Lowell Singer - The Walt Disney Co. Robert A. Iger - The Walt Disney Co. Christine M. McCarthy - The Walt Disney Co..

Benjamin Daniel Swinburne - Morgan Stanley & Co. LLC Michael B. Nathanson - MoffettNathanson LLC Jessica Jean Reif Cohen - Bank of America Merrill Lynch Alexia S. Quadrani - JPMorgan Securities LLC Todd Michael Juenger - Sanford C. Bernstein & Co. LLC Steven Cahall - RBC Capital Markets LLC Jason Boisvert Bazinet - Citigroup Global Markets, Inc. Marci L.

Ryvicker - Wells Fargo Securities LLC Barton Crockett - B. Riley FBR, Inc..

Thank you so much for joining the Walt Disney Conference Call. We apologize for the delay. Speakers, you may begin..

Good afternoon, and welcome to The Walt Disney Company's first quarter 2018 earnings call. Our press release was issued about 25 minutes ago and is available on our website at www.disney.com/investors. Today's call is also being webcast and a replay and transcript will 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. Bob will lead off, followed by Christine. And we'll then, of course, be happy to take some questions. So with that, I'll turn the call over to the Bob and we'll get started..

Galaxy's Edge in Disneyland and Disney World, and preparing to incorporate more of our popular IP into Disneyland Paris.

The investments we've made in IP in addition to the numerous investments we've made across the world in our Parks and Resorts businesses have driven dramatic growth over the last decade, and we're confident this trend will continue well into the future.

I'm going to turn the call over to Christine to talk about the details of our results in the quarter, and then we'll take your questions.

Christine?.

first, the $1.6 billion one-time net benefit driven primarily by the revaluation of our deferred tax liability; and, second, a $0.22 benefit in the quarter due to the lower statutory rate. As I mentioned earlier, our applicable federal statutory tax rate is 24.5% for fiscal 2018. For future years, the federal tax rate will be 21%.

In recent years, our effective tax rate has closely mirrored the statutory rate, and we continue to expect that to be the case going forward. As we look to the second quarter, there are a few factors I'd like to highlight that will influence Q2 comparisons.

We expect cable expense growth to be up mid-teens, reflecting the consolidation of BAMTech and higher programming expenses at ESPN, primarily due to the timing of the College Football semifinal games.

There is no change in our full-year cable expense growth forecast of high-single digits, driven by BAMTech; and up low-single digits on a comparable basis. At broadcasting, results will reflect a $55 million decline in operating income from program sales due largely to the timing of domestic SVOD in international sales.

At the Studio, I'll remind you, we had a very strong second quarter last year due to the performance of Beauty and the Beast and the carryover performance of Rogue One and Moana. We also have two releases this quarter versus one in the prior year, which will drive higher marketing expenses.

So while we are excited about the release of Black Panther and A Wrinkle in Time, these factors create a very difficult comparison at Studio Entertainment. And, finally, last month we announced a one-time bonus to 125,000 cast members.

We expect roughly half of the forecasted expense or about $55 million to fall in the second quarter, with roughly $40 million recorded at Parks and Resorts. And with that, I'll now turn the call over to Lowell for Q&A..

All right. Thanks, Christine. Once again, I want to apologize for the late start. We had issue with our vendor's network, and I think that's why some of you had difficulty dialing in. We're glad you're now with us. And with that, operator, we're ready for the first question..

And thank you so much. Our first question comes from Ben Swinburne with Morgan Stanley..

Thank you. Bob, could you talk a little more about the ESPN product coming to market? Particularly, what are you doing behind the scenes on the technology side and in terms of personalization to really change what the consumer experiences and how does that translate eventually to the large screen? You talked about a mobile UI.

But obviously sitting back on the couch and watching live events on a large screen is a big part of the sports experience. So is this also being built to grow and be engaged with on the big screen? And then, Christine, just if I could come back to tax for a second.

