The Walt Disney Company (DIS) Presents at Morgan Stanley Technology, Media and Telecom Conference 2022 (Transcript)

The Walt Disney Company (NYSE:DIS) Morgan Stanley Technology, Media and Telecom Conference 2022 March 7, 2022 5:45 PM ET

Company Participants

Christine McCarthy – SVP and CFO

Conference Call Participants

Ben Swinburne – Morgan Stanley

Ben Swinburne

We’re going to get started. Good afternoon everybody. I’m Ben Swinburne, Morgan Stanley’s Media Analysts. A quick disclosure from me, please note that important disclosures including my personal holdings disclosures and Morgan Stanley disclosures all appear as a handout available in registration area, and on the Morgan Stanley public website. And we are really excited to welcome to the conference — our in-person conference today Christine McCarthy. Christine is the Senior Executive Vice President and CFO of The Walt Disney Company, having been with Disney for over 20 years and became CFO in 2015.

Christine, thank you for being here.

Christine McCarthy

Thank you, Ben. And I have a disclosure statement for you too. Okay. Certain statements today, including financial estimates or statements about our plans, beliefs, guidance, and other statements that are not historical in nature may constitute forward-looking statements under securities law. We make these statements on the basis of our current views and assumptions regarding the future and do not undertake any obligation to update them.

Forward-looking statements are subject to a number of risks and uncertainties. Actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our Form 10-K, and other filings with the SEC, as well as the legend you see here and on our Investor Relations’ website.

Question-and-Answer Session

Q – Ben Swinburne

Okay, there you go. We’re ready. Christine, I want to start, obviously, the last few years, we were just chatting backstage, they have been pretty eventful, to say the least for all of us. Throughout that time, though, The Walt Disney Company has really been investing, substantially in the business to grow the company, maybe you could talk about the investments you guys have made and sort of how you frame the growth prospects for Disney from here?

Christine McCarthy

Great. It has been an interesting two years and I’m very happy to be in a room with real people and not a lot of little squares on a zoom call. And so welcome to all of you. The investments we have made continued throughout the pandemic and our business was pretty severely impacted as those of you who follow Disney know, we had to shut down many of our businesses because most of them were consumer facing, and that went from everything from people go into theaters to enjoy our movies, people coming to our parks, going on our cruise ship, attending sporting events, all of those things, as we knew a couple of years ago did come to a halt, but we still invested through it.

We continue to invest and we’ve increased our investment. We recently disclosed that our content investment was up to around $33 billion. That was an $8 billion increase from the prior year and where that’s going is primarily into content for our direct-to-consumer platforms and our other platforms, including some linear, about $11 billion of that — about a third is designated for sports rights. And we disclose that in our last quarterly earnings call and in our 10-Q.

But we continue to invest not only in content, but also in improving technologies and in investing in not only the platforms, but the markets that we’re still entering into for a rollout of Disney+.

The other side of our business that we invest pretty consistently and the numbers don’t change that much unless there’s some kind of a bubble payment, which I’ll talk about in a minute. And that’s in our domestic — our international theme parks and resorts business. That’s a global business and we have invested through the pandemic and we have a lot of new offerings that are opening in the current period that we’re looking at.

In Florida, we just opened March 1st, Star Wars: Galactic Starcruiser and that is totally immersive experience very, very unique. We also have galaxy of the Guardians of the Galaxy, Cosmic Rewind, which is a very thrilling attraction at Walt Disney World, that’s opening this summer.

We have Avengers campus over in Disneyland Paris that opens this summer and just coincidentally, they just today celebrated their 30th anniversary. And there are lots of things like that that we continue to invest in.

We do have a little bit of a bubble this year in our theme park CapEx and that’s because we’re taking delivery of one of three cruise ships that we ordered a few years back. The time horizon for those is a little bit lengthy. So, you got to get in front of it. You got to get a place to build the ship takes several years. But we are setting sail on a ship called the Wish and that will be in July. We’re really thrilled about that and there’ll be two more coming one in 2024 and one in 2025. That cruise business is a double-digit ROI C business. It’s a great — very highly rated experience and those are the kinds of things that we look to things that reinforce the Disney brand and really engage our consumers.

Ben Swinburne

Thank you. The timing of this presentation worked out well for us because you had some news on Friday. So, I wanted to ask you about as we talk about direct-to-consumer, Christine, the ad-supported tier of Disney+, why do you think this product strategy makes sense today?

