Q3 2019 Earnings Call
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Ladies and gentlemen, please me line the walk Disney Company's fiscal third quarter 2019 financial results conference call will begin momentarily. Once again. Please standby. Thank you who know much harder.
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Good day, ladies gentlemen, and welcome to the Walt Disney Company's fiscal third quarter 2019 financial results Conference call.
At this time, all participants are in listen only mode.
Later, there will be a question answer session and instructions will follow at that time.
If you require any assistance during todays call. Please first problems or any touchtone telephone as a reminder, this conference call is being recorded.
I would now like turn the conference over to Lowell singer Senior Vice President of Investor Relations you may begin.
Good afternoon, and welcome to the Walt Disney Company's third quarter 2019 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.
Todays call is also being webcast and a replay and transcript will also be available on our website.
Joining me for today's call are Bob Iger, Disney's Chairman and 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 your questions. So with that I will turn the call over to Bob to get started.
Thanks, Michael and good afternoon, everyone I had been doing earnings calls for a long time and this is one of our more complicated ones. We certainly have a lot to cover and discuss.
This is our first full quarter since we closed our acquisition of 21st century Fox in March.
Our results reflect our efforts to integrate the assets businesses and talent, we acquired in order to enhance and advance our strategic transformation.
Implementation of our integration plan is well underway complex process, given the magnitude of the endeavor and we remain confident in our ability to successfully execute our strategy to drive maximum value from the combined company and their appreciation for the long term value. We can create has increased.
I'm going to ask Christine to take you through the numbers and then I'll be back to provide some additional perspective, which would give you greater insight into our bullish view of the future.
Thanks, Bob and good afternoon, everyone.
Excluding certain items affecting comparability earnings per share from continuing operations for the third quarter were $1.35.
Our third quarter results reflect a full quarter of performance of the 21 CF businesses, we acquired and are still in the process of integrating and full consolidation of cooler.
Results. This quarter include a number of factors, we recognized can be challenging to model in a moment I'll discuss our Q3 results in greater detail and shed additional light on these factors and then I'll highlight a few items that will impact our Q4 results.
Since we are in the middle of our fiscal 2020 planning process.
I expect to have more to say on the key drivers of next year's result, during our Q4 call.
The 21 CF businesses, we acquired excluding 21, CF steak, and who had a slightly negative impact on third quarter segment operating income.
The total adverse impact on segment operating income, including full consolidation of Hello.
And the effect of intersegment eliminations was about $300 million.
Overall, we estimate the acquisition of 21, CF had a dilutive impact on our Q3 EPS before purchase accounting on about 60 cents compared to the 35 cents guidance, we provided last quarter.
The initial guidance of 35 cents reflected our assumptions about the business at the time. However, there were a couple of 21 CF businesses, whose results came in significantly lower than our expectations in particular, the 21 CF film studio and Star.
I want to take a moment to discuss the primary drivers of the underperformance of these businesses, which are reflected in our studio and direct to consumer and international segments.
First the 21 CF film studio had an operating loss in the third quarter of about $170 million, which was driven by the underperformance of theatrical titles, including dark Phoenix.
Marketing for future releases and development expenses, partially offset by TV S Vod distribution.
While 21 CF performance is not reflected in our prior year results. We estimate that 21 CF film studio generated about $180 million of operating income in Q3 last year.
On the other hand I'll note that the performance of the Disney film studio continues to be incredibly strong.
This quarter's theatrical slate, including Avengers endgame, Aladdin toy story, four and the carryover success of Captain Marvel drove higher worldwide theatrical results compared to what was also an outstanding slate of films during the third quarter last year, which included vendors Infinity War Incredibles, two and Black Panther.
Second as you know results at DTC I reflect ongoing investment in our direct to consumer businesses.
And this quarter also included an operating loss at star of about $60 million.
We estimate star generated about $150 million of operating income in the third quarter last year.
Stars results this quarter came in well below our expectations and were driven primarily by a meaningful step up in rights costs for the quadrennial Cricket World Cup and the Indian Premier League as revenue growth was more than offset by the incremental rights expense.
There was an additional negative impact to EPS of about six cents as a result of the HEU agreement, we entered into with NBC you in May.
The agreement provides us with full operational control of Hulu and most of the six cents impact results from NBC, you no longer being allocated its share of who operating losses and our financial reporting.
You will find additional detail on the transaction and the financial impact in our 10-Q.
At park experiences and products growth in operating income was driven by higher results at consumer products and Disneyland Paris, partially offset by a decrease at our domestic parks and resorts.
Attendance at our domestic parks was down 3% in the third quarter, but per capita spending was up a healthy 10% on higher admissions.
