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©Disney
Q4 FY17 Earnings Conference Call
N O V E MB E R  9 ,  20 1 7
Disney Speakers:
Bob Iger
Chairman and Chief Executive Officer
Christine McCarthy
Senior Executive Vice President and Chief Financial Officer
Moderated by,
Lowell Singer
Senior Vice President, Investor Relations
Q4 FY17 Earnings Conference Call November 9, 2017
Page 2
PRESENTATION
Operator
Welcome to the Walt Disney Company Fiscal Full Year and Q4 2017 Earnings Conference Call.
My name is Victoria, and I will be your operator for today's call. (Operator Instructions) Please
note that this conference is being recorded. I will now turn the call over to Lowell Singer, Senior
VP of Investor Relations. Lowell, you may begin.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Good afternoon, and welcome to the Walt Disney Company's Fourth Quarter 2017 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 a copy of the webcast and a
transcript will also be available on our website. Joining me for today's call are Bob Iger, Disney's
Chairman and Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President
and Chief Financial Officer. Christine will lead off, followed by Bob and we'll be happy to take
your questions. So with that, let me turn the call over to Christine to get started.
Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Thanks, Lowell, and good afternoon, everyone. Excluding certain items affecting comparability,
earnings per share were $1.07 for the fourth quarter and $5.70 for the full year.
Our fiscal 2017 results came in roughly in line with last year, which is consistent with the
guidance we provided in early September, although they were adversely affected by three
notable items: First, the impact of Hurricane Irma on our Parks business; second, the impact of
canceling the animated film, Gigantic; and third, the impact at BAMTech of a valuation
adjustment to sports programming rights that were prepaid prior to the acquisition. In
aggregate, these three items reduced fourth quarter and full year segment operating income by
about $275 million or approximately $0.11 in earnings per share.
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At Parks and Resorts, operating income was up 7% in the quarter due to an increase at our
international operations, partially offset by lower operating income at our domestic operations.
The impact of Hurricane Irma, which I'll discuss in more detail in a moment, adversely affected
total segment operating income by 14 percentage points.
Results at our international operations continued to improve, led by growth at Disneyland Paris
and Shanghai Disney Resort. Disneyland Paris benefited from the resort's 25th anniversary
celebration and a more favorable tourism environment, which drove higher attendance, guest
spending and hotel occupancy. Shanghai Disney's operating income growth was due to higher
attendance and, to a lesser extent, lower marketing costs compared to the fourth quarter last
year. I'm pleased to note that Shanghai Disney Resort generated positive operating income
during its first full fiscal year of operations, which comfortably surpassed our expectations of
breakeven for its first year.
At our domestic operations, operating income was 6% below prior year due to lower results at
Walt Disney World, which were adversely impacted by Hurricane Irma, partially offset by
growth at Disney Cruise Line, Disneyland Resort and Disney Vacation Club. H
urricane Irma
disrupted our operations in Florida, forcing the closure of Walt Disney World parks for two days
and the cancelation of three Disney Cruise Line itineraries and the shortening of two others. We
estimate the aggregate impact of the hurricane was about $100 million in operating income or
about a 16 percentage point adverse impact to year-over-year growth at our domestic
operations. Operating margins at our domestic operations were down 170 basis points
compared to Q4 last year, and we estimate they were adversely impacted by about 220 basis
points due to the hurricane.
Attendance at our domestic parks was up 2% in the quarter, reflecting favorable guest response
to new attractions, particularly Avatar Flight of Passage at Disney's Animal Kingdom, and
Guardians of the Galaxy: Mission BREAKOUT! at Disney California Adventure, and the
unfavorable impact of the hurricane on Walt Disney World attendance. We estimate the
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hurricane had an adverse impact on the year-over-year change in domestic parks' attendance
of about three percentage points. Per capita spending was comparable to prior year. Per room
spending at our domestic hotels was up 4% and occupancy was down three percentage points
to 84%.
So far this quarter, domestic resort reservations are pacing down one percent compared to
prior year and reflect reduced room inventory due to conversions and ongoing room
refurbishments,
while booked rates are up nine percent.
At Media Networks, lower operating income in the fourth quarter was a result of lower equity
income and a decline at Broadcasting, while Cable operating income was comparable to prior
year.
Equity income was lower in the quarter due to higher losses from our investments in BAMTech
and Hulu and lower income at A&E Television Networks. With the closing of our BAMTech
acquisition on September 25th, BAMTech's results will now be consolidated within our Cable
Networks business.
At Broadcasting, double-digit growth in affiliate revenue and lower programming expenses
were more than offset by lower advertising revenue and a decrease in operating income from
program sales. The year-over-year decline in advertising revenue reflects lower impressions at
the ABC Network, lower political advertising at our owned stations and the absence of the
Emmy Awards, partially offset by higher network rates.
Quarter-to-date, primetime scatter pricing at the ABC network is running 34% above upfront
levels.
As I mentioned earlier, Q4 Cable results were roughly comparable to the prior year. At ESPN,
growth in affiliate revenue was offset by higher programming costs and lower advertising
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revenue. Higher spending on programming was primarily driven by a contractual rate increase
for the NFL. Ad revenue at ESPN was down low-single digits in the quarter as higher rates were
more than offset by a decrease in impressions.
