Walt Disney (NYSE:DIS) reported second-quarter financial results on Wednesday. The transcript from the company's second-quarter earnings call has been provided below.

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Summary

Walt Disney reported a 7% increase in revenue and a 4% rise in total segment operating income for the second quarter, outperforming their guidance.

CEO Josh d'Amaro outlined strategic priorities including enhancing creative storytelling, strengthening streaming, leveraging live sports, and expanding Disney experiences.

The company achieved double-digit advertising revenue growth and saw improvements in subscription revenue driven by both rate and volume.

New content releases such as Pixar's 'Hoppers' and franchise expansions like 'Zootopia 2' contributed to strong performance and engagement.

Disney Experiences saw a 7% revenue growth, with plans to expand the cruise line fleet and invest in new experiential attractions like the World of Frozen at Disneyland Paris.

Management highlighted technology as a key accelerant to improve consumer experience and deepen direct relationships with fans.

Future guidance includes expectations for improved attendance trends at domestic parks and a focus on disciplined execution of current and long-term growth strategies.

Full Transcript

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Our earnings Release and Form 10-Q were issued earlier this morning and are available on our IR website. Our IR website includes a cautionary statement regarding forward looking statements. Today's webcast may include forward looking statements that we make pursuant to the safe harbor provisions of the Private Securities Litigation Reform act of 1995. These forward looking statements, including regarding the company's future business plans, prospects and financial performance, are not historical in nature and are based on management's assumptions regarding the future and are subject to risks and uncertainties, including, among other factors, economic, geopolitical, operating and industry conditions and decisions and legal and regulatory developments. Refer to our IR website the earnings release and 10-Q issued today and the risks and uncertainties described in our Form 10-K and subsequent filings with the SEC. For more information on risks that could cause results to differ. A reconciliation of certain non-GAAP measures referred to on this webcast to the most comparable GAAP measures is on our IR website. Good Morning. Welcome to the Walt Disney Company Fiscal second Quarter Earnings call. Thank you for joining us. I'm Ben Swinburn, Executive Vice President, Investor Relations and Corporate Strategy. With me today are Josh D'Amaro, our Chief Executive Officer, and Hugh Johnston, our Chief Financial Officer. While we intend to keep our prepared remarks brief on future earnings calls, as this is Josh's first opportunity to speak to the investment community as CEO, we wanted to take the extra time for you to hear from him directly regarding his priorities for the company. You will notice that we've adjusted our earnings materials to shift our focus more toward the Walt Disney Company as a whole rather than its individual segments. This is deliberate, as we hope it helps explain why we believe the company is uniquely positioned, lays out our strategy, and illustrates how our various business lines operate together. We also shifted to a shareholder letter this quarter with the intent of including all the information we hope is helpful to the financial markets in one place. After Josh's remarks, we will take questions from the analyst community and with that, let me turn it over to Josh.