Food and beverage and merchandise spending.
Per room spending at our domestic hotels was up 3% and occupancy was up two percentage points to 88%.
Despite domestic parks achieving record revenue in the third quarter operating income was down slightly due to the decline in attendance and higher costs.
Disneyland resort had strong underlying attendance fundamentals with growth in local domestic and international visitation.
We're very pleased with how guests have responded to galaxies edge.
And Millennium Falcon smugglers, Ron is one of our most popular attractions.
The decline in attendance at Disneyland resort was primarily driven by lower annual Passholder visitation as we managed demand for the first few weeks after opening Star Wars galaxies edge in order to maintain a high level of guest satisfaction.
And at Walt Disney World. Our survey data suggests that guests are deferring visitation until after star Wars galaxies edge opens which we believe contributed to the decline in attendance we saw during the third quarter.
Looking ahead, we are excited for the opening of Star Wars galaxies edge at Walt Disney World and the opportunity to introduce guests to the rise of the resistance. Our most technologically advanced and immersive attraction when that attraction opens at Walt Disney World in December and at Disneyland in January .
Our domestic parks incurred incremental operating expenses during the quarter, including wage increases and preopening and operational expenses associated with the opening of galaxies edge.
Results at our international operations were higher in the third quarter due primarily to growth at Disneyland Paris.
At consumer products growth in operating income was due to higher results in our merchandise licensing and retail businesses.
Growth in merchandise licensing was driven by higher revenue from sales of toy story and vendors merchandise, partially offset by lower sales of Star Wars merchandise.
Growth in comp store sales at our brick and mortar stores and higher online revenue drove the increase in retail for the quarter.
Looking ahead to the fourth quarter, we anticipate strong segment operating income growth driven by the benefit from a full quarter of Star Wars galaxies edge at Disneyland and growth at merchandise licensing.
So far this quarter domestic resort reservations are pacing up 4% compared to prior year, while book rates are up 3%.
At media networks total affiliate revenue was up 20% in the third quarter and reflects the impact of the 21 CF acquisition as well as underlying growth at our legacy media network.
The increase in affiliate revenue was driven by 16 points of growth from the acquisition of 21, CF and eight points from higher rates, partially offset by a two and a half point decline due to a decrease in subscribers.
At broadcasting lower programming expenses and higher affiliate revenue were more than offset by the impact of lower program sales and a decline in Raptor Tizing revenue.
AD revenue was lower in the quarter as higher network rates were more than offset by lower viewership.
Quarter to date primetime scatter pricing at the a B C network is running 35% above upfront levels.
APC studios faced a difficult year over year program sales comparison since Q3 results last year reflected the sale of Luke Cage and this quarter, we had lower sales of how to get away with murder and designated survivor compared to last year.
Domestic cable results were up in the quarter due to the consolidation of the 21 CF cable businesses and higher operating income at ESPN, partially offset by a decline at free form.
At Ftn growth and operating income during the third quarter was due to higher advertising and affiliate revenue, partially offset by an increase in programming and production costs driven by contractual rate increases for MLB and be a programming and new right.
ESPN domestic linear advertising revenue was up 13% in the third quarter.
ESPN benefited from two extra NB eight finals games compared to last year.
When you adjust for the mix and the total number of playoff games. This year compared to last year. We estimate there was about an eight point benefit to the year over year growth in advertising revenue.
So far this quarter ESPN domestic cash AD sales are pacing down compared to last year.
Results at our direct to consumer and international segment reflect the consolidation of Hulu and ongoing investment at ESPN, plus and Disney plus.
Results at our direct to consumer businesses had an adverse impact on the year over year change in segment operating income of about $400 million.
ESPN plus had a little over 2.4 million paid subscribers at the end of the third quarter and Hulu at approximately 28 million paid subscribers.
Now I'll turn to some thoughts about fourth quarter.
We expect our direct to consumer and international segment to generate about $900 million and operating losses for the quarter, which represents an increase of about $560 million over the fourth quarter last year.
We expect the continued investment in our DTC services, including Sps, plus and Disney plus and the consolidation of Hello.
To drive an adverse impact on the year over year change in segment operating income of our direct to consumer businesses of approximately $550 million, which is almost the entirety of the total segment change versus prior year.
At media networks, there were few items I'd like to mention that we believe will cause segment operating income to decline by about 10% in the fourth quarter compared to prior year.
We expect the 21 CF television businesses to contribute about $200 million and operating income in the fourth quarter.
With two thirds of that contribution at broadcasting and one third at cables.
We estimate 21, CF television businesses generated operating income of about $485 million in the fourth quarter last year.