So far this quarter, ESPN's cash ad sales are pacing down due in part to the timing of the college
football semifinals and the impact of more game windows on other linear television networks.
Li
ke last year, ESPN will air three of the New Year's six bowl games during the fourth quarter.
However, this year the two semifinal games will air during the second quarter, whereas they
aired during the first quarter last year.
We remain very confident in the value of ESPN's programming, in particular live, must-see
exclusive events like the College Football Playoffs, and in ESPN's ability to reach key audiences
that advertisers covet.
Total Media Networks affiliate revenue was up 4% in the quarter due to growth at both Cable
and Broadcasting. The increase in affiliate revenue was driven by seven points of growth due to
higher rates, partially offset by about a three point decline due to a decrease in subscribers.
We completed the renewal of a distribution agreement with Altice, which demonstrates the
tremendous value of our network and positions us well as we head into future negotiations.
By the end of 2019, we expect to have new agreements in place covering about 50% of our
subscriber base.
At the Studio, results in the fourth quarter reflect higher film cost impairments, lower operating
income from television distribution, driven by the sale of Star Wars Classic titles in Q4 last year
and lower revenue share from Consumer Products. Operating income in our theatrical and
home entertainment businesses was roughly comparable to the prior year.
At Consumer Products & Interactive Media, segment operating income was lower in the
quarter due to a decrease in our merchandise licensing business. While we saw nice growth in
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the sale of Cars and Spider-Man merchandise during the fourth quarter, the growth was more
than offset by strong sales of Star Wars, Frozen and Finding Dory merchandise in Q4 last year.
During the fourth quarter, we repurchased 33.6 million shares for $3.4 billion, and for the full
year we repurchased 89.5 million of shares for $9.4 billion. So far this quarter, we have
repurchased 6.5 million shares for approximately $650 million dollars.
With fiscal 2017 now behind us, we are excited for the opportunities that lie ahead for our
company, which Bob will discuss momentarily. As we look at fiscal 2018 specifically, our
earnings growth will be suppressed somewhat by a couple of factors.
First, the consolidation of BAMTech and its ongoing investment in the business will adversely
impact Cable operating income by about $130 million compared to last year. This will affect our
Cable results for the first three quarters of the year, with roughly half of this BAMTech-related
impact expected in Q1. We expect Cable expenses to be up high-single digits for the year,
driven by the consolidation of BAMTech. However, excluding the impact of BAMTech, we
expect underlying Cable expenses to be up low-single digits.
Second, we expect our share of losses from our equity investment in Hulu to increase by more
than $100 million for the year, driven by Hulu's investment in its digital MVPD service and
higher content spending. Given the timing of these investments, we expect about $70 million of
that increase in equity losses in the first quarter.
At Consumer Products, a timing issue related to the recognition of minimum guarantee shortfall
revenue will cause about $60 million in operating income to shift from Q1 into Q2. The timing
issue stems from the fact that these contracts are measured at month-end and our fiscal first
quarter ends on December 30th this year, whereas it ended on December 31st last year.
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And finally, we will continue to invest in our businesses in 2018, particularly at Parks and
Resorts, where we are building two Star Wars lands. We expect these investments, among
others, to drive fiscal 2018 consolidated capex higher by about $1 billion dollars.
We continue to see attractive opportunities to deploy capital in a balanced way, whether it's
through investment in our Parks and Resorts business, in support of our direct-to-consumer
strategy or by returning capital to our shareholders. We have this flexibility because of our
strong balance sheet. For fiscal 2018, we expect to repurchase $6 billion dollars in stock, which
is close to what we've repurchased on average over the past five years.
And with that, I'll now turn the call over to Bob.
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Thanks, Christine…and good afternoon, everyone.
I’d like to take you through our priorities in Fiscal 2018, to frame up the new year – starting
with our direct-to-consumer initiatives. We believe creating a direct-to-consumer relationship is
vital to the future of our media businesses, and it’s our highest priority this year.
Our decision to acquire control of BAMTech enables us to launch robust DTC offerings, and
immediately provides us the tools we need to stream video at scale,
to acquire and retain
customers, to greatly enhance our advertising opportunities on digital platforms, and to use
consumer data to provide a better user experience,
while giving us the ability to grow revenue
and increase the effectiveness of our digital marketing efforts.
Our first DTC product will be our ESPN-branded sports service, which will be called ESPN Plus.
Launching in the spring, the product will be accessible through a new and fully redesigned ESPN
app, which will allow users to access sports scores and highlights, stream our channels on an
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authenticated basis, and subscribe to ESPN Plus for additional sports coverage, including
thousands of live sporting events.
This one-app experience will be a one-of-a-kind product, offering sports fans far more than they
can get on any other app, website, or channel and immediately propelling ESPN in a new
direction. We will demonstrate this app in early 2018, and also detail pricing and other
elements to provide some perspective on the potential this represents to our company.
