Q3 2022 Walt Disney Co Earnings Call

August 10, 2022

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Good afternoon, and welcome to the Walt Disney Company's third quarter 2022 financial results Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Alexia quote Ronnie Senior VP of Investor Relations. Please go ahead.

Good afternoon, it's my pleasure to welcome everybody to the Walt Disney Company third quarter 2022 earnings call.

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

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.

Thank you Alexia and good afternoon, everyone. We had an excellent quarter powered by World class storytelling outstanding performance at our domestic theme parks increases in live sports viewership across our linear channels and E. S. P N plus N.

Significant subscriber growth and our streaming services, which added $15 5 million subscriptions in the quarter, including $14 4 million Disney plus subscribers of which $6 million or core Disney plus and $8 million were hot star.

As of the close of Q3, we now have 221 million total subscriptions across our streaming offering.

Our results showcased the ability of the Walt Disney company uniquely diversified businesses, the power of our ecosystem and explore growth opportunities across industries and distribution channels.

I'll expand on all of this and more and then Christine will go through the details of our results and provide additional insight into our fiscal 2024 expectations.

Disney plus.

Creative excellence and storytelling that build deep emotional connections with audiences is at the root of our success and I am pleased to say that our creative engines are firing on all cylinders across franchise General Entertainment and sports.

And a testament to the depth breadth and quality of our creative teams. We received 147 Primetime Emmy Award nominations this year, including 92 for our streaming platforms and 'twenty, one our best program and as genre.

Recognition cross format and distribution channels with 47 different shows receiving nominations, including titles like only murders into building.

Abbott elementary what we do in the Shadows and the dropout right alongside shows from Disney Marvel and Star Wars.

Most recently, we received an additional 71 news and documentary Emmy nominations across ABC News National geographic.

Hulu and ESPN.

In addition to critical and industry recognition, we are thrilled by the audience response to our general Entertainment offerings response that is enhanced by a distribution strategy that maximizes reach by taking advantage of the strength of both our linear and streaming channels.

Given the multiple ways, we bring our content to audiences, we take a thoughtful approach to each distribution decision to determine the best strategy for each of our many high quality titles and platforms.

Some like the buzz generating candy.

Dash ins and the bear may be best served as Hulu original.

Others like Abbott elementary in the old men have become multi platform here by reaching different audience demographics across both linear and streaming.

And when it comes to our key franchise content I could not be more proud of the teams that Disney Pixar Marvel and Star Wars.

The hugely successful Doctor strange in the multi versus madness has earned nearly $1 billion at the global box office.

And Thor Love and Thunder, which premiered on July 8th has grossed over $700 million at the global box office and has the highest domestic grossing film for franchise.

Six hours late year, Mark The studios returned to the Big screen in the film debuted on Disney plus last week.

Speaking of Disney plus which is now available in 155 markets. After recently launching in 53, New territories, we released content with appeal across demographic groups, including Obi Wan Kenobi and Ms. Marvel as well as feature films like Disney's Chippendale Rescue Rangers and Disney Natures polar bear.

<unk>.

As you know Disney plus is still a young business and we are learning more every day about the services ability to attract new fans to our powerhouse franchises. For example in addition to driving engagement amongst tens of millions of existing Marvel fans, we have seen each new Disney plus original Marvel series <unk>.

Incremental viewership and new subscribers that hadn't previously engaged with marvell content on the service.

Thanks to the episodic format that enables us to explore new characters.

Donald <unk>.

The value of expanding our fan base is tremendous and this new audience can then experienced marvel across our other offerings from consumer products to games to theme parks.

Looking ahead Q4 will feature a fantastic Disney plus content slate with a steady flow of key releases, including Marvel's She hope attorney-at-law, Lucas films, <unk> and Disney Hocus Pocus too.

And we look forward to celebrating the second annual Disney plus day on September 8th with Activations across our synergy machine.

Given the global nature of Disney plus we are thrilled to bring international music sensation Bts to the service with an exclusive cinematic concert film and Ducky series following the bans incredible journey.

GTS and the K pop genre at large carry massive global appeal and affinity which will further extend our reach into that global fan base.

And we continue to step up our investment in international local original across formats, including bringing the seventh season of coffee with Karen one of India's most popular talk shows exclusively to Disney plus onstar.

On the theatrical side, we have a robust slate debuting later this year, including the highly anticipated avatar the way of water.

Our newest animated film Strange World and the final film and Marvel stays for Black Panther will conduct forever.

Statement for this film is amazing and.

And the trailer received more than 170 million views in its first 24 hours.

Turning to support our industry, leading run of rights acquisitions positions us extremely well for the future. We will continue to focus on audience expansion and long term profitability by being disciplined in our acquisition approach and making deliberate distribution decisions for each sport in the port.

Folio.

The result of this approach were fantastic last quarter as the Walt Disney Company was responsible for 47% of sports hours watched by the 18 to 49 demo in fiscal Q3.

Our innovative NHL deal has been a difference maker across platforms with the Stanley Cup playoffs viewership up 60% over 2021 across cable and broadcast including significant year over year increases in younger demos and female viewers.

<unk> also secured exclusive TV rights for the upcoming 2023 to 2027 IPL season, following a competitive process, where we made disciplined bid with a focus on long term value.

We are excited to continue offering IPO to our linear customers in India, where growth potential exists for our portfolio of more than 70 channels that reaches 90% of pay cable and satellite television home in the region.

Pay TV distribution in India continues to be a robust business with projected GDP growth expected to drive advertising and consumer spending in fact, India is one of the only markets in which we are launching new linear channels.

Finally, given the results of our recently completed upfront. It is clear that our unmatched portfolio continues to be highly sought after by advertisers combined with our deep expertise in AD Tech we are in a position of strength with record upfront advertiser commitment leading into the launch of our AD supported Disney plus.

Here.

Since the launch of Disney plus advertisers have been asking for the opportunity to connect with audiences alongside the most premium brands and content and streaming.

As we shared earlier today.

Plus add tier goes live on December eight and we are taking a thoughtful approach by launching with a lower AD load and frequency to ensure a great experience for viewers. This approach coupled with strong advertiser demand translated into Disney plus Ernie industry, leading CPM rate at the most.

<unk> upfront.

Turning to our parks this quarter featured new magic around the world and strong operating performance.

All of our theme parks are now open and we continue to bring back more of the great experiences guests love that includes character meet and greet nighttime spectacular at Disneyland and theatrical performances. These offerings are not only big hits with Gannett, but also enable us to welcome more people into our parks each day.

We continue to see strong revenue and profit growth at our domestic parks and experiences businesses.

Even as our cruise ships and international visitation have yet to fully recover.

Domestic demand our theme parks continues to be strong and we are seeing continued progress in those businesses still recovering from the pandemic.

At the same time the business model transformations, we have achieved over the past few years has driven substantial increases in per capita spending and give us the flexibility to adapt should economic conditions change.

We celebrated three major milestones for our parks and experienced business this quarter each of which were priorities I set when I had the opportunity to lead our parks team.

First the innovative and immersive new rollercoaster Guardians of the Galaxy Cosmic Rewind opened in <unk> as part of the parks ongoing transformation to a place that is more family more timeless and more Disney.

Second we expanded the Disney cruise line fleet with the Disney wish with sale of its maiden voyage on July 14th. This is the first of three new ships and is infused with Disney storytelling, one of a kind of entertainment and a modern interior aesthetic.

It is powered by liquefied natural gas one of the cleanest burning fuels available.

And finally, Disneyland Paris opened Avengers campus on July 20th completing the first phase of our ambitious expansion plan.

New immersive area features two new attractions five actions done in.

Counters with Marvel superheroes and themed restaurants.

I had the opportunity to help open new land will start from the Marvel cinematic universe and our cast.

