| | | | | | | | | Commodity Price Risk Management
The Company is subject to the volatility of commodities prices and the Company designates certain commodity forward contracts as cash flow hedges of forecasted commodity purchases. Mark-to-market gains and losses on these contracts are deferred in AOCI and are recognized in earnings when the hedged transactions occur, offsetting changes in the value of commodity purchases. The notional amount of these commodities contracts at December 30, 2023 and September 30, 2023 and
THE WALT DISNEY COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited; tabular dollars in millions, except for per share data)
Contingent Features and Cash Collateral
The Company has master netting arrangements by counterparty with respect to certain derivative financial instrument contracts. The Company may be required to post collateral in the event that a net liability position with a counterparty exceeds limits defined by contract and that vary with the Company’s credit rating. In addition, these contracts may require a counterparty to post collateral to the Company in the event that a net receivable position with a counterparty exceeds limits defined by contract and that vary with the counterparty’s credit rating. If the Company’s or the counterparty’s credit ratings were to fall below investment grade, such counterparties or the Company would also have the right to terminate our derivative contracts, which could lead to a net payment to or from the Company for the aggregate net value by counterparty of our derivative contracts. The aggregate fair values of derivative instruments with credit-risk-related contingent features in a net liability position by counterparty were $ billion and $ billion at December 30, 2023 and September 30, 2023, respectively.
16.
million related to exiting our businesses in Russia. These charges are recorded in “Restructuring and impairment charges” in the Condensed Consolidated Statements of Income.17.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
ORGANIZATION OF INFORMATION
Management’s Discussion and Analysis provides a narrative of the Company’s financial performance and condition that should be read in conjunction with the accompanying financial statements. It includes the following sections:
•Consolidated Results
•Current Quarter Results Compared to Prior-Year Quarter
•Seasonality
•Business Segment Results
•Corporate and Unallocated Shared Expenses
•Financial Condition
•Commitments and Contingencies
•Other Matters
•DTC Product Descriptions, Key Definitions and Supplemental Information
•Supplemental Guarantor Financial Information
•Market Risk
CONSOLIDATED RESULTS
| | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) | |
| (in millions, except per share data) | December 30,
2023 | | December 31,
2022 | | | |
| Revenues: | | | | | | | | |
| Services | $ | | | | $ | | | | — % | | | |
| Products | | | | | | | 2 % | | | |
| Total revenues | 23,549 | | | 23,512 | | | — % | | | |
| Costs and expenses: | | | | | | | | |
| Cost of services (exclusive of depreciation and amortization) | () | | | () | | | 6 % | | | |
| Cost of products (exclusive of depreciation and amortization) | () | | | () | | | (4) % | | | |
| Selling, general, administrative and other | () | | | () | | | 1 % | | | |
| Depreciation and amortization | () | | | () | | | 5 % | | | |
| Total costs and expenses | (20,613) | | | (21,519) | | | 4 % | | | |
| Restructuring and impairment charges | | | | () | | | 100 % | | | |
| Other expense, net | | | | () | | | 100 % | | | |
| Interest expense, net | () | | | () | | | 18 % | | | |
| Equity in the income of investees | | | | | | | (5) % | | | |
| Income before income taxes | 2,871 | | | 1,773 | | | 62 % | | | |
| Income taxes | () | | | () | | | (75) % | | | |
| | | | | | | | |
| | | | | | | | |
| Net income | 2,151 | | | 1,361 | | | 58 % | | | |
| Net income attributable to noncontrolling interests | () | | | () | | | >(100) % | | | |
| | | | | | | | |
| Net income attributable to Disney | $ | 1,911 | | | $ | 1,279 | | | 49 % | | | |
Diluted earnings per share attributable to Disney | $ | 1.04 | | | $ | 0.70 | | | 49 % | | | |
CURRENT QUARTER RESULTS COMPARED TO PRIOR-YEAR QUARTER
Revenues for the quarter were comparable to the prior-year quarter at $23.5 billion; net income attributable to Disney increased to $1.9 billion in the current quarter compared to $1.3 billion in the prior-year quarter; and diluted earnings per share (EPS) attributable to Disney increased to $1.04 compared to $0.70 in the prior-year quarter. The EPS increase was primarily due to higher operating income at Entertainment, Experiences and, to a lesser extent, Sports.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues
Service revenues for the quarter were comparable to prior-year quarter at $21.0 billion as lower theatrical distribution revenue and, to a lesser extent, lower TV/VOD distribution revenue were largely offset by higher DTC subscription revenue and increased revenues at our theme parks and resorts.
