Q2 2022 Walt Disney Co Earnings Call

May 11, 2022

Joining me for today's call are Bob Chapek, Disney's Chief Executive Officer, and Christine Mccarthy Senior Executive Vice President and Chief Financial Officer.

Following comments from Bob and Christine we will be happy to take some of your questions.

So with that let me turn the call over to Bob to get started.

Thanks, Alexia and good afternoon, everyone.

In Q2, Disney's employees and cast members continue to execute against our strategic priorities of storytelling excellence innovation and audience focus and I could not be more proud of what they've achieved.

Our strong results this quarter, including fantastic performance at our domestic parks and continued.

<unk> growth at our streaming services.

Along with the creative achievements of our content teams. Once again proved that we are in a league of our own.

We have entertainment's most iconic brands and the world's favorite franchises are high quality creative pipeline that will continue to drive engagement and consumption and an unrivaled synergy machine with touch points that reach audiences across distribution channels geographies and demographics.

Which come together to create a deep emotional connection with audiences across generations.

I'd like to share a few highlights from the quarter that illustrate these strengths as a Christine will go through the details of our results.

As I said, our domestic parks were a standout they continue to fire on all cylinders powered by strong demand coupled with customized and personalized guest experience enhancements. There grew per capita spending by more than 40% versus 2019.

Response to next generation storytelling like Star Wars, Galactic Star cruiser has been phenomenal in fact guest ratings for this immersive experience, which opened March 1st are incredibly high and in line with our best in class offerings demand is strong and we expect 100 per.

<unk> utilization through the end of Q3.

Looking ahead, we could not be more excited to officially welcome writers on Guardians of the Galaxy Cosmic rewind.

On May 27.

One of the longest indoor roller coasters in the world the attraction puts guests in the middle of an exciting adventure as they're called on to help the Guardian's out of a jam with our first ever reverse launch and rotating cars that turn writers 360 degrees guests won't Miss a second of the story during our most immersive.

Mr experience yet.

At Disneyland Paris, we are thrilled to take the next step in our.

Our ambitious expansion plan the opening of Avengers campus. This summer as part of the resorts 30th anniversary celebration.

As Europe recovers from the pandemic, we've seen strong yield growth at Disneyland, Paris, and look forward to its continued recovery.

Another standout this quarter, where our streaming services. We ended Q2 with more than 205 million total subscriptions after adding $9 2 million in the quarter that includes $7 9 million Disney plus subscribers keeping us on track to reach 230.

$30 million to $260 million Disney plus subscribers by fiscal 'twenty for the.

The growth of the platform since its launch reinforces its unique nature quite simply we believe Disney plus is one of a kind of service based on exceptional branded content with wide appeal across all four quadrants. It certainly popular with families, but as a reminder, almost half.

Of Disney plus subscribers are adults without kits.

In recognition of Disney pluses unique ability to attract viewers from a range of demographic groups. We are selectively enhancing Disney plus with general Entertainment titles designed to drive sign ups amongst specific audiences and deepen engagement amongst those cohorts are.

A benefit of our incredible creative engines and decades of General Entertainment Excellence is that we can reach these demographics not only through the creation of original titles, but also by shifting resources from across our content ecosystem, especially as consumer behavior continues to evolve.

Our strategy is not just to fill our distribution pipelines, but to be thoughtful with each asset to best position it amongst our various distribution options.

For instance, dancing with the stars is a beloved show that has entertained viewers for more than 30 seasons on ABC and is a wonderful example of content that brings the whole family together.

We recently announced Disney plus will be the series New home starting this fall.

Beyond targeting specific demos, we are equally enthusiastic about our growth potential in international markets.

We currently have over 500 local original titles in various stages of development and production 180 of those titles are slated to premiere this fiscal year, increasing to over 300 international originals per year in steady state.

We believe these premium local originals, along with branded content with broad International appeal will attract new subscribers and drive engagement. One example in production is nautilus.

From our EMEA team based on 20000 lease under the Sea Nautilus is the origin story of the iconic submarine from the perspective of its mysterious commander Captain Nemo.

This is just one example of how our global network of creative hubs can develop and produce original content with worldwide appeal.

And by the end of Q3, we plan to rollout Disney plus the 53, new markets across Europe Africa, and West Asia.

Starting with South Africa next week.

Leaving Disney plus I want to mention our recently announced plans to introduce an AD supported subscription offering in the U S. By the end of the calendar year and internationally in 2023 expanding.

Expanding Disney plus access through multiple price points is a win for consumers and advertisers.

Of course, all of our success is rooted in great content.

Our general Entertainment team continued its string of phenomenal series with Hulu, Pam and Tommy and the dropout and while not in the quarter, we could not be happier with the performance of the kardashians more great General Entertainment content is ahead like the second season of only Mers and the building on Hulu and the <unk>.

Breaking 19 season, Abc's Grey's anatomy.

This quarter our studios earned six Academy awards, including Best animated feature for Walt Disney Animation Studios and console and best documentary feature for Onyx collective and Searchlight Pictures summer of soul.

Pixar Animation studios, turning Red premiered on March 11th on Disney plus and became the fastest title to reach 200 million hours viewed on our platform.

The Disney plus original series Star Wars, the book of Boba Fett.

Through positive reaction from audiences and Marvel's Moonlight continue the studios impressive track record looking.

Looking ahead, our studios will continue to deliver high quality content at scale with an exciting array of series and films coming to all of our distribution channels in fact, our slate for the remainder of this year is incredibly strong.

With titles like Obi Wan Kenobi.

Mrs Marvel.

Light year.

Our 11 Thunder.

Black Panther will conduct forever and the long anticipated avatar the way of water.

Finally, I must mention the phenomenal success of Marvel's Doctor Strange and their multi verse of madness, which opened to roughly $450 million worldwide. This past weekend domestically. It was the second highest opening of the pandemic era and the 11th highest opening of all time.