And I could not be more proud of the resorts ongoing transformation.

Most are responding in a big way to our enhanced offering at Disneyland Paris as per capita spending in Q3 was up over 30% versus 2019, a great sign of the size potential for growth.

I am incredibly pleased with our performance this quarter.

Competitive position and a unique collection of assets and capabilities that sets us apart.

Going forward, the Walt Disney company's incredible employees cast members and creative teams will continue 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. We are pleased with our strong financial results this quarter with diluted earnings per share, excluding certain items, increasing to $1 90.

Versus 80 in the prior year quarter.

At parks experiences and products.

Third quarter revenues increased by more than $3 billion.

And operating income increased by $1 $8 billion versus the prior year, reflecting improvement across both domestic and international parks and experiences.

Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels.

And our continued focus on improving the guest experience through the use of our reservation system to purposely managed capacity versus simply increasing volume has the added benefit of improving yield and optimizing overall economics.

So even while the average daily attendance at our domestic parks across the first three quarters of this fiscal year was slightly below 2019, we have delivered significantly higher revenue and operating income over that same time period.

This approach also provides flexibility with leverage we can adjust if demand were to shift.

Per capita spending at our domestic parks also remained strong increasing 10% versus Q3 of fiscal 2021 and over 40% versus fiscal 2019.

And then another sign of the robust demand we have seen at our parks and resorts occupancy at our domestic hotels in the third quarter was 90%.

Looking ahead domestic demand at our theme parks continues to look robust with current forward looking hotel bookings and intent to visit roughly in line with pre pandemic trends.

Improvement at our international parks in the third quarter was driven by Disneyland, Paris, where both revenue and operating income exceeded 2019 levels.

And we are seeing the same momentum well into Q4 as we continued to celebrate the 30th anniversary and the opening of Avengers campus in July .

Disneyland Paris as strong performance in the third quarter was partially offset by closure related impacts at Shanghai Disney Resort, where the theme park was closed for all but the last three days of the quarter.

At the media and entertainment distribution segment third quarter revenues increased by over $1 $4 billion versus the prior year and operating income decreased by $645 million as an increase at linear networks was more than offset by declines at direct to consumer.

And content sales licensing and other.

Linear networks operating income in the quarter increased 13% to approximately $2 5 billion driven primarily by growth at our domestic channels.

The increase that domestic channels reflects double digit percentage operating income growth at both cable and broadcasting.

Growth at cable was largely driven by higher advertising revenue and to a lesser extent a decrease in marketing costs and an increase in affiliate revenue.

Advertising revenue at cable benefited from the timing of the NBA finals, which represented six of the top seven telecast among the coveted 18 to 49 demo across all networks this quarter.

Note that the finals aired in the third quarter this year versus the fourth quarter of the prior year.

This timing impact in addition to the benefit of adding the NHL to our portfolio and strong pricing from the continued strength of live sports drove ESPN advertising revenue growth of nearly 40% year over year.

Demand for live sports remains strong however, due to the NBA finals timing impact fourth quarter to date domestic cash advertising sales at ESPN are currently pacing down.

Moving onto broadcasting operating income increased versus the prior year due to higher results at both ABC and our owned television stations.

Total domestic affiliate revenue increased by 2% in the quarter.

This was driven by six points of growth from higher rates, partially offset by a three point decrease from fewer subscribers.

International channels operating income was comparable to the prior year, reflecting increased sports programming costs, partially offset by advertising revenue growth.

Both of these trends were driven by the airing of 35 additional IPL cricket matches in the third quarter versus the prior year.

Note that results also benefited from the closure of certain channels over the past year.

Our direct to consumer lower operating results across Disney plus Hulu and ESPN plus reflect increased programming and production costs in line with the guidance, we gave last quarter as.

As we continue to strategically invest in our streaming businesses.

At Disney plus we cross the 150 million subscriber milestone.

<unk> ended the third quarter with more than 152 million global paid subscribers.

A net addition of more than 14 million subs versus Q2.

Strong Disney plus core net subscriber additions of $6 million reflect growth in existing markets as well as launches and over 15, new markets during the quarter.

And we currently expect Disney plus core net additions in the fourth quarter to accelerate modestly versus Q3, particularly in the domestic market.

At Disney plus Hot Starz subscribers increased by over $8 million as the IPO concluded its 15th season in the quarter.

Hulu added more than 600000 subs during the quarter and ended the third quarter with $46 2 million paid subscribers and ESPN plus ended Q3 with $22 8 million paid subscribers, a net increase of about half a million versus Q2.

At content sales licensing and other operating results decreased in line with our expectations by about $160 million versus the prior year quarter.

Reflecting an unfavorable foreign exchange impact and lower TV S fraud, and home entertainment distribution results, partially offset by higher stage play and theatrical results.

As it relates to foreign exchange note that the overall impact to the company's segment operating income.

Was only modestly negative in the quarter as our FX hedging program continues to be effective in mitigating the impact that changes in exchange rates have on our businesses.

As we continue to scale back on third party content licensing we believe content sales licensing. Another result will continue to face headwinds and expect fourth quarter operating results will decrease versus the prior year by close to $100 million.

Cash content spend across the company is now expected to total approximately $30 billion for fiscal 2022.

This estimate is slightly lower than our previous guidance largely due to timing changes.

And we expect annual cash content spend over the next couple of years to be roughly in the low $30 billion range as well.

We are also revising our full year forecast for capital expenditures to $5 billion compared to fiscal 2021 Capex of $3 6 billion.

Our new expectation for 2022 is roughly $500 million lower than our previous guide in part reflecting timing shifts of various projects across the company.

Finally, before we move to Q&A I want to spend some time sharing a few updates on our fiscal 2024 guidance for Disney plus.

We are providing more detail on subscriber targets by separating our guidance into two categories.

Disney plus and Disney plus Hot Star.

Excluding the impact of any significant future macro headwinds our core Disney plus subscriber target range is 135 million to $165 million by the end of fiscal 2024.

Largely consistent with previously provided guidance that non hot Star Disney plus subscribers in 2024 would approximate 60% to 70% of the expected 230 to 260 million total subscriber base.

We are however, updating subscriber guidance for Disney plus Hot star to up to 80 million subscribers by the end of fiscal 2024.

We intend to refine this target overtime as subscriber visibility in India will be clearer once the ICC and BCC cricket rights sales processes are completed.

As you May know, we recently made the disciplined decision to not proceed with the Indian Premier League Digital rights and we will evaluate these rights with that same discipline.

As we sit here today, we remain confident that Disney plus will achieve profitability in fiscal 2024.

And look forward to several upcoming catalysts, including reaching a steady state of Tentpole original content releases.

Delivery of premium General Entertainment and international local originals.

And the upcoming launch of our AD supported tier.

Alongside the new pricing structure announced earlier today.

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

Thanks Christine.

Transition to Q&A, we ask that you. Please limit yourself to one question in order to help us get as many ounces possible today with that.

Operator, we're ready for the first question. Thank you and to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

And the first question will be from Doug Mitchelson from Credit Suisse. Please go ahead.

Thanks, So much one question there was so much to ask about well while I go with this and I do appreciate you separate out the guidance between I'll start on core Disney, but parks were impressive this quarter and you know.

You talked about levers if demand were to shift is the company satisfied pent up demand.

From the pandemic at the parks. This point should we look at as a go forward basis is relatively normal trends and I'm guessing you have a different answer for domestic versus international and Christina I'd be curious if you've put any meat on the bone regarding the levers if demand were to shift at the parks. Thank you.

Sure. Thanks, Thanks, Doug.

Parks, certainly did have a fantastic quarter and I just wanted to say that the parks team is the same team led by Josh Tomorrow that was able to manage through the COVID-19 crisis that impacted the business significantly.

