here on out.

Our variable obviously as we scale, our business and we get closer and closer to 100% capacity, our efficiencies and operating become much much higher so I think youll see disproportionate benefit as we go from Hereon Kristine I don't know if you want to elaborate.

Yes, I would just add that.

Our parks are plan and once again. This is we'll monitor the trends with what's going on with that Delta variant, but we're expecting to have our parks domestically be fully staffed up by the end of this calendar year calendar 2021, and we're going to be increasing capacities as we as we.

The demand and we're also being able to train thoroughly train our employees as they come back in.

And once again this is an ever changing landscape with COVID-19, but we're going to be particularly careful and we're also going to bring our capacity online aggressively but measured we're not just going to open up the doors.

I'm open so we're doing this in a measured fashion.

The health and safety of not only.

Our guests, but also our cast members in the parks.

Thank you so much.

Doug Thanks for the questions. Operator next question. Please.

Our next question comes from Jessica Reif Ehrlich of Bank of America. Your question. Please. Thanks, I have one on Disney plus and one on film and you mentioned that you're opening in Japan fully opening in Japan in October.

It's such a big country with huge affinity for everything Disney Parks are doing really well there and it's a very affluent countries.

Wondering if you could give us any color on market size in our Po.

And then on film.

If you can just use undergone such massive change over the last few years towards.

Sports streaming, but obviously the pandemic has had a big impact.

Moving in that direction anyway.

With the jewelry add on like how much the box office will come back.

Pre COVID-19 levels.

Think about the success of the film in today's environment, and how does that impact the way you attract talent the way you compensate talent.

And what changes do you expect to make if any in your film strategy from here.

Okay, Jessica Thanks, a lot.

Bob Why don't you take the film question on if you want to make any comments on Japan.

You may want to jump in on that one as well.

Okay. Obviously this this world has been disrupted by Covid.

And were all reacting to a very fluid situation in terms of the marketplace.

We're very grateful for the fact that we have the ability to take out a lot of titles both not only in the theatrical marketplace for those who prefer to watch a film that way, but also at the same time through our Disney Premier access and that was a winning strategy for us to give consumers the choice for those that decided that going back to a theater.

It was not for them at the same time.

That said these films.

Jessica we're really conceived under a time when we did not know what was going to be happening with consumer behavior. Three four years later and certainly didn't know about COVID-19 at the time, so we're dealing under different sort of set of conditions than we thought.

What I will say is that just like we've done many times before as the business has evolved and transformed.

<unk> figured out ways to.

Fairly compensate our our talent so that no matter what the business model is that we have to go to market with everybody feel satisfied and I will say that since COVID-19 has begun we've entered into hundreds of talented arrangements with our talent and buy them.

So they've gone very very smoothly. So we expect that that would be the case going forward. Certainly this is a time of anxiety in the marketplace has a lot has changed recently and again. These films that we're releasing right now were imagined under a completely different environment than unfortunately, the state has delivered us but we're.

Trying to do the best thing for all our constituents and make sure that.

Everybody who is in the value chain, if you will feels like.

There.

Having their contractual commitments honored both from a distribution and a compensation standpoint.

What I will say before I turn it over to Christine on Japan is that remember that heretofore as we've launched Disney plus around the world in Japan, we've done it with a fairly limited distribution system and Thats about the change going forward, but at the same time that market is under as they call. It a state of emerge.

<unk> and that certainly has disrupted that marketplace as we go from a fairly limited distribution now to a much more broad distribution Christine yeah, Jessica we fully agree with your assessment of the market and the high degree of affinity.

That the Japanese market has for Disney IP. So so work with total agreement we did as Bob say did a soft launch with a partner last year, but it was only to a small part of the market and we're really excited to do the full launch that will be in this coming October for Disney plus.

And we'll see how that goes but we have been very.

Cautiously optimistic as we always are but.

But we believe that that IP is going to resonate.

We don't as you know break out our approved by individual markets. So we'll just be.

Giving you the Disney plus our proves the way we currently are doing it.

Thank you.

Okay. Jessica. Thanks, Operator next question. Please next question comes from Jason Bazinet of Citi. Your line is open.

So I think your digital pivot is incredible impressive.

But I want to ask a question that will come across.

Bearish and that's probably not it's an honest question.

I think in the salad days of pay TV, maybe we had it at about 75%, 80% Ptv penetration and people who are paying U S households.

70, Bucks, a month or something and.

And the most mature asphalt platform out there is probably at 50% penetration with our crews that are sort of one shift of pay TV, <unk> and not really growing and.

I just wonder if you guys have any thoughts on what that means for the broader sort of digital pivot and are there things that the.

The industry needs to do as an example, if you think it's tethered to piracy or something like that that could sort of give you and another for the industry, including you. Another leg of growth in terms of net adds that coupon. Thank you developed.

So Bob do you want to take that thanks, Jason for the question by the way Jason.

Jason I'd like to think of it like we are in the first inning of the first game of a very long season, we have not even been at this right now as Disney at least.

For two full years.

Despite that two full years as you suggested we've gone into 61 countries and in 21 months. So we're very proud of that and we're proud of the success that we've had I would caution not to come to any conclusions about the size of the market. We've got a tam of $1.1 billion households.

Cross the globe and we've only just begun.

Our journey and as I think you see what's really going to make the difference for Disney.

As our spectacular content told by the best storytellers against our powerhouse franchises you put that in the context of also all the local investments that we're making and I think we're going to have a bright future ahead.

