---
title: "The future belongs to streaming, but requires reasonable operation (Disney 1Q23FY conference call summary)"
description: "Invest with caution and return to creativity itself."
type: "topic"
locale: "en"
url: "https://longbridge.com/en/topics/3946516.md"
published_at: "2023-02-09T09:09:03.000Z"
author: "[Dolphin Research](https://longbridge.com/en/news/dolphin.md)"
---

# The future belongs to streaming, but requires reasonable operation (Disney 1Q23FY conference call summary)

***Below is*** $ Disney.US *\*\*1Q23FY earnings conference call summary. For financial report analysis, please refer to " \*\** [***The return of the Legend, Disney Begins to Change***](https://longportapp.com/topics/3945212?invite-code=032064)**\_".**

**I. Core Data vs. Market Expectations**

1.  Revenue: QoQ revenue of $23.512 billion, YoY growth of 7.8%, basically in line with market expectations (+0.48%).
    
2.  Operating profit margin: QoQ operating profit margin of 12.9%, YoY increase of 2%, higher than market expectations (+2.3%).
    

**3\. Revenue guidance:**

**(1) 2023 fiscal year cash content expenditure will remain at $30 billion (the same as 2022); the total capital expenditure will be $6 billion (YoY+20%), lower than the previous guidance of $6.7 billion, mainly due to the reduction of capital expenditure on domestic park businesses.**

**(2) 2Q23 cable TV revenue decreased by about $1 billion YoY (-14%), of which ESPN channel decreased by $500 million, broadcasting and other domestic cable networks decreased by $300 million, and international channels decreased by $200 million. The YoY decline in the second half of the 2023 fiscal year will significantly decrease.**

**(3) The sale of film and television content has roughly reached a balance of payments.**

**II. Performance Focus**

1.  Structural adjustment: the entire group is composed of three core business departments-Disney Entertainment, ESPN, and Disney Parks, Experiences and Products. Compared with the past, the biggest change is the separation and reintegration of ESPN and sports-related businesses.

**(1) Disney Entertainment**

Includes the original "Cable Television Media," "Film and Television Content Sales," and "Streaming" (excluding ESPN+)

**(2) ESPN**

Includes "ESPN Network Channel," "ESPN+ Streaming," and "International Sports Channel"

**(3) Disney Parks, Experiences and Products**

Basically, it is the original "DPEP" department, including theme parks, hotels, cruise ships, consumer product, and game publishing businesses.

1.  This year's cost will be reduced by $5.5 billion. Among them, $3 billion comes from the content part (excluding sports), and the remaining $2.5 billion comes from the non-content part, including a 50% reduction in marketing expenses, 30% reduction in employee salary costs, 20% reduction in technology costs, procurement costs, and other expenses. From last quarter, costs have been reduced by about $1 billion.
    
2.  Lay off 7,000 employees, mainly from the DMED department (cable TV, streaming, and film content personnel).
    
3.  The target for Disney+ to achieve profitability by the end of fiscal year 2024 remains unchanged.
    
4.  The Board of Directors recently established a succession planning committee, chaired by Mark Parker, who will become the Chairman of the Board after the annual meeting.
    
5.  There are no plans to spin off ESPN to create a separate company.
    

**III. Original text of the performance conference**

**(I) Management Speech (Robert A. Iger, CEO)**

**1\. Foreword**

It is an honor to return to this outstanding company as CEO on the occasion of the 100th anniversary of Disney's birth (2022). Since becoming CEO (previous term: 2005-2020) in 2005, I have led Disney through two major transformations.

The first time, we gave greater control and power to our creative business, focused on branding and licensing, aimed to embrace new technologies and expand global markets, which led Disney to acquire Pixar, Marvel, and Lucasfilm.

The second transformation occurred in 2016, when the company decided to launch a streaming platform, coinciding with the opportunity to acquire many assets from 21st Century Fox. This acquisition gave the company a richer content library, more licensing agreements, wider and more global influence, and a management team with talent and experience, all of which helped the company output higher-quality content. In 2019, Disney+ released nearly 500 movies and 7,500 TV series. Three years later, its rapid rise has become a milestone in the successful transformation of the media business.

Now, it is time for the third transformation, which will rationalize the streaming business, guide it towards reduced expenses and sustained profitability, better prepare it for future competition and global economic challenges, and place creativity at the center of the company's focus, strengthened accountability, to ensure the quality of content and entertainment experiences.

