Good day, and thank you for standing by. Welcome to The Walt Disney Company's First Quarter 2022 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today's conference may be recorded.

[Operator Instructions] I'd now like to hand the conference over to Jenn Kettnich, Vice President of Investor Relations for The Walt Disney Company. Please go ahead..

Good afternoon, and it's my pleasure to welcome everyone to The Walt Disney Company's First Quarter 2022 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 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 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 Open Avengers Campus at Disneyland Paris, where the iconic Quinjet landed a few weeks ago ahead of the resort's 30th anniversary celebrations. I want to close by thanking our 195,000 employees for bringing Disney magic to audiences and guests around the world, especially in times like these, when the world needs it most.

Our company is truly extraordinary, and I am honored to work with the most talented team in the industry to create the next generation of Disney stories and experiences through our focus on storytelling excellence, innovation and our audience. With that, I'll hand it over to Christine..

No Way Home. As we look ahead, we would like to give you some context around 2 items that may impact our second quarter results. First, as we continue to increase our investment in content, we expect programming and production costs at DMED to increase versus the prior year, primarily driven by Direct-to-Consumer and Linear Networks.

At Direct-to-Consumer, we expect programming and production expenses to increase by approximately $800 million to $1 billion, including programming fees for Hulu Live. At Linear Networks, we expect programming and production expenses to increase by approximately $500 million, reflecting factors including COVID-related timing shifts.

We aired 4 additional NFL games at the start of the current quarter. And as a reminder, the Academy Awards will be held in Q2 of this year, while they fell into Q3 of the prior year.

Second, at content sales, licensing and other, a difficult Q2 comparison to prior year TV and SVOD program sales is due in part to our strategic decision to hold more of our owned and produced content for our direct-to-consumer services.

As a result, we expect operating income to be adversely impacted by more than $200 million versus the prior year quarter. With that, I'll turn it back to Jenn, and we would be happy to take your questions..

Thanks, Christine. As we transition to the Q&A, let me note 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. [Operator Instructions] And with that, operator, we're ready for the first question..

Our first question comes from Ben Swinburn with Morgan Stanley..

Thanks. Good afternoon, and thank you for the additional disclosure. Bob, I wanted to ask you about Disney+. The U.S. subscriber base or the, I guess, the U.S. and Canadian subscriber base is larger than we would have thought. You guys have gotten to, I think, almost -- probably more than 1/3 penetrated of total broadband homes.

And it's, I guess, interesting to me because it's a narrower service than the international product, which has the Star tile. So I'm just wondering if you could talk a little bit about how you see the runway still ahead in North America for that product.

And then when you look at the international business, so leaving Hotstar aside, what does your research tell you about what the company needs to do to drive that business meaningfully higher? Because it deliver on your '24 guidance, that's really probably the biggest key is to get that sub base going.

So I'm just curious, as you look at the plan, what are the things you think really can make that happen? Thank you..

Thanks, Ben. So on the Disney+ U.S. side, you mentioned that we're roughly 1/3 penetrated. We still have some headroom in each one of our major franchises in terms of those viewers, those fans that have expressed interest in subscribing.

So we are not nearly tapped out on each of the major franchises if someone identifies as a Lucas fan, Star Wars or as a Marvel fan or as a Disney fan. The biggest opportunity in terms of significance is with general entertainment being added to the service.

And I think you've seen just this quarter, we mentioned that today that we're adding in Grown-ish, Black-ish and a few other titles into our service. I think that will be a trend of us taking more general entertainment and moving it over to Disney+ because, as you know, about 50% -- slightly over 50% of our consumer base on Disney+ do not have kids.

It's a very broad general service, of course, driven by the Disney brand and driven by families, but what we've seen time and time again is that the elasticity of Disney and its brand is much greater than we might have given it credit.

And I think nowhere does this play out more, now getting into the international side of your question, than we see in Europe with the Star brand tile being the sixth brand tile within the Disney+ offering in Europe.

The other thing, though, to your question directly on international that's going to drive the international business is the predominance of local content that we are developing in order to appeal to the unique taste of each of those international markets.

And I'll point out to the 340 productions that we referenced on the last call that we're developing. And by the way, we just created a new organization within our company to shepherd the development of that content, so that we can maximize the chance that we get some global hits, if you will, out of some of that local content.

And so we're bullish on the future of Disney+, both domestically and internationally, driven by not only additional prevalence of titles within our major franchises, but also general entertainment and specifically in the international territories local content..

That's super helpful, Bob.

And just curious, as a follow-up, of those 300 productions or the local originals, will we see a lot of that in fiscal '22 come on the service?.

Yes. That's the slate that comes on, I think, over the next 1.5 years, next 1.5 years to 2 years. So I don't exactly know the percent that will fall within the context of this year.