Christine McCarthy

We — I like to refer to our direct-to-consumer business, when you think about Disney+ as being a toddler. We started it in November of 2019; that was good timing, given the pandemic, because it was a business that continued through the entire pandemic. But we also — we had some preconceived notions of what we thought consumers wanted. And we’ve done a lot of research and have found that a lot of consumers, they do not mind and some are actually more favorably disposed to services with ads than without ads.

So, we have also had an incredible amount of advertiser demand ever since the launch of Disney+ and as you can see from our results in addressable advertising out of our Hulu business, we have more demand than supply. So, looking at this business and realizing that it’s not only — it’s about choice and control for the consumer, and Bob Chapek, has been really consistent in talking about — let the consumer decide how they want to consume content, how they want to experience things. And this goes right down the alley of having an ad-supported tier. Yes, it will be the lowest cost here.

That’s a benefit to some, although I do — I just want to note, I have a colleague, he’s a direct report of mine. If he has the choice to have an ad-supported versus an ad-free service, he always opts for the ad-supported, not for cost, but he just likes having breaks, breaks when he can do whatever he’s doing.

But I just — it’s not that it’s only people who can’t afford or don’t choose to pay for it, some people just don’t mind seeing ads. So, we look at this as being something that is going to be a win-win for the consumers who want it, the consumers who couldn’t afford it, otherwise, that’s great as an entry level point. And it’s also going to be great for the advertisers because we have a very unique audience here. It is a family audience, we will be very careful about the ads we take, how we put them into our content.

And we’ve learned a lot over the last couple of years about what kind of content lends itself to natural breaks. Movies, we — you do see movies on ad-supported tiers, and they can have breaks in those. But the linear content, it’s really almost written, so they can have natural breaks for ad insertions.

Our ad tech stack technology that we’ve developed in our advertising group and we’re all unified as an advertising group, as opposed to five plus years ago, but we consolidated all of our advertising sales efforts. So, they can sell a whole portfolio of Disney offerings, everything from the linear to digital to DTC platforms. And so we look at this as just being another component of an offering and it’s not something that was done — it’s great, there could be potential upside, we certainly welcome it if it draws in more consumers, more subscribers, if it increases ARPU, but we’re really doing it to address consumer choice.

Ben Swinburne

And Christine, you mentioned that you guys are going to be careful with advertising. I want to ask you, because one of the frequent questions I’ve gotten since Friday, is about the linear Disney Channel historically, was ad-free, or essentially ad-free. How are you thinking about leveraging advertising, given the brand focus of the Disney+ service?

Christine McCarthy

Yes, that’s a great question. Disney Channel, we did not have ads on it. We had some interstitials and things, some promotional things, but it wasn’t as per se. We’re going to be very careful about making sure the — any advertising is consistent with the content; what people are watching. So, it’s not going to be something that’s going to be jarring an off topic or off brand. We’ll also — it’ll be a lighter ad load and we’re also going to make sure that everything complies with Child Protection policies and any kind of COPPA regulations, U.S. as well as international privacy laws. So, we’re going to be very, very mindful of this. And it will be a different ad-supported platform than a lot of others out there just because the nature of the service we’re providing is a family-oriented one.

Ben Swinburne

And imagine with the timing now, the upfront coming up, you have an opportunity to sort of bring something like this to market, how are you — is this positioned that way?

Christine McCarthy

Exactly. But the timing was to sell into the upcoming upfront in May and a lot of those discussions, as I know, many of you covered the advertising market, a lot of those discussions really get — some of them have already started, but they really later this month really start coming gelling and coming together.

So, the timing works. But also this was, I think, I suffice it to say the advertising community was extremely pleased with this announcement. And they’re really looking forward to it. And I think we’ll have once again, because we’re going to be very thoughtful and mindful about what it is we’re putting on an advertising and how much of it, we will be able to curate advertising that we believe is good for the Disney+ service.

Ben Swinburne

And Christine maybe just stepping away from the — or coming back from the ad-supported and thinking about Disney+ and your long-term plans. As you know there’s a huge debate in the market about Disney’s ability to achieve its fiscal 2024 guidance, both subscribers, but also breakeven.

