Disney Lowers Long-Term Streaming User Guidance in Response to Strong Offline Demand (3Q22 Conference Call Summary)

I. Management Communication

1. Subscribed Users and Film Plans

This quarter, we gained 15.5 million new subscribers, including 14.4 million Disney+ subscribers, of which 6 million subscribed to Disney+ core, and 8 million subscribed to Hotstar. As of the end of the third quarter, our total streaming product subscription amounted to 221 million. As proof of our creative team's depth, breadth, and quality, we received 147 Primetime Emmy Award nominations this year, including 92 from our streaming platform and 21 best program nominations in the same category. 47 different TV series were recognized with different forms and distribution channels, including "Murder in the Apartment Building," "Elementary School," "Vampire Stories," and "School Dropout," as well as programs from Disney, Marvel, and Star Wars. Recently, we also received 71 Emmy Award nominations for news and documentaries, with works from ABC News, National Geographic, FX, Hulu, and ESPN.

**Regarding major franchise content, "Doctor Strange in the Multiverse of Madness" has been a major success, with a global box office of nearly $1 billion. "Thor: Love and Thunder," which premiered on July 8, has a global box office of more than $700 million and has the highest domestic box office in the "Thor" film series. Pixar's "Lightyear" marks its studio's return to the big screen, and the film premiered on Disney+ last week. Disney+ is currently available in 155 markets, including 53 newly added regions, and has attracted different audiences with its content, including "Obi-Wan" and "Ms. Marvel," as well as Disney's "Chip 'n' Dale: Rescue Rangers" and Disney Nature's polar bear documentary.

As you may know, Disney+ is still a young business, and we are learning every day how to attract new fans. For example, in addition to attracting millions of Marvel fans, every Disney+ Marvel original series has attracted more and more new audiences who have never been exposed to Marvel content before. These new users can also experience Marvel through our theme parks and other products. As for the future, Disney+ will have a series of exciting content in the fourth quarter, including Marvel's "She-Hulk," Lucasfilm's "Andor," and Disney's "Hocus Pocus 2." We look forward to celebrating the second annual Disney+ Day on September 8.

Considering the global nature of Disney+, we are pleased to invite BTS to produce exclusive movies and documentaries about their legendary journey. BTS and K-pop have tremendous appeal and affinity worldwide, which will further expand our influence among global fan communities. In theaters, we will welcome a strong lineup of films later this year, including the highly anticipated "Avatar: The Way of Water," the animated film "The Strange World," and the final film of Marvel Phase Four, "Black Panther 2," which has generated a lot of attention, with its trailer garnering over 170 million views within 24 hours. 2. Sports Rights

In the sports sector, we have obtained industry-leading rights and the innovative NHL agreement has played an important role on various platforms. Compared to 2021, the number of viewers for the Stanley Cup playoffs on cable TV and live platforms has increased by 60%, with significant increases in the number of young and female viewers. We have also obtained exclusive television broadcasting rights for the 2023-2027 season. We are pleased to continue to provide IPL to our customers in India. Our investment portfolio has over 70 channels covering 90% of the region's paid cable and satellite TV households.

3. Disney+ Advertising Mode

Since the launch of Disney+, advertisers have been seeking opportunities to connect with audiences. As we shared earlier today, the Disney+ ad layer will be launched on December 8th. We will ensure a good experience for viewers by reducing the ad load and frequency, combined with strong demand from advertisers, Disney+ has achieved industry-leading CPMs in recent early investments.

4. Medium and Long-Term Guidance Adjustments for Streaming Disney+

The core Disney+ users are expected to reach 135 million to 165 million in 2024, consistent with the previous guidance. The maximum number of Disney+Hotstar users in 2024 is expected to be 80 million, down from the range of 95 million to 125 million. That is to say, the overall user scale of Disney+ is adjusted to 215 million to 245 million.

The peak loss will be reached in Q4 2022, and it is expected to achieve profitability in 2024.

5. Content Investment Plan

It is expected that the content investment scale for the 2022 fiscal year will be adjusted to RMB 30 billion (down from RMB 32 billion). The full-year capital expenditure will be reduced from USD 5.5 billion to USD 5 billion (cumulative expenditure for the first three quarters has reached USD 3.795 billion).

6. Regarding theme parks, there have been strong operating results worldwide this quarter. All our theme parks are now open, and we will continue to see strong revenue and profit growth from domestic parks and experience businesses, even as our cruise and international tourists have not yet fully recovered.

There are three important milestones for theme parks and experience businesses this quarter:

(1) First, the innovative immersive new roller coaster - Guardians of the Galaxy: Cosmic Rewind has opened in Future World.