But we started this initiative about a year ago, and I must say it's actually extraordinary how great the content is that's being developed in the international territories..

Thank you..

Thanks, Ben, for the question. Operator, next question, please..

Our next question comes from Michael Nathanson with MoffettNathanson..

Hey, thanks Bob. Going on that same part about international Disney+.

Can you talk about what role the sports play, maybe even outside of India? So what are you seeing in Latin America? Does that help close the gap? And in general, how do you consider maybe loss leading with sports versus pulling back on sports and investing in more of your own content? Thanks..

The sports proposition internationally really varies by market. As you know, in Europe, it's not a big component for us, but in Latin America, it actually is.

And our -- the way that we've gone to market in each territory, one of the differences between how we go to market in Asia versus how we go to market in Latin America versus how we go to market in Europe is a function of sports. That's a really big piece of it.

And where you see like in Latin America where we've got a very big percentage of our consumers that are subscribing to our services because of sports, it's a bigger component to that. Sports for us are -- it's a very important strategic offering because the fandom and the passion is so deep.

If you look at India, we're certainly going to try to extend our rights on the IPL. But we're very confident that even if we were not to go ahead and win that auction that we would still be able to achieve our 230 to 260. So it's an important component for us around the world.

Obviously really important in India, but not critical to us achieving the 230 to 260 number that we've guided to..

Thank you..

Thanks, Michael. Operator, next question, please..

Our next question comes from Kannan Venkateshwar with Barclays..

Thank you. So Bob, if I could just follow-up on that comment on IPL. Hotstar was about 40% of your long-term guide and without cricket, getting to that number seems like a little bit tougher to do, just given the popularity of the sport in the country and also the fact that Hotstar has been in the country for a long time as a localized service.

So just wanted to see what bridges that gap to your guidance if -- in the scenario that you don't end up getting Hotstar? And then beyond that, maybe -- sorry, go ahead, Bob..

No, no, go ahead, please..

So Christine, from a guidance perspective, I guess the other variable is just a breakeven guidance in 2024 for the streaming service. And you did talk about content spend being at least $8 billion to $9 billion in that year last quarter.

So just given the growth in entertainment content locally around the world as well as some of the investments in sports in Latin America and potentially an increase in cost in India, could you just frame what kind of upside we could see to that content spend budget? Any framework in terms of how to think about it would be useful? Thanks..

Bob, do you want to start off on the IPL and Christine can chime in with some more detail on that and the breakeven guidance in content spend?.

Sure, sure. So while the IPL obviously, is an important part of the Disney+ Hotstar content offering, it's really one component of a broader portfolio of entertainment and sports.

In addition to, obviously, the original content and the library content from Disney, Pixar, Marvel, Star Wars and Nat Geo, our Disney+ Hotstar offering does have a massive collection of local content, and we add over 18,000 hours of original programming every year.

So while certainly it's an important component, that local content that we're developing really will mitigate the impact of us if we were not to win the auction on IPL. So an important component, but it's not like we see that business evaporating if we don't get it.

Christine?.

Okay. Kannan, on your question on the breakeven guidance and on Disney+ content spend. We're not updating the guidance. We have that fiscal '24 guidance out in the marketplace, and we're sticking to it. We're not yet at a steady state of content expense for Disney+, but we expect to have made significant progress by fiscal 2023..

Next question comes from Jessica Reif Erlich with Bank of America Securities..

Maybe switching gears to Theme Parks. The leverage in that business is ginormous as we've seen in this quarter. Would you consider the 34% operating income margin peak margin? And then just maybe some color because international visitors really haven't come back, we know they stay longer and spend more.

Have you gotten all of the technology improvements that you expect? And within that, with some of the changes that you made in the park, it sounds like you're actually improving capacity.

So how should we think about capacity now versus what it was prior to COVID?.

Christine, do you want that one on the margins?.

Sure. I would say we've been saying this all along through the pandemic, where we have taken measures to really look at the cost base and how we're doing things.

And there's been a fundamental shift in some of the operational processes that the parks had used for many, many years and things like the ability to do mobile dining or not having to check in with the human being at a hotel, those kinds of things are all things that add to upside that we have at the parks.

And as you mentioned, Jessica, we haven't yet seen the return of our international guests. And remember, historically, and we always hit this historical boundary of our band of 18% to 22% of our Walt Disney World guests came from outside of the U.S., and they haven’t even yet started to return.

So I think there's a lot of things that are boding well, and we saw the performance this quarter of Genie and at the other things like Lightning Lane, but it's not just that. It's also really compelling offerings in food, beverage, merchandise.

And it's really great to see not only creativity in our content business, but creativity at our parks as well. And that's driving some of that incremental spending that's certainly helping the margins get to that level that we've seen this quarter..

All right. Thanks for the question, Jessica..

The next question comes from Brett Feldman with Goldman Sachs..