Product revenues for the quarter increased 2%, or $0.1 billion, to $2.6 billion due to higher sales volumes of merchandise, food and beverage at our theme parks and resorts.
Costs and expenses
Cost of services for the quarter decreased 6%, or $0.9 billion, to $13.9 billion primarily due to lower programming and production costs and, to a lesser extent, lower technical support costs, partially offset by the impact of inflation and increased volumes at our theme parks and resorts. The decrease in programming and production costs was due to lower amortization resulting from lower theatrical and TV/VOD distribution revenue and a decrease in programming and production cost amortization at Entertainment Linear Networks and Direct-to-Consumer, partially offset by Sports.
Cost of products for the quarter increased 4%, or $0.1 billion, to $1.7 billion due to higher sales volumes of merchandise, food and beverage and cost inflation at our theme parks and resorts.
Selling, general, administrative and other costs decreased 1% to $3.8 billion, primarily due to lower marketing costs.
Depreciation and amortization decreased 5% to $1.2 billion due to lower TFCF and Hulu acquisition amortization and lower depreciation at Experiences.
Restructuring and impairment charges
In the prior-year quarter, the Company recognized charges of $69 million related to exiting our businesses in Russia.
Other expense, net
Other expense, net in the prior-year quarter included a DraftKings loss of $70 million, partially offset by a $28 million gain on the sale of a business.
Interest expense, net
Interest expense, net is as follows:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | % Change
Better (Worse) |
| Interest expense | $ | (528) | | | $ | (465) | | | (14) % |
| Interest income, investment income and other | 282 | | | 165 | | | 71 % |
| | |
| Interest expense, net | $ | (246) | | | $ | (300) | | | 18 % |
The increase in interest expense was due to higher average rates, partially offset by lower average debt balances.
The increase in interest income, investment income and other was driven by higher interest income on cash balances reflecting an increase in interest rates.
Equity in the Income of Investees
Income from equity investees decreased $10 million, to $181 million from $191 million, due to lower income from A+E Television Networks.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Income Taxes
| | | | | | | | | | | |
| Quarter Ended | |
| December 30,
2023 | | December 31,
2022 |
Income before income taxes | $ | 2,871 | | | $ | 1,773 | | |
Income tax | 720 | | | 412 | |
Effective income tax rate | 25.1 | % | | 23.2 | % |
The increase in the effective income tax rate was due to the impact of adjustments related to prior years, which was unfavorable in the current quarter and favorable in the prior-year quarter, partially offset by lower effective tax rates on foreign earnings compared to the prior-year quarter.
Noncontrolling Interests
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | % Change
Better (Worse) |
Net income attributable to noncontrolling interests | $ | (240) | | $ | (82) | | >(100) % |
The increase in net income attributable to noncontrolling interests was primarily due to improved results at our Asia Theme Parks, the accretion of Hulu’s noncontrolling interest to the amount paid to NBCU in December 2023 (see Note 1 to the Condensed Consolidated Financial Statements) and, to a lesser extent, improved results at ESPN, partially offset by the comparison to the impact of the prior year purchase of Major League Baseball’s 15% interest in BAMTech LLC.
Net income attributable to noncontrolling interests is determined on income after royalties and management fees, financing costs and income taxes, as applicable.
