Disney (Minutes): Integration of streaming resources can lead to an overall value enhancement

The following are the minutes of the FY25Q3 earnings call for$Disney(DIS.US) compiled by Dolphin Research. For an interpretation of the earnings report, please refer to "Be Patient, Disney's Spring is Near"

I. Review of Core Financial Information

1. DTC Continues "Quality" Growth: In the third quarter, streaming subscribers increased by 1.7 million, roughly in line with market expectations, mainly driven by the release of popular titles like "Moana 2" and "Andor" on the platform. The integration of different resources clearly enhances monetization efficiency, with the DTC segment's profit margin improving for four consecutive quarters, reaching 5.6% in the third quarter.

Guidance: The company expects a net increase of over 10 million in total subscriptions for Disney+ and Hulu in the next quarter, exceeding market expectations. The incremental subscriptions are primarily from Hulu, due to the resumption of cooperation with cable company Charter.

2. Competition Impact Less Significant, Park Business Target Raised: The market's expectations for the theme park business have experienced some fluctuations. A key influencing factor is the opening of Universal's Epic in Orlando at the end of May, which has led to competitive diversion.

The market sentiment shifted from initial caution to optimism as the diversion impact weakened. In actual performance, domestic park revenue grew by 10% in the third quarter, mainly driven by per capita spending, with visitor numbers flat year-over-year, slightly weaker than the 2% growth in the previous quarter. Considering the suppressive effect of rising prices on visitor numbers, this indicates that the competitive impact of Epic is relatively controllable.

International parks rebounded in both visitor numbers and per capita spending this quarter after a weak performance last quarter due to a lower base.

The cruise business within the parks is a major focus for fiscal year 2026, with two new routes (Destiny, Adventure) planned to open by the end of the year, expected to bring significant growth. Current website traffic is very promising.

Guidance: The company has raised its profit target for this year from 6-8% growth to 8% growth.

3. Sports Focus on New ESPN Version: The sports business growth was flat in the third quarter, slightly below expectations. Besides the inherent slow growth due to declining viewership, the restructuring impact of India's Star (reflected in investment income post-divestiture) also played a role during the period. The flagship version of ESPN+ will be released on August 21, expected to boost user subscriptions and advertising revenue.

4. Film Still in Content Cycle: Third-quarter content sales revenue slightly exceeded expectations, but the year-over-year growth rate slowed significantly due to a higher base.

Currently, Disney is still in a content cycle, with major releases this quarter including "Elio," "Thunderbolts," and "Lilo & Stitch," all performing well at the box office. However, last year's comparable period featured "Inside Out 2," the global box office leader, putting pressure on growth and monetization efficiency year-over-year.

5. Cable Business Further Weakens: This is the weakest performing segment for the current period, with a 15% year-over-year decline. In addition to industry trends (Nielsen data shows further decline in cable TV share), Disney's own strategic adjustments to cable TV also contributed.

II. Detailed Content of the Earnings Call

2.1 Key Information from Executive Statements

1. Overall Progress: During this period of industry transformation, the company is leveraging its strong position to focus on quality, innovation, and cross-business development.

a. Launching emerging IPs based on the creative success of the film studio (industry-leading level).

b. Strengthening the streaming value proposition by integrating Hulu into Disney+, offering a unified app experience (branded entertainment, general entertainment, news, sports).

c. Positioning ESPN as a leading digital sports platform: launching a direct-to-consumer (DTC) product on August 21; expanding content with new plans with the NFL.

d. Parks and Experiences Business: Global expansion projects at a record high.

2. Film Studio: Revenue increased by 14% year-over-year, reaching $3.2 billion.

a. The live-action "Lilo & Stitch" surpassed $1 billion at the global box office (the first Hollywood film this year; Disney's fourth in over a year). This film will become the company's second-largest consumer product IP (second only to Mickey Mouse; revenue growth over 70%).

b. "The Fantastic Four: First Steps" received positive reviews two weeks after release, successfully introducing it into the Marvel Cinematic Universe.

c. Upcoming Releases: "Zootopia 2" and "Avatar: Fire and Ash" to be released later this year.

3. Streaming Business:

a. Business Integration: Fully integrating Hulu into Disney+, creating a unified entertainment package (branded/general entertainment, children's programming, news, live sports). Enhancing user experience (more choices, greater personalization) while improving streaming business profitability through increased user engagement, reduced churn, optimized operations, and increased advertising revenue.

b. Initiatives: Hulu becomes a global general entertainment brand; replacing Star in the international version of Disney+ in the fall. Improving the Disney+ app within months: new features, more personalized homepage. Unified Disney+ and Hulu app to be launched next year.