And I understand the benchmark that youre using but I think this is a different marketplace and I think.

We're charging forward.

To maximize the opportunity given our unique combinations of not only distribution platforms, but intellectual property and storytelling.

Thank you.

Jason Thanks for the question Operator next question please.

Our next question comes from Brett Feldman of Goldman Sachs. Please go ahead.

Yes, Thanks <unk>.

Earlier, Bob you were talking about the power of the Disney bundle and in the U S. You've really taken a bundle centric approach to the market I was hoping you could give us some insight into that power whatever you can share to help us understand why the bundle. So successful either the portion of your subs Disney plus subs that are in a bundle or the portion of the gross adds.

The engagement.

Whatever you can offer would be great and then just expanding on that a little bit if the bundle really does appear to be the most compelling product in the portfolio why not just make it the core product and eliminate the complexity to the consumer in terms of thinking about which elements of the Disney Entertainment ecosystem. They want and just give it all to them that one thank you.

Alright, Thanks for the question questions I'll turn it over to Bob.

Okay.

Terms of the.

The bundle you see that the majority are not maybe not the majority, but a good chunk of our marketing now is going towards a bundle and that's because the while we enjoy extremely low churn rates on our individual services the churn rates on the bundle or even lower.

Surprisingly low even for us and I think what that says is that our our customers enjoy the price value.

The bundle that we offer beginning an incredible amount of content for a really good price while I can't comment on some of the specific percentages that youre, probably looking for but I will make a comment on sort of going forward you noticed that across the world. We've got different business models, we've got there.

Our business models for two reasons number one unique situation that we find ourselves in each market, whether it's Europe, or Latam or Asia or North America tend to be different in terms of what rights, we have and what the consumers are actually looking for but also is gives us an opportunity to test out different propositions.

Obviously, the proposition that we have in Europe with Star is a six brand tile look significantly different than our relatively unbundle approach that we have in North America again, we are in the first inning of the first game over the long season, and we're taking all this into account there may also be certain constraints that were under that.

At least from a short term standpoint limit our ability to do what long term, we might feel it was ideal, but frankly, we don't know what's ideal yet.

I will say that we're extremely pleased in every market that we've launched our direct to consumer services, we have exceeded our expectations in every marketplace. So in terms of the way that we've approached the market. So far its worked really really well is there an opportunity for improvement by considering something different going forward, possibly.

But we're going to continue to learn and as we learn I'm sure we will refine our offerings in the marketplace.

As time goes on.

Thank you.

Okay. Thanks for the questions operator, given the time I think we will take our final question.

Sir our final question comes from John Hodulik of UBS. Your line is open.

Great. Thank you guys.

Maybe.

The 2024 guide I think included 30% of subs coming from hot start and given the strength of the <unk> does that guidance still hold and then.

Given the content release schedule that we have in the second half of the year do you expect the net add trends in what I'll call the core Disney plus.

Markets to improve in the back half and then lastly, just anything you could tell us on the Disney plus day in November in terms of.

How you expect to promote is it global or U S or just already new content that.

That could be launched that anything you could tell us on that would be great. Thanks.

Thanks, John for the question, Bob Why don't you start on Disney plus day, and then Christine.

Question about.

<unk>.

<unk> guide, etc.

Okay, Disney plus day will be a balanced approach between global and local products.

We're going to have a real exciting lineup as you might guess as we approach those consumers have not yet signed up for Disney plus with a really attractive group.

A group of titles to be announced.

But I think it gives us an opportunity to provide a focal point.

For consumers that have not yet tripped over.

To Disney plus and I think it's going to give us a focal point of ours.

Excitement and energy that will not only pay benefits in the U S, but globally as well.

In terms of the net add question and how that's going to improve first half versus second half.

Again, we feel really great about our trajectory.

As we learned now we're finding out theres tremendous seasonality in this business that we may not have known about before we really got into it at least in terms of.

Above expectations also I want to caveat that.

Our sub adds arent necessarily going to be linear I think a lot of the marketplace expects these things to sort of be straight line math and it's not really turning out that way and as we've indicated before we do believe our first half adds this fiscal year will be stronger than the second half ads that said, we're really feel great about our trajectory pristine want to take it from there.

Sure and I would just add one thing on the Disney plus core markets.

In this third quarter.

When you exclude Disney plus hot start we saw solid sub growth.

Quarter over quarter net adds consistent with what we saw in the previous quarter. So we feel really good about the continued growth in our core markets and on hop Star.

At Investor Day, we said that we anticipated hot started to be between 30% and 40% of total Disney plus and we're not updating that guidance at this point.

Okay. Thank you.

Okay. Thanks for the question and I want to thank everyone for joining us today.

Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website.

Let me also remind you that certain statements on this call, including financial estimates or statements about our plans expectations beliefs or business prospects and other statements that are not historical in nature may constitute forward looking statements under the securities laws.

We make these statements on the basis of our views and assumptions regarding future events and business performance at the time, we make them and we do not undertake any obligation to update these statements forward.

Forward looking statements are subject to a number of risks and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our annual report on Form 10-K.

Quarterly reports on Form 10-Q, and in our other filings with the Securities and Exchange Commission really want to thank everyone for joining US today hope you have a good rest of the debt.

This concludes today's conference call. Thank you for participating you may now disconnect.

[music].

Okay.

Yes.

[music].

Got it.

Sure.

Got it.

Okay.

Fair enough.

Tom.

Yes.