Also we're able to ramp back in on a very phased basis back to the recovery phase and are now positioned for growth. So I just wanted to acknowledge that team for being sort of a triple threat when it comes to being able to manage.

From very very different vantage points based on the environment as it.

It relates to levers of demand some of the things we can do Doug.

We had limited the number of annual passes that we have across some of our businesses. Some of the parks and all of those come with some with the exception of the highest tiered priced annual passes they all come with some blackout dates so to the extent to which perhaps you had.

Lightened demand you could loosen up some of those to bring more people in the park and Jess.

<unk> Park and spend money, while they're there.

And also as it relates to demand we have not yet seen.

Demand abate at all and we still have many days when people cannot get reservations. So we're still seeing demand in excess of the reservations that we are making available for our guests.

Thank you next question.

Thank you and the next question will be from Ben Swinburne from Morgan Stanley . Please go ahead.

Afternoon.

Bob could you talk a little bit about sort of the research and insight you have into your streaming customer base that sort of informs the decision to take these price increases, which on a percentage basis a pretty large.

Without really reducing net ads.

From churn spiking as you implement these price increases.

Maybe talk a little bit about how the product now.

Consumers will be paying for next year at these higher prices will compare to this year.

And I'm just wondering are you planning to take some more pricing moves at least directionally outside the U S over time.

Thanks for the color.

Well as you know.

We launched at an extraordinarily compelling price across all of our platforms that we have for streaming I think it was easy to say that we're probably the best value in streaming and <unk>.

Since that initial launch we've continued to invest handsomely and our content as you know we believe because of the increase in the investment over the past two and a half years relative to a very good.

The price point that we have plenty of room on price value and we do not believe that there's going to be any meaningful long term impact on our churn as a result, I mean, one only needs to look at our recent cigna.

Significant increase on ESPN, plus which had the exact same impact of really no meaningful impact at all on our churn.

And we believe that we've got plenty of price value room left to go.

<unk>.

Thank you next question.

Thank you and the next question will come from Steven Cahall from Wells Fargo. Please go ahead.

Thanks.

So the margins were really spectacular I am just wondering what kind of trends youre seeing from international visitation, where those strong in the quarter or is that a tailwind either per caps or hotel occupancy as you get into the back half of the year and you see more international traffic.

I'll take that one Steve.

The deep type margins were indeed, a very strong one of the things that we've seen is during the pandemic international visitation to our domestic park, primarily Walt Disney World.

Basically nonexistent that has preceded to come back and it has come back very nicely, but it is still below the traditional range that we've given you which is around 17, 18% up to the low twenty's, but.

But it has made significant progress and we expect the international visitation when it is fully back to actually.

Be additive to margins because of those guests tend to stay longer at.

At the parks and they spend more money when they're there as well.

Thank you your next question.

The next question is from Michael Nathanson from Moffatt Nathanson. Please go ahead.

Thank you I just wanted to dig a bit in R&D.

<unk> product Disney plus whats your expectations for Ad load.

Our monetization per sub given theres, a $3 difference between the premium with no ads on the AD product and maybe what you've learned from Hulu over the year that informs your expectations or monetization. Thanks.

Yes.

As you know we've had a lot of experience with this on Hulu and a lot of success with this on Hulu and we are walking before we were running before we run in terms of.

See what the market will bear in terms of an AD looks so we're going in very conservative upfront.

But we believe that there is probably going to be some more ultimate elasticity in that as well as we go forward and we're just really thrilled that we're able to.

Launched Disney plus add tier and expand our audience access through all these multiple price points that we're going to have and as Christine had alluded to the advertising demand since the launch of Disney plus is great and we think that by taking a conservative approach in terms of that AD load upfront it will give us the ability to expand if we need to.

And that has to go the other way, which I think would be a much bigger deal.

The only other thing I would add to that Michael is based on our Hulu experience.

That.

Even current subscribers, who have AD free may choose to stay at the same price point with ads.

The Hulu AD supported tier has more subscribers than the AD free.

In fact, it's well over.

About it's about two thirds and thats something that we can't anticipate that we'd have exactly the same behavior because its a different demo.

That has Disney plus versus Hulu, but that's the best indication that we have but we expect the <unk> to be popular.

And we also expect some people to want to stay with AD free.

Thank you your next question.

That question will come from Jessica Reif Ehrlich from Bank of America. Please go ahead.

Maybe switching gears a little bit.

To sports can you give us your thoughts on what the structure of an M. B a renewal might look like would it be different than in the past you've mentioned participating in sports betting you have the best brand name can you maybe elaborate a little bit on.

Timing of what you're thinking and then just a follow up to some of the comments just on <unk>.

Launched new cruise ship can you talk about what you're seeing in terms of cruise demand overall.

Yes.

Okay, I'll talk about the NBA <unk>.

As you know we've had a great history with EMEA really proud of our partnership there and.

The past season, and the ratings for the finals have been absolutely extraordinary so we're interested in a renewal with the NBA, but like all of our decisions that we make in terms of content. We will only do it if it's accretive to shareholder value and I think that remains the overall guidance, whether youre talking about India with IPL was.

Are you talking about college sports, whether Youre talking about Formula one racing or Youre talking about and so we have an interest to do that we're really happy with our portfolio of sports rights that we have but of course the continued relationship with ENB would be something that would be very attractive to us.

If you wanted to sports betting.

In terms of sports betting.

Sure.

Have been in.

In conversations for quite a long time now with a number of different platforms too.

Add some utility to sports betting and take away some friction for that for our guests we have found that.

Basically our sports fans that are under 30, absolutely require this type of utility.

The overall portfolio of what ESPN offers so we think it's important we're working hard on it.

And we hope to have some something to announce.

In the future in terms of a partnership there that will allow us to access that revenue stream and also make sure that our guests are being Kevin Smith.

Jessica on cruise as you know we welcomed our fifth ship two or four ship fleet. So we now have five.

The new ship as it goes by the name of wish.

As Bob mentioned, and it's quite an extraordinary vessel.

But we've always said that that business has been the most severely impacted by COVID-19 in terms of duration of disruption to the business. So we're still coming out of that but we are focused on the business recovering historically the cruise line has been terrific with really attractive ROIC.

<unk> for us and it's generated double digit return on the investment and we expect that business to come back to the similar similarly attractive returns that.

That we had previously experienced.

And a couple of things the wishes of our newest ship and that has gone with very very high capacity.

And that's that one.

Yes, very well received but we have a competitive position overall in the cruise business, especially the family cruise market. So we generate pricing that's well above the industry average and our cruise ships deliver for US one of the highest rated guest experiences across all of our parks and experiences.

And this is a really interesting comment that we've received from our cruise passengers, 40% of them say that they would not have chosen to go on a cruise vacation if it werent a Disney cruise. So we're a unique product and we're still it's still a relatively small share of the cruise market.

And we're positioned for growth and the other four ships are all selling and their occupancy is improving week by week.

Okay.

Next question please.

Next question is from cut gun Merle from RBC capital markets. Please go ahead.

Great. Thank you for taking my questions one on the parts and then a follow up on FX, if I could.

The parks are going through a particularly innovative and transformative period, given your investments in technology digital tools and improvements in the guest experience. So from the outside it seems that the businesses as well positioned as it's ever been in the face of a potential recession, but I'd love to get your views on the various sensitivities associated.

With what the consumer is seeing and how you'd characterize the resiliency of the business I know you talked about different levers at your disposal, but perhaps there has been a structural change in the business.

Third to prior recessionary periods that you can speak to and then Christine if I could follow up on your foreign exchange commentary can you share a bit more on how you manage your FX risk.

What was the impact of FX on DTC ARPA. Thank you.