The expected year over year decline is due to a combination of factors, including lower program sales and higher content development expense, which are both related in part to our ongoing investment in our direct to consumer businesses.
At HBC Studios, we expect a difficult program sales comparison, given we sold to Marvel series Daredevil and Iron Fist. During Q4 last year and we don't expect comparable sales in Q4 this year.
At ESPN, we expect higher programming expenses, driven by contractual rate increases and launch costs for the HCC network and lower AD revenue to more than offset growth in affiliate revenue.
In aggregate, we estimate the acquisition of 21st century, Fox and the impact of taking full operational control of who will have a dilutive impact on our Q4 earnings per share before purchase accounting of about 45 cents per share.
Despite these headwinds we remain excited about the acquisition of 21, CF and still expect the acquisition to be accretive to EPS before purchase accounting for fiscal 2021, and we also remain on track to realize over $2 billion in cost synergies by fiscal 2021, and with that I'll now turn the call back over to Bob.
Before I discuss our new strategy I'd like to begin by singling out our studio, which is the envy of the industry.
The studio has generated $8 billion in global box office in 2019, a new industry record.
We still have five months left in the calendar year with movies like Maleficent mistress of evil.
Frozen two and Star Wars, the rise of Skywalker still to come.
So far this year, we released five of the top six movies, including four that have generated more than $1 billion global box office.
Ventures endgame is now the highest grossing film in history with almost $2.8 billion worldwide.
Captain Marvel OLED, and the Lion king of each surpassed $1 billion.
And it was more than 960 million in box office to date towards drew four will likely cross that threshold in the coming weeks.
And all of these movies will be on Disney plus in the first year of launch.
The studio Codeshare is behind this record setting performance Alan Horn and Ellenberg room are now redefining Twentyth century, Fox has grown strategy for the future.
Applying the same discipline and creative standards behind the success of Disney Pixar Marvel and Lucas film.
They are taking the Fox studio in a new direction, all new developments slates will focus on a select group of high quality movies for theatrical release as well as for Hulu and Disney plus platform.
And Fox Searchlight, we'll continue to make the prestige films is known for while expanding its high quality original storytelling into the DTC space.
We see great long term value and the broad collection of theatrical IP, we acquired from Fox, including iconic movie franchises, such as Avatar and planet of the apes as well as Marvel's Ekman fantastic four and Deadpool, which are now part of Marvel Studios under the leadership of Kevin Foggy.
Architect of the Marvel Cinematic Universe, which now includes 23 movies global box office more than $22 billion to date.
We're also focused on leveraging Foxs vast library of great titles to further enrich the content mix on our DTC platforms.
For example, re imagining home alone night at the museum cheaper by the dozen and diary over would be cared for in new generation on Disney plus.
As I said, a few times, we analyze the 21st century Fox opportunity entirely through the lens of our future business evaluating the long term potential, especially related to accelerating our transformation into the DTC space on a global basis.
As a result of the acquisition. We also now have full operational control of Hulu and a clear path to full ownership, providing another powerful platform for us to produce and distribute great content.
Who will provide us with an excellent opportunity to leverage the capabilities of our television studios and brands, notably FX and APC television.
The deal also added star of Hotstar to our portfolio of businesses, giving us a significant presence in India, which will soon become the most populous country in the world.
It's a huge market interesting dynamics, notably a rapidly rising middle class with a strong and growing appetite for media, especially sports.
To give you an idea of the value of this platform last quarter Hotstar had more than 300 million average monthly users served an unprecedented 100 million daily users and delivered a high quality streaming experience to 25.3 million simultaneous users, which is a new world record.
The platforms broad array of premium sports rights will serve it well over the next five years, especially as we expand the service into markets across Southeast Asia.
And Walt Disney television the Fox acquisition brought us talented and experienced senior leadership, we're now in place to produce much of the content, we rely on to implement our ambitious strategy.
The studio capabilities production expertise and valuable relationships with the creative community will be vital to our DTC plans well also overseeing a b C. NBC news our own television stations FX, Freeform Disney channel and that Gio.
National Geographic brings a strong global brand to our portfolio along with World class content for our television and DTC businesses.
Disney plus will offer more than 600 hours of premium content from national geographic at launch alone with almost 300 hours of family Entertainment from the Fox Studios Library.
Disney plus will ultimately become the exclusive streaming service for our vast library of movies and series National Geographic content, all upcoming Disney Pixar, Marvel and Star Wars movies, and a robust slate of high quality original programming from the creative engines that drive our entire company.
Regarding our suite of DTC services I'm pleased to announce that in the United States consumers will be able to subscribe to a bundle of Disney plus SPM plus an AD supported Hulu for $12.99 a month.
The bundle will be available on our November 12 launch date.