Any thoughts on Fox.

Talk about that.

Our cash cost.

Thanks, Tom.

Yes.

Okay.

But I don't know about that.

Thanks, Bob.

Hi, Bob.

That's fine.

Yes.

Okay.

What about that.

Okay.

[music].

Okay.

Yes.

Okay.

No.

Got it.

Okay.

Yes.

No.

Black Fox.

Yes.

Okay.

Got it.

Yes.

Okay.

Good afternoon.

Okay.

Yes.

Deb.

Got it.

Robert.

So that type of number.

Okay.

Thanks, Bob.

[music].

Thank you for standing by and welcome to the Walt Disney Company third quarter earnings Conference call. At this time, all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.

Today's conference is being recorded should you require any further assistance. Please press star zero I would now like to hand, the conference over to your host low singer Senior Vice President of Investor Relations. Please go ahead.

Yeah.

Good afternoon, and it's my pleasure to welcome everyone to the Walt Disney Company's third quarter 2021 earnings call.

Our press release was issued about 25 minutes ago and is available on our website at www Dot dot com forward slash investors today.

Today's call is also being webcast and we will post a transcript of this call to our website.

Joining me remotely today are Bob Chapek, Disney's Chief Executive Officer.

Christine Mccarthy senior Executive Vice President and Chief Financial Officer.

Following comments from Bob and Christine We of course, we'll be happy to take some of your questions. So with that let me turn the call over to Bob to get started.

Thanks, lull and Hello, everyone.

Today I'd like to start off by talking about our company's priorities for the future.

As has been the case for Disney is nearly 100 year history. It all begins with great storytelling.

Which is the foundation of our special connection to audiences and guests.

And our foremost priority will continue to be the tell the world's most original and enduring stories brought to life by the world's most talented creators.

As home to some of the most beloved franchises, we will maximize the synergy of our unique ecosystem to further deepen consumers' connection to our characters and stories.

We are executing against these priorities and the results clearly speak for themselves.

Looking across the company over the past quarter. We are pleased with the trajectory. We're on as we continue to grow our businesses. Despite the challenges presented by the ongoing ever changing COVID-19 pandemic.

We ended the third fiscal quarter in a strong position with adjusted EPS up tenfold to 80.

Compared to eight <unk>.

Last year.

At our parks experiences and products business we're in.

<unk> by some of the positive trends, we're seeing and new developments, we have been hard at work on including the brand New Avengers campus of Disney, California Adventure, where guests can came up with their favorite superheroes in thrilling ways.

At our international Parks, Shanghai is celebrating its fifth anniversary this year with great fanfare and we welcome the first guests to our re imagine Marvel themed hotel and Disneyland Paris.

Meanwhile, work continues on a wide array of new experiences.

Clearly the one of the time Star Wars themed Galactic star cruiser at Walt Disney World.

And as part of a multiyear transformation of Epcot will soon introduce our extraordinary new nighttime spectacular harmonious.

Last month, we completed our first cruise since the start of the pandemic with the Disney Magic, which is currently scaling short term staycations for U K residents and at Disney Dream set sail on its first U S based crews this week.

Future bookings for all of our ships remained strong with bookings in the third quarter in particular, having benefited from the announcement of our fall 2022, itineraries and the successful marketing launch of our fifth ship at Disney wish, which will set sail in summer of 2022.

As our parks business continues its recovery and we see demand growth. We are now putting into action. Some of the amazing guest centric services that we have been developing over the last few years.

These include Magic key our recently announced new annual pass membership program at Disneyland.

It provides great value and a variety of options for our guests and will be available starting on August 25th.

The reaction to the news from fans has been extremely positive.

Additionally, we've made significant investments and sophisticated technology and tools, creating a revolutionary new multi tiered service, we're calling Disney Genie that will enable our guests to more easily and efficiently navigate everything our parks have to offer we're very very excited about this new.

Service and we will be providing additional details soon.

The goal of Disney journey, which will appear in a user friendly app is to create a better more personalized and customized experience for guests putting them in control and providing even greater flexibility and choice.

They'll be able to spend less time waiting in line and figuring out what attractions or dining options are available and more time, having fun.

On the direct to consumer side, we are extremely pleased with the continuing success of our portfolio of streaming services Disney plus ESPN pulse and Hulu have performed incredibly well with 116 million $14.9 million and $42.8 million subscribers.

Respectively.

A total of nearly 174 million subscriptions.

Numerous breakout hits from our beloved brands, including Pixar.

And Marvel's Lucky and the Falcon and the winter soldier.

Have contributed to strong engagement and new subscriber growth and core Disney plus markets.

We have continued to launch Disney plus and new markets around the world, including Disney plus Hartstein in Malaysia, and Thailand in Q3.

Disney plus is also currently available in a limited capacity in Japan and will expand to the full market in late October followed by additional APAC markets, including South Korea.

Taiwan and Hong Kong in mid November.

The launch of Disney plus and Eastern Europe has moved from late 2021 to summer of 2022, primarily to allow for an expanded footprint that will include parts of the middle East and South Africa.

Additionally, we're excited about the launch of Star plus throughout Latin America later this month.

As we've said our direct to consumer business is the company's top priority and among our unique advantages and promoting and growing our DTC service.

Our powerhouse brands and the vast array of direct consumer touch points, we have across our businesses from our media networks to our theme parks to our consumer products.

This synergy enables us to raise consumer awareness and further increase engagement with our streaming services.