Our strategy of distribution flexibility has worked well for us and these fantastic results are another sign of our ability to succeed no matter the platform.

That success extends to sports.

<unk> viewership was notably strong for the quarter across both live events and studio programming with ratings up double digits and we remain encouraged by how fans are engaging with sports content coming out of the pandemic.

Opening weekend of the NBA playoffs was the most viewed in the past decade, and the ratings have been fantastic with over $4 3 million average viewers through 'twenty games on ABC and ESPN are.

Our groundbreaking NHL deal is unique and its exposure across ESPN, ESPN, plus ABC and Hulu, culminating with the Stanley Cup playoffs, which began on may 2nd.

In fact, the combination of the NHL and NBA playoffs going on simultaneously kicks off an exciting stretch of championship programming that also includes Wimbledon the NC double a women's and men's college World series.

UFC boxing and more.

Coming off the success of Monday night football with patent and Eli We recently debuted our new season long MLP alternative broadcast.

Hey, Rod cast with Michael Kay and Alex Rodriguez and.

And we began the inaugural season of <unk>.

CGA tour live on ESPN, plus featuring over 4000 hours of live golf coverage from 35 tournaments.

Before I hand, it over Kristina I want to say a few words about our unique synergy machine or franchise flywheel, if you prefer.

What sets Disney apart is our ability to reach people with our uniquely engaging content across an array of touch points to make our portfolio of businesses and brands are bigger part of their lives.

This enables us to not only create new franchises like in console.

But to also build on existing IP across our lines of business.

One example of this is our toy story franchise, which was created almost three decades ago with the release of the first film in 1995, and which is now brought to life across distribution platforms geographies businesses and time.

At our parks, we've built a portfolio of four immersive toy story lands with more than 20 attractions and life character interactions available around the world as well as two themed hotels. The franchise is the cornerstone of Disney plus with all four feature length films as well as the.

Original short series four key ask the question.

Lucidly available on the service.

In nearly 30 years. After the film debuted toy story is still a key consumer products franchise generating over a $1 billion in annual retail sales.

And in just a few weeks pick centers light year will tell the origin story of everyone's favorite space Ranger when it hits theaters on June 17th.

Of course toy story is just one of our many franchises, but it illustrates our unparallel ability to bring stories to life in more ways for more people in more places.

In fact, our franchise library and capabilities will continue to set us apart even further as we bring our IP to life through next generation storytelling that is more integrated and connected across consumer touch points.

As we look to our second century, that's our mission to transform entertainment by combining extraordinary storytelling with innovative technology to create an even larger more connected and magical Disney universe for families and fans around the world.

With that I'll hand, it over to Christine.

Thanks, Bob and good afternoon, everyone excluding.

Excluding certain items diluted earnings per share for the fiscal second quarter were $1 eight.

An increase of 29 versus the prior year quarter.

We continue to be pleased with our financial results with total segment operating income increasing by 50% versus the prior year quarter.

And by over 80% year to date.

Our parks experiences and products segment continued to show strong signs of growth and recovery as operating income increased by nearly $2 2 billion.

Year over year to approximately $1 8 billion.

Growth was primarily driven by our domestic parks, which are open for the entire quarter and.

In the prior year, Walt Disney World was open, but Disney land was closed for the entire quarter.

We continue to be pleased with the overall demand and attendance trends at our domestic parks. In fact, there were many days in the quarter, where we saw a demand exceed 2019 levels. However, we are continuing to control attendance through our reservation system with an eye on delivering a quality guest experience.

As Bob mentioned earlier per capita guest spending at our domestic parks increased by over 40% versus Q2 of fiscal 2019 and by 20% versus Q2 of fiscal 2021 with increases across the board on admissions food and beverage and merchandise.

Looking ahead to the third quarter, our forward looking demand pipeline at both Walt Disney World and Disneyland remains robust and while attendance from international visitation is still in the early days of recovery, we are beginning to see some improvements.

We're also thrilled that as of the end of March all of our domestic resorts are now open a major milestone as we continue to move through the impacts of the pandemic.

At our international Parks operating results improved versus the prior year due to growth at Disneyland, Paris, which was opened in Q2 and closed during the prior year quarter.

This was partially offset by lower results at Hong Kong, Disneyland and Shanghai Disney both of which were impacted by Covid related closures in the quarter.

Consumer products operating income increased in the quarter, reflecting higher sales of merchandise based on several of our iconic franchises, including Mickey and Minnie Spiderman Star Wars and Disney Princess.

Moving on to the media and entertainment distribution segment second quarter operating income decreased by approximately $900 million.

Versus the prior year as revenue growth of about $1 2 billion, primarily driven by direct to consumer was more than offset by higher expenses, including programming and production expenses at linear networks and direct to consumer which came roughly in line with the guidance we gave last quarter.

At our linear networks business operating income in the quarter was $2 8 billion or roughly flat versus the prior year as modest growth at our domestic channels was offset by a decline at our international channels.

Domestically higher operating income at broadcasting was partially offset by lower results at cable.

Broadcasting results benefited year over year from affiliate revenue growth. In addition to higher advertising revenue due to the timing of the Academy Awards, which aired in Q2 this year versus Q3 last year. These.

These impacts were partially offset by higher programming and production costs also driven by the timing of the Academy Awards.

At cable lower operating income versus the prior year was primarily due to an increase in programming and production costs.

The largest component of the increased costs was driven by four additional NFL games versus the prior year, consisting of three regular season games as well as the return of the <unk>.

These impacts were partially offset by growth in cable advertising and affiliate revenue.

Advertising revenue at ESPN increased by over 30% in the quarter and third quarter to date domestic cash advertising sales at ESPN are currently pacing up significantly benefiting from a return to a pre COVID-19 NBA schedule that is driving increased viewership and pricing.

Total domestic affiliate revenue increased by 5% in the quarter.