Yes, I think a lot of onlookers look at our park business and try to sum up our success recently and say that it has something to do with pent up demand and certainly there is pent up demand. So what we're seeing is far more resilient far more long lasting in terms of <unk>.

The increase and the affinity for our parks both from their willingness to come to our parks and.

And its attendance, but also in terms of what guests are willing to spend when they get there in order to personalize their experience as you know everything we do in our parks is all about improving the guest experience and part of that has to do with limited capacity, but also about personalizing those.

<unk> experiences.

So we believe we do have a lot of flexibility.

To shift if our demand changes remember we have a reservation system, which now enables us essentially real time on the fly to change whatever factors, we need in terms of our ticket packaging that we want where years ago. We didn't have that we published our prices by the quarter and that was essentially all.

The flexibility we have.

But as you know our business looks very strong with forward looking bookings and intent at pre pandemic levels and we see nothing in the future that's indicating.

Anything to the contrary, what we see so we're very pleased with that I should also remind you that our reservation system really does a great job, it's spreading demand. So if we see any spiking. This we can actually smoothed that.

In a way that we couldnt before and we're real pleased with that because even our gd product, which as you know we released just a little bit short of a year ago now about 50% of the people that come through the gate actually by up to that Genie products, which I think you can see the result of in our yields.

And I'll take the question on foreign exchange and the way we hedged so we do have a <unk>.

Hedging policy that is well established and has really served the company well over.

Very volatile foreign exchange markets. So just level set we have we have a program and the goal of it is to reduce the impact that changes in foreign exchange rates have on our current and future earnings.

So we really have an objective of trying to.

Attain earnings and cash flow stability and predictability. So we've tried to take out.

The ups and the downs so the hedging program. It has significantly reduced the negative earnings impact of the strong dollar that we've seen both in third quarter as well as the fiscal year to date.

So despite being economically hedged.

As it relates to <unk>, we do not allocate the hedge gains or losses, specifically to <unk> and the various markets. So therefore, the reported <unk> for international Disney plus was impacted by the unfavorable exchange rates in the quarter.

Another thing is when you look at content sales and licensing, especially if you go back and look at the transcript you'll note that there was.

A reference to that also being impacted by.

Negative foreign exchange that was just a balance sheet and effectiveness. We also hedged the balance sheet and that had to do more with we base our hedging on forecasted.

Plans and if the if the plants come in stronger and were under hedged or overheads. In this case we were.

It did not benefit us because we were hedged the right way.

The dollar strengthening but that is a one timer that should not be repeated but as it relates to <unk>. If you have some volatility you will see it in the <unk>, but it nets out as a company overall as I mentioned in my other comments that this is a this is <unk>.

Not a material item for us on a consolidated basis, you just saw spike out, especially in <unk> and the other thing is we do hedging on a multiyear basis. So we layer in our hedges over a period of time, which has really served us well in the current environment.

Thank you next question.

And the next question is from Kannan <unk> from Barclays. Please go ahead.

Thank you.

Okay.

So maybe above from a strategic perspective, when you think about sports.

It does seem like that had a lot of new entrants from an apple seems to be interested in more and more sports right.

And from your perspective, you, obviously walk away from the cricket in India and it looks like Big Bend May also be going in a different direction. So when you think about sport strategically.

Given that cord cutting is structural.

You think about the business longer term do you really have to own ESPN or get into sports screaming in a much bigger way or invest a lot more I mean, the next when we get off a bit.

From a divisional perspective so.

Got it.

Or how youre thinking about sports more broadly.

And then on the advertising side, if I could just.

Ask a bigger picture question around the Disney.

From a subscriber perspective, Disney plus with compatible domestic meat to Hulu and U S is the biggest ad market.

When it comes to the TV opportunity. So when we think about the yellow.

Advertising for Disney.

Is hulu the kind of benchmark, we should be thinking about or Glen business being much bigger because of the international SKU, although CPM, but much lower outside the U S. If.

If you could just help us.

Can you go back over time would be great.

Okay.

Okay in terms of the strategy on sports we're continually.

Enamored by the power of sports in terms of viewership and what it adds to our overall portfolio, particularly in advertising type world.

As you know we get strong cash flows on linear and it helps to pay some of the bills in the company as we make some of our <unk>.

Significant investments in content and we also like the proposition of growth and expansion on our DTC in terms of the rights.

If you look at the college rights, we've got the SEC, we've got the ACC. We've got the Pac 12, we've got the Big 12, we've got to play off we've got the most comprehensive programming so.

If we don't get rights in every single conference. We don't we don't believe that.

In any way limiting.

For us, but what we are all preparing for is the future of what ESPN would look like.

Direct to consumer and a true direct to consumer fashion and I think the way that we're looking at this is that we want to proactively prepare for that future without prematurely disrupting the cash flow that we get from the linear networks right now and as you know we've negotiated flexibility into our rights agreements across the board for <unk>.

Any new rights that we have acquired over the last several years, but we're still bullish on sports. We believe there is tremendous degrees of freedom in terms of what ESPN DTC ultimately looks like.

I think.

We're very proud of what we've done to date on ESPN, plus but that in no way limits, how we envision what true ESPN DTC proposition would look like going into the future.

Hi can on.

Thank you for asking this question about advertising I know theres been a lot written recently about AD trends, but I just wanted to start off by saying pacing in our scatter market continues to be solid across streaming sports as well as our broadcast network.

Now to get to your question about Disney plus Avon and the scale first of all we are going to launch later this year as Bob said December eight and we're taking an intentionally limited approach to it meaning we're launching with a lower AD load and a lower frequency than say Hulu and so.

This will ensure a great experience reviewers and these viewers are different then because a lot of them are families.

And they have a lot of adults at Hulu, but it's a different it's a different viewing experience.

Because of that disciplined lower AD loads are lower.

<unk> C and the strong advertising demand that we've had that translates into some of the.

<unk> industry, leading CPM rates at the most recent upfront for Disney plus and then we look at beyond domestic what we can do internationally and we plan to go international sometime next year and we've built these strong advertising relationships around the world with our previously existing.

<unk> currently existing linear footprint. So we're confident in our ability to navigate the international advertising marketplace, given our depth of knowledge and experience with the traditional linear business. So we really feel well suited to deliver both domestically on Disney plus Avon as.

Well as international.

Thank you next question please.

And that question is from Phil Cusick from Jpmorgan. Please go ahead.

Hi, Thank you one and a follow up on DTC first Christine there were higher DTC and Disney plus programming costs than we expected. This quarter can you give us some direction of where to go in the fourth quarter and when should we expect those Disney plus operating income losses to peak.

And then second if you could dig into the guidance to acceleration of subs in the fourth quarter I think thats an acceleration in the total subs and then you set a higher mix of growth towards domestic thank you.

Okay. Let me start first with the acceleration of subs I did mention that that we expect acceleration of subs to be.

Especially in the domestic market to be modestly above where we are.

Now, but you will see growth in Q4, and we feel good about that because of the content releases, we have and in.

And just the existing shows that are on.

Peak losses, we expect peak losses.

As of today, we expect Disney plus to reach peak losses in this current fiscal year 'twenty two.

So that is something that is consistent with what we've previously said as it relates to higher cost of content and programming.

We have said that we have this is a peak year of losses, which includes those costs, but also we expect as we go into.

Developing our full slate that the next quarter, you will see a similar increase year over year that you saw this quarter.

Thank you next question please.

And that question is from Brett Feldman from Goldman Sachs. Please go ahead.

Hi, Thanks, and if you don't mind I'd like to follow up with a question about the AD experience and Disney plus and it's really two things I was hoping you could comment on the first is would.

Would you expect to potentially display ads alongside any of the content some of that content.

The kids content I think historically in a linear world didn't necessarily have agile outside of it. So I'm just thinking about that element of it and then secondly, the competitors looking to layer advertising their product, they're suggesting that youre going to somehow do it differently and I'm just curious as you think about the experience you've had in.