And the power of this synergy will be on full display on November 12, when we celebrate Disney plus state with an unprecedented companywide cross promotional campaign.

Our robust pipeline of content continues to fuel growth and we have an incredible lineup of new programming for Disney plus.

Thanksgiving day, we are thrilled to be premiering the first of Peter Jackson's highly anticipated six episode Eagles documentary get back.

We also have exciting new series from Marvel Star Wars, and National Geographic coming later, this year, including Marvel's Hong Kong, starring Jeremy Atlanta, and Hailee Steinfeld, the <unk> spin off the book.

And National Geographics welcome to Earth with will Smith.

With respect to our current approach to distributing our feature length films.

Last year in light of the prolonged and unpredictable nature of the pandemic, we needed to find alternative ways to bring our movies to consumers while theaters were closed.

And once they began to reopen there was still widespread reluctance to return.

Therefore, we adopted a three pronged strategy for releasing our films while consisted of theatrical releases.

Disney plus and a hybrid of theatrical plus premier access as we did with Cruella.

Jungle cruise and Marvel's Black widow.

Performing film at the domestic box office since the start of the pandemic.

Both Bob Iger, and I, along with the leaders of our creative and distribution teams determined. This was the right strategy because it will enable us to reach the broadest possible audience.

And just to reiterate distribution decisions are made on a film by film basis based on our global marketplace conditions and consumer behavior.

We have an incredible slate of upcoming theatrical forms starting with free Guy, which premieres tomorrow, followed by Marvel's newest action adventure Shaanxi and the legend of the 10 wins on September three.

The highly anticipated live action musical West side story from Steven Spielberg is set for December as is the King's man a prequel in the popular kinsman series.

We have Disney animation studios and content and incredibly heartwarming stories set to magical time in Colombia, and featuring music by the Incomparable Lin Manuel Miranda.

Our Marvel Slate includes four feature films in fiscal 2022.

All newly tunnels alongside sequels to Doctor Strange Thor and Black Panther.

Our brand New Indiana Jones Adventure, starring Harrison Ford is doing this summer as is the origin story of another intrepid explorer in light year, a spinoff of the beloved toy story franchise.

Widely appealing slate with something for everybody.

Our goal is always to provide guests and consumers with unparalleled entertainment, whether they're visiting one of our parks are watching one of our films in a theater or on our streaming platforms.

And as we continue our recovery. We believe we are taking the right steps to further this goal, while growing our businesses and increasing shareholder value.

Personally I am as optimistic as ever about the future of our company.

We have a robust and growing portfolio of DTC services powered by the world's best storytellers and greatest brands and franchises.

In our parks business, which extend those stories and creates a place where module comes to life in a more.

Our guest friendly way than ever.

With that I'll turn it over to Christine and she'll talk in greater detail about the quarter and the way ahead.

Thanks, Bob and good afternoon, everyone.

Excluding certain items diluted earnings per share for the third fiscal quarter was 80.

An increase of 72 from the prior year quarter.

Segment operating income at Deepak in Q3 increased by $2.2 billion year over year.

At parks and experiences we continued to benefit in the third quarter from the reopening of our sites around the world.

Well at Disney World Resorts, and Shanghai, Disney Resort, where both opened for the entire third quarter, whereas in the prior year quarter, while at Disneyworld was closed for the entire quarter and Shanghai Disney was opened for 48 days.

Hong Kong Disneyland in Disneyland Paris, We're open for 72 days in 19 days, respectively in the third quarter versus 10 days and zero days in the prior year quarter.

And Disneyland resort was opened for 65 days during the third quarter and was closed for all of the prior year quarter.

At Walt Disney World third quarter attendance levels were generally at or near our daily capacity levels, which increased throughout the quarter.

Disneyland resort also steadily increased attendance and capacity following its reopening at the end of April and particularly after the lifting of California state restrictions on June 15th.

Guest spending at our domestic parks has been exceptionally strong with third quarter per cap up significantly versus fiscal 2019 at Walt Disney World and Disneyland.

<unk> has benefited from pent up demand and favorable guest mix driving higher admissions per caps as well as from spending on products related to Star Wars, Galaxy's edge and Avengers campus.

Looking forward theme parks reservations at both of our domestic parks remain strong and we continue to utilize our yield management strategy to deliver the optimal guest experience and provide flexibility to our guests. During these dynamic times, all while driving economic.

<unk> margin for our shareholders.

Our consumer products improved results year over year, driven by growth at both our merchandise licensing and retail businesses.

Growth in merchandise licensing was primarily due to higher revenue from merchandise based on several of our key franchises, including Mickey and Minnie Star Wars, including demand Delorean.

Moving on to our media and entertainment distribution segment.

At linear networks operating results were lower at both our domestic and international channels.

At domestic channel, both cable and broadcasting operating income decreased in the third quarter versus the prior year.

The decrease in operating income at cable was due to higher programming and production costs and higher marketing costs, partially offset by higher advertising and affiliate revenue.

As we called out last quarter the increase in Q3 programming and production costs was due to the return of live sports at ESPN, driven by the MBA and major League baseball.

In the prior year quarter, a significant number of large sporting events were canceled or delayed due to COVID-19.

At broadcasting lower results from the ABC television network were only partially offset by growth at our owned television stations.

The decrease at ABC was largely due to higher programming and production costs, partially offset by higher advertising and affiliate revenue.

Domestic advertising revenue increased year over year at both cable and broadcasting driven by favorable comparisons versus the prior year due to COVID-19.