Do you have any guidance for us on cash taxes? And I'm wondering, in particular, whether your capital spending will qualify for accelerated depreciation, particularly at the Parks, given the changes in the tax law? Thank you both..

So the technological guts behind the entire ESPN online or app experience is being completely redone. And so, the app that we are launching sometime this spring – we didn't give a specific date – will be a completely new app. The app itself will have three primary features, as I've been saying.

But I'll go over them one more time because I want to drill down on a couple of them. The first is the obvious; it'll have tons of scores and highlights and new stories about sports. And that will be highly personalized, both implicit and explicit.

So it's going to use the BAMTech engine, data collection, data management and all of the bells and whistles from a personalization, customization perspective that that can provide.

That will, by the way, be evidenced in both video, as well as basically the written word that's presented, the stories that are presented, customizable obviously by teams, by locations, by general interest.

But also basically machine learning elements of it will enable the app to determine what someone is interested in and feed them more of that as they use the app more. The second feature is live streaming of the networks themselves. That's under authenticated circumstances.

And so, if you are a subscriber to an existing service or if you want to subscribe in the future, you'll be able to use that to stream ESPN1, ESPN2, ESPNU, et cetera. There, if you want to watch it on a small screen, a mobile screen, obviously the app will provide that. The Watch app today does that.

But you can also, as you know, use a variety of different devices. I happen to use Apple TV or I AirPlay. I use Apple TV to access the app, but you can also AirPlay it directly from your mobile device to a large television.

And then, of course, the third feature is going to be this Plus feature, we're actually calling it ESPN Plus, because it's offering an incremental thousands of hours of live sports programming basically to the ESPN experience.

And then, in addition to that, that would be the home of the 30 for 30 series; the entire library of 30 for 30 product will be on there. And we'll continue to invest in original and exclusive content just for the app.

So it's a three-in-one, completely new experience, new technology, and it will basically enable people to access ESPN just about any way imaginable. And we're not only excited about it, but, if anything, points to what the future of ESPN looks like, it'll be this app and the experience that it provides..

Okay. Thank you..

Okay, Ben, your question regarding cash taxes. In the last few years, our cash taxes have generally been a little lower than our book taxes, and we expect the cash taxes to continue to be somewhat lower than book taxes over the next few years. And that's due in part to the accelerated cost recovery of U.S.

investments, the most significant of which would be in our parks and also for film and television production. And I just want to point out that that accelerated cost recovery is set to phase out after five years. Most of our domestic parks assets will be eligible for full expensing at the time they go into service..

That's helpful. Thank you..

Okay, Ben. Thanks. Operator, next question please..

And thank you. Our next question comes from Michael Nathanson with Moffett..

Thanks. Bob, I have two for you.

One is, could you talk a bit now that BAMTech is integrated into Disney, how is it being run? Is it a separate division that kind of sets OTT strategy? Or is it integrated into Media Networks, where the strategy is set by maybe operating divisions? And does that change when you acquire Fox? And, secondly, when you talk about Lucasfilm hiring Benioff and Weiss, who have an amazing track record, why not focus that energy on making a serialized drama that maybe works better for SVOD and builds value over time versus films.

How do you think about the allocation of their talent versus film versus TV?.

BAMTech is part of our Media Networks, because it's Media Networks that BAMTech is primarily providing services to. And so, it will power a number of different sort of go-to-consumer experiences. And I can't really say what we will do post regulatory approval on the Fox acquisition.

We're looking at a number of different organizational opportunities in terms of how we structure. And, clearly, we're interested in some form of conformity when it comes to technology.

When I mean conformity, I just mean basically being more efficient and being more consistent and using basically our best talent and the best technology that we have across as many businesses as possible.

In terms of how the product is actually created, BAMTech largely is responsible for the technological underpinning on audience management, to some extent some sales as well, because they have a lot of experience not just in how to create these experiences, it's also collecting user data, managing customer acquisition, customer retention, billing, and then all the necessary dynamics or technology needed for far more dynamic advertising opportunities and experiences.