Additionally, we’re leveraging BAMTech to launch a Disney-branded DTC service in the latter
part of 2019,
streaming the latest Disney, Pixar, Marvel, and Star Wars feature films in the first
pay window. Our Studio will also produce four or five feature films a year exclusively for this
service.
W
e’re also planning to produce a number of original series for the new service. We’re already
developing a Star Wars live-action series, a series based on our popular Pixar Monsters
franchise, a High School Musical series, and a series from Marvel Television, along with a rich
array of other content, including new movies from our Disney Channel creative team as well as
a variety of short-form films and features from across our company.  The service will also offer
thousands of hours of Disney film and TV library product.
In the coming months we’ll share more specifics about content development, launch plans, and
investment levels.
Our strategic acquisitions have been a key driver of the historic achievements and performance
we’ve achieved over the last decade. We believe BAMTech is another game-changing
acquisition, and we are confident in our ability to generate maximum value from it.
The acquisition of Marvel helped drive our Studio’s performance. Since 2009,
the movies we’ve
released in the Marvel Cinematic Universe to date have delivered an average global box office
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of more than $840 million each. We have four new Marvel movies in Fiscal 2018 starting with
Thor: Ragnarok, which has already topped $500 million in worldwide box office since it
premiered two weeks ago. To put this early performance into perspective, the box office total
for the entire run of our first Thor movie in 2011 was $449 million. Thor: Ragnarok is also one of
the best-reviewed Marvel movies to date.
We’re very excited about Marvel’s next great movie, Black Panther, which opens next February,
and we’re bringing the Avengers back in May with the release of Infinity War. Our final Marvel
movie of the year, Ant-Man and the Wasp, will be in theaters next July.
As you know, our acquisition of Pixar effectively revitalized our entire animation business,
which is essential to the health of our company.  Since that acquisition, the average global box
office for our animated movies has risen to more than $665 million and we’ve captured nine of
the ten Oscars awarded for feature animation.
We’ll release two new movies from Pixar in Fiscal 2018. We’re thrilled with the early reaction to
Coco, which opens at Thanksgiving,
and we’re also looking forward to the summer release of
The Incredibles 2.
We had big ambitions for the Star Wars franchise when we acquired Lucasfilm five years ago
and we’re already exceeding our expectations. The Force Awakens and Rogue One alone
delivered more than $3 billion at the box office, revealing the tremendous, enduring appeal of
this franchise and establishing a strong foundation for the future. We’re thrilled to have two
new Star Wars movies in theaters during this fiscal year. The Last Jedi opens December 15th,
ticket presales are strong, and the excitement will only intensify as we get closer to the release
date. And we just wrapped production on Solo, our second stand-alone Star Wars movie. It’s
essentially the Han Solo origin story, and given the huge popularity and global affection for this
iconic character, we expect a lot of interest and enthusiasm when it opens over Memorial Day
weekend.
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We’ve got more great Star Wars movies already planned for years to come. In addition to the
2019 release of Episode IX, we’re very happy to announce that we’ve just closed a deal with
Rian Johnson, the director of The Last Jedi, to develop a brand new Star Wars trilogy.
We continue to make significant investments required to drive long-term growth across our
entire company. In our Parks and Resorts, for example, we’ve commissioned three spectacular
new cruise ships, which will all be completed between 2021 and 2023. We’re nearing
completion on Toy Story Lands in Shanghai and Orlando, both of which will open by next
summer, and major construction continues on our Star Wars lands in Disneyland and Walt
Disney World, which are on schedule to open in 2019. We’re also adding new attractions and
hotels in our resorts around the world, along with cutting-edge technology to enhance the
guest experience.
We remain optimistic about our future in part because quality truly does matter and the quality
of our content, our products and our services sets Disney apart. No other company in
entertainment today is better equipped to meet the challenges of a changing world or better
positioned for continued growth thanks to our collection of brands, our strong franchises and
our unique ability to leverage IP across our entire company to maximize value and create new
opportunities. We’ll continue to invest for the future and take the smart risks required to keep
moving forward.
I’m now happy to turn the call over to Lowell, and then Christine and I will be happy to take
your questions. Lowell?
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Okay Bob, thanks. Everyone, just so you know, we have been having some slight technical
issues on the call, I think with our host. So we have switched phones and if, for some reason,
we get disconnected during the call, we will dial back in. So with that, we are happy to take the
first question.
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Operator
Our first question comes from Michael Nathanson from MoffettNathanson. Please go ahead.
Michael Nathanson – Analyst, MoffettNathanson
Thank you. I have just one for Bob, and it's a two parter. One is, because you didn't say ‘we're
not going to talk about press speculation’, you have a chance to actually address the stories this
week in the press, if you don't want to do that --
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Michael, let me jump in. It's Lowell. I have some bad news and good news. The bad news is, as
is our practice, we are not going to take any questions on press speculation, but the good news
is, we'll give you another question.
Michael Nathanson – Analyst, MoffettNathanson
Thank you Lowell. It’s very kind of you. So Bob --
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Lowell could not wait to say that.
