Thank you for standing by and welcome to the Walt Disney Company's Fiscal Full Year and Fourth Quarter 2021 Financial Results. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question-and-answer session. As a reminder, today's program is being recorded.

And now I'd like to introduce your host for today's program, Tammy Munsey, Vice President of Investor Relations. Please go ahead..

Good afternoon. It's my pleasure to welcome everyone to the Walt Disney Company's fourth quarter 2021 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 we'll post a transcript of this call to our website.

Joining me remotely today are Bob Chapek, Disney's Chief Executive Officer, and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Following comments from Bob and Christine, we'll of course, be happy to take some of your questions. So with that, let me turn the call over to Bob to get started..

Cosmic Rewind, and the one-of-a-kind Galactic Starcruiser experience. As part of this immersive 2-night adventure, guests will become heroes of their own Star Wars stories. Reservations went on sale just 3 weeks ago, and the first 4 months of voyages have virtually sold out for this premium experience.

Disney Cruise Line continues to be one of the highest rated guest experiences of any of our offerings. As I said earlier, all 4 of our ships are now sailing and we continue to see tremendous demand for the incredible experiences we offer at sea.

We are thrilled to be launching a new ship, the Disney Wish in June of 2022 and will welcome her sister ships to the fleet in 2024 and 2025.

Combined, these 3 vessels will help increase capacity and our footprint in a business that has historically generated a double-digit return on investment, driven by a premium price might well above the industry average. Before leaving our Parks and Experiences, I want to mention the continued transformation of our Consumer Products business.

We have almost completed the reduction of our physical footprint, which will enable us to pivot our approach with a focus on our e-commerce platform, shopDisney, and on more compelling retail partnerships, such as Disney Store at Target, which will triple its locations by the end of the year.

In short, our parks around the globe now have more to offer guests than ever before, with our new offerings and we're making it even easier for them to have the best time imaginable, tailored specifically to their individual needs and preferences in a way, only Disney can.

Our Company is truly unique and that we have a significant presence in the physical world through our parks and resorts, as well as media entertainment assets in the digital world.

And it is incredible to see how our use of our emerging technology and insights gained through our innumerable consumer touch points, is enabling us to transform the way people interact with and experience our stories and products in both worlds.

The Walt Disney Company has a long track record as an early adopter in the use of technology to enhance the entertainment experience.

Steamboat Willie, the first cartoon with synchronize sound, our groundbreaking development and use of Audio-Animatronics, we were the first to distribute downloaded content on the new Apple iPod back in 2005, Pixar has been a pioneer in computer animation, these are just a few examples.

Suffice it to say, our efforts to-date are merely a prologue to a time when we'll be able to connect the physical and digital worlds even more closely, allowing for storytelling without boundaries in our own Disney metaverse.

And we look forward to creating unparalleled opportunities for consumers to experience everything Disney has to offer across our products and platforms wherever the consumer may be.

As we look ahead to this next frontier, given our unique combination of brands, franchises, physical and digital experiences, and global reach, we see limitless potential, and that makes as excited as ever about The Walt Disney Company's next 100 years.

With that, I'll turn it over to Christine, and she'll talk in greater detail about the quarter and the year ahead..

Galaxy's Edge, Avengers Campus, and the EPCOT expansion and a ramp up of expenses in support of our cruise ship expansion. And as we think about fiscal '22 results at DMED, there are few things worth noting. First, we are excited about the 9 theatrical releases we have slated for the first quarter of fiscal '22.

However, we expect that the prolonged recovery we're seeing in the theatrical market, paired with the marketing costs associated with each release may adversely impact theatrical operating results in the first quarter by approximately $300 million versus the prior-year quarter, which had only 2 releases.

At Linear Networks, we expect that first quarter operating income will decrease by nearly $500 million versus the prior year. Reflecting factors including higher contractual sports rights costs for college football and the NFL. Timing of cricket expenses at Star India an adverse comparison to the prior year's political advertising revenue.

Finally as it relates to our expectations for Disney+. Looking at fiscal '22, we are thrilled about the quality of the content coming in the first 3 quarters of the year. But we will not yet be at our anticipated steady-state cadence of content releases.

The fourth quarter will likely be more indicative of what our slate could look like once we have content flowing steadily from all of our industry-leading creative engines.