In streaming advertising are you, mostly going to look to leverage the formats, you've used very successfully with Hulu or do you actually think there may be an opportunity to use of innovative formats on Disney plus Brad. Thank you.

I should say that the.

The technology for Disney plus is a completely different platform than the Hulu platform. So while we certainly have tremendous learnings over the years in terms of how to do addressable advertising and we've done that at the advantage of.

Our shareholders.

Result, I will have to say that we are not encumbered by that or in any way limited by what we've done in the past therefore, we could have.

Add proposition as good as the one that we've had on Hulu, but it could actually be better because of that different technology platform.

So it has the ability to evolve over time much more on the new platform then it doesn't.

That's one.

And as it relates to the AD experience Brett.

It's not all content on Disney plus.

Being treated equally there will be no ads in kids profiles are preschool at least at the launch and so this is going to be done very thoughtfully.

And looking at the content and also making sure that the advertiser is consistent with the content.

Thank you operator, I think we have time for one more question sure. The question is from Bryan Kraft from Deutsche Bank. Please go ahead.

Hi, good afternoon, Kristine, there's been heavy working capital use year to date in fiscal 'twenty two both from cash content cost as well as what we traditionally think about is working capital can you just talk about your outlook for the rest of the year and the prospects for some of that reversing in <unk> and in next year and then I was wondering if you could also comment.

Really just on tax I think you've had an elevated tax rate. This year you talked about it last quarter is that something that's going to extend into 2023 and if you could just provide any color around what some of the factors are driving that thank you.

Sure so on working capital.

We have seen net working capital outflows as our businesses are getting back up and running and going back to more normalized operations.

After they were kind of turned down during the pandemic.

And Youll see in this quarter, we did generate positive free cash flow of $187 million.

In the quarter.

On taxes.

Our effective annual effective tax rate has generally been correlated with the U S statutory rate.

But there is a lot of things in a quarterly basis, we call them puts and takes in any given period and these can lead to these quarterly variances.

But we still expect our full year 'twenty two tax rate is going to be somewhat elevated above the U S. Statutory rate similar to what you saw and for Q4, it could even be slightly above Q3.

As it relates to fiscal 'twenty three we're just working now through our annual operating plan.

And I don't want to get too specific today, but it's one of the factors, we keep a close eye on as it relates to our ability to utilize foreign tax credits and that that ability to utilize foreign tax credits has been the source of some volatility that you've seen especially in Q2 tax rate.

Okay. Thanks for the question.

I wanted to thank everybody for joining us as well and for your convenience, we will be posting the pricing schedule and updated content slate on our website.

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 planned guidance 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 looking statements are subject to a number of risks and uncertainties and actual results may differ materially from results expressed.

Or implied in light of a variety of factors, including macroeconomic or industry factors and execution risk.

For more information about key risks please refer to our Investor Relations website. The press release issued today and the risks and uncertainties described in our Form 10-K Form 10-Q, and other filings with the Securities Exchange Commission, we want to thank you all for joining us and wish everyone. A good rest of the day.

Yeah.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Yeah.

[music].

After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to Alexia quote Ronnie Senior VP of Investor Relations. Please go ahead.

Good afternoon, it's my pleasure to welcome everybody to the Walt Disney Company's third quarter 2022 earnings call.

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

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.

As of the close of Q3, we now have 221 million total subscriptions across our streaming offering.

Our results showcased the ability of the Walt Disney company's uniquely diversified businesses, the power of our ecosystem and explore growth opportunities across industries and distribution channels.

I'll expand on all of this and more and then Christine will go through the details of our results and provide additional insight into our fiscal 2020 for expectations for <unk>.

Disney plus.

Creative excellence and storytelling that built deep emotional connections with audiences is at the root of our success and I am pleased to say that our creative engines are firing on all cylinders across franchise General Entertainment and sports.

And a testament to the depth breadth and quality of our creative teams. We received 147 Primetime Emmy Award nominations this year, including 92 for our streaming platforms in 'twenty, one for best program and as genre.

Recognition cross format and distribution channels with 47 different shows receiving nominations, including titles like only murders in the building.

EBIT elementary what we do in the Shadows and the dropout right alongside shows from Disney Marvel and Star Wars.

Most recently, we received an additional 71 news and documentary Emmy nominations across ABC News National geographic.

Sex Hulu and ESPN.

Linear and streaming channels.

Some like the buzz generating candy.

<unk> and the bear maybe best served as Hulu original.

Others like Abbott elementary in the old man have become multi platform hits by reaching different audience demographics across both linear and streaming.

And when it comes to our key franchise content I could not be more proud of the teams at Disney.

XR Marvel and Star Wars.

The hugely successful doctor strange in the multi versus Amanda has earned nearly $1 billion at the global box office and 411 Thunder, which premiered on July 8th has grossed over $700 million at the global box office and has the highest domestic grossing film Thor franchise.

Six hours late year, Mark The studios returned to the Big screen in the film debuted on Disney plus last week.

Speaking of Disney plus which is now available in 155 markets. After recently launching 53, new territories, we released content with appeal across demographic groups, including Obi Wan Kenobi and Ms. Marvel.

As well as feature films like does this chippendale rescue Rangers and Disney Natures polar bear.

Incremental viewership and new subscribers that hadn't previously engaged with marvell content on the service.

Thanks to the episodic format that enables us to explore new characters.

Genre.

The value of expanding our fan base is tremendous and this new audience can then experienced marvel across our other offerings from consumer products to games the theme parks.

Looking ahead Q4 will feature a fantastic Disney plus content slate with a steady flow of key releases, including Marvel's She hope attorney at law Lucas films <unk>.

And Disney's Hocus pocus too.

And we look forward to celebrating the second annual Disney plus day on September 8th with Activations across our synergy machine.

Given the global nature of Disney plus we are thrilled to bring international music sensation Bts to the service with an exclusive cinematic concert film and <unk> series following the bans incredible journey.

And the K pop genre at large carry massive global appeal and affinity which will further extend our reach into that global fan base.

And we continue to step up our investment in international local original across formats, including bringing the seventh season of coffee with Karen.

One of India's most popular talk shows exclusively to Disney plus Homestar.

On the theatrical side, we have a robust slate debuting later this year, including the highly anticipated avatar the wastewater.

Our newest animated film Strange World and the final film and Marvel stays for Black Panther will conduct forever.

Statement for this film is amazing and.

And the trailer received more than 170 million views in its first 24 hours.

Folio.

The result of this approach were fantastic last quarter as the Walt Disney Company was responsible for 47% of sports hours watched by the 18 to 49 demo in fiscal Q3.

We also secured exclusive TV rights for the upcoming 2023 to 2027 Ipos season, following a competitive process, where we made disciplined bid with a focus on long term value.

We are excited to continue offering IPL to a linear customers in India, where growth potential exists for our portfolio of more than 70 channels that reaches 90% of pay cable and satellite television homes in the region.

Finally, given the results of our recently completed upfront. It is clear that our unmatched portfolio continues to be highly sought after by advertisers.

With our deep expertise in AD Tech, we are in a position of strength with record upfront advertiser commitment.

Going into the launch of our AD supported Disney plus tier.

Since the launch of Disney plus advertisers have been asking for the opportunity to connect with audiences alongside the most premium brands and content and streaming.

As we shared earlier today.

<unk> upfront.

Turning to our parks this quarter featured new magic around the world and strong operating performance.

All of our theme parks are now open and we continue to bring back more of the great experiences guests love that includes character meet and greet nighttime spectacular at Disneyland and theatrical performances. These offerings are not only big hits with gap, but also enable us to welcome more people into our park each day.