This was primarily driven by seven points of growth from higher rates, partially offset by a three point decline due to a decrease in subscribers.

Operating income at our international channels decreased versus the prior year, driven by lower affiliate revenue and an increase in programming and production costs, partially offset by advertising revenue growth.

At direct to consumer operating losses widened to almost $900 million due to higher losses at Disney plus and ESPN, plus and lower operating income at Hulu.

The higher losses at our DTC services were largely driven by higher programming and production expenses in line with what we noted in our guidance last quarter.

At Disney plus programming and production costs grew along with marketing and technology costs to support our growth around the world.

Partially offset by higher subscription revenue.

We ended the quarter with nearly $138 million global paid Disney plus subscribers, reflecting close to 8 million net additions from Q1.

A little over half of those net adds were from Disney plus Hot Star, which benefited from the start of the new IPL season towards the end of the second quarter.

Internationally, excluding Disney plus Hot Star, we added over 2 million paid subscribers versus the first quarter with Latin America being the strongest contributor driven by growth of the combo plus offering.

Domestically net adds of approximately $1 5 million reflect in part the success of Tentpole content releases, including turning Red and Moon night, as well as the strength of our bundled and multi product offerings.

ESPN plus ended Q2 with $22 3 million paid subscribers, a net increase of about $1 million versus Q1.

Operating results decreased compared to the prior year due to higher sports programming costs and lower pay per view income, partially offset by subscription revenue growth.

And at Hulu, which ended the second quarter with $45 6 million paid subscribers.

Higher subscription and advertising revenues versus the prior year were more than offset by higher programming and production marketing and technology costs.

Moving on to content sales licensing and other results decreased by approximately $300 million versus the prior year driven by lower television spot result, which we discussed in our guidance last quarter. In addition to a decrease in home entertainment results.

As a reminder, these impacts are deliberately aligned with our strategic decision to utilize our content on our own direct to consumer services.

Before I touch on a few things that we'd like you to keep in mind for the back half of the fiscal year I'll quickly note two other relevant items for the second quarter, we recognized a revenue reversal of $1 billion related to the early termination of content licensing agreements with a customer and.

In order to make that content available on our own direct to consumer services.

Substantially all of the consideration we received was recognized as revenue at the time that content was originally made available in previous years, we've recorded amount to terminate the agreement net of remaining amounts of deferred revenue as a revenue reversal.

Finally, a note on the impact of some tax related items on our Q2 EPS.

Our diluted earnings per share, excluding certain items of $1 eight.

Includes an adverse impact of approximately 11 cents due.

Due to the impact of higher effective tax rate on foreign earnings, including the impact of a recent change in U S tax regulations.

It's worth mentioning that while our annual effective tax rate has generally been correlated with the U S. Statutory rate. There are many complex puts and takes in any given period, which can lead to these variances quarter to quarter and we currently expect the full year tax rate could remain somewhat elevated above.

Of the U S statutory rate.

Now as it relates to the third quarter and the second half of fiscal 2022 at Deepak closures at our Asia theme parks could adversely impact operating income in the third quarter by up to approximately $350 million versus the prior year as a reminder, Hong Kong Disneyland.

Lam was closed for the first three weeks of the quarter Shanghai Disney has been closed quarter to date, and we do not yet have visibility to a reopening date.

As we continue to strategically prioritize leveraging our content for our own services, we expect content sales licensing and other operating results to decrease in the third quarter by approximately $150 million to $200 million versus the prior year.

The expected decrease is primarily driven by declines in content licensing along with a continued decline in home entertainment results.

Direct to consumer programming and production costs in Q3 are expected to increase by more than $900 million year over year, reflecting higher original content expense at Disney plus and Hulu.

Increased sports rights costs and higher programming fees at Hulu live.

At Disney plus while we still expect higher net adds in the second half of the year versus the first half it's worth mentioning that we did have a stronger than expected first half of the year.

Additionally, note that some of the eastern European markets, we're launching in towards the end of Q3, including Poland or in regions being impacted by geopolitical factors.

As it relates to content spend we previously stated that we expect fiscal year 2022 cash content spend to total as much as $33 billion.

We've adjusted that amount to as much as $32 billion to.

<unk>, a slightly slower cadence of spending than anticipated during the first half of the year.

Note that we are still expecting a strong content slate in the back half of the year and as Bob mentioned, we are confident in our long term subscriber guidance of 230 to 216 million Disney plus subs by fiscal 2024, we also still expect that.

<unk> plus will achieve profitability in fiscal 2024.

And with that I'll turn it back to Alexia and we would be happy to take your questions.

Okay.

Thank you Christine we're happy to be back here in person. So this cost that can make it easier I will help direct the questions.

Ask that you. Please limit yourselves to one question in order to help us get to as many analysts as possible today and with that operator, we're ready for the first question.

Thank you. Your first question is from Brett Feldman with Goldman Sachs. Please go ahead.

Yes. Thank you for taking the question and Bob touched on pricing to some degree during his comments. So I thought we could come back to that one of the questions. We've been getting is how do you think about the right cadence for revisiting pricing on Disney to Australia. When you can take price higher it just seems like Theres a lot of factors that would go into that including the fact that will be launching a new ads.

Each year Youre, putting a lot more content onto the service youre seeing some increased competition and obviously there is some inflationary pressures and I'm just not quite sure. If you put all of that to apart what that yields in terms of how youre thinking about pricing. Thanks.

Alright, thank you.

As you know, we launched with an extremely attractive opening price point on Disney plus and we've been very comfortable with the price value relationship that we've offered.

And as you know as we increase our content investment we believe that that's going to give us the ability to adjust our price.

Still at the same time maintaining that strong.

<unk> <unk>.

Proposition.

You mentioned that Disney plus add tier.

I think this is going to give us the ability to reach an even more broad audience as we expand Disney plus across multiple price points and using some of our other services. We can see the additive nature of an AD driven service that enables us to keep the price lower of course, that's made up for by the.