Q4 will be the first time in Disney+ history that we plan to release original content throughout the quarter from Disney, Marvel, Star Wars, Pixar, and Nat Geo all in one quarter. This include highly anticipated titles such as Ms. Marvel, Andor, and Pinocchio.

And as Bob mentioned earlier, we are also increasing our local content offerings in Asia, India, Europe, and Latin America in fiscal 2022, with the majority of those titles also releasing in the back part of the year. As we've discussed before, we don't anticipate that sub-growth will necessarily be linear from quarter-to-quarter.

So putting this all together and also taking into consideration the timing of our planned international launches in 2022, we expect Disney+ subscriber net adds in the second half of fiscal 2022 will be meaningfully higher than the first half of the year.

Additionally, we now expect the Disney+ will reach its peak year of losses in fiscal 2022 instead of in fiscal 2021, as better-than-expected revenue and lower content expenses due to production delays contributed to lower-than-expected losses in 2021. As Bob mentioned, we are increasing our overall long-term content expense for Disney+.

And we believe we are well-positioned to achieve the subscriber target of 230 million to 260 million by fiscal 2024 that we laid out at last year's Investor Day. And we also remain confident in our expectations that Disney+ will achieve profitability in fiscal 2024.

And with that, I'll now turn the call back over to Tammy, and we would be happy to take your questions..

Thanks, Christine. As we transition to the Q&A, let me know that since we are not physically together this afternoon, I will do my best to moderate the Q&A by directing your questions to the appropriate executive. And with that Jonathan, we're ready for the first question..

Certainly. Our first question comes from the line of Ben Swinburne from Morgan Stanley.

Your question, please?.

Thanks. Good afternoon. Bob or -- and/or Christine. I think there's 2 areas where expectations have probably been out of line with reality this year, that's a on the stock. One of them is the Disney+ net adds, the other is probably more recently on Parks margins and you talked a lot about both of those in your prepared remarks.

But maybe you could just spend a minute, on both topics. On Disney+, it sounds like we should think about net-adds being higher in 23 and 24 than in 22 based on the surge that I think you mentioned, Bob, on the programming side. So I'm wondering if you could help us with that. I think that would help set the expectations in the right spot.

And then on the Parks front. Bob, you talked a lot about Parks margins, when you get back to prior peak revenues being at or maybe even higher than before, but obviously there is also not a linear ramp on the margin front either.

So if you could talk a little bit about how expenses come back into the business over the course of time as it recovers relative to revenue, so we make sure we're thinking about that business the right way in this set of unusual circumstance coming out of a pandemic. Thank you..

Bob, why don't you start off with Disney+ net ads, and Parks as well.

And then Christine, maybe you can chime in on the expenses for Parks?.

Okay. Thank you, Ben. On the Disney+ side, as Christine had said, we're real pleased with where we're sitting. But again, it's not going to be a linear rate quarter to quarter. I think the recovery that you mentioned in terms of getting the growth rate back up to where it's been historically, is really going to come in the third and the fourth quarters.

The third quarter will be powered, not necessarily by the content, but by the number of ads that we have in terms of markets. Our number of markets that we're going to add will essentially double to more than 160 by FY2023, and that will propel us in the third quarter. And the fourth quarter will be more of a function of that.

Finally, the dam will break in terms of the content that we announced last December that will be substantial, and will lead to a cadence of content throughout the quarter that will look more like what we expect to see from an ongoing standpoint.

Obviously, we're only in year 2 of the Disney+ launch, and the hunger for content, for the service is extraordinary. And when you have that happen at the same time that you have a pandemic, and you have to shut down production. That's not a good combination.

And yet we identified the need for the content way-back exactly a year ago, and have prepared a very strong cadence of content which will now hit the pipeline in the second half of this year. In terms of the park situation, we are very bullish. We're seeing incredible 30% increases in per caps, as I think was referenced in the earnings letter.

And so we're not only seeing strong demand, but it's at per caps that are much higher than we've traditionally seen. There was a reference and I am not sure if everyone appreciates the gravity of this to the Genie+ success, 1/3 of our guests at Walt Disney World, are buying the Genie+ upgrade at $15, that's per guest, per day.

And that is a very, very material increase for in per-caps, but also in margins. So we're very bullish about both our Disney+ business, both in terms of of guidance that has been given today.