Certain Items Impacting Results in the Quarter
Results for the quarter ended December 30, 2023 were impacted by the following:
•TFCF and Hulu acquisition amortization of $451 million
Results for the quarter ended December 31, 2022 were impacted by the following:
•TFCF and Hulu acquisition amortization of $579 million
•Impairment charges of $69 million
•Other expense, net of $42 million due to the DraftKings loss of $70 million, partially offset by a $28 million gain on the sale of a business
A summary of the impact of these items on EPS is as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions, except per share data) | Pre-Tax Income (Loss) | | Tax Benefit (Expense)(1) | | After-Tax Income (Loss) | | EPS Favorable (Adverse)(2) |
| Quarter Ended December 30, 2023: | | | | | | | |
| | | | |
TFCF and Hulu acquisition amortization | $ | (451) | | | $ | 106 | | | $ | (345) | | | $ | (0.18) | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | | | | |
| Quarter Ended December 31, 2022: | | | | | | | |
| | | | |
TFCF and Hulu acquisition amortization | $ | (579) | | $ | 135 | | | $ | (444) | | | $ | (0.24) | |
| | | | |
| Restructuring and impairment charges | (69) | | 8 | | | (61) | | | (0.03) | |
Other expense, net | (42) | | 16 | | | (26) | | | (0.01) | |
| | | | |
| | | | |
| | | | |
| Total | $ | (690) | | $ | 159 | | | $ | (531) | | | $ | (0.29) | |
(1)Tax benefit (expense) amounts are determined using the tax rate applicable to the individual item.
(2)EPS is net of noncontrolling interest share, where applicable. Total may not equal the sum of the column due to rounding.
SEASONALITY
The Company’s businesses are subject to the effects of seasonality. Consequently, the operating results for the quarter ended December 30, 2023 for each business segment, and for the Company as a whole, are not necessarily indicative of results to be expected for the full year.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Entertainment revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, timing and performance of film releases in the theatrical and home entertainment markets, and the timing of and demand for film and television programs. In general, domestic advertising revenues are typically somewhat higher during the fall and somewhat lower during the summer months. Affiliate revenues vary with the subscriber trends of multi-channel video programming distributors (i.e. cable, satellite telecommunications and digital over-the-top service providers). Theatrical release dates are determined by several factors, including competition and the timing of vacation and holiday periods.
Sports revenues are subject to seasonal advertising patterns, changes in viewership and subscriber levels, and the availability of and demand for sports programming. In addition, advertising revenues generated from sports programming are impacted by the timing of sports seasons and events, which varies throughout the year or may take place periodically (e.g. biannually, quadrennially).
Experiences revenues fluctuate with changes in theme park attendance and resort occupancy resulting from the seasonal nature of vacation travel and leisure activities, which generally results in higher revenues during the Company’s first and fourth fiscal quarters, the opening of new guest offerings and pricing and promotional offers. Peak attendance and resort occupancy generally occur during the summer months when school vacations occur and during early winter and spring holiday periods. In addition, theme park and resort revenues may be higher during significant celebrations such as theme park or character anniversaries and lower in the periods following such celebrations. Consumer products revenue fluctuates with consumer purchasing behavior, which generally results in higher revenues during the Company’s first fiscal quarter due to the winter holiday season. In addition, licensing revenues fluctuate with the timing and performance of our film and television content.
BUSINESS SEGMENT RESULTS - Current Quarter Results Compared to Prior-Year Quarter
The Company evaluates the performance of its operating businesses based on segment revenue and segment operating income.
The following table presents revenues from our operating segments:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | |
| Entertainment | $ | 9,981 | | | $ | 10,675 | | | (7) % | | | |
| Sports | 4,835 | | | 4,640 | | | 4 % | | | |
| Experiences | 9,132 | | | 8,545 | | | 7 % | | | |
Eliminations (1) | (399) | | | (348) | | | (15) % | | | |
| Revenues | $ | 23,549 | | | $ | 23,512 | | | — % | | | |
(1)Reflects fees paid by Direct-to-Consumer to Sports and other Entertainment businesses for the right to air their linear networks on Hulu Live and fees paid by Entertainment to Sports to program sports on the ABC Network and Star+.