At cable the increase was driven by ESPN, where third quarter advertising revenue increased by $400 million versus the prior year, reflecting the return of live sporting events.

We're not going to provide a forecast for the quarter, but the underlying sports AD marketplace remains strong for us, particularly in a quarter in which the Olympics were held.

At broadcasting higher advertising results were primarily driven by increased rates and the timing of the Academy Awards, which benefited both the owned television stations and ABC.

Results at international channels declined due to higher programming and production costs, partially offset by higher advertising revenue.

Both of these factors were impacted by the return of live sporting events and in particular, the Indian Premier League, which held cricket matches from April nine until the season was postponed on May four versus no matches in the prior year quarter due to COVID-19.

Turning to direct to consumer Q3, operating income improved by over $300 million versus the prior year, driven by Hulu, partially offset by a higher loss at Disney plus.

The increase at Hulu was due to growth in subscription and advertising revenue, partially offset by higher programming costs related to Hulu live.

Hulu ended the third quarter with $42.8 million paid subscribers up from $41.6 million in Q2 inclusive of the Hulu live digital Mvpds service.

Paid subscribers to Hulu live decreased slightly to $3.7 million from $3.8 million at the end of Q2.

At Disney plus operating result decreased versus the prior year due to higher programming and production marketing and technology costs driven by the ongoing expansion of the service.

These higher costs were partially offset by increased.

Subscription revenue, reflecting subscriber growth and increases in retail pricing as well as premier access revenue for Cryolife.

Note that Disney plus Premier access revenue is included in our DTC operating results, but is excluded for the purposes of calculating our Peru.

As Bob mentioned earlier, we ended the third quarter with $116 million global paid subscribers to Disney plus up from approximately $104 million in the second quarter.

Disney Parks Hot Star accounted for the majority of our net subscriber additions between Q2 and Q3.

Making up a little less than 40% of our total Disney plus subscriber base as of the end of the third quarter. However.

However, subscriber growth was also solid at our core Disney plus markets, excluding Disney plus Hot star with total quarter over quarter net ads in those markets consistent net adds from Q2.

Disney Pluses overall <unk> this quarter was $4.16.

Excluding Disney plus hop Star It was $6.12.

Or an increase of about 50 versus the second quarter, reflecting a benefit from the recent price increases both domestically and abroad.

Disney plus <unk> also increased from Q2 to Q3 due to higher AD revenue per subscriber, reflecting the roughly four weeks of IPL matches that were played in Q3 versus none in Q2.

Content sales licensing and other operating income at <unk> decreased in the third quarter versus the prior year due to lower home entertainment and theatrical distribution results.

Ferrari in the prior year quarter, along with lower catalog sales.

The decrease in theatrical distribution results was primarily due to higher marketing expense for future releases and lower operating income from titles in release.

Looking ahead, there are a handful of items I would like to mention as you think about our fourth quarter.

As it relates to the 50 <unk> week recall that last year, we estimated a benefit of approximately $200 million to the company, which primarily impacted our linear networks.

Sensing.

We now expect our capital expenditures in fiscal 2021 to be approximately $200 million lower than our fiscal 2020 capex of $4 billion.

Due to lower spending at our domestic parks and resorts, partially offset by increased spending for facilities across the enterprise and technology for our DTC services.

Back to levels more consistent with a single a credit rating.

And with that I'll now turn the call back over to the level and we would be happy to take your questions.

Okay. Thanks, Christine and once again as we transition to the Q&A. Let me note that since we are not physically together. This afternoon I will do my best to moderate the Q&A by directing your questions to the appropriate executive.

With that we are ready for the first question.

Our first question comes from the line of Michael Nathanson of Moffett Nathanson. Your line is open.

Thanks, Laura I'll, let you.

I'll, let you choose the speakers, but sure the questions. One is I wanted to understand.

How the countries thinking about near term theatrical releases.

Given the steep falloff in secondary Fox rising that you also variant international market still an open so.

Why not delay or pause release schedules and then secondly on DTC profits I guess more Hulu profit it looks like continually theyre getting better than expected.

Okay. Michael Thank you for those questions I'll turn the first one over to Bob and then Christine can address the Hulu profitability question.

In an ecosystem, having a lot of partners they need to be able to plan their business too and so at some point, we have to put a stake in the ground and say.

And we value to follow where the consumer is going to go and while some of that's uncertain I think in terms of relative to where the rest of the market as you see that we've got more flexibility in terms of how we program and nothing's in stone because the marketplace is rapidly changing but at some point you've got to put a stake in the ground and say this.

We're going to do and that's where we ended up on Sean.

<unk> Frigo, which are next two titles.

Bob how much follow up why wouldn't you just add from your access given what you saw happen.

Successfully with black widow, so those two titles.

Okay. Good questions on <unk>. Obviously this is a title that we acquired under a different distribution assumption incentive agreements. So we don't have the degree of freedom to do that on free Guy Anshan Chi we think it's actually going to be an interesting experiment for us because it's Scott only.

A 45 day window for us so the prospect of being able to take a Marvel title to the service after going theatrical was 45 days will be yet another data point to inform our actions going forward on our titles, but once again I'll refer back to my previous answer when we.

Thanks.

I'll take your question on Hulu Michael.

Youre, absolutely correct truly exceeded our expectations and it was profitable this quarter. There's a couple of things going on here. One is it has had a continued to have subscriber growth and also very strong.