Before we take your questions, let me reiterate a few things.
Today much of our focus is on integrating foxs assets and leveraging them along with our Disney businesses to move quickly into the direct to consumer space nothing is more important to us than getting this right.
We remain confident in our strategy and our ability to successfully executed and as Christie noted, we still expect the acquisition to be accretive to EPS for purchase accounting for fiscal 2021.
We're clearly bullish on our future for good reason.
On that note Christine and I will be happy to take your questions.
Thank you, ladies and gentlemen, if you wish to ask a question at this time. Please press Star then one on you touched on telephone.
If your question has been answered or you wish move yourself from the queue. Please press the pound key.
To prevent any background noise, we ask that you. Please place your line on mute. Once your question has been stated.
Our first question comes from Alexia Quadrani with JP Morgan Your line is open.
Hi, Thank you very much just just two questions if I may 1st on the.
On the stock of integration I know, it's really early days and you highlighted some areas of weakness 20. Once you have had in the quarter, but you also spoke about the opportunity of Fox and.
He presents longer term.
I guess my question is any color how long it takes to for the just the impact really impacts these assets I assume it takes a while for the studio and the other assets you really you have to own them for a while before you really see the impact and then my follow up question is on the park.
Any color on how star Wars galaxies edge opening at Disneyland did versus your internal expectations anything you learned from it and terms the opening that you can sort of the tighter orlando's opening later this month.
Sure Alexia thank you.
First of all.
Regarding Fox and the integration.
And I think in terms of his results aside from a lot of the ins and outs that Christine described like the faster cricket in India et cetera, and so on in the.
The impact to the who were dealing with one of the biggest issues that we faced in this quarter in terms of the result, the the earnings was the Fox studio performance.
Which was well below where it had been in well below what we had where we hoped it would be.
When we made the acquisition now understand I've been through a number of these first of all I was bought twice.
First that cap capital cities, a b C. And then Disney bought a B C and I know what happens when companies are purchased often decision, making can grind to a halt or certainly slowed down.
We've managed to avoid that and the purchases of Pixar and Marvel and even lucasfilm in part because between when we made the deal and when the deal closes relatively short periods of time.
In this case, we announced the deal first in December 17, and we didn't close the deal until spring of 2019.
And that's a long period of time for a business that relies on constant decision, making and constant attention to detail.
Well I don't in any way, meaning to cast dispersions at any individuals at all it was a very difficult transition for that business and what we've done is we've put it under our studio and you know the results there.
They have been hard at work working primarily with Emma Watson the live action side to redirect the efforts of the live live action part of that business first of all to consolidate a cutback in the numbers of leases and then to focus on the kind of release that we would hope to come out of that studio. We like some of the movies that are coming up notably this one called Ford Ferrari, which we've all seen which is great.
But it will probably take good solid year may be two years before we can have an impact obviously takes longer on the development side, but an impact on the films that are actually in production.
Thank you all confident that we're going to be able to turnaround the fortunes of Fox dive action.
And and you'll see those results in a couple of years.
On the.
Scansource galaxies edge front to give you some color I think a number of things happened first of all.
Helped in part by some of our efforts to his tremendous concern in the marketplace that there was going to be huge crowding. When we opened galaxies edge and so some people stayed away just because they expected that it would not be a great guest experience.
The same time that was going on all the local hotels in the region expecting a huge influx of influx of visitation.
Raise their prices so its simply got more expensive to come stay in Anaheim. In addition to that we raised our prices. We put we brought our daily price up. So if you think about local visitation, we brought the price of a one day ticket up substantially from a year ago.
And then we opened up galaxies edge was one attraction instead of to the second attraction is going to open in January .
So all of those factors contributed to.
Attendance that was below what we would have hoped it would be that said guest satisfaction interest in there in the attractions in the land is extremely high they are among the most the most popular thing at the park.
So long term I mean look we don't leasing so long term, we have no concerns whatsoever about the opening galaxies edge in August .
In.
Lando the second attraction there will open in December and as I said, the second attraction in Anaheim.
I will open in January so we feel great about the product that we've created if you can just take some time for basically for things to work themselves out in terms of how the marketplace is reacting.
Okay, Great just one Alexia I just want to put a little more granularity on the Disneyland results for the quarter.
As I said, the attendance was down 3%, but the paid attendance was up in the quarter and that lower attendance was primarily driven by the annual Passholder visitation and when we look at the the per cap spend across Disneyland all categories. They were up significantly year over year.
Hi, Thank you both very much.
Thanks, Alexia take the next question please.
Our next question comes from Michael Nathanson with Moffettnathanson. Your line is open.