Additional revenue that we would get per user on the advertising spending. So we believe that we can sort of move up and Cascade up our net price over time, given the tremendous value that we started with and the increased price value relationship all of all the new content, but we're pretty bullish about that thank you.

Operator next question.

Next question from Ben Swinburne with Morgan Stanley . Please go ahead.

Thanks, Good afternoon.

A question and if I can't Alexia, just a clarification from the prepared remarks.

On parks as you know youll start to lap some really strong significant double digit per capita growth as you move through the rest of the summer and into the fall and I'm, just wondering particularly given how focus everybody is on the economy and inflation the consumer if youre seeing any signs that would suggest that youre going to see substantial.

Celebration or even maybe not grow your per capita growth at the domestic parks.

Just be curious on how youre thinking about the full year and as you lap. These comparisons and then I just wanted to come back Christine on the second half net ads.

Are you still expecting a stronger second half at Disney plus then the first half and you're just calling out that maybe the relative comparison won't be as pronounced just wanted to make sure I understood. What you were we understood. What you were saying thank you.

Bob why don't you take the first half that interesting.

So we continue to see really strong demand and we are encouraged by the trends that we're seeing.

Particularly as we going to get we're going to get some improvements to international visitation, but.

We're controlling our tenderness as Christine mentioned in her comments using a reservation system to optimize the guest experience, but that domestic yield strategy and we're also seeing it in Paris is really exceeding our expectations. If you remember last quarter. We mentioned that we had some high hopes for it but we were seeing well above what we had anti.

<unk>, while I'm happy to say that in Q2 or even as you say, we're lapping those numbers again, even higher so we're very very encouraged by the continuation of the trends that we're seeing in terms of the number of people for example that sign up for Gd plus plus the willingness to come to our parks with our.

Balanced reservation system, which really helps us sort of manage our price per day. If you will so that domestic yield strategy is really structurally allowed us to increase that per capita spending meaningfully without having to rely solely on raising ticket prices and we don't see any end in sight for that.

Great.

Then your question on net adds for the second half of the year.

Still do expect an increase over the first half.

However, the first half came in.

Better than expected so that delta that we had initially anticipated and may not be as large, but we still do expect an increase in the second half to exceed the first half.

Thank you both.

Operator next question.

Michael Nathanson with Moffett Nathanson. Please go ahead.

Thank you I have two.

First one Bob it seems that you have.

Every market is now focused on kind of the cost to achieve subscriber growth.

And maybe not just focus on sub numbers as much as the cost to achieve so I wonder.

With you given the rising content costs, you are seeing in things like sports.

Competition around the globe, how do you measure maybe the need to drive shareholder returns.

We are attaining those sub targets that were laid out in 2020, and how do you and how and when will you determined what the ROIC would be maybe the next 100 million subs versus the first one and then Christa.

Can you talk a bit about any type of incremental margins.

Parks very strong so far halfway through the year.

<unk>.

Inflation implementation on the parks I can let me maybe the margin growth we've seen.

At this point so thanks.

So as you know we're very.

Carefully watching our content growth.

Content cost growth.

And we've reaffirmed as you heard earlier our targets.

<unk>, both subs and on profitability. So we think they've moved together, it's obviously a balancing act, but we believe that great content is going to drive our subs and those subs then in scale will drive our profitability. So we don't see them as necessarily counter we see them as such.

Consistent with the overall approach that we've laid out.

We're extremely happy with the content that we've got.

Both across the general Entertainment option, which frankly is.

You heard that 50% of our subs are families with kids and so at the same time that relative content expenditure is a little cheaper than our typical franchise expenditure on a per program basis. So even though we're adding a lot of content both in local international markets and as well in the General Entertainment.

<unk> area it doesn't come at the per title level. If you will that we've been seeing sort of to date on our general franchise films that said, we are balancing all three and we're very confident that going forward, we're going to hit both of those sub guidance and profitability guidance.

By bringing in the cost at a reasonable level relative to their ability to attract and retain our subs.

Hi, Michael.

The parks margins as Bob said, we feel really good about the.

The consumer demand and what we're seeing in the forward looking bookings and everything else in the.

Attendance levels so.

So we feel good about that portion of margins. The one that is a more challenging is what we faced with inflation.

But we do play pay close attention to all the recent inflationary pressures and it covers everything from merchandise too.

Food and beverage I'll give you an example of something for those we are actually always looking at.

At mitigating impacts of rising costs, but I'll give you a good a good example of one that we.

We are executing on and that is the increased cost and fuel we have a very robust fuel hedging program at Walt Disney World and that reduces risk and minimizes volatility.

This volatility in the cost of.

Fuel and so that while we suspended that program, while the parks were shut.

We have re opened that program and we are doing what we tend to minimize the impact.

On that particular cost we do have the labor impacts rising wages is something that everybody is dealing with and a tighter labor market on the supply chain, our business isn't immune to the global supply chain challenges.

And to the extent, we experienced any product availability impacts given strong demand that we're seeing we're working with our suppliers.

Two suppliers too.

To diversify some of our suppliers and we're also working with shippers to expedite the time to receive those three shipping but right now it's very difficult to accurately forecast the potential financial impact due to the fluidity of the situation but.

Ken.

Trust that we are fully aware of it and we're working hard to mitigate any pressure on the margins.

Operator next question.

So Jessica Reif Ehrlich with Bank of America. Please go ahead. Thank you.

I have one quick question Multipart can you get upfront coming next week can you give us any color on how youre thinking about.

What this does this year's upfront will be like given changes in measurement multiple platforms that youre selling across.

And of course the economy.

And staying with the <unk>.

<unk>.

Given your kind of the upcoming rollout of the.

Avon platform for Disney plus you already have Hulu ad inventory.

And now you are adding Disney plus do you think this will grow the pie overall for Disney advertising dollars or will this ultimately just drive share shifts from traditional broadcast linear.