Advertising revenue.

The advertising is coming from higher sell through rates.

A lot of addressable advertising and a significant ramp up in the dynamic AD insertion technology that we have within Hulu live.

So those are things that are driving it and at the same time. If they are just like all of our other streaming services that are ramping up their production programming and also marketing expense to two.

To promote those new shows so we're very pleased with what's going on at Hulu, but we're not going to update our guidance yet because we are in the process of doing our.

Fiscal 'twenty two annual operating plan and if we feel that we have to update it. After we complete that we will certainly do it.

Thank you guys.

Hey, Michael Thanks for the questions. Operator next question. Please.

Our next question comes from Alexia <unk> of Jpmorgan. Your line is open.

My question's on the parks side, if I can I.

I guess the first one is we've seen really really much much improved results this quarter and moving forward I am curious if youre seeing any recent impact from the Delta Varian is the domestic or international parks, maybe cause for concern, particularly as you're increasing capacity and then just staying on the parks. Maybe you can elaborate on how we should view sort of longer term.

Profitability given the improvements you have to make in terms of automating many aspects of the parks during COVID-19 are while they were close.

But now maybe with heightened.

Heightened cleaning expenses, perhaps jang for awhile and other expenses related to COVID-19 staying for a while given how this.

Varian has continued to kind of make up its still very much part of our lifestyle.

Yeah, Alright, Alexia thanks for the question so Bob maybe.

Can you talk about <unk>.

So its impact on parks and you may want to talk about <unk> second question some of the deals.

Joining me Christine you probably want to follow up on the second part.

Okay in terms of impact of the Delta very we see strong demand for our parks continuing and the.

Primary noise that we're seeing right now are really around group a convention cancellations in other words.

Going forward I May also suggest as a bridge to the second question that we've implemented a reservation system, that's going to enable us to spread our demand increase our yield and improve our guest experience at the same time and in terms of the long lasting impacts that you mentioned.

I think some of the cost implications that we need to do for hygienic purposes are going to be relatively short lived and frankly in the Grand scheme of operating our parks not all that material, but what will be the long lasting impact is the improvements that we're making with guest personalization and guest choice therefore affecting the tremendous.

This yield benefits that we've been able to.

Extract over the last few quarters, and that's really going to grow in the future with our ability to really do world class yield management systems through our new reservation system.

Hi, Alexia and I'd add to that a couple of things one is <unk>.

We have seen very very strong per caps. In addition to all the yield management things Bob mentioned.

But the per caps in my comments I referred to them is exceptionally strong and I would not use that word were it not for the fact that they were exceptional last quarter I said that they were up.

Strong double digits.

And this quarter was even stronger.

If you look at when our park is closed for a long period of time as Disneyland was as Paris was when they reopen the per caps really showed up.

And we still have even though Walt Disney World has been open now for over a year, we're still seeing extremely strong per cap growth continue at that park. So in addition to all the technology things that we're implementing as Bob mentioned reservation systems. The dining apps, we're just seeing the consumer behavior.

Very favorable and the guest experience is something that we're going to be focused on especially as we continue to reopen.

Thank you.

Alexia Thanks for the questions today, operator next question. Please.

Our next question comes from Ben Swinburne of Morgan Stanley. Your question. Please.

Thank you good afternoon.

Couple of probably for Kristina Kristina I'm wondering if you could give us the hulu advertising growth.

In the quarter I think you've given to us in prior quarters and then also.

Just are you expecting.

IPL to come back.

September at this point and any update on the Latin American sports situation. Since that's part of your launch there and then if I can ask Bob Parks question, just on technology, you mentioned that Disney Jeanie.

How substantial of sort of an improvement or evolution in the guest experience.

Are you expecting to bring to market and in the my Magic plus is pretty it's been around for a while and I'm. Just wondering if you think theres a real transformation ahead for the business as you take advantage of the last year plus of downtime.

To reinvent the experience just maybe add some context would be helpful.

Okay. Ben Thank you. Thanks for the questions. Thank you Ben.

It will start with Bob if you want to talk a little bit about some of the technology at the parks and then we'll go to Christine talked about Hulu ad growth.

And watch it.

Okay, and then you use the correct word transformational my Magic plus was us basically sticking our toe in the pond of this type of transformational work Disney Genie, though is that program on steroids. This is going to revolutionize our guest experience guests are going to spend less time waiting.

And more time, having fun in our parks with a dramatically improved guest experience that's going to make their navigation of their day and their planning of their day much easier essentially what it's going to do is take the consumer preferences that we know from our consumers given what we know from them and Glen.

And that with.

Lead to substantial commercial opportunities for us as the guests navigates their days.

No.

It certainly qualifies in my mind for both materiality and transformational impact on our business from a yield standpoint.

Great.

Okay, then I'll try to go through your <unk>.

I can remember them, all so Hulu, who.

<unk> did have very strong advertising growth in the quarter and we continue to see that growth quarter. After quarter, we haven't specifically quantified it but I would say that it is driven by higher impressions as well as rate.

And as I mentioned, the ability for us to use of the dynamic AD insertion and Hulu live is also a benefit.

Think the advertising sales team if they had more inventory that could certainly solid there's that much demand for it.

Just to put some context around it because I think it's a precursor of.

What the upfront showed is that we had.

Came out of a very strong upfront, but we had about 40% of the total upfront dollars.

Streaming and digital and a lot of that is not only across Hulu, but also across our other entertainment and sports platforms. So I think that just shows that the kind of advertising that's going through Hulu is.