And so, the editorial side of ESPN will still flow through ESPN, work in conjunction with BAMTech. But the technology side is largely BAMTech's responsibility. On Lucasfilm question you asked and Benioff and Weiss, their interest was in creating a series of films that are Star Wars based. And we've actually been talking to them for a long time.

To my knowledge, they didn't express interest in creating a series. But they have an idea about a number of films at some later date, I'm sure we'll disclose to all of you just what those are. They're focused on a point in time in the Star Wars mythology and taking it from there.

We are developing not just one, but a few Star Wars series, specifically for the Disney direct-to-consumer app. We've mentioned that and we're close to being able to reveal at least one of the entities that's developing that for us. But because the deal isn't completely closed, we can't be specific about that.

But we are pleased with the level of interest among the creative community in creating not just Star Wars, but other series for this Disney app. And I think you'll find that the level of talent that will be on, if you call it, the television front will be rather significant as well..

Okay. Thanks, Bob..

Thank you, Michael. Operator, next question please..

Our next question comes from Jessica Reif with Bank of America..

Thanks. Just a couple. First, Bob, you kind of alluded to some of the positives of Fox besides the cost that you guys outlined in the past.

Can you talk about how you're thinking about some of the revenue benefits from integrating Fox, particularly on the production side? And then on the theme parks side, can you give us any color on Toy Story Lands? How big it will be, meaning number of attractions, rides? And would you think of it the way – in terms of impact the, way Cars Land or Pandora impacted, like lower attended gates, will it even out attendance? How are you thinking about it?.

I'll start with the second part. We're building two Toy Story Lands. One will open in late April in Shanghai. We broke ground on that, I think, actually before we actually opened Shanghai. And the other one is being built in Orlando. And that will be opened some point later this year, but we have not announced a date.

And they're both large lands, they're not as large as the Star Wars Lands that we're building. I'm not 100% sure how they compare in size to Cars Land, but they all will have multiple attractions and other experiences.

And given the fact that that franchise is still quite popular and we're making a fourth Toy Story film that comes out in 2019, we feel good about it. They're large in size, 10 acres I'm being told versus 13 acres for Cars Land. So they are not quite as large, but they're large enough. We feel good about that.

And they'll have very, very distinct IP from Toy Story. So in other words, people will know exactly what the experience is going to be. We basically immerse you in a toy world.

To your first question, I think the way to look at the revenue opportunities, as particularly as it relates to production, is to consider the fact that what we're buying here is significant production capabilities and, with that, the talent to produce on our behalf.

The production or the output that we're buying from those entities will flow through our studio in both the tent-pole movie direction, but also in, we'll call it, specialty movie direction, the Fox 2000 and the Fox Searchlight businesses, as a for instance. And there is also capability there to make films for direct-to-consumer experiences.

In addition to that, Fox has had significant success on the television studio front, Modern Family, This is Us, two very specific examples of that, as well as on the FX studio front, where they produce a number of the series that are on FX.

And so, we will, as a company, when combined, have far more production and obviously production capability to flow into our traditional distribution businesses, that being TV channels and the motion picture exhibition business, as well as the capability to create product for our direct-to-consumer businesses.

And we're really – and this is – I think needs to be considered on a global basis. So this, obviously, is application well beyond just domestic consumption or domestic distribution platforms..

Thank you..

Thanks, Jessica. Operator, next question please..

Yes. Thank you. Our next question comes from Alexia Quadrani with JPMorgan..

Hi. Thank you. Bob, just on the Studio, you guys have been such a stand-out in the box office this past few years and the pipeline continues to look so strong given the tracking early reviews of Black Panther.

I guess, how should we think about the value of the Studio output deal in terms of a differentiator or driver for the Disney streaming when you launch in 2019? And does that become even more meaningful as the home entertainment window continues to wane? And then, Christine, just a follow-up.

Last quarter, I believe you said you expect Hulu to be about $100 million worse in fiscal 2018 than last year.

Is that still a good number to use?.