The business is going to need to re accelerate. When you when you look at the business today and the research that you guys have done, what gives you and Bob and the team confidence, you can deliver on both the subscriber expectations, but also drive the financial model?

Christine McCarthy

That’s a good point. We, as a management team, like having both targets out there in public. So, we either make it or don’t make it. But we believe we are well-suited to achieve the subscriber guidance as well as the profitability guidance. This ad support — I know there’s been things written, is this like a Hail Mary? No, it’s not. This is something that we don’t need to make and we said it. I know some people were skeptical on our last earnings call when we said that, we could still make our guidance and this actually related to something in India regarding the IPL. But we feel good about where we are with that 230 million to 260 million Disney+ ads — subscribers by 2024.

What we’re really looking at is not only subscribers, but profitability. And we like those two, because we think it injects the right kind of, I say tension with a little T, but at the right kind of tension for really managing the business. And we’re driving towards that and we feel really good because of the content that we have; the brands we have the intellectual property we have to work with. And once again, we’re learning more.

As I said, we’re two and a half years old, barely and so we’ve learned a lot about this business. But we’re also — we couldn’t be happier with the amount of data that we’ve been able to get about who’s watching what — when are they watching it? How many times? For how long? Those are the kinds of things that we never had before. We were always going through intermediaries.

So, once we have that, we really incorporate it into our planning, our content. We’re not making content through algorithms, but we’re using that that information to inform what content works or if something doesn’t work, why it doesn’t work.

Ben Swinburne

You guys gave us some new disclosure last quarter, which was very appreciated. The regional breakdown of Disney+ was interesting to see is a bigger U.S. business than at least we were expecting. Let me ask you about international, maybe we could start, you mentioned IPL, we’ll start with India. How do you think about investing in that market? You guys have some really popular sports rights. They’re coming up for auction with the IPL. What’s the strategy in a market like India where there’s a lot of subscribers, but also unclear sort of the long-term economics?

Christine McCarthy

Yes, that’s — that — India is a is a big market, we all know. There’s a lot of focus on the IPL Disney+ Hotstar, yes, people are — enjoy the current IPL sport program that we have on there. But they also enjoy a lot of other sports programming, whether it’s other cricket rights, other international sports, marquee, other sporting events. But we something that’s very underappreciated is the amount of general entertainment in the quality of that entertainment in viewership in the Indian market.

There, in 2021, of the 15 top viewed series on direct-to-consumer, nine of those came from Disney+ Hotstar. So, there’s content that people are going to view just like here in the States, a lot of people view sports, sports is something that’s a very popular type of content to consume, but they also consume other types of content. And so when you think about the number of hours and the quality of the content that is being produced in the Disney+ Hotstar Originals, that’s something we’re very proud of. And we think that that will continue to make that business one that consumers will engage in.

Ben Swinburne

How about Europe and Latin America? How would you sort of assess how the toddler has done so far? I guess even younger, if we extend the analogy in those markets. But why do you think penetration in those markets has lagged sort of what we’ve seen in the U.S. so far?

Christine McCarthy

Yes, there’s a conversion in Latin America specifically, that is really a more deliberate shift of going off of linear to direct consumer. A lot of times, even if you have the — even if it’s not going to cost, if you have the linear feed and you can get the direct-to-consumer, human nature is if you have to do something to activate it, you may do it, or you may not do it. And I think once again as those linear channels sunset, we will have the consumers who have been consuming that content now shift to the direct-to-consumer model.

So, we also have Disney+ down there, we have Star Plus, we’ve got great sports programming in Latin America. So, it’s a different offering than we have here in the U.S. And it has all sorts of — I mean, if we could just have one thing that was uniform, it would make everyone’s life easier, including mine. But different regulations in different existing contracts and affiliate agreements just — we have a basic type of offering, but there’s some nuances in each market. And in the Latin American market, there are a few different, as I mentioned, Disney+, Star Plus, and then a combo — a combo plus.

But I think Latin America will get there. It’s great content and also, there’s — as once again, we’ve talked about local programming, native programming in a culture that’s going to resonate with the people who live in that culture, we believe is something that is necessary outside of the U.S. in all of those markets and we’ve made a big investment in those, including just announcing recently that we have an international content hub. And we took one of our top executives and put them who had been doing international in addition to other things, but put them over that. And they’re overseeing 340 different productions in various stages, but you’ll start seeing those roll out into all the different regions, probably starting in this year.