It's certainly a growth driver.

The IPL is coming back it's scheduled to come back on September 19.

And it will run through I believe the last final match is scheduled for mid October around October 15th.

It has a lot of original content library content in it from all of the Disney plus.

<unk> and IP and we added over 18000 of original local programming every year. So we feel really good about.

Yes.

Not only the IPL, but also star I'll hop Star plus.

In Latam, we will be.

Let him the launch for Latam is in later this quarter.

But I don't have any updates to anything new on the sports side.

Thank you.

Okay, Ben Thanks for the questions. Operator next question. Please our.

Our next question comes from Doug Mitchelson of Credit Suisse. Your line is open.

Thanks, so much.

Paul two questions. It's certainly nice to see the U S parks profitable in fiscal <unk> and I would note that operating expenses are back at 81% of 2019 fiscal <unk> levels, while revenues about 60% of 2019 levels and that seems consistent with.

Commentary that you made in the past that you have to ramp overhead in advance of consumers coming back to the parks. So my question is is the overhead now sort of re ramped at the parks can we look at this as the right overhead level from here.

Variable costs growing.

With consumers continuing to come back and Thats, how we should think about modeling the parks going forward and then the second area is just on stream and I Hope you can discuss the health of Disney plus how was engagement trended in the quarter, how has churn training in the quarter or what was the impact of star as you merged in with Disney plus and.

In Europe, and anything else you want to know what the health of Disney plus would be appreciate it. Thank you.

Hey, Doug. Thanks for the question Bob You May want to start on the streaming question and under John to make some comments on kind of parks cost ramp and then Christine you may want to jump in on that as well.

Okay in terms of the health of Disney plus we feel really great about our trajectory.

Mind, including Latin America, where we went up I mean by in Europe, sorry by two euros. When we added star brand as the sixth brand title. So our retention is very healthy across the globe. We're really really pleased with that and I think again, it really goes back to the price value that we're offering our guests when you take out.

So hi al.

The local quarters, where we're we're taking price increases I think says everything about it in terms of and I'll start this off Christine on the cost side.

And what we expect to see in terms of our parks profitability, but.

Our variable obviously as we scale, our business and we get up closer and closer to 100% capacity, our efficiencies and operating become much much higher so I think youll see disproportionate benefit as we go from Hereon Kristina I know if you want to elaborate.

Yes, I would just add that.

The demand and we're also being able to train thoroughly train our employees as they come back in.

I'm open so we're doing this in a measured fashion.

The health and safety of not only.

Our guests, but also our cast members in the parks.

Thank you so much.

Doug Thanks for the questions. Operator next question. Please.

Our next question comes from Jessica Reif Ehrlich of Bank of America. Your question. Please.

I'm wondering if Disney plus and one on film you mentioned that you're opening in Japan fully opening in Japan in October.

It's such a big country with huge affinity for everything Disney Parks are doing really well there and it's a very affluent countries.

Wondering if you could give us any color on market size and <unk>.

And then on film.

If you can just use undergone such massive change over the last few years.

Toward streaming, but obviously the pandemic has had a big impact.

Moving in that direction anyway.

With the jewelry add on like how much the box office will come back to.

Pre COVID-19 levels.

Do you think about the success of the film in today's environment, and how does that impact the way you attract talent the way you compensate talents and what changes do you expect to make.

And your film strategy from here.

Okay, Jessica Thanks, a lot.

Let me take the film question I, just want to make any comments on Japan.

You may want to jump in on that one as well.

Okay. Obviously this this world has been disrupted by Covid and were all reacting to a very fluid situation in terms of the marketplace.

We're very grateful for the fact that we have the ability to take out a lot of titles both not only in the theatrical marketplace for those that prefer to watch a film that way, but also at the same time through our Disney Premier access and that was a winning strategy for us to give consumers the choice for those that decided that going back to a theater.

It was not for them at the same time.

That said these films.

Jessica we're really conceived under a time when we did not know what was going to be happening with consumer behavior. Three four years later and certainly didn't know about COVID-19 at the time. So we're dealing under different sort of set of conditions and we thought what I will say is that just like we are.

Done many times before as the business has evolved and transformed.

We've figured out ways too.

Large they've gone very very smoothly. So we expect that that would be the case going forward. Certainly this is a time of anxiety in the marketplace has a lot has changed recently and again. These films that we're releasing right now where imagine under a completely different environment than unfortunately, the state has delivered us but we are.

We're trying to do the best thing for all our constituents and make sure that.

Everybody who is in the value chain, if you will feels like.

There.

Having their contractual commitments honored both from a distribution and a compensation standpoint.

What I'll say before I turn it over to Christine on Japan is that remember that heretofore as we've launched Disney plus around the world in Japan, we've done it with a fairly limited distribution system and that's about to change going forward, but at the same time that market is under as they call. It a state of emerge.

And we'll see how that goes but we have been very.

Cautiously optimistic as we always are but.

But we believe that that IP is going to resonate.

We don't as you know break out our approved by individual markets. So we'll just be.

Giving you the Disney plus ARPA is the way we currently are doing it.

Thank you.

Okay. Jessica. Thanks, Operator next question. Please next question comes from Jason Bazinet of Citi. Your line is open.

So I think your digital pivot is incredible impressive.

But I want to ask a question that will come across.

Bearish and it's probably not it's an honest question.

I think in the salad days of pay TV, maybe we had I don't know, 75%, 80% PTC penetration and people who are paying U S households.