**2\. Business Description**

(1) Restructuring

Disney's cornerstone is stories and creativity, and the best way to spread creativity is to empower the people who manage the creative process. Therefore, the new structure will return most of the power to the creative directors, and make them accountable for the financial performance of the content. Specifically, the creative team will now decide on content production, distribution, marketing, and monetization, and their responsibility is to manage costs, maximize revenue, and content.

After the strategic restructuring, the company will have three core business units: Disney Entertainment, ESPN, and Disney Parks Experiences and Products. Alan Bergman and Dana Walden will serve as co-chairs of Disney Entertainment, which includes global entertainment, media, and content businesses. James Pitaro will continue to serve as the president of ESPN, which includes ESPN Network, ESPN+ and International Sports Channels; Josh D'Amaro will continue to serve as the chairman of Disney Parks, Experiences and Products, which includes theme parks, cruise lines, and product, game, and publishing businesses. The organizational changes mentioned above will be implemented immediately and reported using the new business structure at the end of the current fiscal year.

This restructuring will make the company more cost-effective, coordinated, and streamlined. In particular, in the challenging economic environment today, the company is committed to operating its business more effectively.

In terms of improving efficiency, the company aims to cut $5.5 billion in costs. $3 billion comes from the content section (excluding the sports section), while the remaining $2.5 billion comes from non-content sections. Since last quarter, costs have been reduced by about $1 billion. Overall, the savings mainly come from the reduction of SG&A and other operating costs. To achieve this goal, the company has decided to lay off 7,000 people.

(2) Content

Expectations are that the annual content investment will be reduced by $3 billion (excluding the sports section) in the next few years.

(3) Streaming Business

1.  Business Changes

Proud of the achievements made since the launch of Disney+ three years ago, we are now offering high-quality content to more places and audiences in various ways.

Like our peers, we will no longer provide long-term user guidance to get rid of the emphasis on short-term quarterly indicators, but we will provide information on the related driving factors.

The company's top priority is the sustained growth and profitability of the streaming business. At present, the company's internal forecasts show that Disney+ will be profitable at the end of the 2024 fiscal year.

\[1\] It will focus more on core brands and franchises that have always brought high returns.

\[2\] Actively improve the quality of general entertainment content.

\[3\] Reassess market coverage, balance global and local content.

\[4\] Evaluate and adjust pricing strategies; fine-tune advertising plans for all streaming platforms.

\[5\] Improve marketing, better balance platform and programmatic marketing; at the same time, use traditional distribution platforms for marketing and program production, such as making more use of traditional distribution opportunities to increase revenue and more effectively allocate content investment.

As mentioned earlier, the new organizational structure will rebuild the direct link between content, decision-making and financial performance, which is the primary task of improving the economics of the streaming business. The company is focused on achieving the success of the streaming business and creating long-term returns for shareholders.

1.  Performance

James Cameron's Avatar: The Way of Water became the most successful movie of the quarter with ease, and is currently the fourth highest-grossing movie ever with nearly $2.2 billion at the box office. Avatar: Explore Pandora, an immersive theme exhibit inspired by Avatar, is now open to visitors at Disney Parks, providing fans with the opportunity to participate in the movie. Avatar has set strong viewing records in cinemas and on Disney+, and Disney Parks will continue to bring exciting Avatar experiences to fans, with more details to be announced later. As seen in the past, Avatar is another core franchise for Disney. The company has unique ways of achieving long-term success across multiple businesses.

Disney leads the pack with the most Oscar nominations, including two Best Picture nods: (20th Century Studios) The Way of Water and (Searchlight Pictures) The Banshees of Inisherin; (Marvel) Black Panther Wakanda Forever received five Oscar nominations. Besides grossing $840 million at the box office, Black Panther Wakanda Forever became one of the most successful Marvel films after its release on Disney+ last week.

The upcoming movie lineup is still exciting: first up is (Marvel) Ant-Man and the Wasp, followed by The Little Mermaid, Guardians of the Galaxy 3, (Pixar) Elemental Indiana Jones and the Dial of Destiny, and (Disney) Haunted Mansion. (Lucasfilms) The Mandalorian series was a hit on Disney+, and the highly anticipated third season will premiere in early March. In addition, the animation studio is working on sequels to its most popular franchise animations, including Toy Story, Frozen, and (Zootopia), with more details to come, indicating the company's tilt towards unrivaled brands and franchises.

Disney has won more Golden Globes than its peers, with a total of 9 Golden Globes Awards as of this year. Among them, Abbott Elementary was the first broadcast program to win the Best Drama Series at the Golden Globe Awards in nearly a decade. With the help of linear channel and direct-to-consumer (D2C) businesses, especially the assets acquired from Fox, Disney's television business is second to none. Good content brings high returns to the content library and is long-lasting because of its high quality: The Simpsons is the best example—it has been aired for over 30 seasons on Disney+ since 2019, and it is still one of the best-performing programs; ABC News remains America's largest news program.