Is it incremental or not how are you thinking about that and how much do you think that having an AD supported service will increase overall Tam for subscribers.

Okay, let's see I'm going to take the first part first.

Expecting a very positive reaction from advertisers overall and as you suggest this is a combination of our excitement around the Disney plus add tier they have been asking for this for years.

And we also expect Hulu as you know, which has been very strong for us at the same time to be a key contributor of our performance at the Upfronts. This year. The other thing is that sports are going to continue to be in high demand.

And so with the advertisers we focused on the rights deals that we've made over the past few years as well as a robust slate of original content shows.

And studio shows and original content games.

In terms of sort of the growing the pie.

We believe that the value proposition of advertising with Disney plus is only enhanced with our addition of an AD supported tier.

<unk> on Disney plus so we believe it's good for the consumer because it is going to give us another entry price point.

But it's also going to be great for the advertisers.

Our advertisers increasingly are looking for multiple platforms.

To reached a broader reach and we think that as a company we're going to provide that given our portfolio of streaming and our linear networks. So I think we are creating more avenues, both for consumer choice and for our comprehensive advertising solutions for our advertising customers at the same time.

Operator next question.

From Stephens go Hall with Wells Fargo. Please go ahead.

Thanks.

Just to maybe first Bob what's holding you back from making ESPN plus a fully Ala Carte sports network.

Disney Historically has always been more aggressive in the pivot to streaming than some of the peers. We've already seen some of the peers put a lot of their key sports like the NFL on to streaming.

You talked a lot about how much the bundle is working with Disney plus and Hulu. So just really wondering how youre thinking about.

All the content you have got on ESPN, plus and what it would take to make that fully Ala Carte and drive the DTC strategy, even harder and then Kristina asked this before.

Just going to try again of the $32 billion in content spend.

Helping sizing maybe how much of that is either general entertainment or local content. Thanks very much.

Okay. So as you know on all of our linear networks, there's huge cash generators for us so to some extent.

We're doing a really good job of chopping down some of the debt that we've had to accumulate due to either acquisition or through the Covid challenge and so.

A hesitancy to move too fast away from those as really a cash flow situation that I think puts our company in a healthier healthier overall situation at the same time, we're very conscious of our ability.

To go more aggressively into the DTC area.

SPN and so what we're doing is sort of putting one foot on the dock if you will and one foot on the boat right now, but we know that at some point when it's going to be good for our shareholders will be able to fully go into an ESPN DTC offering the way that you described.

And we fully believe that there is a business model there for us that's going to enable us to regain growth on ESPN plus.

Full DTC expression.

But at that point, obviously that will have ramifications on immediate cash flow that we get from our legacy linear networks.

Okay Steve.

To answer your question on that $32 billion of content spend and where it's going.

Remember back when we talked about that initially we talked about it being about one third in sports that still remains and when you think about the.

The balance of that 32 billion a meaningful amount of it will be enterprise wide content budget that will be dedicated into investments into the general entertainment content that we can leverage across all of our various distribution platforms.

When we say that we mean linear theatrical as well as direct to consumer.

And as I mentioned earlier, our world class creative teams are focused on creating content that will drive subscriber growth in targeted segments and deeper engagement across the platform.

This includes leveraging our existing intellectual property also we're intent on creating new franchises you saw that in <unk>.

And investing in general Entertainment local language content and sports rights.

Even though you didn't ask about local language content I don't want to give you some perspective, because we havent provided this previously but as Bob mentioned, we have about 500 shows in the pipeline for local content outside.

The U S are English speaking.

When you look at that 500, I'll give you some broad breakdown.

In the Asia Pacific Region region, including Southeast Asia at that 500 140 is in that region.

EMEA, it's 150 in India, It's 100 and in Latin America. It's 200, so we haven't given that before but I think that also kind of breaks it up in the various regions that we're in outside of the U S.

Sure.

Great. Thank you your next question.

Next question's from Canon Bank catastrophe with Barclays. Please go ahead.

Thank you.

A couple if I could.

Bob first I guess, when we think about.

The streaming goal.

If we are really looking at.

240 million subs.

Point.

With the new AD supported streaming service.

What proportion of the base do you expect.

We'll be on that theater versus normal premium tier, especially given the fact that now you may have to do more than 50 million subs a year to get to that goal.

Given the timeline before this year.

So that would be the first one and secondly.

I don't think Disney being able to deliver a movie in China since 2019.

You could just help us understand.

What are the roadblocks that are in.

When we could see some change.

In that process.

Okay, I'm going to start with China, I'm going to start with China and.

The situation there has been very fluid and as you probably guess very complicated both from a business standpoint and from a political standpoint, but as you know we've got a long track record of success and a strong fan base for our brands and franchises in this market and our most recent releases where death on the Nile and in content.

And we will continue to submit our films for release and it's not worth noting I think so.

At the time that we're having some difficulty in getting our films in China that Doctor Strange did extraordinary we've just crossed $500 million.

In less than a week without this market. So we're pretty confident that even without China. If it were to be that we continue to have difficulties in getting titles in there that it doesn't really preclude our success.

The relatively lower.

Take rate that we get on the box office in China than we do across the rest of the world.

Christine do you want to talk about share.

On streaming.

Right now we have not disclosed our mix our expected mix of an AD supported tier.

So we don't have any additional details on that product and that includes pricing as well, but when we expand Disney plus across multiple price points with this new Disney plus add tier we are able to reach an even broader audience and will create more avenues for consumer choice and this is a consistent theme that you've.

Heard from us having the the consumer be our north star.

We will continue to evaluate what makes sense for the service our brand and our core principle of providing consumers with the maximum flexibility and choice. So we expect the advertising revenue, we earned will contribute as well.

<unk> contributed positively to our ARPA as we look to achieve our long term profitability goal.

Operator next thank you Mike.

Question from Philip Cusick with Jpmorgan. Please go ahead.