I believe we're going to be coming up on an anniversary of the first price change that you had for the Disney+ service.

And so I was hoping you could give us some insight in terms of how you're thinking about pricing strategy for the product going forward? And what are the key things that influence that in terms of timing, when you bring new content on, distribution partners or anything else we should be thinking about as we model out ARPU?.

Christine, I'll start with this. And if you want to augment, please do. We maintain that we offer an extraordinary price value relationship around the world for Disney+. Obviously, the last few years, pretty much the entirety of the launch of Disney+ have been plagued by COVID-related production interruptions.

Plus in all fairness, our own recognition that we needed to essentially double our production output. You put those 2 things together, and we certainly have less content than we want. But as we've said over the last few earnings calls, that will rectify itself in the second half of this year, we've already reached 1 of our 2 goals.

One of the goals was to go ahead and ensure that we had a new title every week, and we've achieved that. But by '23, we want to get to a steady state, which is even higher than we have right now.

And I think that will give us the impetus to increase that price value relationship even higher and then have the flexibility if we were to so choose to then look at price increases on our service.

But it's all about content, content, content and we are bullish about our future content going forward, not only in terms of quality, but also in terms of quantity. And that's really what's driving our bullishness for what we might see as the pricing power that we would have going forward..

Brett. The only other thing I would add to that is that we are still only less than 2.5 years into this business, and we're learning a lot about what consumers are watching, consumption patterns, repeatability and all of those things will factor into when we look at the -- as Bob mentioned, the price value equation going forward.

So as we learn more, we'll continue to refine the business model..

Our next question comes from Doug Mitchelson with Credit Suisse..

I'd echo Ben's appreciation of the extra streaming details. I guess a couple of questions. Latin America was not mentioned. And I know on the last conference call, there was a discussion of working with distributors on Star post launch to improve traction there.

Is there any story as to why there was pretty good success here in Europe and Asia Pac, but a little bit less so in Latin America? And then probably for Christine, but on the Direct-to-Consumer programming cost increase that you highlighted for fiscal 2Q, I'm not sure if there's more context there, but also can we think about the next couple of quarters thereafter to be something in a similar range? Certainly, the fourth quarter was already highlighted as a quarter where we're going to see a lot of fresh original programming.

Anything that could sort of help us shape out the year on that regard would be helpful..

Thanks, Doug, for the question. Bob, do you want to start off on LatAm or international subs and then Christine, you can add to that..

Yes, I will. I'll talk about LatAm because it kind of goes back a little bit to this live sports story that was questioned earlier. We're actually encouraged by what we see in LatAm, especially given the straight of that Live Sports calendar and a growing pipeline of local original productions.

I mean, the reason why we're doing so many local productions because we know what their power is in those localized markets. And we're also encouraged that we're seeing a dynamic that we also see in the U.S., which is the vast majority of the sign-ups that came this quarter came from the Combo Plus. In other words, it's the bundle.

And so we're starting to see LatAm sort of pick up some of the same characteristics that we see in domestic. When we started off in LatAm, just like we did with Disney+, it was a little bit slower, but they always seem to keep -- kind of a catch-up, if you will.

And we believe in the strength of our local originals and those 2,000 live sporting events that we program each month. Our growing wholesale footprint, you talked about partnerships. That's an important part, particularly in Latin America, that wholesale footprint and new promotional offers that we are testing in the marketplace.

So we think that the combination of those things plus our ability to migrate our customers from our linear channels to their digital channels really gives us reason to be fairly bullish in Latin America right now. And Christine..

Doug, the question on Disney+ programming. We expect to -- for the full year spend on content to be -- including sports rights to be as much as that $33 billion in total. The increase from year-over-year is more spending on our DTC expansion.

And this also assumes there is no significant production delays and things could happen for things other than COVID as well. We had a couple of productions that did get delayed for other reasons. But when you think about -- your comment on our heavy slate of content coming to the service in the fourth quarter is true.

But remember, the spending for that is before then. So you'll continue to see increased spending this year. And when you're looking at that $33 billion, I think it's also informative to take into account that about 1/3 of that is for sports rights, including the programming and production, but primarily it's the sports right.

So if you want to think about the total $33 billion, take out 1/3 for sports and the remainder is for content. Not all on Disney+, some of that's for Hulu as well..

Our next question comes from Michael Morris with Guggenheim..

I wanted to ask you one about Hulu and just follow up on the parks. On Hulu, the SVOD ARPU was down a bit year-over-year. You guys cited the lower per subscriber ad revenue. I'm hoping you could talk a little bit more about what's driving that.

Is engagement down? Is pricing down? I know there's been some talk of some content that may be coming off the service. So if you could expand on that a bit, that would be helpful. And then second, I just want to follow up on the earlier question about capacity at the parks and whether that has expanded through the cycle.