**ESPN also continues to create value for the company. In 2022, ESPN's linear ratings increased by 8%, with prime time ratings up 14%;** streaming platforms have also seen strong growth. Currently, the company is selectively renewing and rigorously acquiring copyrights. The company is focused on driving the development of ESPN's traditional linear and streaming platforms. ESPN is not just a network. The company team is using innovative technologies to provide exciting reporting and entertainment content to audiences who have deep connections with brands and content.

**(4) Park**

To maintain the visitor experience and control the number of visitors, the park announced a price increase last month. However, 1Q of the theme park still performed well. The company actively listens to visitor feedback and is committed to improving the park experience.

**(5) Dividend**

During the previous term, when investing in core business and acquiring new business, the company repurchased shares and distributed dividends to shareholders. Due to the impact of the epidemic, dividends were suspended since the spring of 2020. The epidemic is now over, so dividends will be resumed before the end of this year. Due to the cost reduction plan, dividends have become possible. Although the amount is currently small, it is expected to gradually increase in the future.

**(6) Succession**

The board of directors recently established a succession plan committee, chaired by Mark Parker, who will become the chairman of the board of directors after the annual meeting.

**(II) Q&A session**

**(1) Strategy**

**Q: What impact will the $3 billion content cost reduction have on DTC business profit margin?**

**A:** First, carefully evaluate the cost of all work. At the same time, rigorously examine the quantity of production. Generally, entertainment is usually undifferentiated, while the company's core franchise rights and brands have created high returns for many years due to their differentiation and quality. Therefore, the quantity and cost of general entertainment will be reduced through more active management.

In addition, the new organizational structure will place responsibility for all international program content investments in one department to better balance global and local content distribution and consumption. Along with cost reductions, the goal of Disney+ profitability expected to be achieved by the end of fiscal year 2024.

**Q: From the time when you (Robert A. Iger, CEO) ended the previous term to your return as CEO, the environment in which the company operates has undergone tremendous changes. Which measures in the restructuring do you think can quickly see results, and which will take longer to bear fruit?**

**A:** Indeed, times are changing. Today, competition is more intense, and the macroeconomic environment is full of challenges due to the impact of the epidemic.

Nevertheless, Disney is still a creativity-centered company that is connecting creativity with distribution and monetization, which will strongly promote the effectiveness of the restructuring. The company has the ability to balance content distribution platforms (traditional platforms, theaters, multi-channel TV, streaming media), which will help to promote the development of advertising business, monetization, and marketing.

Even in difficult times, the combination of restructuring and core franchise rights and brands can still achieve strong returns when the right creativity bursts forth.

**Q: Is the royalty business a potential profit point?**

**A:** It is a potential profit, and its size cannot be estimated. The acquisition of Fox greatly enhanced the company's ability to produce TV and movies, bringing excellent talent in the film and television industry. The company will not give up this business, but will plan its development more carefully. The company will make good use of these excellent talents to create business growth. **（2) Streaming Media**

**Q: Thoughts on streaming media gradually replacing linear TV.**

**A:** Technological advances are pushing power from content producers and distributors to consumers, who can freely subscribe and unsubscribe from programs at lower prices. Streaming media is eroding linear share and will dominate in the future. Currently, we are in a very interesting transitional phase.

The evolution of media form is directly related to the strategy of restructuring. Companies will rebalance cable channels, theaters and streaming media. In fact, traditional platforms still have strong revenue-generating capabilities and can help companies better spread the cost of content across multiple platforms while creating the Marketing Cloud.

For example, Abbott Elementary first aired on ABC and then was released on Hulu. The ABC television audience was about 60 years old, while the Hulu audience was about 30 years old. This shows that linear platforms still have viewers and revenue-generating capabilities, and that companies can effectively promote their monetization.

The future belongs to streaming media, but we will not give up traditional platforms as they can still create returns for the company and shareholders.

**Q: Outlook for the Streaming Media Business.**

**A:** First, the number of users. Currently, the industry is in a fierce user competition, and the number of users has become a measure of success within the company and in the investment community. However, prior company promotion efforts were too aggressive, and they will review this. (The company will no longer provide long-term guidance targets, meaning that future user growth is not the top priority for management)

Second, pricing. After significantly increasing the price of Disney+, it was not affected, indicating that aggressive promotions are not necessary.