But additionally, in terms of where our Parks business is going to go from a demand standpoint once we completely clear the pandemic, but also in terms of the what we expect to be a long lasting benefits in terms of yields.

Christine?.

Thanks, Bob. And thanks, Ben. I'm glad you asked the question on Parks expenses. And I know you know this business well, but just for the benefit of some others that maybe newer to following Disney. Let's remember that the Parks expenses are in 3 buckets, fixed, which is quite substantial, semi-fixed, and variable.

So variable was where we were really able to make some adjustments during COVID. But the other fixed and semi-fixed buckets are ones that we have to carry on regardless of the operating environment that we found ourselves in.

So as we come back online, we've also done a lot of work on fundamentally changing some of the ways we've have done business on both the revenue side and the cost side to optimize margins. What you see this fourth quarter is an overall margin for the global business, for DPEP, a little under 12%, and that's well below our pre - COVID levels.

I've said this before and I'll say it again, that I believe that we will get not only back too, but have high probability of exceeding those previous margin levels in our parks because of some of the things we've done. We're using date-based pricing. We're strategically managing attendance.

We do have some promotional offers that are really meant to balance yield with the demand, given capacity on any given day or week during the year. And on the cost efficiency side, we really made some improvements, not only to the cost side, but also that improves the guest experience.

So those are things like the mobile food ordering that we have, a lot of people who have been to our parks since we reopened really enjoyed that. There's contactless check-ins at our hotels; lots of people enjoy that as well.

We have virtual queues for selected attractions, and we're once again really looking at even physical park improvements that allow for better guests movement throughout the Parks.

So while these margins will remain impacted, while we are still operating under capacity constraints, again, we believe over the long term that these fundamental changes are going to yield -- are going to result in higher margins overall. So thanks for asking that question. And the other thing I would say is, Bob mentioned, Genie.

Genie we have launched in Walt Disney World. We have not yet launched it in Disneyland. And I think when we have that exposure to the Disneyland, people who come to visit Disneyland -- the response will be as strong if not stronger. Thanks..

Thank you both..

Thank you, Ben. Next question, please..

The next question comes from the line of Alexia Quadrani from JPMorgan. Your question, please..

Thank you. Just a few questions if I may. First, ARPU on Hotstar is obviously lower than core Disney+ jobs.

I'm curious if you could elaborate on the opportunity to narrow that gap over time and does it eventually become profitable contributor and maybe how much investment is needed in a big picture in that property? And then just my follow-up question is on the -- your decision to revert back to include the Asheboro releases, at least for now, it looks like even though they might be lost incurring initially, why do you ultimately feel that's a better model? Was it piracy, any color there? Thank you..

Bob why don't you start with exclusive theatrical releases and then Christine can talk about Hotstar ARPU?.

Okay. As you know, we have preached flexibility in terms of making decisions on distribution as we recover from the pandemic and in the mix of changing consumer behaviors.

The extent to which we had a number of titles release going to theatrical will eventually go to Disney+, but what we're seeing is some recovery of the theatrical exhibition marketplace, which is a good thing by the way, for not only Disney but also for the industry, and because most of the franchises that we've had as Walt Disney Company have been built through the theatrical exhibition channel of distribution.

At the same time, we're watching very, very carefully different types of movies to see how the different components of the demographics of that market come back.

And we're watching very carefully our family films, as they are released over the next couple of months to make sure that that market will come back to theatrical exhibition as the general entertainment with say the films that appeal to a younger target audience have come back.

And so we're sticking with our plan of flexibility, because we're still unsure in terms of how the marketplace is going to react when family films come back with a theatrical first window.

I should say that -- you'll notice that the films that we are putting into the marketplace, in theatrical that are family films have a fairly short window, at least in terms of any reference point to what history might have been.

And we're doing that so that we can get our films quicker to Disney+ and -- but at the same time see if the theatrical market can kick back into full gear as we prime the pump with these films. But we're going to do what's best for our shareholders ultimately.

And we don't announce our films that far in advance, like we used to because we know that we're in a time of flux and change still. And while COVID will be in the rearview mirror, God-willing, I think changing consumer behavior is something that's going to be more permanent.

And so we're reading that on a weekly basis and make our decisions going forward accordingly..

Thanks, Alexia, for your question on Hotstar ARPU. Just to make something very clear, the Disney+ Hotstar is included in our overall Disney+ guidance that we reiterate to be profitable in 2024. So I just want to make sure that everyone understands that.

