Yahoo Finance The Walt Disney Company (NYSE:DIS) Q2 2024 Earnings Call Transcript
The Walt Disney Company (NYSE:DIS) Q2 2024 Earnings Call Transcript May 7, 2024
The Walt Disney Company beats earnings expectations. Reported EPS is $1.21, expectations were $1.1. The Walt Disney Company isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day, and welcome to The Walt Disney Company's Second Quarter 2024 Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, today's event is being recorded. I would now like to turn the conference over to Alexia Quadrani, Executive Vice President of Investor Relations. Please go ahead.
Alexia Quadrani: Good morning. It's my pleasure to welcome everybody to The Walt Disney Company's second quarter 2024 earnings call. Our press release was issued earlier this morning and is available on our website at www.disney.com/investors. Today's call is being webcast, and a replay and transcript, as well as the second-quarter earnings presentation will all be made available on our website after the call. Joining me for today's call are Bob Iger, Disney's Chief Executive Officer, and Hugh Johnston, Senior Executive Vice President and Chief Financial Officer. Following comments from Bob and Hugh, we will be happy to take some of your questions. So with that, let me turn the call over to Bob to get started.
Bob Iger: Thank you, Alexia, and good morning, everyone. Our strong performance in Q2 demonstrates we are delivering on our strategic priorities while building for the future. Overall, this was another impressive quarter for us, with adjusted earnings per share up 30% compared to prior year. And I'm pleased to say, this outperformance raises our full-year adjusted EPS growth target to 25%. Our results were driven in large part by our Experiences segment and our streaming business, which achieved an important milestone with the Entertainment portion of the streaming business achieving profitability in the quarter. This is a testament to the turnaround we set in motion last year and the outstanding leadership of Disney Entertainment Co-Chairmen Alan Bergman and Dana Walden.
It is particularly noteworthy when you consider we reported peak losses only 18 months ago. We also remain on track to reach profitability in our combined streaming businesses in Q4. We've said all along, our path to profitability will not be linear. And while we are anticipating a softer third quarter, due in large part to the seasonality of our India sports offerings, we fully expect streaming to be a growth driver for the Company in the future and we have prioritized the steps necessary to achieve this. In March, we successfully launched Hulu on Disney+, bringing extensive general entertainment content to the platform for bundle subscribers. And we're encouraged by the early results. And by the end of this calendar year, we will be adding an ESPN tile to Disney+, giving all US subscribers access to select live games and studio programming within the Disney+ app.
We see this as a first step to bringing ESPN to Disney+ viewers, as we ready the launch of our enhanced standalone ESPN streaming service in the fall of 2025. The key to our success in streaming and what consistently brings consumers back for more is the array of exceptional content we produce that captivates audiences of all ages and backgrounds. Looking at our film studios, we have a number of highly-anticipated theatrical releases arriving over the next few months, including Kingdom of the Planet of the Apes, which opens this Friday, as well as Pixar's Inside Out 2, Marvel's Deadpool & Wolverine and 20th Century Studios’ Alien: Romulus, which are all slated for this summer. Later this year, we're looking forward to Moana 2 and Mufasa: The Lion King.
And in 2025, our slate remains just as robust with Captain America: Brave New World, Fantastic Four, Elio, Zootopia 2 and Avatar 3. Our series also continue to resonate with audiences and critics alike. FX's Shogun has proven to be a global hit with success on both linear and streaming. It's tracking as FX's most-watched show ever on our streaming platforms and it's driving the second largest number of sign-ups to our streaming services since 2022, behind only Black Panther: Wakanda Forever. This is a great example of how we are successfully reaching wider audiences with our combined linear and streaming ecosystem. In Q2, series that aired on linear networks accounted for 17 of the top 20 most viewed series on our streaming platforms, with almost 3 billion hours of consumption.
Our linear channels are deeply embedded in our direct-to-consumer strategy, as they continue to deliver high-quality content that reaches demographics not captured on streaming alone, allowing us to broaden our audiences and leverage our unmatched content engine across an expansive base. Turning to ESPN, sports continues to stand out when it comes to convening large audiences, with recent big ratings wins across a variety of sports. ESPN had a fantastic April in terms of total day viewership, the highest April since 2012. For Primetime viewership, it was ESPN's highest April on record. The NCAA Women's Final Four in Cleveland was the most viewed on record, and the championship between Iowa and South Carolina was ESPN's most viewed college basketball game ever, men's or women's.
We also saw record-breaking ratings for the WNBA draft. Monday Night Football had its most-watched season since 2000 and the NFL Postseason also broke viewership records. The divisional playoff game between the Houston Texans and Baltimore Ravens was ESPN's most-watched NFL game ever, with 32.4 million viewers. Looking at our Experiences business, which remained an impressive financial driver in the quarter, we are focused on turbocharging growth with a number of long-term strategic investments. That includes our Disneyland Forward initiative, the first step in our expansion plans at Disneyland Resort, which received unanimous preliminary approval by the Anaheim City Council last month. This was a significant milestone, and the final vote is expected to take place this evening.
We're incredibly excited for the many potential new stories our guests could experience at Walt's original theme park, including the much-anticipated opportunity to bring Avatar to Disneyland. When you consider all of our businesses as a whole, from Entertainment to Sports to Experiences, it's clear that no one has what Disney has. The turnaround and growth initiatives we set in motion last year have continued to yield positive results, and we are executing against our ambitious strategic priorities with both speed and determination. To walk you through more of our results from the quarter, I will now turn things over to Hugh.