Josh D'Amaro

Thank you, Ben. I want to begin by saying just how honored I am to be leading the Walt Disney Company. This is one of the world's truly great companies, built over more than a century through powerful storytelling, constant innovation, and a singular ability to forge deep emotional connections with audiences all around the world. I step into this role with genuine appreciation, a strong sense of responsibility, and real optimism about what lies ahead. I also want to express my gratitude to Bob Iger. Bob led Disney with extraordinary vision. He led it with discipline and ambition and because of that leadership this company stands on a strong foundation with real momentum. I'm fortunate to be leading a company with exceptional assets, talented leaders and a well defined strategic direction. My immediate focus it's clear we will execute with discipline against the plans and commitments we've already communicated to the market, staying focused on the priorities that we believe will unlock value for our shareholders. First, investing in the breakthrough creative storytelling that sets Disney apart. Second, strengthening our streaming business through product and technology innovation. First Third, fully capturing the power of live sports as we continue building ESPN's direct to consumer business and fourth, delivering on our bold growth plans at Disney experiences. At the same time, while we execute our current plan with focus and precision, we're actively laying the groundwork for Disney's next phase of growth. Disney is uniquely positioned in the entertainment industry. No other company reaches consumers to the same degree across both digital and physical environments. Our goal is to leverage that position to extend our reach, deepen engagement and generate greater value from our world class intellectual property. To fully capture this opportunity, we'll embrace technology more aggressively and build a more connected consumer experience with Disney right at the center. However, this morning I want to stay focused on execution, how it's showing up in our results today and what it means as we head into the back half of the year. In the second quarter we grew revenue and total segment operating income 7% and 4% respectively relative to the prior year and outperformed our guidance for the quarter. The outperformance was driven by stronger than expected revenue growth. Let's turn to our operating results in the quarter. Starting with streaming, our focus remains consistent. Improve the consumer experience, deepen engagement and continue building a healthy and more durable growth business. We made meaningful progress during the quarter on the platform itself with product enhancements that improved the Disney user experience. We were pleased with our entertainment Subscription Video on Demand (SVOD) financial performance this quarter, notably the sequential acceleration in revenue growth from 11% in Q1 of 26 to 13% in Q2. Importantly, subscription revenue growth was driven by both rate and volume. Additionally, we saw double digit advertising revenue growth compared to the prior year period. We are highly focused on churn and we continue to see the integrated Disney and Hulu experience benefiting retention. Disney has meaningful opportunity for growth internationally and we're focused on scaling outside the us. We are increasing our local content investments and early results. They're encouraging. While more work remains, we're pleased with the progress we're making in both the consumer experience and underlying economics. Our IP remains central to our long term streaming success and we continue to invest in the great storytelling franchises and talent that define Disney and fuel our film and television content. Highlights in the quarter that demonstrated this focus included returning series High Potential and Paradise, along with our new limited series Love Story, John F. Kennedy Jr. And Carolyn Bessette. And we of course see the potential of the strategy in films like Zootopia 2, which not only generated 1.9 billion in global box office, but the franchise has now surpassed 1 billion hours streamed on Disney. During the quarter, we released Pixar's Hoppers to critical success, a strong reminder of Pixar's track record of creating meaningful original IP that resonates with audiences all around the world. We are thrilled with last weekend's opening of the Devil Wears Product two and as we look ahead, we're excited about our upcoming film slate including the Mandalorian and Grogu, Toy Story 5, the live action, Moana and Doomsday. When you look at our upcoming slate of franchise films, each has the potential to resonate with our fans well beyond its initial release, Moving across platforms, experiences and products in a way that deepens engagement and extends reach over time. At Disney Experiences, we continue to demonstrate strength in the core business and make progress against our growth initiatives. With strong revenue growth of 7% and segment operating income growth of 5% in the quarter, both revenue and segment operating income were ahead of our prior expectations and represent second quarter records. Over the past few quarters, the team has successfully navigated known attendance headwinds. We are now starting to lap these headwinds and expect attendance trends at our domestic parks to improve in Q3 when compared to the results we reported for Q2 today. Since our last call, Disney Cruise Line launched the Disney Adventure, our first ship home ported in Asia and at Disneyland Paris, we opened World of Frozen as part of the reimagined Disney Adventure World. These are meaningful milestones that extend the reach of our brands to new markets and new fans around the world. The strong demand that we're seeing for these attractions reinforces our confidence in the long term opportunity across our portfolio of experiential assets, parks, cruise line and immersive experiences alike. We remain mindful of the near term variability, but are also well positioned to benefit from sustained consumer demand for live entertainment at a scale unique to Disney. Speaking of the power of live, ESPN continues to build toward a stronger direct to consumer future. Enhancements to the ESPN app, including MultiView Virtual and SportsCenter 4U, are making the offering increasingly compelling for fans. As we manage this business in transition, we remain focused on serving sports Fans in a way that fully captures the value of ESPN and live sports within Disney's broader direct to consumer offering. Looking at the first half of the fiscal year and our expectations for the second half, we're executing with focus, delivering against our stated commitments and investing in areas that we believe will drive long term value as we look ahead. My strategic priorities as CEO build directly on that foundation. Let me summarize my long term perspective briefly here. First, creative excellence. It'll remain at the center of everything that we do. Disney's greatest competitive advantage has always been the quality of our storytelling and the enduring connection our brands have with audiences all around the world. Second, we have a real opportunity to deepen our direct relationship with our fans by creating a more connected Disney experience across streaming sports games and experiences, with Disney playing an increasingly central role. Third, technology. It can be a powerful accelerant for Disney, improving the consumer experience across our business lines, driving operational efficiency and unlocking new possibilities for creativity, growth and returns. To wrap up, our immediate priority is disciplined execution. But I'm equally energized about the opportunities ahead. Disney has iconic brands, extraordinary creative talent, powerful platforms and unmatched experiences. Our job is to execute with rigor, to invest with confidence and connect those strengths in ways that create lasting value for consumers and shareholders alike. With that, I'll turn it back over to Ben to begin our Q and A.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Thanks, Josh. We will now turn to questions from the analyst community. So our first question is from Sean Difley from Morgan Stanley. This is for you, Josh, on strategic priorities. What are your three biggest priorities going forward? What are the biggest synergies between the businesses today and any examples of how Disney can leverage learnings across its businesses.