So, Alexia, as you know, the Netflix output deal expires with the 2018 slate. They will have rights to the films that were made in 2016, 2017, 2018 for quite a long period of time thereafter with a window for us to use them ourselves that falls within the period of time or the tail that they'll have those rights.

The films that our studio makes in 2019 and beyond will be sub-licensed or licensed to our own platform, and that will include the Marvel, Pixar, Disney and Lucasfilm films. And we'll talk at a later date about our intentions regarding the Fox studio output, but obviously Hulu is a possibility in that regard.

But they have been existing output deal already with HBO that will last longer than by a few years the deal that we have with Netflix.

But it's ultimately our intention, and this acquisition clearly will enable this even more, to create and to ultimately grow a global direct-to-consumer business that will take advantage of the production output that the combined companies will have, whether it's on the television side or on the network side.

And we fully hope to actually expand our production of intellectual property under those different umbrellas, Studio and Television, to feed multiple channels and in particular direct-to-consumer businesses that we own..

Alexia, thanks for the question on Hulu. You're right that we said at our November year-end call that we expected Hulu to come up with about a $100 million greater loss year-over-year. And we now expect that equity loss for the year to be approximately $250 million higher than last year.

And the best way to think about that, how it's going to fall, you can expect about a third of that to impact our Q2 results. So the increase is largely related to the content licensed from Hulu's equity owners.

And as one of the equity owners, our portion of these incremental costs will largely be recouped by ABC's program sales, as well as affiliate revenues to some of our various networks..

All right. Thank you very much..

Thanks..

All right. Thanks, Alexia. Operator, next question please..

Yes. Thank you. Our next question comes from Todd Juenger with Sanford Bernstein..

Hi. Thanks. I'll take my two, if you'll indulge me. It's going to be the farthest you made it through an earnings calls in years without somebody asking about pay-TV subs. So I'm sorry to do this to you, I really am, but I have to ask and it's really just a slight clarification.

Bob, I think you're on CNBC after hours saying – I think you used the word that maybe industry – sub-losses for you were moderating a bit, I think. I don't want to put words into your mouth. But then, Christine, when you sort of laid out the sub-loss, I think you said minus 3% effect on cable networks, which is the same as the minus 3% last quarter.

So I suppose we're just talking about rounding here in terms of a moderation, but not enough to change that number. Just wanted to confirm that because I think it's still important? And a second quick one, Christine. On the parks, you laid out a lot of things going on there, and I appreciate that. I don't think I heard Shanghai called out.

I apologize if I missed it. Would love, if you could just share something on that. How is it – revenue up or down, is attendance up or down? Is OI up or down? That sort of thing. Anything you can share would be great. Thanks..

Okay. First, I'd like to just touch on the subs comments. So as you noted, we did a growth of 7% from contractual rates and a decrease of 3% in our sub-count for the quarter. And the 3% versus 3% is due to rounding.

But I would also say that we did see a modest sequential improvement in Q1, which is the second consecutive quarter that we've seen this trend. And the growth is being driven by adoption of the digital MVPD platforms..

And just to add to that, Todd. What we're seeing is very encouraging in terms of the digital platforms. I mentioned on the CNBC interview that we're noticing that people are coming into the basically multi-channel world or subscribing that we've previously considered cord-nevers.

Clearly there lower price, the fewer channels and the more sort of mobile-first and improved basically user experience, are all having an impact on attracting new consumers. And we believe the trends in terms of growth in the new over-the-top or digital platforms will continue.

And, hopefully, they'll continue to offset because the growth is getting compelling. The loss is on the traditional side. On the Shanghai front, I think there are a few things.

We didn't note it because Shanghai has had just a great year, including some days where they just had unbelievable records, well over I think 65,000, 68,000 in attendance on one day in October. And the comparisons to a year ago are relatively similar, because we've had just a great year consistently.

It was announced in December that we're taking our prices up. We're actually going to a three-tier pricing strategy. And that will have some impact on the bottom line going forward, provided attendance continues to be strong, which we fully expect it will. And then, we opened Toy Story Land there in late April, April 26.