But as it relates to ARPU specifically, there's been a lot of noise in the Indian market, a lot of which has been around sport. So when you look at the ARPU for Hotstar on a linked quarter basis from Q3 to Q4 this year, it actually decreased, and that was a result of lower per sub advertising revenue because there were fewer IPL matches this year.

In Q4, there were only 18, and I believe the number was 29-ish in Q3. So you had a linked-quarter reduction in games, therefore lower subscriber advertising revenue. And when we think about ARPU overall, there's several levers here. There is a price value relationship over time, high-quality content. And the content in India is really 2 things.

It's not only the IPL, but other key sports like Beyond Cricket. So you have things like the English Premier League and. And also there's a big general entertainment component. We have all of our Disney+ content over there for all the different labels that we have, Disney Pixar, Marvel, Star Wars, and so on.

But they also have over 18,000 hours of original local programming that is produced every year. So once again, I think the upside potential as when all things are working, also cylinders are working and we'll be able to take price up as the market allows..

Thank you. Thank you, Alexia. Next question, please..

Our next question comes from the line of Michael Nathanson from MoffettNathanson. Your question, please..

Thanks. Hey, Tammy. I have 2. One is I appreciate your view that the content side would get better, and it will drive some growth. But I really want to focus on the U.S. What gives you confidence that that's what is the reason for the slowing growth. Are there any cohorts, any demographics that you're underpenetrated.

And perhaps the widening out of content is an issue versus just more new content. That's 1. And then 2 is we have covered Disney a long time, but I've never seen this much inflation before, and I don't think any of us have in 30 years.

I wonder how will you mitigate that inflation, and at what point it would start becoming a meaningful drag on the margin recovery that you identified. Thanks..

Thank you, Michael. Bob, how about if you talk about the Disney+ sub grows in the U.S.

and Christine can talk about inflation?.

So Michael, your first question was about the of the supply chain of new content coming into the service and its impact on our net sub adds.

As you can probably suspect, in a world of to Direct-to-Consumer, we have a lot of information, a lot of data, and we have a pretty good idea of what the marginal impact of a particular title might be to our service, and we always say that library titles tend to increase engagement and minimize churn.

But new titles, new content, whether the movies or series, add -- actually add new subs. And that is actually the reason why we're pretty confident that the increase in content flow towards the second half of fiscal '22 will actually lead to the types of results that we're anticipating.

And so we've got some pretty good data that suggests that that is the case, given our history. While we only have two years, that two years has represented a number of titles, and you can start to build models as I'm sure you can understand.

Every time that we have a title, we have a pretty good idea of what the net impact that that's going to be, both from a retention and to an addition standpoint.

So we're pretty confident that once we get to more of a normal content flow in the second half of the year that some of the vacuum that we've had over the last couple of months will not be the case. Christine, you want to handle the -- oh, and Charlie there was also a question about Cohorts widening. I'll handle that one as well.

It is true that Disney+ is a 4 quadrant service. And as such, we need content that's going to be broad in order to appeal to each of those demographics. If there is an opportunity that we're working on right now, it's our preschool area.

We believe that there's an opportunity for us to sort of assert ourselves in the Direct-to-Consumer way the same way we did in the Linear Networks with Disney Channel. So that would be the biggest opportunity.

And I can tell you that in sitting through our creator of reviews, the new content that we've got, the new storytelling that we've got in the area of preschool is absolutely extraordinary.

And I think we're going to see a resurgence of Disney in that area in terms of content that's really going to become of the cultural zeitgeist, and then drive our subs amongst that particular cohort of potential sub-adds for Disney+. But it is true that being a 4-quadrant service, we need to be broad in our approach.

And that's why we fired up the engines, the production engines of our Fox teams that we gotten in acquisitions Searchlight, and just our general -- Disney General Entertainment team making content both for Hulu and for Disney+, as well as our services internationally.

Christine?.

Thanks, Bob. Hi, Michael. I think you asked a question that's on the minds of every CFO and every senior management team of companies out there. Inflationary pressures are something we are all looking at and trying to assess, and think about how do we manage through it.

This is also one that -- I just mentioned, we've already experienced in some parts of our business. So over the past year or so, we've talked about the increase in the price of content. You see the content, that because of just the competition for talent for everything that's involved in productions, content costs have gone up.