Michael Nathanson – Analyst, MoffettNathanson
So within your presentation a minute ago, you walked through your film strategy, and that was
essentially fixing Disney's film content. So this week, Kevin Mayer was saying that Disney has
turned their attention to looking at TV, because that's where the challenges are. So I wonder,
when you think about television, do you see the television challenge for you guys as having the
right platform? The right model? Or having the right content? So is there a content fix here that
maybe needs to be done as you did in film?
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Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Well, we think that the world today offers ample opportunity to monetize high-quality, in-
demand television programming. I think that's been demonstrated by a number of entities out
there today. And if you look at consumption, which admittedly is fragmented, it's actually quite
significant in terms of people's interest in consuming TV. We've had -- over the last few years,
we've had some disappointments on the ABC side, but we've been focused on turning that
around. We're actually very pleased with the performance of The Good Doctor already, and we
have three dramas in mid-season that we're quite excited about as well, including a Grey's
Anatomy spin-off. So I think as we look at TV, we think yes, some improvement with -- from a
quality perspective would be helpful, but we also think we've got great opportunities.
We also have strong production and creative capabilities, both from the ABC production side,
also from the Disney television production side and from Marvel. And I mentioned in my earlier
comments that we're in development on a Star Wars live-action series as well. So our intention
as a company is to take advantage of the opportunities that exist out there today for good
television and to produce more of it.
Michael Nathanson – Analyst, MoffettNathanson
Okay Thanks.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Okay Michael thanks. Operator next question please.
Operator
Our next question comes from Alexia Quadrani from JP Morgan. Please go ahead.
Alexia Quadrani – Analyst, JP Morgan
Q4 FY17 Earnings Conference Call November 9, 2017
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Thank you. I've got one for Bob, one for Christine, if I may. Bob, I guess, when you look at your
film studio specifically, you've really outperformed with such a huge margin and the pipeline
continues to look so robust. I guess, can more scale or acquisitions facilitate further growth? Or
is your plate really full enough, given the successful studios and IP you already have?
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
I appreciate the question, I think it's a bit -- leading the witness a little bit, as it relates to the
subject that Michael brought up earlier. There's -- I don't think that there's ever such a thing as
having too much quality or too many strong franchises when it comes to films. We do not feel
right now that we have a great need to add to the film slate that we have, because as you cited,
we're doing just fine. That doesn't mean there isn't room for more, we just don't have a
significant or urgent need for that. That said, we've also, as a company, demonstrated an ability
to leverage success in this area, not just in our Studio, but across various other businesses,
particularly Consumer Products and Theme Parks. And so we're always going to be looking to
add to the number of film franchises that we produce and own.
Alexia Quadrani – Analyst, JP Morgan
Thank you. And then Christine, I know it might be too early days, but I was wondering if there's
any color you can provide on the investment spending associated with the 2019 direct-to-
consumer launch. Any sort of early data you can give us in a way to frame how we should think
about potential earnings adjustments going into that product launch?
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Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Alexia, we have not yet finalized what the content spend is going to be and the cadence of it.
But as Bob mentioned, we will be providing more information on that as it develops over the
next few months.
Alexia Quadrani – Analyst, JP Morgan
Thank you very much.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Alexia thank you. Operator next question please.
Operator
Our next question comes from Ben Swinburne from Morgan Stanley. Please go ahead.
Ben Swinburne – Analyst, Morgan Stanley
Thank you. Bob, now that you've got the Altice deal done, so your first renewal this cycle is sort
of behind you, and at least for this quarter the subscriber losses seem to have gotten less
severe,
how are you feeling about that business over the next couple of years? Is that a
business that you think operating income should grow? Do you have the sort of confidence? I
wonder if you could talk a little bit about the outlook for that business and how the OTT launch
fits into it.
And then Christine, if I could just follow up on Alexia's question on the -- either forgone
licensing or incremental programming,
are we able to say at least for fiscal 2018 that we won't
have a material impact from those two factors hitting earnings? Since you didn't list them when
you talked in your prepared remarks about the sort of factors to be thinking about this year.
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Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Ben, I won't say too much about the Altice deal. I know you asked the business overall, but I will
say that in that deal we met or achieved our -- both our pricing and our distribution objectives,
which bodes very well for negotiations that we will be having in 2019 and beyond, actually 2018
and beyond rather -- Verizon in 2018, and Charter and AT&T/Direct beyond that, and then
Comcast beyond that. We're pleased with where we ended up.
We're also pleased with trends that we're seeing on the OTT side, where we've seen a nice
pickup in subs in the -- basically, the new players in the market. And what we're really
heartened by is the fact that some of them are spending a fair amount and have just stepped
up their marketing efforts aggressively. If you watched the World Series, you probably couldn't
have missed the number of spots that were in almost every hour for, I guess it was YouTube, a
new OTT service. That we think is great. It's also interesting that these OTT -- the entrants in the
OTT business are spending in live sports. They obviously believe that the sports fan is
potentially a primary customer of new OTT services. And what we've seen as well is that
millennials seem to be particularly interested in these services. I think it's a combination of
pricing and the user-friendly nature of these services.
As we've said call after call, we've had some sub issues that we've been dealing with, but
Christine's comment suggested that, while we lost some subs in the quarter, the losses were
not as steep as they had been in prior quarters. And we're not -- we're heartened by that as
well, but it is one quarter.