Without user growth, profitability and growth cannot be achieved. Therefore, although the company has cancelled the publication of the number of subscription users, it will still pursue growth in subscription users. It will focus on increasing the number of loyal subscribers and has the ability to effectively price loyal customer groups.

In addition, it will rely more heavily on core franchise rights and brands. For example, better utilize studios such as Disney, Pixar, Marvel and Star Wars. At the same time, efforts will be made to reduce costs. Although the content is currently very satisfactory, its cost has reached an excessively high level.

Overall, it will continue to pursue growth in subscription users, but will be more cautious in reducing content and infrastructure costs and rebalancing platform marketing and programmatic marketing.

A few weeks ago, Nielsen surprised us with the top 10 most widely circulated streaming movies in the United States in 2022, including Marijuana, Topia, Frozen, Turning Red, and Encanto. This proves that the company's brand and franchise rights have performed very well on streaming media platforms. In addition, as mentioned earlier, Avatar's performance has also been very impressive.

Therefore, a combination of core brands and franchise rights, more effective pricing, and stronger marketing will continue to drive growth in streaming media business, albeit at the expense of linear programming. However, TV consumption has not decreased and is actually increasing. **（3）ESPN**

**Q: What are the necessary and unnecessary elements of the sports copyright investment plan?**

**A:** Some transactions have been locked in, such as SEC, NFL, and the NBA, which is urgently needed due to its high quality and popularity.

The company selectively purchases ESPN copyrights. In fact, ESPN+ has demonstrated the strength of the ESPN brand's streaming media, and the company will continue to use it as a potential fulcrum for ESPN to break away from linear business, but will not act rashly before seeing its economic strength clearly.

**Q: What is the view on ESPN's future development in light of past discussions on whether ESPN needs to be split up?**

**A:** ESPN is a relatively special existence of the company. It is one of the best brands in the sports industry, although it is challenged by cable programs, it still creates huge value for the company. What needs to be considered now is how to achieve monetization in this challenging environment.

Splitting ESPN is not currently being considered.

**Q: What are the signs of ESPN's transition to a streaming format from its linear business?**

**A:** The transition to a streaming format is necessary, but it is still too early to discuss it.

This is related to the number of subscribers and pricing power, both of which are related to the sports projects authorized by ESPN.

**（4）Theme parks**

**Q: 1Q theme parks recorded high profit margins. Is this sustainable in the long term? What is the outlook for the trend of theme park profit margins in 2Q-4Q?**

**A:** The high profit margin of 1Q theme park was not affected by one-time accounting items (that is, the theme park company's profit margin has rebounded, and it can be maintained in the long term).

In the first few quarters, international parks performed worse than domestic ones due to the impact of the epidemic. However, international parks showed strong performance this quarter. In the Paris park, thanks to the opening ceremony of Avengers Campus in July and the transformation of the old hotel into the Marvel-themed hotel, its year-on-year performance was outstanding. In addition, the licensing fee for the franchise rights of the Tokyo park is huge.

At the same time, the performance of every 1Q is better than that of other quarters in the same year, but this year's 1Q performance is particularly outstanding.

**Q: Can theme parks maintain healthy growth? What are the growth driving factors?**

**A:** Theme parks can maintain healthy growth.

The positive attitude towards the development prospects of theme parks comes not only from the impact of the epidemic recovery, but also from the high demand of theme parks themselves. Increasing the number of visitors to the park and lowering prices to meet high demand are not smart methods because they will both affect the park experience. Therefore, in fact, the company reduced the number of visitors to the park during the holiday season, improved the park experience, and at the same time maintained strong profitability.

In addition, the problem of pricing causing alienation from consumers has been noticed before, and "carefree play without high consumption burden" has always been the core value of the Disney brand, so we will solve the problem of excessive pricing. The new pricing strategy will extend the minimum available time for the lowest price from 15 days/year to 50 days/year, greatly increasing the range of entry time for the lowest price, winning positive feedback from consumers. This will turn some groups who would normally only visit Disneyland once in their lifetime into annual pass holders, and annual pass holders tend to spend more per person.

At the same time, the company will manage park projects more carefully. In fact, as investment in expanding the park increases, so does business development. Star Wars Land, Pandora Animal Kingdom, and others are excellent examples of this. Therefore, as mentioned earlier, Disneyland will introduce an "Avatar" version of the experience.

In summary, the investment in expansion will ensure a great visitor experience at the park.

**Risk disclosure and statement for this article:** [**Dolphin Research Disclaimer and General Disclosure**](https://support.longbridge.global/topics/misc/dolphin-disclaimer)

### Related Stocks

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> **Disclaimer**: This article is for reference only and does not constitute any investment advice.