The following table presents income from our operating segments and other components of income before income taxes:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | |
| Entertainment operating income | $ | 874 | | | $ | 345 | | | >100 % | | | |
| Sports operating loss | (103) | | | (164) | | | 37 % | | | |
| Experiences operating income | 3,105 | | | 2,862 | | | 8 % | | | |
| Corporate and unallocated shared expenses | (308) | | | (280) | | | (10) % | | | |
| Restructuring and impairment charges | — | | | (69) | | | 100 % | | | |
| Other expense, net | — | | | (42) | | | 100 % | | | |
| Interest expense, net | (246) | | | (300) | | | 18 % | | | |
| TFCF and Hulu acquisition amortization | (451) | | | (579) | | | 22 % | | | |
| | | | | | | | |
| | | | | | | | |
| Income before income taxes | $ | 2,871 | | | $ | 1,773 | | | 62 % | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Depreciation expense is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Entertainment | $ | 163 | | | $ | 154 | | | (6) % | | | |
| Sports | 11 | | | 10 | | | (10) % | | | |
| Experiences | | | | | | | | |
| | | | | | | | |
| Domestic | 424 | | | 452 | | | 6 % | | | |
| International | 171 | | | 164 | | | (4) % | | | |
| | | | | | | | |
| Total Experiences | 595 | | | 616 | | | 3 % | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Corporate | 54 | | | 48 | | | (13) % | | | |
| Total depreciation expense | $ | 823 | | | $ | 828 | | | 1 % | | | |
Amortization of intangible assets is as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Entertainment | $ | 13 | | $ | 34 | | 62 % | | | |
| Sports | — | | — | | nm | | | |
| Experiences | 27 | | 27 | | — % | | | |
| TFCF and Hulu intangible assets | 380 | | 417 | | 9 % | | | |
| | | | | | | | |
| Total amortization of intangible assets | $ | 420 | | $ | 478 | | 12 % | | | |
Entertainment
Revenue and operating results for the Entertainment segment are as follows:
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | | |
| Revenues: | | | | | | | | |
| Linear Networks | $ | 2,803 | | | $ | 3,202 | | | (12) % | | | |
| Direct-to-Consumer | 5,546 | | | 4,822 | | | 15 % | | | |
| Content Sales/Licensing and Other | 1,632 | | | 2,651 | | | (38) % | | | |
| | | | | | | | |
| $ | 9,981 | | | $ | 10,675 | | | (7) % | | | |
| Segment operating income (loss): | | | | | | | | |
| Linear Networks | $ | 1,236 | | | $ | 1,330 | | | (7) % | | | |
| Direct-to-Consumer | (138) | | | (984) | | | 86 % | | | |
| Content Sales/Licensing and Other | (224) | | | (1) | | | >(100) % | | | |
| | | | | | | | |
| $ | 874 | | | $ | 345 | | | >100 % | | | |
Revenues
The decrease in Entertainment revenues was due to lower theatrical distribution revenue and, to a lesser extent, decreases in TV/VOD distribution, advertising and affiliate revenue. These decreases were partially offset by subscription revenue growth.
Operating income
The increase in operating income was due to improved results at Direct-to-Consumer, partially offset by a decline at Content Sales/Licensing and Other.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Linear Networks
Operating results for Linear Networks are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Revenues | | | | | |
| Affiliate fees | $ | 1,766 | | | $ | 1,873 | | | (6) % |
| Advertising | 994 | | | 1,267 | | | (22) % |
| Other | 43 | | | 62 | | | (31) % |
| Total revenues | 2,803 | | | 3,202 | | | (12) % |
| Operating expenses | (1,171) | | | (1,462) | | | 20 % |
| Selling, general, administrative and other | (557) | | | (591) | | | 6 % |
| Depreciation and amortization | (12) | | | (12) | | | — % |
| Equity in the income of investees | 173 | | | 193 | | | (10) % |
| Operating Income | $ | 1,236 | | | $ | 1,330 | | | (7) % |
Revenues - Affiliate fees
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| | |
| Domestic | $ | 1,480 | | $ | 1,557 | | (5) % |
| International | 286 | | 316 | | (9) % |
| $ | 1,766 | | $ | 1,873 | | | (6) % |
The decrease in domestic affiliate revenue was due to a decrease of 10% from fewer subscribers, including the impact of the non-carriage of certain networks by an affiliate, partially offset by an increase of 5% from higher contractual rates.