Thanks, I want to Bob Owens Christine.
Bob Thanks for the update on the whole bundle, that's who we want to ask you. Another question on Hulu is any update on international rollout now that you have full control that's something that people have been focused on and then first for Christine I'm just confused a bit by what surprised you at at Star because those contracts were known so was it something more about.
For most of those contracts that you are in terms of the ratings of that contract that that surprises anymore on India. It would be helpful. What what disappointed you.
They were not.
Updating anything regarding who internationally.
Kevin Mayor and the team at who are studying opportunities along with our international team market by market.
Obviously, we have designs on growing Hulu outside the United States, but no update on that right now.
Okay and Onstar Michael the.
The.
It was the quadrennial cricket World Cup of course, they have their Indian Premier League, which is ongoing but this is once every four years for the World Cup. There were a couple of significant games that were rained out.
They have insurance coverage for some of those but any proceeds would be in future periods and there was also some weakness in advertising revenue that was related to the local advertising market.
Okay. Thanks Christine.
Okay. Thanks, Operator next question please.
Our next question comes from Jessica Reif Ehrlich with Bank of America Merrill Lynch. Your line is open.
Thank you.
Couple of different questions, but can you talk a little bit about the marketing for Disney plus with the launch of less than three months to get away you talked at the analyst day about having 90% plus awareness can you just.
I haven't seen marketing gets if you talk about the plan.
Different topic, but on.
All of the stuff that's going on in China, as well as in Hong Kong.
Can you talk a little bit about the.
Give us some color on what you're seeing in terms of impact on tourism, and the parks and how that might be affecting pricing in future investment.
And then one last kind of follow up on the pricing.
You did increase the prices unusually I think just I'm not sure if it's just a nuance.
Can you talk about how you're thinking about pricing going forward, it's a domestic parks.
Thanks.
Disney plus marketing is going to start to hit in.
Later this month later in August we're actually going to.
Allow members of the 23 to be the first.
To subscribe.
I am actually going through a comprehensive marketing plan with the team next week comprehensive probably is an understatement. It is going to be treated as the most important product that the company is launched launched and I don't know certainly during during my tenure.
In the job, which is quite a long time.
And you will see marketing both in traditional and non traditional directions, basically digital and analog also a significant amount of support.
Within the company on basically company platforms, and then of course, all the touch points that the company has whether it's people staying in our hotels people that our co branded credit card people are members of the 23 annual pass holders I could go on and on but the opportunities are tremendous.
Hi to market this and I feel good about some of the creative that I've already seen you won't start to see it until later this month.
On the China front.
To date, we have not seen any impact at all in Shanghai.
About the unrest that's going on in Hong Kong or from the that the.
The trade issues.
Between our countries in Hong Kong, we have seen an impact from the protests obviously they are significant in nature.
And while the impact is not reflected in the results that we just announced.
You can expect that we will feel it in the quarter that were currently in and we'll see how long the protests go on but there's definitely been disruption that has impacted our visitation there.
On the pricing side.
As we've said a number of times our pricing is designed to.
Really accomplished a number of things one is to reflect the value of the product that we have in the marketplace that includes the franchises and the popularity of them and of course the investments that we've made in these parks and resorts by continuing to build them out and continuing to create experiences that are better than many of those that we've had in the past.
We also have tried very hard to protect guest experience and so the pricing has been designed to make it more expensive in peak periods to manage that demand.
And less expensive or not as expensive in.
In the non peak periods to make it more accessible.
And for the most part we've done a good job doing that we know the demand on our product is so extraordinary in the peak periods ended just as in our better interest.
Two.
Managed crowding because it just affects guest guest satisfaction.
At the same time that we have taken our prices up our competition has actually been in the market discounting a little bit more we've certainly seen that with universal in Florida, and so the gap between what we Didnt, where they'd been maybe is a little greater than its been and perhaps that's had an impact. We obviously monitor these things very carefully I tried to explain what some of the pricing impact on Star Wars galaxies edge was but we did not feel that we have a pricing issue at our domestic parks and thats reflected in basically not only current business, but a fair amount of research that we've done.
Thank you.
Hey, Thanks, Jessica Operator next question please.
Our next question comes from Ben Swinburne with Morgan Stanley . Your line is open.
Thank you.
Bob as you get ready to launch does the plus I'm wondering if you could update us on sort of the technical platform behind the product and kind of where that stands versus where it needs to be.
Scale, a big business globally.
And also your philosophy on distribution partnerships, you mentioned bundling, Hulu and Aspen, plus which certainly makes sense, but there's a lot of companies as you're well aware of out there.
Sort of selling in a digital.
Native environment, like Amazon and Apple and others.