We continue to see strong revenue and profit growth at our domestic parks and experiences businesses.

Even as our cruise ships and international visitation have yet to fully recover.

Domestic demand our theme parks continues to be strong and we are seeing continued progress in those businesses still recovering from the pandemic.

At the same time the business model transformation, we have achieved over the past few years have driven substantial increases in per capita spending and give us the flexibility to adapt should economic conditions change.

We celebrated three major milestones for our parks and experienced business this quarter each of which were priorities I set when I had the opportunity to lead our parks team.

First the innovative and immersive new rollercoaster Guardians of the Galaxy Cosmic Rewind opened in ERCOT as part of the parks ongoing transformation to a place that is more family more timeless and more Disney.

Second we expanded the Disney cruise line fleet with the Disney wish with sale of its maiden voyage on July 2014. This is the first of three new ships and is infused with Disney storytelling, one of a kind of entertainment and a modern interior aesthetic.

It is powered by liquefied natural gas one of the cleanest burning fuels available.

And finally, Disneyland Paris opened Avengers campus on July 20th completing the first phase of our ambitious expansion plan.

New immersive area features two new attractions five action stunt.

Counters with Marvel superheroes and themed restaurants.

I had the opportunity to help openness in the land will start from the Marvel cinematic universe and our cast.

And I could not be more proud of the resorts ongoing transformation.

Are responding in a big way to our enhanced offering at Disneyland Paris as per capita spend in Q3 was up over 30% versus 2019, a great sign of the potential for growth.

I am incredibly pleased with our performance this quarter, our competitive position and unique collection of assets and capabilities that sets us apart.

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

Thanks, Bob and good afternoon, everyone. We are pleased with our strong financial results this quarter with diluted earnings per share, excluding certain items, increasing to $1 90.

Versus 80 in the prior year quarter.

At parks experiences and products.

Third quarter revenues increased by more than $3 billion.

And operating income increased by $1 8 billion versus the prior year, reflecting improvement across both domestic and international parks and experiences.

Demand at our domestic parks continues to exceed expectations with attendance on many days tracking ahead of 2019 levels.

Our continued focus on improving the guest experience through the use of our reservation system to purposely managed capacity versus simply increasing volume has the added benefit of improving yield and optimizing overall economics.

This approach also provides flexibility with levers that we can adjust if demand were to shift.

Per capita spending at our domestic parks also remained strong increasing 10% versus Q3 of fiscal 2021 and over 40% versus fiscal 2019.

And then another sign of the robust demand we have seen at our parks and resorts occupancy at our domestic hotels in the third quarter was 90%.

Looking ahead domestic demand at our theme parks continues to look robust with current forward looking hotel bookings.

And intent to visit roughly in line with pre pandemic trends.

Improvement at our international parks in the third quarter was driven by Disneyland, Paris, where both revenue and operating income exceeded 2019 levels.

And we are seeing the same momentum well into Q4 as we continued to celebrate the 30th anniversary and the opening of Avengers campus in July .

At the media and entertainment distribution segment third quarter revenues increased by over $1 $4 billion versus the prior year and operating income decreased by $645 million as an.

Increase at linear networks was more than offset by declines at direct to consumer and content sales licensing another.

Linear networks operating income in the quarter increased 13% to approximately $2 5 billion.

Given primarily by growth at our domestic channels.

The increase at domestic channels reflects double digit percentage operating income growth at both cable and broadcasting.

Growth at cable was largely driven by higher advertising revenue and to a lesser extent a decrease in marketing costs and an increase in affiliate revenue.

Advertising revenue at cable benefited from the timing of the NBA finals, which represented six of the top seven telecast among the coveted 18 to 49 demo across all networks this quarter.

Note that the final third in the third quarter this year versus the fourth quarter of the prior year.

Demand for live sports remains strong however, due to the NBA finals timing impact fourth quarter to date domestic cash advertising sales at ESPN are currently pacing down.

Moving onto broadcasting operating income increased versus the prior year due to higher results at both ABC and our owned television stations.

Total domestic affiliate revenue increased by 2% in the quarter.

This was driven by six points of growth from higher rates, partially offset by a three point decrease from fewer subscribers.

International channels operating income was comparable to the prior year, reflecting increased sports programming costs, partially offset by advertising revenue growth.

Both of these trends were driven by the airing of 35 additional IPL cricket matches in the third quarter versus the prior year.

Note that results also benefited from the closure of certain channels over the past year.

Our direct to consumer lower operating results across Disney plus Hulu and ESPN plus reflect increased programming and production costs in line with the guidance, we gave last quarter.

As we continue to strategically invest in our streaming businesses.

At Disney plus we cross the 150 million subscriber milestone.

<unk> ended the third quarter with more than 152 million global paid subscribers.

A net addition of more than 14 million subs versus Q2.

Strong Disney plus core net subscriber additions of $6 million reflect growth in existing markets as well as launches and over 50, new markets during the quarter.

And we currently expect Disney plus core net additions in the fourth quarter to accelerate modestly versus Q3, particularly in the domestic market.

At Disney plus Hot Star subscribers increased by over $8 million as the IPO concluded its 15th season in the quarter.

At content sales licensing and other operating results decreased in line with our expectations by about $160 million versus the prior year quarter.

Reflecting an unfavorable foreign exchange impact and lower TV, <unk> and home entertainment distribution results, partially offset by higher stage play and theatrical results.

As it relates to foreign exchange note that the overall impact to the company's segment operating income was only modestly negative in the quarter as our FX hedging program continues to be effective in mitigating the impact that changes in exchange rates have on our business.

Mrs.

As we continue to scale back on third party content licensing we believe content sales licensing. Another results will continue to face headwinds and expect fourth quarter operating results will decrease versus the prior year by close to $100 million.

Cash content spend across the company is now expected to total approximately $30 billion for fiscal 2022.

This estimate is slightly lower than our previous guidance largely due to timing changes.

And we expect annual cash content spend over the next couple of years to be roughly in the low $30 billion range as well.

We are also revising our full year forecast for capital expenditures to $5 billion compared to fiscal 2021 Capex of $3 6 billion.

Our new expectation for 2022 is roughly $500 million lower than our previous guide in part reflecting timing shifts of various projects across the company.

Finally, before we move to Q&A I want to spend some time sharing a few updates on our fiscal 2024 guidance for Disney plus.

We are providing more detail on subscriber targets by separating our guidance into two categories.

Disney plus and Disney plus Hot Star.

Excluding the impact of any significant future macro headwinds our core Disney plus subscriber target range is 135 million to $165 million by the end of fiscal 2024.

Largely consistent with previously provided guidance that non hot Star Disney plus subscribers in 2024 would approximate 60% to 70% of the expected $230 million to $260 million total subscriber base.

We are however, updating subscriber guidance for Disney plus Hot star to up to 80 million subscribers by the end of fiscal 2024.

We intend to refine this target overtime as subscriber visibility in India will be clearer once the ICC and BCC cricket rights sales processes are completed.

As you May know, we recently made the disciplined decision to not proceed with the Indian Premier League Digital rights and we will evaluate these rights with that same discipline.

As we sit here today, we remain confident that Disney plus will achieve profitability in fiscal 2024.

And look forward to several upcoming catalysts, including reaching a steady state of Tentpole original content releases.

Delivery of premium General Entertainment and international local originals.

And the upcoming launch of our AD supported tier.

Alongside the new pricing structure announced earlier today.

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

Thanks, Christine as we transition to Q&A, we ask that you. Please limit yourself to one question in order to help us get as many ounces possible today.

And with that operator, we're ready for the first question.

Thank you and to ask a question you May Press Star then one on your telephone keypad. If you are using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.

And the first question will be from Doug Mitchelson from Credit Suisse. Please go ahead.