Ben Swinburne

And maybe one last streaming question before we move on on Hulu. You had your partner, Brian Roberts on the stage this morning, but what’s your vision for how Hulu fits into the Disney direct-to-consumer strategy longer term?

Ben Swinburne

We think Hulu is a fabulous platform. When you think about Disney+, ESPN+, and Hulu, they really are discrete. They have their — I mean, there are discrete types of programming. There are discrete types of target audiences, demos that they’re going after. But we look at the Hulu as being very high quality, general entertainment. It has some next-day programming and I know Brian spoke about that. But it also has original programming and some other licensed content.

But the new original programming that has been developed for and launched on Hulu has really resonated. And I’ll just throw a couple of names out because you may know some of — murders — Only Murders in the Building, that was a very, very popular. I think a lot of people actually probably signed up to Hulu, so they could see it.

We have Nine Perfect Strangers. There’s a new one that’s just coming on The Dropout. I think that’s a story many of you know. And that’s one that’s just launched. But there’s a lot of different programming on Hulu that is original and only seen on Hulu. So, it’s really part of our overall offering.

Ben Swinburne

And maybe before we shift to the parks business, I wanted to ask you just one more on media, you announced last week that you were pausing release of theatrical films in Russia. Can you talk a little bit about Disney’s business in that market and in Ukraine, sort of, the exposure, in general?

Christine McCarthy

So, it’s a very unfortunate situation. I think all of us know that. I don’t need to elaborate on it. But theatrical release of films in Russia is not the only thing that we have, many parts of our business have different relationships or business ventures in Russia. I’d like to put a context on what it means for us in terms of operating income. And that’s about 2% of our operating income. And that’s for the region, Russia and Ukraine. And just to scale between the two, Ukraine is about 10% of that 2%.

So, it’s not a significant number for us. I hate losing any operating income. But I just want to put it in context, because I think this is one that we’ve had some licensing businesses and a theatrical distribution, but that’s what the overall exposure of our company is.

Ben Swinburne

Thank you. Shifting now to the DPEP segment in the theme park business, you had record performance in the calendar fourth quarter fiscal Q1. And the number that everyone brings up is the per capita spending growth of 40% over 2019 levels. What’s driving that? I don’t think it’s all ticketing, what — can you give us a little bit of context and sort of how sustainable growing that number can be, when you start lapping these comps and thinking about the long-term for the parks business?

Christine McCarthy

Our parks had remarkable recovery. As I mentioned, they were all closed, Disney World came back online before Disneyland, Disneyland was closed for over 400 days, it opened about a year ago, last spring, actually in April of last year. But the performance has been outstanding and it has not been driven just by — I know we get a lot of focus on ticket prices, we have a wide range of ticket prices and not that dissimilar to what we’re doing in an ad-supported tier in Disney+, we have a very steady, stable entry level price for our parks that has not been raised since 2019.

And so there’s an affordable level. Now, you don’t get everything, you don’t get every day, you don’t get peak periods, but you could go at the lowest price. You can go into the park like anybody else. And so that’s just something that I think it’s a philosophy that we do want our products and our services to be accessible. But like any business, there’s things that you can buy up or trade up for just a more a more engaged experience or more accessibility or more flexibility.

So, our ticket price, yes, it’s some of the increase in per cap. But most of the per cap increase came in food and beverage, the — when we do immersive experiences, we also try to make the food and the beverage part of that overall experience. Our merchandise spending was incredible. There been lines for hero T shirts and parts of Walt Disney World when they dropped something, these are just t shirts, but they’re limited. But the amount of spending and part of its because people could not go to our parks for a long period of time, especially in California. And when they came back, they wanted to spend money. They were there, they wanted to basically maximize their spirit — their experience. So, we have those parts.

And we also have introduced some things like Genie. Now, Genie is a — it’s a mobile device on your cell phone, you can download it. And there’s a free version and what the free version does, it allows you to plan your day and you’ll have a better experience. It will tell you right on your phone how long the wait lines are and maybe you should eat at this time or do something else at that time, if you want to get into a certain attraction. And then just like you can buy up, you can buy up to Genie+, and you can get access to — it’ll tell you when you can get faster access to something called Lightning Lane, which is sort of like the old Fast Pass and you can do that.