The other thing I want to note that's interesting, which ties into your question about the health
of the business, is that Nielsen provided us with two weeks of data, which is essentially data
about live consumption of sports across multiple platforms, including streaming and these OTT
services. And what they told us was that, by including that, we had a 25% increase in total day
ratings and a 29% increase among -- in Primetime. That was basically -- that includes out-of-
home viewing as well.
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So we think that the trends that we're seeing, albeit they're still not lengthy trends, but they are
at least giving us some reason to feel good about the business. We've always felt we were
positioned well because of ESPN and Disney and ABC.
On the direct-to-consumer front, we've said as well that we're going into that business because
we believe that our direct-to-consumer opportunities, given the technology that's out there,
are significant, and given the fact that we've got these great brands and franchises. And we
think that what we're doing can easily be complementary to the multichannel services in the
market, both the traditional ones and the new ones. And when you see the apps that we will
demonstrate sometime after the first of the year, you'll see that we're coming up -- we're
developing one app experiences, where ESPN's app will enable the highlights and scores that
ESPN typically gives, will enable live streaming of the channels on an authenticated basis, and
we'll also add a Plus
service, which will enable users to subscribe to, for an extra fee, to
thousands more live sporting events a year.
Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Ben, to answer your question on the 2018 spend, in my comments I mentioned the BAMTech
investment that is going to impact Cable operating income by $130 million. That's BAMTech,
but on the Disney DTC, we don't expect any significant items to impact spend in 2018.
Ben Swinburne – Analyst, Morgan Stanley
That’s helpful. Thank you both.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Okay operator next question please.
Q4 FY17 Earnings Conference Call November 9, 2017
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Operator
Our next question comes from Jessica Reif Cohen from Bank of America Merrill Lynch. Please go
ahead.
Jessica Reif Cohen – Analyst, Bank of America Merrill Lynch
Thanks. Maybe switching it up a little bit, but can you talk a little bit about addressable or
targeted advertising? Is it still off limits on the Disney DTC offer? And how do you think about
the tipping point on adjustability across all Disney advertising-related platforms?
And then just -- Christine, if we could just follow up on some of the capex questions. Could you
talk about the cadence at all beyond fiscal 2018? It was great to get the color for fiscal 2018,
but given the number of projects, Toy Story Lands, Star Wars lands, the cruise ships, et cetera,
Shanghai, can you just talk about what fiscal -- beyond fiscal 2018, fiscal 2019 through 2022 or
2023, what the cadence might be?
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Jessica, on the first question, we're going to launch the ESPN service in the spring. That
obviously will be advertiser supported. BAMTech, as we said at your conference and as I said in
my remarks earlier, offers us some far more, I should say, capabilities when it relates to -- as it
relates to addressable ads, live or inserted live on a dynamic basis into live sporting events. And
so we feel that that gives us a lot of capability that we haven't had before. Whether that
extends -- that capability extends to our other businesses in the non direct-to-consumer, I'm
not sure.
We currently are not planning to sell ads on the Disney service, but that's just in development.
There may be some interesting possibilities in terms of sponsorships versus inserted ads. But as
of now, we're not planning to have the programming that airs in the OTT -- in the, sorry, the
DTC service, interrupted by commercials.
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Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Jessica, on capex, you see for this year that we gave the comment that you can expect capex for
2018 to be about $1 billion above the 2017 level. And once again, a lot of that spend is going
into the completion of the two Star Wars lands, and we're also completing Toy Story Land in
Orlando and there are other initiatives that are in process around the globe.
We've talked about the longer-term menu, and I think at some of the meetings we've had,
we've talked about both the longer-term plans for our Parks and Resorts business and
developing out further on attractions and resorts. So I think it's fair to assume that we will
continue to make investments in areas in which we see driving long-term value and long-term
returns. So I would say, this is a business that we feel very confident in and the business is
working right now at a very high level, and will continue to do so.
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
The other thing to add to that is, when you look at the results of our international parks,
Shanghai as Christine cited, and the improvements that we’re seeing in Paris and the
restructuring in Paris, as well as Hong Kong and in Tokyo, we have ample opportunity to
continue to invest and continue to expand those businesses. And with the franchises that we
have, and their popularity in these markets, the opportunity actually has increased significantly
over the last few years.
Jessica Reif Cohen – Analyst, Bank of America Merrill Lynch
Thank you.
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Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Thank you Jessica. Operator next question please.
Operator
Our next question comes from Jason Bazinet with Citi. Please go ahead.
Jason Bazinet – Analyst, Citi
Just a question for Mr. Iger. Not really talking numbers, but more philosophically, as you
approach Disney DTC, have you decided sort of the cadence that you're going to approach this
opportunity? In other words, you could go and sort of spend large and sort of say there's only
going to be one or two winners on the back-end of this evolution and Disney's going to be one
of them. And another way you could do it is, just sort of spend consistent with the revenue that
that new business generates so it doesn't really contribute to earnings, maybe over the next
three to five years. Can you just describe how you're thinking about the cadence of your
approach?