And so, that will represent an opportunity in terms of more capacity. And we have on the drawing board a number of other potential expansions. We've got some discussions underway with our partners there to address some of that in the months and then, of course, the years ahead. But Shanghai is doing quite well..

And, Todd, I'll just add a little bit more of year-over-year comparisons for Shanghai. And once again, the parks had such a strong quarter. We had so many records in quarterly OI and revenue numbers. Shanghai, not to not pay attention to them, but they too had growth. They had growth in attendance, guest spending, revenue and operating income.

And the new pricing system that Bob referenced does take place on June six..

Thank you..

Thank you, Todd. Operator, next question please..

Our next question comes from Steven Cahall with Royal Bank of Canada..

Yeah. Thank you. So my question is just kind of on how you're going to use some of your incremental cash flow you've got from tax reform, both the rate going down and the accelerated depreciation, and you've talked about a couple of billion synergies with the transaction.

And then, Bob, you said you're looking to create and grow a global direct-to-consumer business, and your biggest competitor there just continues to increase the amount of cash they're spending on original content.

So when we think about some of the incremental cash that you're going to have at hand, how do you think about how many billions of that you need to put back into these direct-to-consumer enterprises to be competitive and to grow at the global scale you want to be at?.

Well, in the earlier interview that I did on CNBC, I was asked a similar question. We've had a real blend in terms of how we've allocated our capital, increased dividends, continued share buybacks, actually got more aggressive in the last few years, and then investing both in acquisition and in organic growth.

Theme parks being a great example of that with the expansion that we've talked about not just, by the way, Shanghai, but the expansion of every park and resort around the world and then the commitment to build three new cruise ships. And that's all benefited us greatly.

As we look forward, we believe that you'll see a similar blend, except as I said earlier too, with the acquisition of 21st Century Fox, I think, you can check that box off for a while. I don't think we're going to be in the market looking to acquire for quite a long period of time.

In terms of how we might allocate the other capital, I think you have to look at the film and television production as investment in organic growth. In this case, it will be aimed at growing our presence in direct-to-consumer platforms. We have not been specific yet about what incremental spend that will be.

I think we were looking to say something more about that around this time of year. But since the acquisition of 21st Century Fox, that's going to shift. And until we get closer to full regulatory approval and, essentially, absorbing those assets, we're probably not likely to say something specific.

What we do have that's very, very interesting that we're quite mindful of as we take these direct-to-consumer properties to market is we have the benefit of these wonderful brands.

So if you look at the Disney direct-to-consumer product, which is not in the market and you haven't seen it yet, and you consider that it will be populated in terms of product by Disney, Marvel, Pixar, Star Wars product, we have an opportunity to spend more on original product, of course, but not necessarily to go in the volume direction, say, that Netflix has gone because we have this unique brand proposition.

And the demand for those brands, we believe, will give us the ability to spend less on volume. Not to suggest that we're going to be low, because we obviously are going to need enough critical mass from a product perspective.

But when you go to market with Star Wars movies, Disney movies, Pixar movies, Marvel branded and branded television shows under those umbrellas, in some cases using very well-known IP, we're developing a monster series, we're developing a High School Musical series, we're developing a Star Wars series, just to name a few, that will give us the ability to probably spend less than if we had gone to market with a direct-to-consumer service without these brands..

Maybe just to follow-up with Hulu, just a similar question.

Do you feel like because that is more of a broader, to use your term, volume platform, is it at the right level of original content or total content spending? Or do you see needing to be more aggressive there as well?.

No. We're a 30% owner of Hulu right now, and we have not chosen to speak on Hulu's behalf on such matters. They have been increasing not only the amount of product that they've licensed, but the amount of product that they produce and with some considerable success; Handmaid's Tale being one of the most recent example of that.