But then the most attractive, the most wanted attractions, the ones that are really popular on any given day, you can buy up even more to get a specific time that you can go to that attraction. So, those things — people can decide whether or not how much they want to spend on these. But those have also lent to just a better experience for people trying to maximize the day and some people look — some people have more time than they do money. And some people have more money than they do time. And I think this really is in response to that sort of personal choice and equation.

Ben Swinburne

You guys also talked Christine on the call about limiting capacity. I think some of the live events stuff has still not been completely back to normal. What does full capacity mean looking forward at the parks? Can you give us any sense of sort of where you guys are today?

Christine McCarthy

Yes, we are coming back to full capacity — towards full capacity. We’re not yet there. But one of the things we were able to do when the parks were closed was really look at some of the underlying technologies for how we could run the business better and give a better consumer experience. And one of the key linchpins on this was a reservation system. Now, we needed that when we were limited — severely limited in capacity, when the government restrictions were such that you could only allow, 10% 20%, 25% in.

But then we saw that we could actually use this, even when the restrictions were lifted, that we know how many people are going to the park on a given day. And if they filled up a certain amount or how many reservations would be left for people just walking up at the last minute, but it allows us to better balance load throughout the year, throughout the week, throughout the month. And so that’s something that has really given us a toggle for how we’re going to manage attendance.

Some of the attractions which are great for capacity management are things like nighttime attractions, the parades, what — when those happen, people are on rides or attractions, they’re watching a nighttime spectacular or watching a parade that they’re seeing go down Main Street.

The other thing that has not yet come back, but should be coming back soon is character meet and greets. And for any of you with children or grandchildren, you probably have had — little kids love being around those beloved Disney characters. And those character meet and greets also take people out of lines for going on Space Mountain or Mickey and Mini’s Runaway Railway.

I mean, they’re just things that you load balanced the park better and so when we can get all of those back on and they should be all coming back on this year. But they’re all not back yet. I think with the trending of COVID, we’re definitely going to see some of those face-to-face interactions come back.

Ben Swinburne

And I know that you and the team — the team at the parks really focuses on yield. So, is that going to be the focus going forward? Or do you think we go back to the kind of attendance levels we saw before? Or are you managing the business a little bit differently?

Christine McCarthy

We’re managing the business differently. So, you’ll see yield — we’re looking at yield, but we also want to — once again, the consumer experience, when you’re a guest in a park and you can’t do things and everything is too crowded, your guests experience is going to go down, your intent to return is going to go down and word of mouth will not be as good. So, we’re really balancing.

We don’t want to have the parks bursting at the scene. We want to have them so that they are a great experience and when you’re there, if you’re having a good time, you’re probably inclined to spend more money. And that has been our — the results we have had to-date since we’ve reopened. So, yield is important.

And the other the other part of yield is we did some things on the technology — utilization of technologies, whether it’s mobile dining apps, as I mentioned, keyless — contactless checking into hotels, those are things also that have allowed us to really take a hard look at our cost base. And where we can use technologies and I think in today’s world, a lot of people would rather deal with their phone, necessarily than standing in line dealing with a person if they can do it themselves, that also impacts our cost base, which also impacts yield.

Ben Swinburne

Got it. Actually, that’s a great segue to my last question as we get close to the end of time here, which is on margins. Your domestic parks margins in the first quarter, you’re almost essentially back to 2019 levels, which was pretty impressive. What are the variables we should be thinking about going forward on the cost front? And do you think you can exceed prior peak margins over the near to medium term at the U.S. parks?

Christine McCarthy

Our park margin this past quarter was — and this is for the parks and resorts, domestic 32%, that’s pretty darn good. You have to appreciate that in that calculation is also our Disney Cruise business, which is not back.

The first quarter of our fiscal year, which we just announced. We — for the first time since the pandemic, we had all four of our existing ships on the seas. Now, they were at significantly reduced capacities and people were still having a great time on them, even with all the health and protocols — health — safety protocols that we are very strict about. But that’s carrying that.

And so when you’re seeing — when the cruise business comes back on, when — as we’ve met — we’ve talked about you can let more people in, not necessarily filling it to the gills, but we can let more people in very thoughtfully on how we’re going to balance these loads. You’ll see I believe that I don’t think the best is over for parks.

Ben Swinburne

That’s a perfect way to wrap-up Christine. Thank you so much for being here and please come back.

Christine McCarthy

Thank you very much.