(2) Second, the Disney Wish cruise ship made its maiden voyage on July 14th, powered by liquefied natural gas, which is one of the cleanest burning fuels available today.

(3) Finally, the Avengers Campus opened at Disneyland Paris on July 20th. The park's per capita consumption in Q3 increased by more than 30% compared to 2019, indicating growth potential for the park. 2. Analyst Q&A

Q: The performance of the theme park this quarter is impressive. Does the company think it is mainly due to the release of demand suppressed by the epidemic? I guess you have different answers for domestic and international markets. If consumer demand changes, what is your view on the elasticity of subsequent growth?

A: The theme park team is led by Josh D'Amaro, and they were able to survive the COVID crisis and return to the recovery phase on a phased basis. They are now ready for growth.

Regarding demand elasticity, we previously limited the number of annual passes for some parks, which may have reduced demand, but now that we have lifted those restrictions, more people can come to the park. And we have not seen a decrease in demand. There are still many times when people cannot book seats. Therefore, demand still exceeds the reservation limit we provide.

Q: Can you talk about your research and insights on the streaming customer base? Do these research and insights in some way affect whether you will raise prices? Looking at the percentage, the price increase is quite large. Does the net increase in customer loss occur simultaneously with the price increase? Will consumers buy products at a higher price next year than this year? Do you plan to adopt similar pricing measures in at least areas outside the United States?

A: We have launched very attractive prices on all streaming platforms, and we may be the most valuable in streaming. As you know, we have been investing in game content since the game was first launched, and with investment continuing to grow in the past two and a half years, we have enough room to increase prices.

But we do not believe that raising prices will result in customer loss. You just need to look at the recent ESPN+ price increase, which has not had a substantial impact on our user loss.

Q: DPEP's profit is very considerable. I would like to know what trends you see in international passenger flow and whether they performed well this quarter. Will the increase in international passenger flow in the second half of the year be conducive to the increase of per capita check-in rate or hotel check-in rate?

A: DPEP's profit margin is indeed very high. During the epidemic, there were basically no international tourists in the domestic Disney parks. But now they have resumed, although still below the historical range of around 18% to 20%. When the international tourist traffic is fully restored, it will also increase profits because these tourists tend to stay longer in the park and spend more money there.

Q: I want to know more about Disney+'s advertising products. Considering there is a $3 difference between ad-free and ad-supported products, what is your profit expectation for advertising load? What relevant information have you learned from Hulu in recent years?

A: Before we officially launch, we need to see the market's tolerance for advertising loads. Therefore, we are very conservative at the beginning, but as we develop, there may be more elasticity. Since the launch of Disney+, there has been significant demand for advertising, and we are pleased to introduce Disney+ advertising tiers and expand our user coverage through different prices. According to our experience at Hulu, even users who currently do not have ads may choose to keep the ad-supported model. 2/3 more Hulu users choose the ad-supported model than the ad-free model. However, because Disney+ and Hulu are completely different, we cannot predict the same results for both. But we expect the ad-supported model to be popular, and we hope some people will continue to use the ad-free service.

Q: Can you talk to us about your thoughts on renewing the NBA, and would there be any differences in the architecture? You mentioned involvement in sports betting, can you elaborate on what you are thinking?

A: Let me first talk about the NBA. As you know, we have a great history with the NBA and the viewership of last season and the Finals was very high, so we are interested in renewing with the NBA. But we only do so when it adds shareholder value. We are very satisfied with the sports rights we own. Of course, continued partnerships with the NBA are very attractive to us. Regarding sports betting, we've had extensive discussions with different platforms to add practical features for sports betting and to remove barriers for our customers. We found that sports enthusiasts under 30 absolutely need the features ESPN (a cable sports channel owned by WarnerMedia) provides. So we are working hard to announce something in our future collaborations.

Q: You mentioned launching a new cruise ship, can you talk about overall demand for cruises? Regarding cruises, our fleet now has 5 cruise ships, and the new ship is called the Wish. But in terms of the duration of the interruptions, the cruise business has been most affected by COVID, so we are still recovering. Historically, the capital return rate of the cruise company has been very attractive and has generated double-digit investment returns. We hope this business will also generate similarly attractive returns. We are in a competitive advantage for the cruise business, especially in the family cruise market. So our pricing is far above the industry average. Among all theme parks and experience products, the cruise business has the highest-rated visitor experience. 40% of cruise passengers say they wouldn't choose a cruise vacation if it weren't for Disney Cruise Line. But our market share in the cruise market is still relatively small, and our position is that future market share will continue to grow. Additionally, the other four ships are sailing normally, and their occupancy rates are increasing every week.