Josh D'Amaro

Okay, great. Well, thanks, Sean. I guess first and foremost what I'm focused on is executing on the priorities that we've already communicated to the market. And I think this group knows these. In fact, I just hit them in my prepared remarks. First, we're focused on creating best in class content. We're doing really well there. Second, we're strengthening our streaming businesses and driving top line growth and profitability as well. Third, we're continuing to take advantage of the growing power of live sports and build ESPN's direct to consumer business. And then of course, we're turbocharging Disney experiences all across the globe. While we're focused on executing these priorities, we're also starting to lay the groundwork for the next phase of growth. And you're going to hear more about this over time, but maybe today I'll just Share some high-level thoughts on that. First, we're going to continue to build and fully leverage all of our ip. Of course, this starts with great storytelling, but the opportunity is going to be much broader than that. We'll invest in both existing franchises and new ip. So that means building on brands like Toy Story, while also at the same time creating new stories that connect with generations of fans across the globe. And the key here is fully harnessing that IP across the whole company that's in film and in streaming, across our experiences and products and in games, so that each of our successes, it compounds in value over time. Then second, I think we have a real opportunity to deepen our direct relationships with our fans. And we can do this by creating a much more connected Disney experience. And we'll do that across streaming and sports and games and experiences. And we'll put Disney right at the middle, playing an increasingly central role. And then third, technology, I think it can be a real powerful accelerant for Disney. I think it can improve the consumer experience across our businesses. It'll certainly drive operational efficiency for us and then unlock brand new possibilities for creativity, for growth and returns. And then when you step back and you put all that together, our next phase of growth, it'll be centered on creative excellence. It'll be a more connected fan experience and we'll use technology as an accelerant. But I just want to be clear, as I said in the immediate term, I'm staying focused on delivering against the priorities that we currently have in motion. But thanks for the question. Great.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Thank you, Sean. Thank you, Josh. We're going to now turn to three questions on our direct to consumer streaming strategy. First question is from Michael Ng from Goldman Sachs. Probably for you, Josh, the success in the parks was built on driving per capita and attendance through high touch, immersive storytelling. As you take the helm of the company, how do you replicate this high LTV model within Disney? Specifically, does Disney become larger? Less a video repository and more of an interactive hub including merchandise, park access and games integration.

Josh D'Amaro

Okay, well, thanks, Michael. I guess I'll start. Lifetime value is something that we're focused on across the whole enterprise. And you start with our fan base. Disney has the world's most passionate and loyal fans. It's something, if you go to our theme parks, you see it all the time. They're a high-touch, high Lifetime Value (LTV) business. And our biggest fans, they, they come often, they tend to be repeat visitors. Now, a large number of our park visitors, they're also Disney subscribers. Subscribers. But there are there are millions of Disney subscribers who aren't regular park visitors. And so this is where we're focused. Our parks, they're essentially the physical centerpiece of the company. And similarly, we're building Disney to serve as the immersive, interactive, digital centerpiece of the company. And in the long term, what you'll see is those pieces of the company become increasingly connected. And when we do this, well, which we will, the lifetime value equation, it starts to change fundamentally. A fan who watches a Disney film, for example, or visits a park or plays a game and buys our merchandise, it's not just a subscriber. They're in a relationship with a company, one that spans years and can generate value across every part of our business. And that's the model that we're building toward right now.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Great. We're now going to take a question from David Karnofsky from JP Morgan. Again, I think for you, Josh, as you think about Disney domestically, what paths do you see to organically grow engagement? How do you think about this in terms of your own content, but also through making the platform a portal through which third parties can distribute programming?