Thanks, So much one question there was so much to ask about well while I go with this and I do appreciate you separate out the guidance between Onstar Oncor Disney but parks were impressive this quarter.

You talked about levers if demand were to shift is the company satisfied pent up demand.

From the pandemic at the parks. This point should we look at the go forward basis is relatively normal trends and I'm guessing you have a different answer for domestic versus international and Christina I'd be curious if you put any meat on the bone regarding the levers if demand were to shift at the parks. Thank you.

Sure. Thanks, Thanks, Doug.

Our parks certainly did have a fantastic quarter and I just wanted to say that the parks.

<unk> is the same team led by Josh Tomorrow that was able to manage through the COVID-19 crisis that impacted the business significantly.

So we're able to ramp back in on a very phased basis back to the recovery phase and are now positioned for growth. So I just wanted to acknowledge that team for being sort of a triple threat when it comes to being able to manage.

From very very different vantage points based on the environment.

As it relates to levers of demand some of the things we can do Doug.

We had limited the number of annual patches that we have across some of our businesses. Some of the parks and all of those come with some with the exception of the highest tiered priced annual passes they all come with some blackout dates so to the extent to which perhaps you had.

Lightened demand you could loosen up some of those to bring more people in the park and Jess.

<unk> Park and spend money, while they are there.

And also as it relates to demand we have not yet seen.

Demand abate at all and we still have many days when people cannot get reservations. So we're still seeing demand in excess of the reservations that we are making available for our guests.

Thank you next question.

Thank you and the next question will be from Ben Swinburne from Morgan Stanley . Please go ahead.

Afternoon.

But could you talk a little bit about sort of the research and insight you have into your streaming customer base that sort of informs the decision to take these price increases, which on a percentage basis a pretty large.

Without really reducing net ads.

From churn spiking as you implement these price increases.

Maybe talk a little bit about how the product now.

Consumers will be paying for next year at these higher prices will compare to this year.

And I'm just wondering are you planning to take some more pricing moves at least directionally outside the U S over time.

Thanks for the color.

Well as you know.

We launched at an extraordinarily compelling price across all the platforms that we have for streaming I think it was easy to say that we're probably the best value in streaming and since that initial launch we've continued to invest handsomely and our content as you know we believe because the increase in the investment over the past.

Two and half years relative to a very good.

Price point that we have plenty of room on price value and we do not believe that there's going to be any meaningful long term impact on our churn as a result, I mean, one only needs to look at our recent cigna.

Significant increase on ESPN, plus which had the exact same impact of really no meaningful impact at all on our churn.

And we believe that we've got plenty of price value room left to go.

Yes.

Thank you next question.

Thank you and the next question will come from Steven Cahall from Wells Fargo. Please go ahead.

Thanks.

So the margins were really spectacular I am just wondering what kind of trends youre seeing from international visitation, where those strong in the quarter or is that a tailwind to either per caps or hotel occupancy as you get into the back half of the year and you see more international traffic.

I'll take that one Steve.

The deep margins were indeed, a very strong one of the things that we've seen is during the pandemic international visitation to our domestic park, primarily Walt Disney World.

It was basically nonexistent that has preceded to come back and it has come back very nicely, but it is still below the traditional range that we've given you which is around 17%, 18% up to the low twenty's, but.

But it has made significant progress and we expect the international visitation when it is fully back to actually.

Be additive to margins because of those guests tend to stay longer at.

At the parks and they spend more money when they're there as well.

Thank you your next question.

The next question is from Michael Nathanson from Moffatt Nathanson. Please go ahead.

Thank you I just wanted to dig a bit in R&D.

The AD product Disney plus.

Your expectation for Ad load.

As you know we've had a lot of experience with this on Hulu and a lot of success with this on Hulu and we are walking before we running and Karen before we run in terms of seeing.

See what the market will bear in terms of an AD load. So we're going in very conservative upfront.

But we believe that there is probably going to be some more ultimate elasticity in that as well as we go forward and we're just really thrilled that we're able to.

And that has to go the other way, which I think would be a much bigger deal.

And the only other thing I'd add to that Michael is based on our Hulu experience.

That.

Even current subscribers, who have AD free may choose to stay at the same price point with ads.

The Hulu AD supported tier has more subscribers than the AD free.

In fact, it's well over.

About it's about two thirds and thats something that we can't anticipate that we'd have exactly the same behavior because its a different demo.

That has Disney plus versus Hulu, but that's the best indication that we have but we expect the <unk> to be popular.

And we also expect some people to want to stay with AD free.

Thank you your next question.

That question will come from Jessica Reif Ehrlich from Bank of America. Please go ahead.

Maybe switching gears a little bit to sports can you give us your thoughts on what the structure of an M. B a renewal might look like would it be different than in the past you've mentioned participating in sports betting you have the best brand name can you maybe elaborate a little bit on.

Timing of what you're thinking and then just a follow up to some of the comments just on <unk>.

You launched new cruise ship can you talk about what you're seeing in terms of cruise demand overall.

Okay.

Okay. Thank you.

Yourself.

Okay I'll talk about EMEA.

As you know we've had a great history with the MBA really proud of our partnership there and.

The past season, and the ratings for the finals had been absolutely extraordinary so we're interested in a renewal with the NBA, but like all of our decisions that we make in terms of content. We will only do it if it's accretive to shareholder value and I think that remains the overall guidance, whether youre talking about India with IPL was.

Youre talking about college sports, whether youre talking about Formula one racing or Youre talking about and so.

So we have an interest to do that we're really happy with our portfolio of sports rights that we have but of course the continued relationship with ENB would be something that would be very attractive to us.

Do you want to export setting.

In terms of sports betting.

Sure.

Have been in.

In conversations for quite a long time now with a number of different platforms too.

Add some utility to sports betting and take away some friction for that for our guests we have found that.

Basically our sports fans that are under 30, absolutely require this type of utility and the overall portfolio of what ESPN offers so we think it's important we're working hard on it.

And we hope to have some something to announce.

In the future in terms of a partnership there.

Allow us to access that revenue stream and also make sure that our guests are being having the Smith.

Jessica on cruise as you know we welcomed our fifth shipped to our four ship fleet. So we now have five.

The new ship as it goes by the name of wish.

As Bob mentioned, and it's quite an extraordinary vessel.

<unk> for us and it has generated double digit returns on the investment and we expect that business to come back to the similar level.

Really attractive return on.

That we had previously experienced.

And a couple of things the wishes of our newest ship and that has gone with very very high capacity.

And that's that one.

And we're positioned for growth and the other four ships are all selling and their occupancy is improving week by week.

Okay.

Next question please.

The next question is from cut gun Merle from RBC capital markets. Please go ahead.

Great. Thank you for taking the questions one on the parts and a follow up on FX, if I could.

<unk> to prior recessionary periods that you could speak to and then Christine if I could follow up on your foreign exchange commentary can you share a bit more on how you manage your FX risk.

What was the impact of FX on DTC ARPA. Thank you.

Yes, I think a lot of onlookers looked at our park business and try to some of our success recently and say that it has something to do with pent up demand and certainly there is pent up demand. So what we're seeing is far more resilient far more long lasting in terms of <unk>.

The increase and the affinity for our parks both from their willingness to come to our parks and.

Yes.

So we believe we do have a lot of flexibility.

The flexibility we have but as you know our business looks very strong with forward looking bookings and intent at pre pandemic levels and we see nothing in the future that's indicating.

Anything to the contrary, what we see so we're very pleased with that I should also remind you that our reservation system really does a great job of spreading demand. So if we see any spiking. This we can actually smoothed that.

And I'll take the question on foreign exchange and the way we hedged. So we do have a hedging policy that is well established and has really served the company well over.