So they're ramping up their volume. They're also packaging the subscription SVOD service with a multi-channel service, and that product is doing quite well. I know they mentioned that they had in excess of 17 million subs, and we're not going to update that. We'll leave it to their team, if and when they choose to do so.

But that will give them the ability to continue to increase volume by going to market with a slightly different set of products, the channels being the differentiator. There's an opportunity, obviously, when we own more production capability to create more for those platforms, but we don't have anything specific to address at this point..

Thank you..

All right. Steven, Thank you. Operator, next question please..

And thank you. Our next question comes from Jason Bazinet with Citigroup..

Just a quick question for Ms. McCarthy. I think your studio historically has been a bit unique, in that you don't use co-financing to de-risk the business.

As you think about the pro forma entity with Fox, have you all made a decision about whether or not you'll continue that practice? And if you don't, is there any sort of guidance you can tell us in terms of what the implication might be financially?.

Well, obviously, we'll honor all deals that the Fox studios have in place. We've made no decision – this is Bob, not Ms. McCarthy, Jason. We'll assess those deals once the studio is absorbed. As a company, we've stayed away from co-financing for a variety of reasons. One, we've had plenty of access to capital at very low cost.

Secondly, we've always believed that sort of in for a penny, in for a pound in the movie business. You take risk every time you make a film. But as we've proven in the last probably half a dozen years, there's considerable upside when you make them well, and we don't like sharing upside.

So I think probably more likely than not that you won't see new deals, but obviously we will be respectful of and honor deals that are in place..

Understood. Thank you..

Thanks, Jason. Operator, next question please..

Yes. Our next question comes from Marci Ryvicker with Wells Fargo..

Thanks. Bob, you mentioned you've started conversations with your regulators as it relates to 21st Century Fox.

So has this changed at all your view on timing of when the deal could close? And then, second question, any update on trends in consumer products? I know this is a bit of a sore spot due to tough comps, but any comment on potential profitability this fiscal year or any update would be great..

We don't really have any update on the regulatory front. We're going through the process, which is significant, because of the number of jurisdictions that we have to file in and the size and the complexity of this deal.

And as much as we'd love to be at a point where we'd gain regulatory approval and we're integrating the companies, we know from the absolute beginning just how patient we have to be in this regard. So there is nothing to update you on there.

You want to take the Consumer Products, Christine?.

Black Panther, Avengers and Ant Man and the Wasp. And this summer, we also have a highly anticipated Pixar film, Incredibles 2. So all of those things, we think, are going to bode well for the business. I'd also like to mention that Star Wars was the number one toy franchise over this past holiday period as well..

Thank you..

Thanks, Marci. Operator, we're going to take one more question..

And thank you so much. It looks like our final question comes from Barton Crockett with B. Riley FBR..

Okay. Thanks for taking the question. I was interested in the ad trend at ESPN, which was a little bit lighter than I was expecting. And you talked about 11% decline and 7% normalized pacing flat for the March quarter, I think, including the benefit of the game shift. And I was just wondering if you could elaborate a little bit on what's going on there.

Is that ratings-driven or is there some category that's being lost? Is it anything to do with some of the controversy around the NFL? And what would the normalized kind of pacing be in the March quarter if you adjust it for the games shift like you did in the December quarter?.

If you adjust it for the games, Barton, the pacing would be down a little bit. But right now, Q2 ad sales are comparable to where they were in the prior year. One of the factors that's impacting us in the sports marketplace is the Winter Olympics.

It's obviously driving an increase in sports inventory, and that's one of the factors that's having an adverse impact on our ad sales in Q2..

Okay. That's great. Thank you..

Okay. Thanks, Barton. Thanks, again, everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website.

Let me also remind you that certain statements on this call including financial estimates and statements as to the expected timing, completion and effects of the proposed transaction 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, other Securities and Exchange Commission filings we make in connection with the proposed transactions, and in our other filings with the SEC.

This concludes today's call. Have a good afternoon, everyone..

And thank you, ladies and gentlemen. This concludes today's conference call. We thank you for participating. You may now disconnect..