Josh D'Amaro

Okay, a lot in there. Thanks, David, for the question. So I'm happy to talk about engagement. I think you asked domestically, but truly around the world, I'll start with maybe something that's obvious. It's a competitive streaming marketplace out there right now. But despite that, we saw an increase in engagement in the quarter. And then when we look ahead, our key drivers for engagement growth, they include content and product enhancements. On the content side, we're obviously going to continue to deliver exceptional content, not just the popular franchise films, but across television and live sports and general entertainment and international local programming as well. On the product side, our team is really focused on improvements that reduce user friction, that allow more intuitive discovery for our subscribers, and help users decide what to watch and to decide sooner. So you think of it like a visual homepage,, easier navigation, more personalized recommendations. There's a good example of this in our video and Browse initiative. It launched in the United States back in January. And what it does is it lets subscribers preview content directly while still browsing, so they don't have to click in and out of titles. So, yeah, our tech team is making some really nice strides here, always learning, and they're iterating and doing a lot of experimentation. And then engagement, of course, is critical to reducing churn on the service, all of the opportunities that we have to drive value at this company. Reducing churn. Disney might be the single most significant opportunity that we have. And so it's probably not surprising that I'm pushing the entire organization to prioritize against that goal. And then on third party distribution, I guess that I'd position it as we're selective, but we're not closed off the right partnerships, whether it be on content or distribution. They have to strengthen the Disney experience and then deepen that fan relationship and our bundling approach inside of Disney. I think it's a good example of how that works. Well, it drives lower churn, drives higher engagement than any of the services if they were just on their own. So we'll continue to evaluate those opportunities through that specific lens.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Okay, next question is from rich Greenfield at LightShed Partners. I think this is for you, Josh. You recently stated Disney will continue to evolve beyond a traditional streaming service to become the digital centerpiece of the company. A portal that connects stories, experiences, games, films and more in entirely new ways. Rich's questions are he's curious what you mean by digital centerpiece. Does it imply a shift away from third party licensing distribution to drive engagement with Disney? How do you think about the trade offs of reach and exposure on third party platforms versus keeping content exclusive to Disney's streaming platforms? And then the last piece is how do you reconcile Disney as the digital centerpiece with your Epic Games partnership that will place a, a Disney universe into Fortnite?

Josh D'Amaro

Okay, great question. And I think as I'm listening to that, it's really three questions, so I'm going to take them in turn here. So first, digital centerpiece means Disney becomes the primary relationship between Disney and its fans. The place where everything comes together, entertainment, sports experiences, all of that converges. So it's, it's less about a product, it's more about how we're, it's a strategic posture essentially on third party licensing, we've always distinguished between franchise IP and general entertainment. So franchise and branded IP stays on the platform and general entertainment, that library content can find audiences elsewhere. And it's been working pretty well for us financially. And then on your question about Epic Games and its relation to our Disney ecosystem, I think so. Disney is the hub, but the hub needs spokes. Epic gives us an interactive gaming native environment to reach audiences that we don't currently own, by the way, particularly younger audiences. Think of this as acquisition and engagement, feeding the centerpiece, not necessarily competing with it. The roadmap runs from near term streaming optimization and content investment through medium term interactivity. Things like vertical video, personalized espn, the parks, AI work all the way to a longer term single point of contact with our fans that drives lifetime value across everything that we're doing. The through line here is going to be the same own that fan relationship. So thanks for the question Rich.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

Okay, we're now going to move to three questions on Disney experiences, so I think for Hugh Question from Sean Difley at Morgan Stanley on Core US Parks Trends, can you unpack the international visitation and epic related headwinds that you are seeing and if they are sequentially better or worse over the last few quarters?

Hugh Johnston (Chief Financial Officer)