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Sure. Before I do that, I know that there's been a lot written about whether this is aimed at
being a Netflix killer, et cetera, and so on. By the way, they have been a good partner of ours.
Our goal here is to be a viable player in the direct-to-consumer space, space that we all know is
a very, very compelling space to be in. We also believe that our brands and our franchises really
matter, as we've seen through Netflix and all other platforms. And so that gives us an
opportunity as well.
We are working on the cadence that we will produce and sort of schedule product in this OTT
service. We've not determined fully what that will be, although we've laid out, on a calendar
basis
, a fair amount of specifics. We're still working to develop original movies and original TV
Q4 FY17 Earnings Conference Call November 9, 2017
Page 20
shows and figure out what makes the most sense, part of it has to do with when they will be
available.
But I'd say that we're -- I don't want to say we're going to walk before we run, because we're
going to -- as I've said earlier, we're going to launch this thing pretty aggressively. But I think
what you'll see is a ramp up over time of production spending that will start with a product that
we believe is representative of the great brands and franchises that we have, between Marvel
and Disney and Pixar and Star Wars, and then grow from there.
Jason Bazinet – Analyst, Citi
Okay. Very helpful. Thank you.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Thank you Jason. Operator next question please.
Operator
Our next question comes from Todd Juenger from Sanford Bernstein. Please go ahead.
Todd Juenger – Analyst, Sanford C. Bernstein
Thanks. I can't help but ask my respective question on the entertainment OTT, I'm sorry. And
then I have a quick one on Consumer Products as well. Actually, just picking up kind of right
where you left off, Bob,
I'm just very curious to know how you're thinking about the role of the
Disney brand, obviously very important to the service, and what that means in terms of the
type of content you envision ultimately fits within that brand on the service. You've talked
about a lot of Disney
-branded content specifically, and I heard you list, obviously, Marvel and
Lucasfilm and Pixar. It begs the question, do you think about Freeform and ABC content as also
fitting within Disney? And then even when you start thinking of content that you could license
in or otherwise get a hold of outside of your company, can you imagine that fitting in the
Q4 FY17 Earnings Conference Call November 9, 2017
Page 21
service? Or does this need to stay narrowly defined, sort of all about the Disney brand and what
that means? Thanks.
And then, quickly just on Consumer Products. I was wondering how you think the -- Cars has
been the stalwart of Consumer Products for so long. You've had a new release of a movie. Just
wondered how the results lived up to your expectations on the Consumer Products side to
that? And depending on your answer to that, any learnings there as you think about other
franchises, particularly in the animation space, that have lasted a long time,
in the new world of
the consumer opportunity there? Just any learnings from that would be great. Thank you.
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Okay, Todd. So this -- the service will be Disney-branded. It'll be, in other words, it will be
Disney named. We haven't determined what the name is yet, but it will be Disney named. The
product we have in Europe is called Disney Life, but we've not decided what this one will be yet.
I think you have to think about it like you think about our Theme Parks, where they are Disney
Parks, but you go in and you see Marvel and Star Wars and Pixar, for instance. So it's a
collection -- it will be a collection of just those brands. And if one of those series, whether it's
from Marvel or Lucas or whatever, has standards -- first of all, nothing's going to be hard,
nothing is going to be R -- but has standards that don't necessarily fit completely with, I'll call
them the G or G-rated Disney, there'll be ample filtering opportunities for people using it. So if
you just want your kids to see the Disney
-only product, that can easily be accomplished.
We're not ruling out the possibility of licensing product from third parties for it provided the
product fits with the Disney brand. As it relates to ABC and Freeform, we're going to continue
to produce product for ABC and Freeform, and our production capabilities for programming like
that; we'll also look to sell product to third parties including Hulu. And it's also possible,
by the
way, that ABC Productions could end up producing for the Disney-branded service as well,
Q4 FY17 Earnings Conference Call November 9, 2017
Page 22
we've actually talked about that a bit. But we're going to stick to Disney-branded service, and it
will include Marvel, Pixar and Lucas brands within it, or Star Wars brands.
Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
So Todd, on your question on Consumer Products, specifically related to Cars. Cars is still a very
strong franchise for us. So even though Cars 3, the theatrical release of the movie
underperformed, and the performance of Consumer Products in this calendar year was a little
bit lighter than we would have liked it to be, it's still one of our strongest franchises, and when
we talk about some of the franchises that are over $1 billion annually, Cars is in there.
And just another thing about 2018, for Consumer Products. We feel really, really good about
the lineup we have going into this year. We have Star Wars Episode VIII: The Last Jedi. We
deferred revenue in the fourth quarter into the first quarter, like we did with Episode VII for
that. We also have Han Solo, a movie coming out named Solo in the spring quarter, and we've
got four Marvel movies including Avengers in the spring. We also have Mickey's 90th birthday.
You should mark your calendar for this,
it's November 18, 2018, but Mickey's 90th is something
that the entire company's going to get behind, and that should also be good for our Consumer
Products business.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Todd thank you. Operator next question please.
Operator
Our next question comes from Steven Cahall from RBC. Please go ahead.