Where we see it directly in our parks business is primarily through the hourly wage inflation that we've seen through contact -- contract renegotiation in our commitment to paying our park workers well.

And then we have things on the cost of goods side and it's interesting -- just last week maybe it was -- just last week I was talking to our Parks Senior Team about things we could do there, and there are lots of things that are worth talking about.

We can adjust suppliers, we can substitute products, we can cut portion size which is probably good for some people's waistlines. We can look at pricing where necessary, but we aren't going to go just straight up across an increased prices.

We're really going to try to get the algorithm right to cut where we can and not necessarily do things the same way. As I mentioned, we're also using technology to reduce some of our operating costs, and that gives us a little bit of headroom also to absorb some inflation.

But we're really trying to use our heads here to come up with a way to kind of mitigate some of these challenges that we have. It's a great question, and I'm sure it's one that you could ask every single Company in your coverage universe. Thanks..

Thanks..

Thank you Michael. Operator, we have time for one more question..

Certainly. Our final question for today then comes from the line of Jessica Reif Ehrlich from Bank of America Securities. Your question, please..

Thank you. 2 of course. First, could you talk about the advertising outlook? There's a lot of moving pieces here between strong upfront, good sports ratings, but supply chain issues affecting some categories.

And within advertising, if you could talk a little bit more about Hulu advertising, what's going on there with your aired light service versus pure premium subscription. And then the second question is -- I know Bob mentioned in prepared remarks -- sports betting.

Can you frame or give us any color on the opportunity? Obviously, it's an area of growth as more states are approving it and it effects advertising, which should be good for the stations.

But how can you participate in a bigger way while still protecting the ESPN brand?.

Thank you, Jessica. Bob, why don't you address sports betting and Christine can talk about advertising..

Okay. Will do. Jessica, you're right. We do believe that sports betting is a very significant opportunity for the Company, and it's all driven by the consumer. It's driven by the consumer, particularly the younger consumer that will replenish the sports fans over time and their desire to have gambling as part of their sports experience.

It's not necessarily a lean-back, it's a little bit of a lean-forward type experience that they're looking for. And as we follow the consumer, we necessarily have to seriously consider getting into gambling in a bigger way. And ESPN is a perfect platform for this.

We have done substantial research in terms of the impact to not only to ESPN brand, but the Disney brand in terms of consumers changing perceptions of the acceptability of gambling. And what we're finding is that there's a very significant isolation. Gambling does not have the cache now that it had, say 10 or 20 years ago.

And we have some concerns as a Company about our ability to get in it without having a brand withdrawal. But I can tell you that given all the research that we've done recently, that that is not the case. It actually strengthens the brand of ESPN when you have a betting component, and it has no impact on the Disney brand.

Therefore, to go after that demographic opportunity plus the, of course, not insignificant revenue implications, that is something that we're keenly interested in and are pursuing aggressively..

Okay. I'll take the advertising question, Jessica. So overall, the ad market is strong across our entire DMED portfolio. And the sports market is strong, and it's really being driven by football at both the college and professional level, NHL and the NBA.

We are seeing some impact from supply chain issues impacting certain sales categories than the 2 that I would just call out are autos in technology and those are for obvious reasons that we all know about, the chip shortage. On Hulu specifically, we're really pleased with the advertising demand we've seen for Hulu.

And we believe the overall addressable market in the U.S. market will continue to grow. Hulu, we believe also has some real strategic advantages in this space. We've got a great slate of premium content and we've developed the ability to use our data to offer that targeting advertising, that advertisers really desire.

And we also have a purpose built and unified ad platform. I mentioned this last quarter, but that's really helped us grow in addressable advertising. So we'll continue to make investments in technologies that are going to allow us to continue to exploit this advertising that we see on Hulu.

And it's automating the sales process with programmatic, and advertisers self-service channels that we think are really going to continue to show good growth. So we expect advertising to continue to be an important driver of Hulu revenues going forward. Thanks..

Thank you..

Jessica, thanks for the question. I want to thank 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 or statements about our plans, expectations, beliefs, or business prospects, and other statements that are not historical in nature may constitute forward-looking statements under the securities laws.

We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements.

Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from 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.

We want to thank everyone for joining us today. Hope you have a good rest of the day..

Thank you for your participation in today's conference. This does concludes program. You may now disconnect. Good day..