Hugh Johnston: Thanks, Bob. Diluted earnings per share, excluding certain items, for the second fiscal quarter were $1.21 and reflected the second quarter in a row of strong double-digit percentage year-over-year earnings growth. We also met or exceeded all of our financial guidance for the quarter. And as Bob mentioned, we are now targeting adjusted EPS growth of 25% for the full-year. At our Entertainment segment, second-quarter operating income increased by over 70% versus prior year, driven by direct-to-consumer. Entertainment DTC revenue increased 2% sequentially and 13% year-over-year, and generated operating income of $47 million. These results exceeded our guidance, primarily due to expense savings. Core Disney+ subscribers increased by 6.3 million in the quarter, reflecting nearly 8 million additions domestically, driven by charter entitlements and a slight loss internationally from the impacts of wholesale deal changes and price increases.
Disney+ core ARPU increased sequentially by 6% or $0.44, reflecting price increases for the domestic premium tier as well as international ARPU growth, partially offset by lower ad-supported ARPU domestically, driven by dilution from charter entitlements. And the recent Charter deal also drove Disney+ ad tier subscriber growth in the quarter. We ended Q2 with 22.5 million ad tier subscribers globally. We are pleased with the progress we're making in streaming although, as we said before, the path to long-term profitability is not a linear one. On that note, we are forecasting a loss for Entertainment DTC in the third quarter, the vast majority of which is due to Disney+ Hotstar's ICC cricket rights. We also do not expect to see core subscriber growth at Disney+ in the third quarter, but anticipate sub-growth will return in Q4.
As Bob mentioned, we continue to expect our combined streaming businesses to be profitable in the fourth quarter and expect further improvements in profitability in fiscal 2025. At Entertainment Linear Networks, a decrease in operating income versus the prior year was primarily driven by lower affiliate and advertising revenue domestically and lower affiliate revenue internationally. And at Content Sales/Licensing and Other, lower Q2 results versus the prior year reflect the absence of significant theatrical releases in the quarter. For Q3, we expect this business to generate modestly positive operating income, an improvement over the prior quarter and prior year. Moving to Sports, second quarter operating income decreased slightly versus the prior year, driven primarily by a decrease at ESPN, offset by improved results at Star India Sports.
As expected, at ESPN, lower results at the domestic business reflect higher programming and production costs from the timing of an additional college football playoff game in the quarter versus the prior year, which were only partially offset by higher ad revenue. Domestic affiliate revenue also decreased in the quarter. ESPN domestic ad sales increased by more than 20% versus the prior year or high single digits when adjusted for the college football playoff timing shift of an additional game as well as a new NFL divisional playoff game in Q2 of this year. Q3 to date, we are seeing healthy demand driven by the NBA playoffs and domestic ESPN cash ad sales are pacing up. At Star, higher results in Q2 versus the prior year include the impact of a decrease in programming and production costs, attributable to the non-renewal of BCCI cricket rights.
Looking ahead, note that we are currently expecting to incur linear ICC rights expense at Star India in Q3. At Experiences, second-quarter revenue grew 10%, operating income grew 12% and segment margins expanded by 60 basis points versus the prior year. Parks and Experiences OI increased by 13% year-over-year and Consumer Products OI increased by 7%. Strong international Parks growth was driven by Hong Kong Disneyland Resort, while Walt Disney World and the Cruise business both contributed to domestic growth. At Disneyland, despite growing attendance and per-capita spend, results declined year-over-year due to cost inflation, including from higher labor expenses. We continue to expect robust operating income growth at Experiences for the full year.
However, third-quarter OI is expected to come in roughly comparable to the prior year. Several non-comparable or timing-related items are expected to adversely impact Q3 results, including timing of media and tech expenses, non-comparable items in the prior year at Consumer Products and the timing of Easter. Beyond these comparability related headwinds, the third quarter's results will be impacted by three additional factors, higher wage expenses, pre-opening expenses related to the Disney treasure and adventure cruise ships, as well as Disney Cruise Line's New Island, Lookout Cay, and some normalization of post-COVID demand. As it relates to demand, while consumers continue to travel in record numbers and we are still seeing healthy demand, we are seeing some evidence of a global moderation from peak post-COVID travel.
While pressures from wages, reopening costs and demand impacts are expected to persist in Q4, we do expect year-over-year Experiences operating income growth to rebound significantly in the fourth quarter due to fewer comparability or timing factors. On an Enterprise level, we continue to make good progress on our cost-efficiency initiatives and remain positioned to exceed our $7.5 billion annualized target. We still expect to generate over $8 billion in free cash flow this fiscal year and the shareholder return goals we've previously spoken about are also still very much on track. We repurchased $1 billion of stock in the second quarter. We continue to position the company for long-term growth and profitability, and are making tangible progress on generating compounding earnings and free-cash flow growth, which will enable us to continue returning capital to shareholders.
I'll now hand the call back to Alexia for Q&A.
Alexia Quadrani: Thank you. As we transition to the Q&A, we ask that you please try to limit yourself to one question in order to help us get to as many analysts as possible today. And with that, operator, we're ready for the first question.
See also
Insiders are Buying These 10 Undervalued Bank Stocks and
20 Best Business Ideas According To Reddit.
To continue reading the Q&A session, please click here.