4. ESPN:

a. Launching ESPN's full network and services on August 21. Multi-view, enhanced personalization, statistics integration, betting, fantasy sports, commerce, personalized SportsCenter. Disney+, Hulu, ESPN bundle subscribers can watch ESPN content within Disney+.

b. Agreement with the NFL:

- ESPN acquires NFL Network and other media assets; in exchange, the NFL receives a 10% equity stake in ESPN.

- Expanding NFL highlight rights, interactive features (betting, fantasy sports). ESPN can sell/bundle NFL Plus Premium (including NFL Red Zone); gains additional non-exclusive preseason rights from the 2025 season. Can stream ESPN/ABC coverage on ESPN DTC, Hulu, Disney+.

- ESPN becomes the exclusive platform for WWE premium live events.

5. Parks and Experiences:

a. Global expansion projects: covering all theme parks, setting a historical record.

- Disneyland Paris: New "Frozen" world opening in 2026.

- Magic Kingdom: Villains in "Cars-themed" areas.

- Disney's Hollywood Studios: "Monsters, Inc." area.

- Disney California Adventure: "Avatar" themed destination.

- Abu Dhabi: New theme park.

b. Disney Cruise Line: Launching two new ships later this year (Disney Destiny and Disney Adventure, the latter being the company's largest ship and the first to dock in Asia); expanding the fleet to eight ships operating globally.

2.2 Q&A Session

Q: The strategic alliance with the NFL is clearly beneficial for ESPN, but from a value perspective, you gave up 10% of network equity—how does this agreement help accelerate ESPN's business growth? Given today's announcement, is your previous '26 guidance still valid, i.e., double-digit EPS growth and low single-digit OI growth for the sports business?

A: These agreements include two separate parts: content licensing and asset exchange. As a result, ESPN will have more NFL games than ever before—from 22 windows previously to 28, providing more viewing opportunities for fans.

By acquiring the NFL Network, we will continue to distribute its content linearly and fully integrate it into ESPN's direct-to-consumer (DTC) app, including seven games on the NFL Network. This will bring significant value. Additionally, there are multiple features enhancing the app experience: seamless integration of fantasy sports, betting, statistics, personalized SportsCenter (including NFL highlights), and commercial opportunities to purchase NFL merchandise from the app.

From an economic perspective, although it involves an asset exchange, the NFL gaining equity allows it to receive dividends from ESPN's earnings, but we expect ESPN to achieve value accretion in the first year after the transaction is completed. We will increase revenue and operating profit from distributing the NFL Network and other properties; this does not include potential lower churn rates and advertising value.

In summary, this is very exciting and represents the most significant step for ESPN since transitioning from half a season to a full NFL season in 1987, enabling ESPN to launch a more attractive app and accelerate business growth.

Q: How will this agreement and its content (such as acquiring the NFL Network and other assets) drive ESPN's revenue growth, subscriber growth, and overall business benefits?

A: We will provide rigorous guidance during the fourth-quarter earnings call. Although there is cooperation with the NFL and WWE, if there is a substantial impact on guidance, we would mention it now. The absence of changes indicates that we do not expect significant impacts at this time.

We are very satisfied with the NFL transaction. The transaction may be completed by the end of next year, and before purchase accounting, we expect earnings per share to increase by approximately $0.05, with a positive financial outlook.

Q: By fully integrating Hulu into Disney+, how do you accelerate DTC growth? What subscription and advertising revenue opportunities does this bring? What does this mean for Hulu as a standalone app?

A: From a consumer perspective, integrating Hulu into Disney+ will provide a better experience by combining all program assets from the two existing apps. This will help us significantly reduce churn rates—our focus.

The integration will also bring efficiency improvements: a unified technology stack and platform. We have been jointly selling ads, but now the sales team can more effectively package them. In the future, this may bring greater pricing flexibility.

Additionally, it creates significant opportunities for bundling: one app containing a large amount of Disney-branded programming and general entertainment, combined with the ESPN DTC app, offers a far superior value proposition from both consumer and company perspectives than before.

Q: Given the strong DTC profitability and raised full-year guidance, is there any updated thinking on the double-digit profit margin target for DTC?

A: No updates to the guidance.

Q: The Q4 guidance shows operating profit growth ending on a high note. Can you preview the potential influencing factors for growth in fiscal year 2026?