A couple of follow ups, if I can thank you.

On parks can you talk about where the parks are in use part time.

As well as the potential for upside or not on those domestic attendance numbers.

Yes.

And then Bob if I can go back to your comment on ESPN. During all online someday I think most of us expect us to happen eventually.

That'll be a huge change in the P&L at both DTC and linear.

When that happens does the overall profitability of the company to take the hit for a year or two.

And how does the long term.

Yeah.

Sports on ESPN, plus model work and what's the structure of that and versus what we've seen in the past of our purely linear model. Thanks very much.

Christine do you want to start with the first question and then I'll share on our parks business. We're obviously extremely pleased with our domestic parks operations and how they have come back so robustly.

But on domestic attendance.

We could but we're choosing to limit attendance using our reservation system and once again that goes back to us trying to balance demand and attendance throughout.

Throughout the year not have days when consumers in the parks aren't enjoying the experience. So attendance is something that we're controlling but we're doing it to have a better consumer experience and some of the things that we've brought back we will continue to expand with additional capacity.

Some capacity that we just brought back in April where things like the character meet and greet at our domestic parks and we also brought back.

In April our nighttime spectacular.

At the Disneyland resort and we'll also be opening a new.

New attraction at Walt Disney World Guardians of the Galaxy Cosmic <unk> at the end of this month on Memorial day weekend and that is.

That is.

All new capacity and we're really looking forward to having our guest experience that.

Okay and on the ESPN question, we're not ready to share the specifics of our model in terms of.

How long it would take for us to.

Reach profitability on that or the impact that would have on our linear business, but I would emphasize that we're only going to do it if it's accretive to our shareholder value.

When it comes time to actually pull the trigger but I can tell you that it will be the ultimate fan offering that will appeal to super fans that really love sports and I think theres, nobody but ESPN.

Frankly could actually pull that off but we don't have a lot of specifics when it comes to structure.

But we do believe that.

<unk> sports is so powerful in fact in the last quarter 46 of the top 50, most viewed programs on linear.

Television, where sports and obviously ESPN dominates that and I do believe that sports is the third leg of our domestic offerings in terms of our DTC offerings and right now that expression is through the bundle and I think that could become very powerful for us going forward in the future.

Operator next question please.

From Doug Mitchelson with credit Suisse. Your line is open.

Thanks, so much for taking.

The question. So I guess two questions if I could Bob you've continued to suggest a lot of confidence in Disney plus guidance can you talk about trends for churn and engagement for Disney plus.

Not sure if you're willing to share how much of Disney plus viewing as new content versus library, just thinking as more and more new content starts to show up and ramp and then.

Separately and maybe this is for Christine Alexia, you'll let me know, but I'm just curious what you think the international theme Park margin potential as it peaked at 16% in fiscal 19, and I think we're getting a pretty good idea.

Domestic theme parks is going to be very very profitable, but international so bit of a mystery I know you've got some parks closed and there was some disruption but you also have a good idea of what youre seeing in the U S. How you could apply that overseas and what you've done with the cost structure.

During the pandemic and also you'll look back at fiscal <unk> I'm, sorry for making the question of that longer but Hong Kong were shut down for part of the year, China was what in year three.

So I'm just curious if those international margins do we think about getting.

Getting closer and closer to our U S margins over time, thanks, so much.

Bob why don't you take the first half and then Kristina <unk>, Okay and in terms of our confidence in Disney plus guidance as you probably know we have a tremendous amount of data that we get on our DCC platforms things like the first view, what's the first view that somebody watches when they first come onto our platform, which is a pretty good proxy for maybe why they signed up.

There is also the amount of time spent.

The engagement scores and then of course, the churn information that you sort of looked at and.

We've said this before in past earnings calls, but we're extraordinarily pleased with the low churn that we see particularly given.

The bundle.

The bundle is really.

Efficient in terms of churn and that gives us a lot of.

Bullishness when it comes to the idea of bigger offerings from Disney So as we sort of take each of these elements when we get a new piece of content. We will look at first view, we'll look at engagement. We look at the amount of time they spend on it and we can model. We can do a lot of modeling in that modeling suggests that in.

In addition to things like local market content, new content coming online both in terms of general entertainment and from franchises.

As well as new markets being added that that Disney plus guidance.

It is going to be very achievable for us both in terms of the sub adds and in terms of the operating performance.

Okay on the international theme parks Doug.

On Asia, I think it's really too early for us to tell.

As you heard in my comments, we said that.

We could see a negative impact of Hong Kong and Shanghai of $350 million in the next quarter. So just keep that in mind.

But it is a bit of a tale of two cities I can give you some very positive trends, we are seeing out of Disneyland Paris.

So just like domestically, we're seeing very strong yield growth at Disneyland, Paris, and we're looking forward to its continued recovery.

Particularly with the recent launch of their 30 <unk> anniversary celebration.

Vendors campus.

That's the first new themed area of our multi year expansion that we've talked about previously for DLP that will open this summer.

What is already opened is the one of our large hotels over there the New York Hotel has been re themed in a.

And a Marvel statement Avenger state so that's very exciting and our guests love staying there. So I think it's what we're seeing in Paris gives me.

Hope I hope is not a strategy, but it gives me hope that our other parks in Asia, we'll see that same rebound when there are COVID-19 related headwinds abate.

If I could just follow up maybe the simple way to put it as you've talked about the potential for higher park margins than previous peak would that apply to both domestic parks and separately international parks longer term.

Well, Doug we have set it for domestic.

We're not going to update that for international there's just too much uncertainty with the region and Asia that has two of our parks right now alright, I thought I'd try. Thanks, so much okay. Thanks, operator, we have time for one more question.

Thank you from Michael Morris with Guggenheim. Please go ahead.

Thank you very much good afternoon guys.

A couple on this advertising.

We're talking about for Disney plus my first is can you share anything else on what remains to be done prior to the rollout the implementation of that advertising tier.