Steve Cahall – Analyst, RBC Capital Markets
Thank you. Two for me. First, Bob, on direct-to-consumer. I was wondering if you have given
any thought to the pricing strategy. Netflix has certainly been rewarded for strong subscriber
Q4 FY17 Earnings Conference Call November 9, 2017
Page 23
growth, rather than necessarily revenue growth. So do you think you build more equity value by
coming out with a product that's really inexpensive in the Disney-branded direct-to-consumer,
in order to maximize sub growth early on?
And then Christine, just on the buyback guidance. I think you did a little less than $9 billion in
free cash flow this year, and you've got a $1 billion step up in capex, so that's $8 billion in free
cash flow before any cash flow growth next year at the operating line. So why the big step
down in the buyback year-on-year? Are you just trying to be conservative and give yourself
some wiggle room as you go through the year? Is it a view to the share price? Is it a view to
build cash on the balance sheet? Any color there would be great. Thank you.
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Steven, we've given a lot of thought to pricing, to both the ESPN and the Disney-branded
service, and I can't get specific with you yet. We haven't actually officially determined it, but we
said we will be forthcoming with you on this sometime after the first of the year.
I can say that our plan on the Disney side is to price this substantially below where Netflix is.
That is, in part, reflective of the fact that we'll have substantially less volume. You'll have a lot
of high quality, because of the brands and the franchises that will be on it that we've talked
about, but it will simply launch with less volume, and the price will reflect that.
It is our goal to attract as many subs as possible starting out. We think we've got some
interesting opportunities there given the affinity to Disney, whether it's with our Disney
-
branded credit card holders, our Annual Passholders, people who are members of D23, people
who own Vacation Club units at Disney, people who visit our parks frequently, there's a gigantic
potential Disney customer base out there that we're going to seek to attract, with pricing that is
commensurate with -- or that balances the quality of the brands and franchises that are in
there, but also takes into account the volume. And that will give us an opportunity to grow in
volume and to have the pricing over time reflect the added volume as this product ages.
Q4 FY17 Earnings Conference Call November 9, 2017
Page 24
Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
Steve, on the buyback, that $6 billion is a number that, as I mentioned, is the average over the
last five years -- roughly the average over the last five years. As you saw both in 2017 and 2016,
we came in at a higher level than what we originally started out the year at. So if you want to
view that as a conservative approach, we are early in the year and we'll make adjustments as
we go through the year based on the business environment. But once again, we have increased
the last couple of years from what we originally started out at.
Steve Cahall – Analyst, RBC Capital Markets
Thank you.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Alright thanks, Steve. Operator next question please.
Operator
Our next question comes from Marci Ryvicker from Wells Fargo. Please go ahead.
Marci Ryvicker – Analyst, Wells Fargo
(technical difficulty)
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Marci? Okay operator let’s move on. Oh there you are. Now we got you Marci.
Marci Ryvicker – Analyst, Wells Fargo
A little more color on sports write-offs, if that's what they were, related to BAMTech? Was it a
certain sport? Was this just technical just because there's so much sensitivity around sports
Q4 FY17 Earnings Conference Call November 9, 2017
Page 25
rights, right now? And then, second question, there was an article that came out at some point,
talking about, maybe there's a time when ESPN may not participate or have NFL rights, and
maybe you're changing your distribution agreements to allow some sort of flexibility. Is there
any -- (technical difficulty)
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Okay. We lost you, Marci. Is that? Can you hear us still Mike?
Marci Ryvicker – Analyst, Wells Fargo
Can you hear me?
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
We got the two questions, so --
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
The NFL was one which, we're not going to comment on, we've had a long, healthy relationship
with the NFL. It's important for our -- ESPN, both the live games that we have on Monday night
and all the shoulder programming that we do. Some of it, or much of it licensed directly from
the NFL, and we're not going to comment on anything related to the future relationship, or the
-- as it affects our distribution agreements.
Christine McCarthy – Senior Executive Vice President and Chief Financial Officer, The Walt Disney Company
So on the BAMTech valuation adjustment: that was an adjustment to programming rights that
were prepaid prior to the acquisition. And we're not going to be specific on it, but it does relate
just to one rights deal, and we looked at it based on current performance and the duration of
the contract, and we didn't think we had enough time to recover the payments, so the contract
was marked-to-market.
Q4 FY17 Earnings Conference Call November 9, 2017
Page 26
Marci Ryvicker – Analyst, Wells Fargo
Thank you.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Okay Marci thanks. Operator next question please.
Operator
Our next question comes from Tim Nollen from Macquarie. Please go ahead.
Tim Nollen – Analyst, Macquarie
Hi thanks. Bob, I'd like to follow up on your comments on the really strong pickup in ratings
from the streaming viewership. I know there's a summit being convened later this month by
one of your peers. I just wonder if you have any comment to make on broader use of digital
measurement in the TV ecosystem?