A: I will still defer this discussion to the fourth-quarter earnings call. As a reminder, several cruise ships will be launched at the end of this year and early next year, which will incur related launch costs early next year, impacting the profit margin of this business line.

Q: Regarding the standalone ESPN app, what are your expectations for user engagement with the app for users outside and within the ecosystem? What are the benefits of Pay TV user engagement with the app?A: As for user engagement with the ESPN app and partnerships, we believe both will bring incremental benefits. ESPN's goal is to reach sports fans according to their preferences—whether through the ESPN app, Disney+ Hulu app, or cable TV, we interact with them on the channels they are on.

We no longer view ourselves solely as a "linear TV" or "streaming" business but focus on the overall TV business. Our goal is to allow viewers to choose their preferred way to watch our content, whether on cable TV, multi-channel service providers, or streaming apps like Disney+ and Hulu. This applies to ABC, National Geographic, FX, and Disney channels, and ESPN will do the same.

Additionally, the ESPN app will offer far more features and content than linear channels, making it an ideal platform for sports fans, covering more events. Overall, we are integrating all businesses for higher efficiency and achieving subscription and advertising revenue growth on broader platforms.

Q: This year, the Experiences business's operating income grew by approximately 7% year-over-year, and the guidance has been raised to 8%. Could you elaborate on the factors that drove this growth in the domestic parks and cruises segment this quarter? While performance is strong, are you also seeing the impact of economic uncertainty?

A: Firstly, regarding the Experiences business, we have an excellent portfolio. As I mentioned this morning, as we exited the last quarter, Walt Disney World just achieved a record-breaking third-quarter revenue, which we are very pleased with.

Furthermore, we expect Disneyland Paris to perform very well. Last year's Olympics provided a favorable base (due to a low comparable period last year), but even without considering these factors, the overall business remains strong.

The China market, as discussed in previous earnings calls, faces some challenges, primarily not in terms of foot traffic, but in per capita spending, as Chinese consumers are under some pressure.

Meanwhile, the cruise business is currently performing exceptionally well, with strong bookings and high ship occupancy rates. Looking ahead to the fourth quarter, Experiences business bookings are up approximately 6% year-over-year, and we are very optimistic about this trend.

Q: Looking ahead to Fiscal Year 2026, with new sports rights (such as WWE) coming online, what trends do you anticipate for overall content cash spending next year? Besides sports rights, content investment is core to the company. Do you have any guidance on the level of content spending for the next 12 months?

A: I will wait until the Q4 earnings call to provide further details.

Q: Next year, the new cruise ship will debut in Singapore. As a major strategic move into a new region, how do you see this ship impacting Disney's various businesses?

A: Regarding the Singapore cruise ship, this will be our largest ever, capable of accommodating approximately 7,000 passengers, significantly exceeding our current 4,000-person capacity ships. Bookings for it sold out quickly upon release, demonstrating a very enthusiastic response. This not only provides us with an opportunity to introduce the Disney brand to new markets like Southeast Asia but also allows this ship to serve as a "floating brand ambassador," fully showcasing our IP and brand influence.

Q: Regarding the content business, while the overall assessment is positive, the guidance indicates significant pressure in the fourth quarter. How do you view the main challenges and opportunities for the content business in the coming year?

A: In terms of content business, the fourth quarter faces pressure due to a very high comparable base from last year's Inside Out 2. However, these factors have already been incorporated into our full-year performance guidance of $585 million.

Q: Disney has recently achieved great success with sequels and reboots. However, in the current theatrical market environment, what are the company's considerations and strategies for launching new IP?

A: We have always highly prioritized creating new IP, which is crucial for the company's long-term value. At the same time, classic IP remains very popular. Whether it's producing sequels, creating modern interpretations, or adapting animated films into live-action movies like 2026's Moana, these are excellent opportunities that help reinforce our brand.

We are not prioritizing one over the other; our primary goal is to release great films that resonate. We are also developing original projects under 20th Century Studios and Searchlight Pictures. Even with Marvel, while some characters have previously been featured in films, for many audiences, we are launching entirely new content, such as Fantastic Four this time, which in some ways can also be considered original.

Q: Is launching new IP more challenging now compared to the past? Regarding the new policy of "100% depreciation tax deduction," could you discuss the potential tax benefits for Disney and possibly provide quantification?