Q: First, regarding the park, given your investments in technology, digital tools, and visitor experience, the park is going through a particularly innovative and transformative period. Therefore, from an external perspective, the company appears to be in an unprecedentedly advantageous position when faced with potential downturns. How do you view the business's elasticity? Second, you mentioned different levers that can be used, but has the corporate structure changed compared to previous downturns? Finally, how do you manage forex risk and how does forex affect DTC ARPU?

Q: Many people think that the growth of the amusement park business in recent times is due to pent-up demand, but what we see is more resilient and long-lasting business. If demand changes, we have great flexibility to shift direction. Our booking system essentially allows us to make real-time changes to any factor. In addition, our booking system has indeed done well in increasing demand. So if we see any anomalies, we can quickly fix them.

In terms of forex risk, we have mature hedging solutions. Whether it's in the third quarter or this fiscal year to date, this hedging program has greatly reduced the negative impact of a strong dollar on profits. Although we have made economic hedges in terms of ARPU, we have not specifically allocated hedging gains or losses to ARPU in each market. Therefore, the ARPU reported by international Disney+ was negatively affected by exchange rates this quarter. In addition, you'll notice that content sales and licensing have also been negatively affected by adverse exchange rates.

Q: There are many newcomers in the sports market, and Apple seems to be increasingly interested in sports copyrights. From your perspective, you have obviously given up the Indian copyright, and it looks like Big Ten may also be moving in a different direction. So how do you view the long-term development of this business? Do you really have to have ESPN or other channels to enter the sports streaming field? In terms of advertising, in terms of user base, Disney+ is on par with Hulu in the US, so when we consider the advertising scale of Disney+, should Hulu be our benchmark?

A: In terms of the strategic aspects of sports, we like to analyze from the perspective of viewership and overall portfolio contributions, especially in this prevalent advertising world. We have strong cash flow, which helps pay for major investments in content, and we also like the growth and expansion strategy of DTC. As for copyrights, we have SEC, ACC, Pac-12 and 12 Big 12 in college sports. We have the most comprehensive planning, so even if we can't obtain all the copyrights, it won't restrict us in any way.

In terms of advertising, first of all, our scatter market is still strong in streaming, sports and broadcast networks. Regarding Disney+'s AVOD model, we will launch it on December 8 this year. Early on, we intentionally took a cautious and conservative approach, which means we will launch with a lower ad load than Hulu. As for overseas, we plan to enter the international market next year. Therefore, considering the depth of our knowledge and experience in traditional linear businesses, we are confident in our navigation ability in the international advertising market. So we think it's very suitable to use Disney+ AVOD both domestically and internationally.

Q: The DTC and Disney+ program costs this quarter were higher than expected. Can you give us some direction for the fourth quarter? When will Disney+'s operating revenue losses reach their peak? Secondly, can you delve into the guidance for accelerated subscription growth in the fourth quarter? Q: Hi Dolphin Analyst, I have a question about the Disney+ advertising experience. Firstly, do you want to display ads next to any content? There are some contents, including some children's content, that have historically never had ads. Secondly, are you mainly looking to leverage the streaming advertising experience you've used on Hulu? Or do you really think Disney+ has the opportunity to use some innovative new models for advertising?

A: The technology for Disney+ is completely different from that of Hulu. Therefore, we could have an ad plan as excellent as Hulu's, but Disney+ could have a better plan due to the different technological platforms.

As for the advertising experience, the content on Disney+ is not treated equally, at least not with ads appearing in children's materials or preschool children's materials.

Q: Kristin, Operating cash outflows have been very frequent, including cash costs for content and operating cash we traditionally think of. Can you talk briefly about your outlook for the remaining time this year, and the prospects for economic recovery in Q4 and next year? Secondly, could you comment briefly on taxes? I think your tax rate has increased this year, will it extend to 2023?

A: In terms of operating capital, we have seen net operating capital outflows because the enterprise is returning to operation. In this quarter, we generated positive free cash flow ($187 million).

Regarding taxes, the annual effective tax rate is typically related to the US statutory tax rate. But there are a lot of things that are based on a quarterly basis, which leads to quarterly differences.

However, we still expect our full-year tax rate to be higher than the US statutory tax rate, and Q4 data may even be slightly higher than Q3. As it relates to Fiscal 23, we are currently formulating our annual operating plan. I don't want to get too specific today, but it is one of the factors we are closely monitoring.

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