Yes.

Are there.

There are assets you need to acquire or what are you building or anything like that given the pieces that you do already have in place through your ownership of Hulu et cetera. So I'm curious about the advertising infrastructure and then the second you touched on this a little bit Kristine, but I'm curious if you could share any more relative sizing of the <unk> potential of the ads for the service.

Yes.

Given that Disney plus is still half the price of Netflix domestically I'm curious AD supported <unk> could actually be higher than where you are right now and if this does present a catalyst for you to raise price on the AD free service. Thank you.

Bob Why don't you start and then Christine can finish okay. We're in really good shape in terms of being able to meet our timing.

With our Disney plus add tier and that's largely because we're already doing it the combination of our ESPN plus SKU.

Creaming Tech stack and our experience in Hulu and the software.

We think that our occur advertising capabilities.

Really substantially prepare us to already bring this tier into operation. So there is nothing that we need to go acquire or frankly, even in any significant way develop it anything new and thats due to the ongoing investments in technology that we've made over time to increasingly.

Much of this process and we've been looking forward to this for a while so.

This is something Thats, well greased if you will.

Our teams are hard at work at making that become a reality.

So on the.

Incremental information you attack on on our AD supported tier at this time, we haven't announced a price point.

For it so we're not going to do that today.

But we will continue to evaluate what makes sense for the service in terms of pricing.

And I will say that you can look to our experience with Hulu and their AD supported tier.

We believe that this will contribute to <unk>.

And when we look at it as certainly something additive that will work towards achieving our long term profitability goals.

Okay. Thanks for the question 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 state estimates or statements about our plans and guidance expectations beliefs, our business prospects or other statements that are not historically 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 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 variety of factors for more information about such factors. Please refer to our Investor Relations website and the press release issued today as well as the risks and uncertainties described in our annual report on Form 10-K.

The reports on Form 10-Q, and other filings with the Securities and Exchange Commission, we want to thank you for joining us today and wish everyone. A good rest of the day.

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Thank you for standing by and welcome to the Walt Disney Company Second quarter 2022 financial results Conference call. At this time all participants are in a listen only mode. Please.

Please be advised that this conference is being recorded after the presentation. We will conduct a question and answer session to ask a question. During this session you will need to press star one on your telephone if you require any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today Oleksiak Wadhwani.

<unk> Senior Vice President of Investor Relations. Please go ahead.

Good afternoon, it's my pleasure to welcome everybody to the Walt Disney Company second quarter 2022 earnings call. Our press release was issued about 25 minutes ago and is available on our website at www Dot Disney Dot com forward slash investors today.

Today's call is being webcast and a replay and transcript will also be available on our website.

Joining me for today's call are Bob Chapek, Disney's Chief Executive Officer, and Christine Mccarthy Senior Executive Vice President and Chief Financial Officer.

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

Thanks, Alexia and good afternoon, everyone.

Our strong results this quarter, including fantastic performance at our domestic parks.

And continued growth in our streaming services.

Along with the creative achievements of our content teams. Once again proved that we are in a league of our own.

Which come together to create a deep emotional connection with audiences across generations.

I'd like to share a few highlights from the quarter that illustrate these strengths and then Christine will go through the details of our results.

As I said, our domestic parks were a standout they continue to fire on all cylinders.

Offered by strong demand, coupled with customized and personalized guest experience enhancements that grew per capita spending by more than 40% versus 2019.

Response to next generation storytelling like Star Wars collective Star cruiser has been phenomenal in fact guest ratings for this immersive experience, which opened March 1st are incredibly high and in line with our best in class offerings demand is strong and we expect 100.

Percent utilization through the end of Q3.

Looking ahead, we could not be more excited to officially welcome writers on Guardians of the Galaxy Osmek rewind.

On May 27.

One of the longest indoor roller coasters in the world the attraction puts guests in the middle of an exciting adventure as theyre called on to help the Guardian's out of a jam with our first ever reverse launch and rotating cars that turn writers 360 degrees guests won't Miss the second of the story during our most immersive.

Coaster experience yet.

At Disneyland Paris, we are thrilled to take the next step in our ambitious expansion plan.

Opening of Avengers campus. This summer as part of the resorts 30th anniversary celebration.

As Europe recovers from the pandemic, we've seen strong yield growth at Disneyland, Paris, and look forward to its continued recovery.

Another standout this quarter, where our streaming services. We ended Q2 with more than 205 million total subscriptions after adding $9 2 million in the quarter.

That includes $7 9 million Disney plus subscribers, keeping us on track to reach $230 million to $260 million Disney plus subscribers by fiscal 'twenty four.

The growth of the platform since its launch reinforces its unique nature quite simply we believe Disney plus is one of a kind a service based on exceptional branded content with wide appeal across all four quadrants. It certainly popular with families, but as a reminder, almost half.

Of Disney plus subscribers are adults without kids.

The benefit of our incredible creative engines and decades of General Entertainment Excellence is that we can reach these demographics not only through the creation of original titles, but also by shifting resources from across our content ecosystem, especially as consumer behavior continues to evolve.

Our strategy is not just to fill our distribution pipelines.

But to be thoughtful with each asset to best position it amongst our various distribution options.

For instance, dancing with the stars is a beloved show that has entertained viewers for more than 30 seasons on ABC and is a wonderful example of content that brings a whole family together.

We recently announced Disney plus will be the series New home starting this fall.

Beyond targeting specific demos, we are equally enthusiastic about our growth potential in international markets.

We believe these premium local originals, along with branded content with broad International appeal will attract new subscribers and drive engagement. One example in production is nautilus.

From our EMEA team based on 20000 lease under the Sea Nautilus is the origin story of the iconic submarine from the perspective of its mysterious commander Captain Nemo.

This is just one example of how our global network of creative hubs can develop and produce original content with worldwide appeal.