A: Regarding taxes, I believe you are asking about the impact of "The Beautiful Act." Simply put, this has no significant impact on book taxes but is positive for cash flow. We will explain this in detail during the fourth-quarter earnings call, but we can confirm it has a positive effect on cash taxes, which benefits the company's cash flow.

Q: After the launch of the new ESPN platform, considering its competitive pricing, is it expected to accelerate B2C business growth, both in terms of subscriber numbers and user engagement?

A: While we cannot specifically predict the growth rate, obtaining Disney+, Hulu, and ESPN for $29.99 offers extremely high value and is expected to drive subscriber growth. The content integration of ESPN with Hulu and Disney+ is also anticipated to enhance user activity and thus reduce churn. Furthermore, through our partnership with the NFL, we can bundle the NFL Premium Plus service, including RedZone, with the triple-play package, which also helps increase user engagement and reduce churn.

Q: With the fleet size set to double in the coming years, particularly with the recent addition of the Disney Treasure, and the upcoming Disney Destiny and Disney Adventure, how do you view the growth prospects for the cruise business? When evaluating future financial impact, should we focus on referring to per-ship or per-cabin economic data from the existing fleet? Additionally, what is the potential for new ships in terms of revenue and profit contribution?

A: Regarding the expansion of the cruise business, there are several key points: Many existing customers will be among the first passengers on the new ships, leading to high repeat bookings and loyalty. At the same time, new ships allow us to reach more global destinations, expanding into new markets and customer segments, especially in regions like Singapore. This both broadens our consumer base and offers new experiences to existing customers. From a financial perspective, we recommend referring to the multi-year Experiences business guidance we provided last fall. Although we do not disclose cruise data separately, all new ship expansions are already factored into our expectations. From actual bookings, about half of the overall cabin capacity for next year has already been sold, and new ships have even higher booking rates, indicating a very positive market response.

Q: Could you share the engagement trends of existing Disney+ and Hulu users, and how the current DTC strategy is influencing these trends?

A: Regarding user engagement, when we made the Disney+ and Hulu experience more seamless and integrated, user engagement significantly improved. With further integration,

we expect engagement to continue to rise. Concurrently, we have implemented several technological upgrades, such as strengthening recommendation algorithms, improving homepage display, and introducing streaming features (e.g., the full Simpsons collection, ABC News 24/7 live news), all of which have significantly enhanced user stickiness.

Q: With the DTC profit margin exceeding the 10% target, is there an opportunity to further increase content investment to enhance long-term market share?

A: As for content investment, the domestic market does not require a significant increase in spending. The future focus will be on international markets, for example, consolidating content under the Star brand into Hulu, and increasing investment in regions with growth potential to drive subscription and advertising revenue growth and achieve higher profitability.

Our core objective is to maximize long-term profit through a growth-oriented strategy, rather than solely relying on cost control. The U.S. market has significant room for improvement; increasing engagement and reducing churn will free up more marketing resources, which can then be used for deepening content investment in key international markets. Our strategy is to strategically focus on certain markets rather than broadcasting widely. Therefore, the DTC profit margin will not stop at 10%; we believe there is more room for improvement, but this will primarily be achieved through business growth, rather than cost cutting.

Q: This quarter, domestic theme park per capita spending increased by 8% year-over-year, reaching a two-year high. Has this growth been influenced by changes in the proportion of local, out-of-state, or international visitors? What are the differences in visitation trends among different visitor groups?

A: Changes in visitor composition do affect per capita spending, but there are no significant changes in aspects like international visitors that you mentioned. However, there are no noteworthy new trends in the proportion of local and out-of-state visitors. We are not only satisfied with the growth in per capita spending but also optimistic about overall visitor numbers, especially in the face of increased market competition. The overall goal remains to achieve coordinated growth in visitor numbers and per capita spending, and we will continue to pursue this direction.

Q: How far is the current market strategy for sports streaming products from the ultimate goal? With the addition of features like NFL Red Zone, will you consider introducing more paid or tiered products?

Is there an opportunity to bundle with other sports platforms (like Fox) to promote the integration of sports content platforms?

A: We are indeed exploring bundling cooperation with other companies' sports content and have related discussions, but there is no specific progress to announce at this time. We are not only focused on the growth of our own users and subscriptions but also aim to enhance the user experience. If we can concentrate multiple sports content on the same platform, simplifying the search and viewing process, it will be a great convenience for users, and we will continue to work towards this direction.

<End Here>

Risk Disclosure and Statement of This Article:Dolphin Research Disclaimer and General Disclosure