Lower international affiliate revenue was primarily attributable to a decrease of 7% from fewer subscribers.
Revenues - Advertising | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| | |
| Domestic | $ | 706 | | $ | 980 | | (28) % |
| International | 288 | | 287 | | — % |
| $ | 994 | | $ | 1,267 | | (22) % |
The decline in domestic advertising revenue reflected decreases of 15% from fewer impressions, driven by a decrease at ABC Network, and 11% from lower rates primarily attributable to a decrease in political advertising at the owned television stations. Fewer network impressions were in part due to the impact of the guild strikes on our programming schedule primarily due to a shift of units to the Sports segment reflecting the simulcast of certain NFL games.
Revenues - Other
Other revenue decreased $19 million, to $43 million from $62 million, primarily due to an unfavorable movement of the U.S. dollar against major currencies including the impact of our hedging program (Foreign Exchange Impact).
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Operating expenses
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Programming and production costs | | | | | |
| Domestic | $ | (760) | | $ | (1,027) | | 26 % |
| International | (183) | | (163) | | (12) % |
| Total programming and production costs | (943) | | (1,190) | | 21 % |
| Other operating expenses | (228) | | (272) | | 16 % |
| $ | (1,171) | | $ | (1,462) | | 20 % |
The decrease in domestic programming and production costs was primarily due to fewer hours of scripted programming in the current quarter, reflecting the impact of the guild strikes. Scripted programming was primarily replaced with lower average cost non-scripted programming as well as ESPN on ABC sports programming, the costs of which are recognized in the Sports segment.
International programming and production costs increased primarily due to inflation.
The decrease in other operating expenses included lower technology and distribution costs.
Selling, general, administrative and other
Selling, general, administrative and other costs decreased $34 million, to $557 million from $591 million, due to lower marketing costs.
Equity in the Income of Investees
Income from equity investees decreased $20 million, to $173 million from $193 million, primarily due to lower income from A+E Television Networks driven by decreases in advertising and affiliate revenue, partially offset by a gain on the sale of an investment.
Operating Income from Linear Networks
Operating income from Linear Networks decreased $94 million, to $1,236 million from $1,330 million, due to decreases at our domestic and international businesses and lower income from equity investees.
Supplemental revenue and operating income
The following table provides supplemental revenue and operating income detail for Linear Networks:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Supplemental revenue detail | | | | | |
| Domestic | $ | 2,210 | | $ | 2,565 | | (14) % |
| International | 593 | | 637 | | (7) % |
| $ | 2,803 | | $ | 3,202 | | (12) % |
| Supplemental operating income detail | | | | | |
| Domestic | $ | 838 | | $ | 879 | | (5) % |
| International | 225 | | 258 | | (13) % |
| Equity in the income of investees | 173 | | 193 | | (10) % |
| $ | 1,236 | | $ | 1,330 | | (7) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Direct-to-Consumer
Operating results for Direct-to-Consumer are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Revenues | | | | | |
| Subscription fees | $ | 4,507 | | | $ | 3,861 | | | 17 % |
| Advertising | 974 | | | 866 | | | 12 % |
| Other | 65 | | | 95 | | | (32) % |
| Total revenues | 5,546 | | | 4,822 | | | 15 % |
| Operating expenses | (4,493) | | | (4,623) | | | 3 % |
| Selling, general, administrative and other | (1,121) | | | (1,087) | | | (3) % |
| Depreciation and amortization | (70) | | | (96) | | | 27 % |
| Operating Loss | $ | (138) | | | $ | (984) | | | 86 % |
Revenues - Subscription fees
Growth in subscription fees in the current quarter compared to the prior-year quarter reflected increases of 13% from higher rates attributable to increases in retail pricing at Disney+ Core and, to a lesser extent, Hulu, and 4% from more subscribers, due to growth at Disney+ Core and Hulu.