Got it. Thanks for the question Sean. Answering directly, we expect international visitation and epic related headwinds to ease in the coming quarters as we begin to lap both of those impacts Q2 experiences results came in ahead of our prior guidance despite the fact that these headwinds did have some impact in the quarter on segment Operating Income (OI) which was up 5% and attendance in domestic parks which was down 1%. While Q2 bore the full impact of those headwinds, excluding just the international visitation impact alone, domestic parks attendance would have grown. Despite this, our revenue growth for the quarter was 7% in experiences and the lack of flow through to operating income this quarter was driven primarily by pre opening costs for World of Frozen and the Adventure, which we won't be incurring obviously in the second half of the year. We recognize that domestic attendance is an important metric for investors and we're focused on it as well. However, as you know, we're investing to grow our global footprint, including plans to expand the cruise line fleet from eight currently to 13 ships by 2031. So tying our guest demand to our capital plans. More directly, Global Guests, which aggregates domestic and international parks attendance along with passenger cruise days, grew more than 2% in Q2. The good news is, as we look forward, we expect growth to improve in the back half and our forward bookings are very encouraging as we look to the rest of the year. Great. Another question. This is from Steve and Cajal from Wells Fargo. Hugh, have you picked up any change in behavior at domestic or international parks due to the increased price of oil gasoline? How are you managing around these risks and at this point do you anticipate any shift to your adjusted EPS growth guidance for fiscal 26 or fiscal 27 due to the macro factors? Thanks Steve. No, we haven't seen any change in consumer behavior from elevated gas prices thus far and aren't currently seeing a material impact on the remainder of the fiscal year based on forward bookings. Disney World bookings are pacing up strongly and Even with our 40% increase in cruise capacity booked occupancy remains in line with the prior year. However, we're mindful of the macro uncertainty consumers are facing and we're not immune to the impacts, including how a significant further rise in fuel prices from current levels could eventually lead to changes in consumer behavior. If that possibility were to occur. Each business has levers in place to make adjustments in order to help offset those kinds of macro pressures. So as we communicated in our letter, we expect 12% growth of adjusted EPS for fiscal 26 and double digit growth of adjusted EPS for fiscal 27, both excluding the impact of the 53rd week.

Josh D'Amaro

Great. Maybe over to you, Josh. Kind of last question on experiences. So looking for an update. This is from Rick Prentice at Raymond James. Looking for an update on capital expenditure investment program. What are you most excited about? What have you learned from the recent openings of the World of Frozen at Disneyland Paris? When can we expect the investments to drive an inflection upward in attendance at the parks? Okay, great. Well, first I'm excited about a lot, so thanks, thanks for the question, Rick. The capital investments that we're making to create create these new experiences based on our most popular IP, they're obviously an important part of our strategy to continue growing our experience as business. And these investments, they're diversifying our portfolio and allowing us to reach a lot more Disney fans. I was at the opening of World of Frozen in Paris in March and if you get an opportunity to go and see it, you're gonna understand why the guest response has been so great. I mean it's completely transformed our second gate at Disneyland Paris and, and we have so much more of this coming around the world and the investments are working hard for us. I'll say that while we haven't officially announced opening dates for some of our either our other major attractions that are coming, we have more projects underway around the globe than at any time in our history. So we're being very ambitious and very aggressive on this front. In 26, most of our forecasted capex and experiences includes the new shIP and the ramp of major new expansions at Walt Disney World in Orlando, Disneyland in Anaheim and at our Shanghai Disney Resort. And then when we think about the next decade, the majority of our capex is earmarked for investments that are expanding our capacity. Our business has a solid track record of generating great returns, and driving long term earnings and cash flow growth. And each one of this is important. Each one of these investments is, is individually justified and designed to entertain guests for literally generations to come. I think it's worth noting that we also have a few exciting expansions underway using what we're calling a capital light model. So we've got a new cruise shIP with the Oriental Land Company in Japan and a new theme park in Abu Dhabi with our partner morale. And then finally, when we look forward, demand's healthy. We're expecting attendance at our domestic parks in Q3 compared to the prior year period to show improvement compared to the 1% decline that we had reported in Q2. And this will happen as headwinds related to international visitation stabilize and we begin to lap the opening of Epic universe. Great.

Ben Swinburn (Executive Vice President of Investor Relations and Corporate Strategy)

We have two questions now on the content front, I think, Josh, this one's probably from you. This is from Jessica Reef Erlich from Bank of America. Josh, some of Disney's greatest growth years were driven by original IP from Disney, Pixar and Marvel. Can you provide color on how you plan to supercharge your content division? What changes should we expect now that content is unified under Dana Walden?

Josh D'Amaro

Okay, thanks Jessica. This morning you heard me talk about how creativity is absolutely central to the execution of our strategy. And we're focused on investing in IP that really breaks through and that builds those fan connections and endures. And as you heard me say this morning, Zootopia is a prime example of this. We understand the importance of investing in existing franchises, but then also taking creative risks to build brand new ones. And I think the studio team's all over that. You take Hoppers as an example. So this is original IP from Pixar. Great critical reception and we're pleased with how fans have embraced the film and all the new characters that come along with it. And just think about this. Relative to original films, Pixar alone has released eight original films since 2017. Those are films like Coco and Soul and Elemental. And when you step back and think about it, that's more than all of the other major non Disney animation competitors combined during that same period. So, you know, in an industry that's changed so much since the.

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