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Well, I think, first of all, as I said earlier, it just was two weeks, and we like the trend, obviously,
but we have to give this more time. Frankly, we're not really surprised by it though, because
we've known for a long time that out-of-home viewing of sports is significant and the more
granular or the more unimpeachable data we can get on that, the better, because it just
confirms what we all know, we all watch sports wherever we are, or out of the home. It also
confirms that sports on mobile platforms, which often is out of the home, is also growing in
popularity. And this picks up a lot of that consumption. And the other thing it includes, it
includes live sports viewership on new OTT entrants -- on new OTT platforms. And there, too, in
part because of the interest in those platforms for millennials, suggests that sports -- live sports
is very, very important to those platforms. And I think that's reflected in the fact that every one
of these services that launched has launched with the rights to distribute ESPN, and to all of
Q4 FY17 Earnings Conference Call November 9, 2017
Page 27
their customers. And because they know how vital it is, and as I said earlier, just the fact that
these platforms are advertising in live sports suggests they're going after the sports viewer or
the sports fan, because they think that's a -- that has high potential for them as a customer.
So we're -- we feel good about what we're seeing and while there's obviously been a lot of
attention paid to ESPN and subs, et cetera, and so on, we've never lost our bullishness about
ESPN. The brand is strong, the quality of their programming is strong. There are always
opportunities to improve. We're just launching a new morning program, as a for instance, but
we like where ESPN is these days and we believe that one of the best things that we've got
going for ESPN is the new technology in the marketplace that's enabling people to watch sports
on more user-friendly platforms and wherever they are. And if we can measure that, and add to
that the technology that we need to monetize advertising in more effective ways, that's a
pretty good combination.
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Tim, thank you. Operator we have time for one more question.
Operator
Our next question comes from Barton Crockett from B. Riley. Please go ahead.
Barton Crockett – Analyst, FBR
Okay thank you for taking the question. I was interested in looking at the bigger kind of impact
of Hulu. So you've got some drag from your share of the losses in the earnings of Hulu, but
you've also got a benefit from -- you are selling them programming to some degree, you're
getting subs from them, they pay you fees,
there’s some share of advertising. I was just
wondering, when you net it all together, is this actually a net drag, or largely mitigated or
maybe a net positive, if you look at the broader impact of Hulu?
Q4 FY17 Earnings Conference Call November 9, 2017
Page 28
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
Talking over time or to date? Because we know to date....
Barton Crockett – Analyst, FBR
To date and obviously, over time, you think it works. But just right now, as you're kind of
ramping up, I think there's some mitigation of the expenses there with some of the benefits.
Bob Iger – Chairman and Chief Executive Officer, The Walt Disney Company
So to date, the P&L impact of Hulu is positive to the company -- for the year, sorry, for the year,
not to -- for fiscal 2017. It's positive to the company because the investment that we've made in
it as it grows has been offset by the licensing fees that we've gotten for both our channels, but
largely in 2017, because they didn't launch the service until late, than the licensing of
programming to the standard Hulu service. It was also an improvement from 2016. So in other
words, we had growth to the bottom line in Hulu from 2016 to 2017.
Where -- our continued investment in Hulu is because we're confident in its ability to both grow
in terms of its SVOD service, but also to grow as an OTT multi-channel operator. And we've seen
some nice numbers there. Still, just the beginning, and we're not going to get specific about
what those are.
We've got new management at Hulu as well,
Randy Freer's now running it, and I know he's
certainly bullish about it. And we continue to believe that long-term, Hulu is a significant -- will
be a significantly valuable investment for us. We also believe that we can grow our licensing to
Hulu, I talked earlier about television production, it’s yet has another opportunity for us.
Barton Crockett – Analyst, FBR
Okay that’s great, thank you.
Q4 FY17 Earnings Conference Call November 9, 2017
Page 29
Lowell Singer – Senior Vice President, Investor Relations, The Walt Disney Company
Thank you, Barton, and thanks, everyone, for joining us today. Sorry about some of the
technical glitches. 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 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 and in our other filings with the Securities and Exchange
Commission.
This concludes the call. Have a good afternoon, everyone.
Operator
Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You
may now disconnect.
###
Q4 FY17 Earnings Conference Call November 9, 2017
Page 30
Forward-Looking Statements:
Management believes certain statements in this call may constitute “forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  These
statements are made on the basis of management’s views and assumptions regarding future
events and business performance as of the time the statements are made.   Management does
not undertake any obligation to update these statements.  Actual results may differ materially
from those expressed or implied.  Such differences may result from actions taken by the
Company, including restructuring or strategic initiatives (including capital investments or asset
acquisitions or dispositions), as well as from developments beyond the Company’s control,
including:
- adverse weather conditions or natural disasters;
- health concerns;
- international, political, or military developments;
- technological developments; and
- changes in domestic and global economic conditions, competitive conditions and
consumer preferences.
Such developments may affect travel and leisure businesses generally and may, among other
things, affect:
- the performance of the Company’s theatrical and home entertainment releases;
- the advertising market for broadcast and cable television programming;
- expenses of providing medical and pension benefits;
- demand for our products; and
- performance of some or all company businesses either directly or through their impact
on those who distribute our products.
Additional factors are set forth in the Company’s Annual Report on Form 10-K for the year
ended October 1, 2016 and in subsequent reports on Form 10-Q under Item 1A, “Risk Factors”.
Reconciliations of non-GAAP measures to closest equivalent GAAP measures can be found at
www.disney.com/investors.