Lots of services like these I'm just wondering if you could talk about.
Your philosophy on utilizing those versus a pure direct to consumer business, because those could certainly impact sort of how fast you get out of the gate.
And then I just wanted to ask Christine you Didnt mention the 21st 21, CF television studio, which I believe is in your broadcast segment. That's a business that I think you would acknowledge has been performing quite well for a long time.
Any sense for how thats doing or how that impacted the quarter it would be appreciated.
Okay.
On the second part of your question first.
About basically digital distribution partners at Investor Day, we announced that we had a few distribution partners.
There are others out there, notably Apple and Amazon and Google for instance that we've been in discussions with about distribution. You. You can expect that we will conclude deals with them as distribution partners. We think it's important for us to achieve scale relatively quickly and there will be an important part of that.
Nothing to announce specifically said, we've had conversations with all of them, they're all interested in distributing.
The product.
On the Tech side, we continue to.
Look very carefully at the tech platform that we have obviously, we're using that platform for SPM plus we continue to learn with <expletive> were most focused on.
Not how robust it is because we believe we have that already.
But we're most focused on the onboarding experience and making sure that people who sign up as subscribers for the service do so with incredible areas. We know how important it is to create a frictionless experience and there is a lot of time being spent on that I want to also say, even though it wasn't part of your question that as we are.
Dealing with distribution opportunities as well as what we just talked about which is a tech in the sign on or the Onboarding side, there's a huge amount of work going on on the production front I just want to touch touch on some of that as you know we're going to launch with.
A significant number of movie titles that were from our studio they'll be well over 300 on launch day and over 400.
In year, one, including the great slate that the studio has out in the marketplace now by the way those titles.
Our significant in terms of their quality for instance, there will be eight star wars titles when we launch.
18, Pixar 70 Disney animation.
240, Disney live action for Marvel and then followed by eight more Marvel in year, one so a lot of quality and then over 7500 episodes of Disney TV.
We are augmenting all of that with a tremendous amount of original live action product and have actually screen to fair amount, including the entire series Amanda Lorin for season, one a number the movies that we made including Togo and Lady in the Tramp and Noel.
Star Girl and I could probably name a few others and a lot of the other series product that we're making from Marvel from Pixar from Disney Channel High School musical another one and I've been really impressed with the quality with a variety and with the volume so tremendous amount going on on that front I'm convinced that we're going to launch with a tremendous array of intellectual property for people who are interested in national geographic Marvel Pixar.
Disney and Star Wars, and then on the studio fried Christine could take some of this but some of the particulars.
As it relates to the television side, Okay. So 21st century TV was a contributor in the quarter.
On an operating income basis, but at a more significant contribution on the cable side than the broadcast side.
Although we did mention that there would be some headwinds in the fourth quarter. It will still be a positive contributor. There is it will just be lower than it was year over year.
Thank you everybody.
Thanks, Ben Operator next question please.
Our next question comes from Todd Juenger with Sanford Bernstein. Your line is open.
Hi, Thanks.
Picking up a little bit I guess on what Michael was.
I really appreciate all the different lines of businesses and brands and how you are helping us to understand and can I ask a little bit about who we lie if it fits into all of this in the state.
Generally in just we've seen price increases at other places how you feel about profitability there just your.
The fact that you're in the business now we're being a in the PD and what that role that plays for Disney. That's question, one and question number two not completely unrelated.
And we will confuse it how you're thinking about the live television brands like National Geographic and Disney Kids' channels, which will also exist on Disney plus.
Well, all the content that especially the new content. That's on the TV networks be available that gives me pause subscribers is there a windowing philosophy same way going backwards. How do you manage that so that consumers are both products feel like they're getting the full benefit of those brands. Thanks, a lot. Good. Good question no. We're we're negotiating with a number of MDP days right now.
To extend our linear or live as you call them television channels and these remain important deals to us and important businesses to us as well.
And obviously that includes HBC and Disney Channel, you mentioned, Nat Geo and free form and FX to name a few.
So it is important for us to continue to fuel those channels was enough quality enough original programming.
To support the business as they exist today.
We also know that.
If you look at all the disruption in our business. The business is probably being impacted the most is that live multichannel television product.
And so the pivot to the direct to consumer businesses designed.
To not only address the opportunity that exists in that space, but to dress the challenge that exist on the traditional side of the business, which means that we have our own balancing act to do in terms of fueling both sides the traditional side and.
New side or the the direct to consumer business with enough quality product.
To succeed in both both places obviously, what we also are doing is setting ourselves up in a way that we can be resilient sheet, probably more resilient than any of our competitors should the traditional side erode so significantly that is not as viable as it has been as a business and that would enable us to pivot pretty quickly by moving even more product from the traditional channels over to the nontraditional channels. So its a as I said, it's a balancing act we believe that we are.