Revenues - Advertising
Higher advertising revenue in the current quarter compared to the prior-year quarter reflected an increase of 23% from higher impressions, partially offset by a decrease of 11% from lower rates attributable to a decrease at Hulu. The increase in impressions was due to airing more hours of International Cricket Council (ICC) cricket programming compared to the prior-year quarter, growth of the U.S. ad-supported Disney+ service, which launched in December 2022, and higher impressions at Hulu due to more units delivered.
Revenues - Other
The decrease in other revenue was due to an unfavorable Foreign Exchange Impact.
Key metrics
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of Disney+(1) and Hulu(1), and we believe these metrics are useful to investors in analyzing the business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Paid subscribers(1) at: | | | | | | | % Change Better (Worse) |
| (in millions) | December 30,
2023 | | September 30,
2023 | | December 31,
2022 | | Dec. 30, 2023 vs. Sept. 30, 2023 | | Dec. 30, 2023 vs. Dec. 31, 2022 |
| Disney+ | | | | | | | | | |
| Domestic (U.S. and Canada) | 46.1 | | | 46.5 | | | 46.6 | | | (1) % | | (1) % |
International (excluding Disney+ Hotstar)(1) | 65.2 | | | 66.1 | | | 57.7 | | | (1) % | | 13 % |
Disney+ Core(2) | 111.3 | | | 112.6 | | | 104.3 | | | (1) % | | 7 % |
| | | | | | | | | |
| Disney+ Hotstar | 38.3 | | | 37.6 | | | 57.5 | | | 2 % | | (33) % |
| | | | | | | | | |
| Hulu | | | | | | | | | |
| SVOD Only | 45.1 | | | 43.9 | | | 43.5 | | | 3 % | | 4 % |
| Live TV + SVOD | 4.6 | | | 4.6 | | | 4.5 | | | — % | | 2 % |
Total Hulu(2) | 49.7 | | | 48.5 | | | 48.0 | | | 2 % | | 4 % |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Average Monthly Revenue Per Paid Subscriber(1):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change Better (Worse) |
| December 30,
2023 | | September 30,
2023 | | December 31,
2022 | | Dec. 30, 2023 vs.
Sept. 30, 2023 | | Dec. 30, 2023 vs.
Dec. 31, 2022 |
| Disney+ | | | | | | | | | |
| Domestic (U.S. and Canada) | $ | 8.15 | | $ | 7.50 | | $ | 5.95 | | 9 % | | 37 % |
International (excluding Disney+ Hotstar)(1) | 5.91 | | 6.10 | | 5.62 | | (3) % | | 5 % |
| Disney+ Core | 6.84 | | 6.70 | | 5.77 | | 2 % | | 19 % |
| | | | | | | | | |
| Disney+ Hotstar | 1.28 | | 0.70 | | 0.74 | | 83 % | | 73 % |
| | | | | | | | | |
| Hulu | | | | | | | | | |
| SVOD Only | 12.29 | | 12.11 | | 12.46 | | 1 % | | (1) % |
| Live TV + SVOD | 93.61 | | 90.08 | | 87.90 | | 4 % | | 6 % |
(1)See discussion on page 50 —DTC Product Descriptions, Key Definitions and Supplemental Information.
(2)Total may not equal the sum of the column due to rounding.
Average Monthly Revenue Per Paid Subscriber - First Quarter of Fiscal 2024 Comparison to Fourth Quarter of Fiscal 2023
Domestic Disney+ average monthly revenue per paid subscriber increased from $7.50 to $8.15 due to increases in retail pricing, partially offset by a higher mix of subscribers to promotional offerings.