70, Bucks, a month or something and.

And the most mature asphalt platform out there, it's probably at 50% penetration with our tools that are sort of one shift of pay TV, <unk> and not really growing and.

I just wonder if you guys have any thoughts on what that means for the broader sort of digital pivot and are there things with the.

So Bob do you want to bet. Thanks, Jason for the question by the way.

Jason I like to think of it like we are in the first inning of the first game of a very long season, we have not even been at this right now as Disney at least.

For two full years.

Despite that two full years as you suggested we've gone into 61 countries and in 21 months. So we're very proud of that we're proud of the success that we've had I would caution not to come to any conclusions about the size of the market. We've got a tam of $1.1 billion households.

Cross the globe and we've only just begun.

Our journey and as I think you see what's really going to make the difference for Disney.

And I understand the benchmark that youre using but I think this is a different marketplace and I think.

We're charging forward.

To maximize the opportunity given our unique combinations of not only distribution platforms, but intellectual property and storytelling.

Thank you.

Jason Thanks for the question Operator next question please.

Next question comes from Brett Feldman of Goldman Sachs. Please go ahead.

Yes, Thanks <unk>.

Earlier, Bob you were talking about the power of the Disney bundle and in the U S. You've really taken a bunzl centric approach to the market I was hoping you could give us some insight into that power whatever you can share to help us understand why the bundle. So successful either the portion of your subs Disney plus subs that are in the bundle or the portion of the gross adds.

Engagement.

Alright, Thanks for the question questions I will turn it over to Bob.

Okay in terms of the.

Bundle do you see that the majority are not maybe not the majority, but a good chunk of our marketing now is going towards a bundle and that's because the while we enjoy extremely low churn rates on our individual services the churn rates on the bundle or even lower.

Surprisingly low even for us and I think what that says is that our our customers enjoy the price value.

Current business models for two reasons number one unique situation that we find ourselves in each market, whether it's Europe, or Latam or Asia or North America tend to be different in terms of what rights, we have and what the consumers are actually looking for but.

Also is gives us an opportunity to test out different propositions, obviously the proposition that we have in Europe with star is a sixth brand tile look significantly different than our relatively unbundle approach that we have in North America again, we are in the first inning of the first game over the long season, and we're taking all.

This into account there may also be certain constraints that were under that could at least from a short term standpoint limit our ability to do what long term, we might deal with ideal, but frankly, we don't know what's ideal yet.

I will say that we're extremely pleased in every market that we've launched our direct to consumer services, we have exceeded our expectations in every marketplace. So in terms of the way that we've approached the market. So far it's worked out really really well is there an opportunity for improvement by considering something different going forward, possibly.

But we're going to continue to learn and as we learn I'm sure we will refine our offerings in the marketplace.

As time goes on.

Thank you.

Okay. Thanks for the questions operator, given the time I think we will take our final question.

Sir our final question comes from John Hodulik of UBS. Your line is open.

Great. Thank you guys.

Maybe.

The 2024 guide I think included 30% of subs coming from hot start and given the strength in <unk> does that guidance still hold and then.

Given the content release schedule that we have in the second half of the year do you expect the net add trends in what I'd call the core Disney plus.

Markets to improve in the back half and then lastly, just anything you could tell us on the Disney plus day in November in terms of.

How you expect to promote is it global or U S or just or any new content.

That could be launched that anything you could tell us on that would be great. Thanks, okay. Thanks.

Thanks, John for the question, Bob Why don't you start on Disney plus days and Christine.

It's been about.

Hop Star Guide et cetera.

Okay, Disney plus day will be a balanced approach between global and local product.

We're going to have a real exciting lineup as you might guess as we approach those consumers have not yet signed up for Disney plus with a really attractive group.

A group of titles to be announced.

But I think it gives us an opportunity to provide a focal point.

For consumers that have not yet tripped over.

To Disney plus and I think it's going to give us a focal point of all.

The excitement and energy that will not only pay benefits in the U S, but globally as well.

In terms of the net add question and how thats going to improve first half versus second half.

Again, we feel really great about our trajectory.

As we learned though we're finding out theres tremendous seasonality in this business that we may not have known about before we really got into it at least in terms of.

Above expectations also I want to caveat that.

Our sub adds arent necessarily going to be linear I think a lot of the marketplace expects these seems to sort of be straight line math and it's not really turning out that way and as we've indicated before we do believe our first half adds this fiscal year will be stronger than the second half ads that said, we're really feel great about our trajectory pristine want to take it from there.

Sure and I would just add one thing on the Disney plus core markets.

In this third quarter.

When you exclude Disney plus hot start we saw solid sub growth.

Quarter over quarter net adds consistent with what we saw in the previous quarter. So we feel really good about the continued growth in our.

Our core markets and on Hot Star.

At Investor Day, we said that we anticipated hot started to be between 30% and 40% of total Disney plus and we're not updating that guidance at this point.

Okay. Thank you.

Okay. Thanks for the question and I want to thank everyone for joining us today.

Note that a reconciliation of non-GAAP measures that were referred to on this calls with equivalent GAAP measures can be found on our Investor Relations website.

Quarterly reports on Form 10-Q, and in our other filings with the Securities and Exchange Commission really want to thank everyone for joining US today hope you have a good rest of the debt.

This concludes today's conference call. Thank you for participating you may now disconnect.

Q3 2021 Walt Disney Co Earnings Call

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