And by the end of Q3, we plan to rollout Disney plus the 53, new markets across Europe Africa, and West Asia.

Starting with South Africa next week.

Leaving Disney plus I want to mention our recently announced plans to introduce an AD supported subscription offering in the U S. By the end of the calendar year and internationally in 2023 <unk>.

Expanding Disney plus access through multiple price points is a win for consumers and advertisers.

Of course, all of our success is rooted in great content.

On the mergers in the building on Hulu and the record breaking 19 season ABC Gray's anatomy.

This quarter our studios earned six Academy awards, including Best animated feature for Walt Disney Animation Studios and content and best documentary feature for Onyx collective and certainly pictures summer of soul.

Pixar Animation studios, turning Red premiered on March 11th on Disney plus and became the fastest title to reach 200 million hours viewed on our platform.

The Disney plus original series Star Wars, the book of Boba Fett.

Through positive reaction from audiences and Marvel's Moonlight continue the studios impressive track record looks.

Titles like Obi Wan Kenobi.

Mrs Marvel.

Light year.

Our 11 Thunder.

Panther will conduct forever and the long anticipated avatar the way of water.

Finally, I must mention the phenomenal success of Marvel's Doctor Strange and the multi verse of madness, which opened to roughly $450 million worldwide. This past weekend domestically. It was the second highest opening of the pandemic era and the 11th highest opening of all time.

Our strategy of distribution flexibility has worked well for us and these fantastic results are another sign of our ability to succeed no matter the platform.

That success extends to sports.

Opening weekend of the NBA playoffs was the most viewed in the past decade, and the ratings have been fantastic with over $4 3 million average viewers through 'twenty games on ABC and ESPN are.

Our groundbreaking NHL deal is unique in its exposure across ESPN, ESPN, plus ABC and Hulu, culminating with the Stanley Cup playoffs, which began on May <unk>.

UFC boxing and more.

Coming off the success of Monday night football with Peyton and Eli We recently debuted our new season long MLP alternative broadcast.

Hey, Rod cast with Michael Kay and Alex Rodriguez.

And we began the inaugural season of <unk>.

PGA tour live on ESPN, plus featuring over 4000 hours of live golf coverage from 35 tournaments.

Before I hand, it over to Christine I want to say a few words about our unique synergy machine or franchise flywheel, if you prefer.

What sits Disney apart is our ability to reach people with our uniquely engaging content across an array of touch points to make our portfolio of businesses and brands are bigger part of their lives.

This enables us to not only create new franchises like in content.

But to also build on existing IP across our lines of business.

At our parks, we have built a portfolio of four immersive toy story lands with more than 20 attractions and life character interactions available around the world as well as two themed hotels. The franchise is the cornerstone of Disney plus with all four feature length films as well as the.

Original short series four key ask the question.

<unk> available on the service.

In nearly 30 years. After the film debuted toy story is still a key consumer products franchise generating over $1 billion in annual retail sales.

And in just a few weeks Pixar slight year will tell the origin story of everyone's favorite space Ranger when it hits theaters on June 17.

Of course toy story is just one of our many franchises, but illustrates our unparallel ability to bring stories to life in more ways for more people in more places.

With that I'll hand, it over to Christine.

Thanks, Bob and good afternoon, everyone excluding.

Excluding certain items diluted earnings per share for the fiscal second quarter were $1 eight.

An increase of 29 versus the prior year quarter.

We continue to be pleased with our financial results with total segment operating income increasing by 50% versus the prior year quarter.

And by over 80% year to date.

Our parks experiences and products segment continued to show strong signs of growth and recovery as operating income increased by nearly $2 2 billion.

Year over year to approximately $1 8 million.

Growth was primarily driven by our domestic parks, which were open for the entire quarter in.

In the prior year, Walt Disney World was open, but Disney land with closed for the entire quarter.

We continue to be pleased with the overall demand and attendance trends at our domestic parks. In fact, there were many days in the quarter, where we saw demand exceed 2019 levels. However, we are continuing to control attendance through our reservation system with an eye on delivering a quality guest experience.

Yeah.

We're also thrilled that as of the end of March all of our domestic resorts are now opened a major milestone as we continue to move through the impacts of the pandemic.

At our international Parks operating results improved versus the prior year due to growth at Disneyland, Paris, which was opened in Q2 and closed during the prior year quarter.

This was partially offset by lower results at Hong Kong, Disneyland and Shanghai Disney both of which were impacted by Covid related closures in the quarter.

Moving on to the media and entertainment distribution segment second quarter operating income decreased by approximately $900 million versus.

Domestically higher operating income at broadcasting was partially offset by lower results at cable.

These impacts were partially offset by higher programming and production costs also driven by the timing of the Academy Awards.

At cable and lower operating income versus the prior year was primarily due to an increase in programming and production costs.

The largest component of the increased costs was driven by four additional NFL games versus the prior year, consisting of three regular season games as well as the return of the <unk>.

These impacts were partially offset by growth in cable advertising and affiliate revenue.

Total domestic affiliate revenue increased by 5% in the quarter.

This was primarily driven by seven points of growth from higher rates, partially offset by a three point decline due to a decrease in subscribers.

At direct to consumer operating losses widened to almost $900 million due.

Due to higher losses at Disney plus and ESPN, plus and lower operating income at Hulu.

The higher losses at our DTC services were largely driven by higher programming and production expenses in line with what we noted in our guidance last quarter.

At Disney plus programming and production costs grew along with marketing and technology costs to support our growth around the world.

Partially offset by higher subscription revenue.

We ended the quarter with nearly $138 million global paid Disney plus subscribers, reflecting close to 8 million net additions from Q1.

A little over half of those net adds were from Disney plus Hot Star, which benefited from the start of the new IPL season towards the end of the second quarter.

<unk> net adds of approximately $1 5 million reflect in part the success of Tentpole content releases, including turning Red and Moon night, as well as the strength of our bundled and multi product offerings.