Very volatile foreign exchange markets. So just levels that we have we have a program and the goal of it is to reduce the impact that changes in foreign exchange rates have on our current and future earnings. So we really have an objective of trying to.

Attain earnings and cash flow stability and predictability. So we try to take out the <unk>.

And the downs so the hedging program. It has significantly reduced the negative earnings impact of the strong dollar that we've seen both in third quarter as well as the fiscal year to date and so despite being economically hedged.

Another thing is when you look at content sales and licensing, especially if you go back and look at the transcript you'll note that there was.

A reference to that also being impacted by.

Negative foreign exchange that was just a balance sheet and effectiveness. We also hedged the balance sheet and that had to do more with we base our hedging on forecasted.

Plans and if the if the plants come in stronger and more under hedged or overheads. In this case we were.

But it did not benefit us because we were hedged the right way.

The dollar strengthening but that is a one timer that should not be repeated but as it relates to our <unk>. If you have some volatility you will see it in the <unk>, but it nets out as a company overall as I mentioned in my other comments that this is a this is <unk>.

Not a material item for us on a consolidated basis, you just saw spike out, especially in the med and the other thing is we do hedging on a multiyear basis. So we layer in our hedges over a period of time, which has really served us well in the current environment.

Thank you next question.

And the next question is from Kannan <unk> from Barclays. Please go ahead.

Thank you.

Okay.

Maybe above <unk>.

Using perspective, when you think about sports.

It does seem like that had a lot of new entrants I mean, apple seems to be interested in more and more sports rights.

And from your perspective, you, obviously walk away from the cricket rights in India and it looks like began may also be going in a different direction. So when you think about sport strategically.

Given that cord cutting is structural.

Do you think about the business longer term do you really have to own ESPN or get into sports streaming and a much bigger way or invest a lot more I mean, the next when we get off of it.

Obviously from a decision perspective, so it'd be great to get.

Or how youre thinking about sports more broadly.

And then on the advertising side, if I could just.

Ask a bigger picture question around the Disney.

From a subscriber perspective, Disney plus with compatible domestically to Hulu and U S is the biggest ad market.

When it comes to the TV opportunity. So when we think about the yellow.

Advertising for Disney plus is Hulu, the kind of benchmark, we should be thinking about or Ken business loves to be much bigger because of the international SKU, Although CPM they must know what I would say.

If you could just help us claw back opportunities great.

Okay in terms of the strategy on sports we're continually.

<unk> by the power of sports in terms of viewership and what it adds to our overall portfolio, particularly in an advertising type world.

As you know we get strong cash flows on linear and it helps to pay some of the bills and the company as we make some of our <unk>.

Significant investments in content and we also like the proposition of growth and expansion on our DTC in terms of the rights.

If you look at the college right. So we've got the SEC, we've got the ACC. We've got the Pac 12, we've got the Big 12, we've got to play off we've got the most comprehensive programming. So if we don't get rights in every single conference. We don't we don't believe that.

In any way limiting for us, but what we are all preparing for is the future of what ESPN would look like in a direct to.

Consumer and a true direct to consumer fashion and I think the way that we're looking at this is that we want to proactively prepare for that future without prematurely disrupting the cash flow that we get from the linear networks right now and as you know we've negotiated flexibility.

Our rights agreements across the board for any new rights that we have acquired over the last several years, but we're still bullish on sports. We believe there is tremendous degrees of freedom in terms of what ESPN DTC ultimately looks like.

I think.

We're very proud of what we've done to date on ESPN, plus but that in no way limits, how we envision what true ESPN DTC proposition would look like going into the future.

Hi can on.

To ensure a great experience reviewers and these viewers are different then because a lot of them are families.

And you have a lot of adults at <unk>, but it's a different it's a different viewing experience.

But because of that disciplined lower AD load lower frequency and the strong advertising demand that we've had that translates into some of the.

Industry, leading CPM rates at the most recent upfront for Disney plus.

And then we look at beyond domestic what we can do internationally and we plan to go international sometime next year and we've built these strong advertising relationships around the world with our previously existing and currently existing linear footprint. So we're confident in our ability to navigate.

International advertising marketplace, given our depth of knowledge and experience with the traditional linear business. So we really feel well suited to deliver both domestically on Disney plus is Avon as well as international.

Thank you next question please.

And that question is from Phil Cusick from Jpmorgan. Please go ahead.

Hi, Thank you one and a follow up on DTC.

Kristine there were higher DTC and Disney plus programming costs than we expected. This quarter can you give us some direction of where to go in the fourth quarter and when should we expect those Disney plus operating income losses to peak.

Okay. Let me start first with the acceleration of subs I did mention that that we expect acceleration of subs to be.

Especially in the domestic market to be modestly above where we are.

Now, but you will see growth in Q4, and we feel good about that because of the content releases, we have and.

And just the existing shows that are on.

Peak losses, we expect peak losses.

As of today, we expect Disney plus to reach peak losses in this current fiscal year 'twenty two.

So that is something that is consistent with what we've previously said as it relates to higher cost of content and programming.

We have said that.

We have this is a peak year of losses, which includes those costs, but also we expect as we go into.

Developing our full slate that the next quarter, you will see a similar increase year over year that you saw this quarter.

Thank you next question please.

And that question is from Brett Feldman from Goldman Sachs. Please go ahead.

Hi, Thanks, and if you don't mind I'd like to follow up with a question about the AD experience and Disney plus and it's really two things I was hoping you could comment on the first as well.

Would you expect to potentially display ads alongside any of the content some of that content.

The kids content I think historically in the linear world didn't necessarily have agile outside of it. So I'm just thinking about that element of it and then secondly, the competitors looking to layer advertising their product, they're suggesting that they're going to somehow do it differently and I'm. Just curious as you think about the experience you've had.

I should say that the.

Our shareholders.

Result, I will have to say that we are not encumbered by that or in any way limited by what we've done in the past therefore, we could have.

No.

Add proposition as good as the one that we've had on Hulu, but it could actually be better because of that different technology platform.

So it has the ability to evolve over time much more on the new platform than it does in the platform.

And as it relates to the AD experience spread.

It's not all content on Disney plus being treated equally there'll be no ads in kids profiles are preschool at least at the launch and so this is going to be done very thoughtfully.

And looking at the content and also making sure that the advertiser is consistent with the content.

Thank you operator, I think we have time for one more question sure. The question is from Bryan Kraft from Deutsche Bank. Please go ahead.

Lastly, just on tax I think you have had an elevated tax rate. This year you talked about it last quarter is that something that's going to extend into 2023 and if you could just provide any color around what some of the factors are driving that thank you.

Sure so on working capital.

We have seen networking capital outflows as our businesses are getting back up and running and going back to more normalized operations.

After they were kind of turned down during the pandemic.

And Youll see in this quarter, we did generate positive free cash flow of $187 million.

In the quarter.

On taxes.

Our effective annual effective tax rate has generally been correlated with the U S statutory rate.

But there is a lot of things in a quarterly basis, we call them puts and takes in any given period and these can lead to these quarterly variances.

But we still expect our full year 'twenty two tax rate is going to be somewhat elevated above the U S. Statutory rate similar to what you saw and for Q4, it could even be slightly above Q3.

As it relates to fiscal 'twenty three we're just working now through our annual operating plan.

Okay. Thanks for the question I wanted to thank everybody for joining us as well and for your convenience, we will be posting the pricing schedule and updated content slate on our website.

Or implied in light of a variety of factors, including macroeconomic or industry factors and execution risk for more information about key risks. Please refer to our Investor Relations website.

Press release issued today and the risks and uncertainties described in our Form 10-K Form 10-Q, and other filings with the Securities Exchange Commission, we want to thank you all for joining us and wish everyone. A good rest of the day.

Okay.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.

Q3 2022 Walt Disney Co Earnings Call

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