We're making enough quality product for both sides right now.
To feel confident about both sides of the business.
The windowing strategy essentially is that we're taking a lot of product that we're making for the traditional channels and ultimately moving it onto the nontraditional, but we're also making as you know original product for the new channel that Disney plus and who they will not go back onto the other channels. Although in some cases it might just to give you an idea how should we be making.
FX shows for Hulu that might actually that might premiere on it a little bit ultimately end up on the linear channels is onex. One example of that so we're going to look at variety of different.
Opportunities.
And just make sure that there is enough content flowing in both directions as a service for the businesses to be successful.
On the on the who live front.
We felt it was important to.
Do we can to grow digital MPPD businesses, we obviously know that there are others in the space that have been good partners to us due to would be.
One dimension.
We like the fact that who is out there with a product that is very unique in that it gives subscribers an opportunity to buy linear television.
Digital over the top linear television to buy off network programming, because we know that the deal the content licensing deals that they have with the networks and to buy original programming and that combination of all three.
What should have been a very unique place in that there's really no. One out there that's offering the comprehensive a comprehensive television offering the way, who Lewis and we'll continue to stay at it the thing to note by the way is who has grown is it's also developed into a very very important advertising business.
And when you think about advertisers who are looking to reach clients on digital platforms, who offers a great opportunity to do that to what extent does live channels will enable the opportunity on the to sell advertising along with the advertising that is sold in the programming has made just for Hulu is another story, but it's a big part in a growing part of that business.
And one more thing on who lives the digital platform grew the most of any DMD PD this quarter.
A lot in there. Thank you both very much.
Okay. Todd. Thanks, Operator next question. Please our next question comes from Marci Ryvicker with Wolfe Research. Your line is open.
Thanks, I just I have one for Christine there's so many moving pieces at the moment can you just talk about your leverage target has this changed at all in terms of the actual target or when you expect to get there and then maybe comment on your free cash flow priorities and how should we think about the timing on a return to share repurchases. Thanks.
Sure.
Our target has not changed Marci, we are still targeting.
A mid single a target.
We have an ongoing dialog with the rating agencies.
They understand our strategy they understand what it takes to get there.
And the overall pivot in our strategy has been multiyear and I would say its been capped off with the acquisition.
Of 21st century assets and.
We will be meeting with them, but our our attitude towards share repurchase has always been once we invest in our businesses and we make any acquisitions and as we see fit we.
Look at our dividend capacity and.
If all of those still result in excess cash for US we will return it to shareholders. I don't think you should anticipate that happening in the near future because we're still in an investment mode as it relates to our direct to consumer activities.
And that's what we're really focused on right now.
Got it. Thank you. Thanks Marci operator next question please.
Our next question comes from Doug Mitchelson with Credit Suisse. Your line is open.
Oh, thanks, so much Bob I guess two questions first I think there was a lot of familiarity, yes, or with everyone listening on the call as to the U.S. prospects for the Dizzy plus service marketing might you might do in the competitive environment is international different and you talked about bundling with Hulu and the U.S., but that's not something you can do overseas. So I'd just love to hear how your protrude international marketing them and sort of the early prospects for this service overseas the extent, it's different and the United States. Then I have a second question on content distribution strategy.
Well.
We will launch in international markets.
Very quickly I think to actually are going to launch when we launch Disney plus around the same time.
And then over the next two to three years, we're going to roll out a number of other markets you're right a number of those markets are different than the United States, but what they do share which is very very important is an interest in Marvel Pixar Disney National Geographic and Star Wars. So the product is being made for the platforms travels globally and that's a big deal we will have to augmented in certain markets with local programming to meet quotas that are now being applied to Otcs services and we're also.
Going to enter into discussions on an international basis market by market with local distributors as well we're already in those discussions actually and so we don't have anything to announce right now in terms of new markets that we're going to launch in but it's safe to assume that we're going to launch in multiple international markets within two years certainly within three years of launch of the United States and a couple of other markets.
Thanks for that and I guess on content distribution, you talked about fueling the traditional channels versus fueling your OTI T. services and obviously a third area is selling programming to third party S. Vod services and I'm sort of curious overseas I know, who international's off limit.
To the extent, you're trying to drive Fox profitability to the point, where it's accretive to fiscal 21 do you need to continue to sell programming into S. Vod windows overseas and the reason I. Obviously ask is I'm wondering if at some point you start warehousing content that would go into a who international service. Thanks.
I think on the Fox front, meaning old call. It non Disney Pixar branded type product or a star wars.