So I'm just trying to think about the runway given how strong the per caps have been and we can kind of do the math on how much attendance went down and how much you've reported, it's come back. But I'm curious if you can give us any more perspective on whether we can exceed or by how much we could exceed those prior attendance levels..

Bob, do you want to start off on parks then Christine can touch on Hulu SVOD ARPU?.

Okay. I'll start off on parks. So the issue or the question of capacity at parks is a bit of a complex one because it's driven by several different dynamics. First of all, we've got really strong domestic demand, as we've said, mitigated a little bit by a lagged return from the international markets.

Now that in itself is expected because the booking timetable is so long on international trips. So we believe that will come up and enable us to get closer to where we would have been in the past.

But in terms of sort of the self-management capacity, one of the last things to come back for us in a post-COVID world -- what we hope is a post-COVID world, is actually live entertainment because much of the live entertainment is close proximity. And we are self-regulating that.

We are self-managing that because we don't want our guests to feel an excessive level of density. And the place that you get it is parades and firework shows and things like that. So I suspect that over time, we'll start to regain some of the capacity drop-off that where it's kind of self-imposing on ourselves.

The other thing I should say is that, to a certain extent, because people spend such a long time in our parks and resorts, the food and beverage component is actually a pretty big one of those. And if there's -- we really haven't had too big of an issue in terms of retaining and attracting people into our parks -- to work into our parks at all.

As a matter of fact, we had 85% of our cast members pretty much say, yes, immediately, when we ask them back.

But at the same time, the 2 areas that have been difficult is hospitality, and right now, we've got 90% of our hotels at Walt Disney World open and we've got all of our hotels at Disneyland open, but also sort of cooks, I think kind of short order cooks.

And so the capacity constraints, the self-imposed capacity constraints are really a function of our food and beverage sort of mitigation, if you will.

But the second one is live entertainment, and we're working towards restoring both of those so that we can get up to something that would be more similar to what we've seen in the past in terms of the number of people we put into our parks.

But I must tell you that our ability to increase our guest experience through a very -- a reservation system in a very carefully managed demand ticketing system has been something that we really like.

And I think guaranteeing our guests that they have a great experience no matter when they come, whether it be the Christmas holiday or whether it be in the middle of the month of September, that's really important to us. And so we're going to self-manage as to optimize the guest experience.

But at the same time, we know we firmly got some headroom, whether it's due to international or whether it's due to an expansion and reinstatement of things like live entertainment..

Great. And Mike, your question on the Hulu SVOD ARPU. Let me just start with advertiser demand because I think this is an important concept. It's incredibly robust for advertising on Hulu. We're able to use our data. We offer targeted advertising. Some people call it addressable.

We've built a unified ad platform across all of our businesses that do utilize advertising. So we're seeing that as being a growth business for us and are very, very pleased with it. On this particular question on the ARPU for Hulu. In the quarter, we benefited growth from some high-impact promotional offers during the quarter on Black Friday.

There was one that went into the market. Those particular subscribers are showing high rates of engagement and the conversion of them from the promo to the full price, we're pretty optimistic of that given their engagement levels. So while it was down, you could view it as this was an offering to get people to sample the product.

And the -- it seems like the product is being certainly appreciated. And we're hoping for those to once again convert to full paid subscribers.

This question comes from Jason Bazinet with Citi..

I just had one long-term question. You guys have done so well over the years in terms of running theme parks world-class and storytelling as you alluded to. The one area where I think Disney has sort of struggled a little bit has been with software development.

And as you think about sports betting and the metaverse, it just seems like strategically, that's going to become potentially a more important piece of your core competency going forward.

Is that sort of top of mind? Or do you think that's sort of not a correct way to think about sort of the muscles that you guys need to build over the next 5 years?.

Jason, I think you're cutting in and out, but I think we got the gist of the question.

Bob, do you want to take that one?.

Yes, yes. I think I got the gist of it. It is top of mind. It is absolutely top of mind because we realize that in the future, you can call it what you want. You want to call it metaverse, you want to call it the blending of the physical and digital experiences, which I think Disney should excel at for all the reasons that you said in your opening.

We realize that it's going to be less of a passive type experience where you just have playback whether it's a sporting event or whether it's an entertainment offering and more of an interactive lean forward, actively engaged type experience.

And this is a very top of mind thing for us because we are continuing over time to augment our skills and the types of people that we attract into The Walt Disney Company to reflect the aggressive and ambitious technology agenda that we have.

You probably noticed that one of my 3 pillars is innovation and specifically technological innovation because we realize that this is going to be an important part of telling story in that third dimension that lean forward Interactive dimension. So it is absolutely top of mind..

Okay. Thanks for the question, and we 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 estimates 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 you all for joining us today and wish everyone a good rest of the day..

This concludes today's conference call. Thank you for participating. You may now disconnect..