We'll continue to license to third parties overseas.
To reap the benefits of the revenue that we could derive from those sales.
Until such time as we believe a launch in that market is eminent in which case, we'll pivot in whole product for us.
We're even going to do that to a lesser extent, a far lesser extent with some of the Disney content as well until we are ready to launch in a market.
We may license some of that content to third parties to.
To continue to drive to continue to drive revenue.
Sure. So then we should we assume shorter term deals than you have done historically.
Yes, clearly when we do such deals we're going to do so.
To avoid the encumbrances that would make it impossible are difficult for us to put the product on our platform once we launch.
Thanks, So much thanks, Doug Operator next question please.
Our next question comes from Canada Vince.
To touch war with Barclays. Your line is open.
Hi.
Bob One question for you on the content front, which is when you think about.
You know the balance between quality and quantity.
How much content from a volume perspective as you know how much is too much I mean, how are you thinking about the long term targets in terms of content volumes, then how do you balance that.
And Christine from your perspective on the marketing side.
I think.
You mentioned Q3 is where we might see some of the spend coming in Q3 and Q4.
Well will this all be expensed upfront or will this be amortized over time.
Would be great. If you could help us with that thank you.
As we said cannot on Investor Day, We said a few times.
Given the fact that the Disney plus product.
His Disney and Pixar and Marvel and Star Wars.
Geographic mentioned 8000 times.
We feel that we can.
Focus more on quality than on and then on quantity, but we obviously know we need enough quantity under each brand umbrella.
To drive subscribers, who are primarily interested in those brands and so obviously, if you compare us to Netflix we're going to have far less products than they do.
But we are relying on the strength of our brands and the.
The fervor that fans of those brands have for the product that we make under those brands Ambrose.
And on the marketing side can on.
In my comments, I mentioned marketing, but that was related to 21 CF film studio that they had some marketing in the third quarter for movies that would be released in fourth quarter, but I'm. Assuming your question really is related to marketing that would go along with the launch of Disney plus.
And as far as that's concerned we will be expensing those marketing costs as we incur them.
Thank you.
Okay cannot thanks, operator, we have time for one more question.
Our last question is from Jason Bazinet with Citi. Your line is open.
Just a question for Mr. iger.
In the fullness of time as your DTC strategy plays out.
Do you think who will be more important app or financial driver than Disney plus and the reason I ask is.
I understand the elements that good Fox brought to the Disney plus Pap.
You know the Simpsons, Nat Geo and some of those Marvel characters, but those seemed sort of small in the context.
Of the amount of money that you spent to acquire Fox and so it it sort of hints at something.
Bigger as a foot in terms of your overall strategy. Thank you.
Well, we obviously in analyzing the assets and 21st century Fox that we bought.
Placed a lot of value on the Hulu stake that we were getting.
And that obviously was also reflected in the deal that we did with Comcast.
Where the value of their stake is been public since we announced that deal.
So who will play an important part in our future as a platform for.
The non so called family like programming that will be on Disney plus.
And that will be fueled not just by library that we bought from Fox and that library as both movie and television library.
But by a tremendous amount of television production.
Capabilities. So when you think about what the Cup our company today and the creative engines. We obviously have a movie studio that includes now Fox live action and.
Fox Searchlight.
We have.
And along with all the Disney assets, we have a sprawling television business.
That includes ABDC Disney Channel FX, Nat Geo free form.
Et cetera, and so on and the television business or is or a unit that we created under Peter Rice is now been structured to probably produce original product for all of it for all of the platforms. Both the linear platforms. The traditional MPPD channels as well as the new platforms, notably Hulu. So there will be an increase in production activity the company under that unit.
Producing products specifically for flu.
Very helpful and so as we see it.
Our play in the digital Otcs space ultimately globally, but we're just start as Weve said more domestically is to have general entertainment will call at Hulu more family like Entertainment, which is Disney plus and sports.
And that bundle that we're creating 12 99 bundle where you can buy all three offers consumers tremendous volume tremendous quality and tremendous variety.
For a good price.
Makes perfect sense. Thank you.
And thank you, Jason and thanks, 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.
In our remarks, we provided estimates of the performance of certain 21 CF assets in periods of the prior year. These estimates are based on an analysis of 21 CF records, but are nonetheless, unaudited estimates are not precise measures of historical results before the acquisition.
Let me also remind you that certain statements on this call, including financial estimates 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 a variety of factors, including factors contained in our annual report on Form 10-K quarterly reports on Form 10-Q and in our other filings with the Securities and Exchange Commission. This concludes today's call have a great day everyone.
Ladies and gentlemen. This concludes today's conference. Thank you for joining and have a wonderful day.
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