International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber decreased from $6.10 to $5.91 due to a higher mix of subscribers to promotional offerings.
Disney+ Hotstar average monthly revenue per paid subscriber increased from $0.70 to $1.28 due to higher advertising revenue and increases in retail pricing, partially offset by a higher mix of subscribers from lower-priced markets.
Hulu SVOD Only average monthly revenue per paid subscriber increased from $12.11 to $12.29 due to increases in retail pricing, partially offset by lower per-subscriber advertising revenue and a higher mix of subscribers to promotional offerings.
Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $90.08 to $93.61 due to increases in retail pricing.
Average Monthly Revenue Per Paid Subscriber - First Quarter of Fiscal 2024 Comparison to First Quarter of Fiscal 2023
Domestic Disney+ average monthly revenue per paid subscriber increased from $5.95 to $8.15 due to increases in retail pricing and higher advertising revenue, partially offset by a higher mix of subscribers to multi-product offerings.
International Disney+ (excluding Disney+ Hotstar) average monthly revenue per paid subscriber increased from $5.62 to $5.91 due to increases in retail pricing and a favorable Foreign Exchange Impact, partially offset by a higher mix of subscribers to promotional offerings.
Disney+ Hotstar average monthly revenue per paid subscriber increased from $0.74 to $1.28 due to higher advertising revenue and increases in retail pricing, partially offset by a higher mix of subscribers from lower-priced markets.
Hulu SVOD Only average monthly revenue per paid subscriber decreased from $12.46 to $12.29 reflecting lower per-subscriber advertising revenue, a higher mix of subscribers to multi-product offerings, lower per-subscriber premium add-on revenue and a higher mix of subscribers to promotional offerings, partially offset by increases in retail pricing.
Hulu Live TV + SVOD average monthly revenue per paid subscriber increased from $87.90 to $93.61 due to increases in retail pricing, partially offset by lower per-subscriber advertising revenue.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Operating expenses
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Programming and production costs | | | | | |
Hulu | $ | (2,126) | | $ | (2,106) | | (1) % |
Disney+ and other | (1,459) | | (1,556) | | 6 % |
| Total programming and production costs | (3,585) | | (3,662) | | 2 % |
| Other operating expense | (908) | | (961) | | 6 % |
| $ | (4,493) | | $ | (4,623) | | 3 % |
Higher programming and production costs at Hulu in the current quarter compared to the prior-year quarter were due to more content provided on the service and higher subscriber-based fees for programming the Live TV service. These increases were partially offset by lower average costs per hour of content available on the service. The increase in subscriber-based fees for programming the Live TV service was attributable to rate increases and more subscribers.
The decrease in programming and production costs at Disney+ and other in the current quarter compared to the prior-year quarter was due to lower average costs per hour of content available on Disney+, partially offset by more content provided on the service and higher costs for ICC cricket programming. The increase in costs for ICC cricket programming was attributable to higher average costs per match and more matches aired.
The decrease in other operating expense was due to lower technology and distribution spend reflecting the impact of cost saving initiatives.
Selling, general, administrative and other
Selling, general, administrative and other costs increased $34 million, to $1,121 million from $1,087 million, due to an increase in marketing costs at Hulu.
Depreciation and amortization
Depreciation and amortization decreased $26 million, to $70 million from $96 million driven by assets that were fully depreciated.
Operating Loss from Direct-to-Consumer
The operating loss from Direct-to-Consumer decreased $846 million, to $138 million from $984 million, due to a lower loss at Disney+ and higher operating income at Hulu.
Content Sales/Licensing and Other
Operating results for Content Sales/Licensing and Other are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Revenues | | | | | |
| TV/VOD distribution | $ | 522 | | | $ | 713 | | | (27) % |
| Theatrical distribution | 251 | | | 1,140 | | | (78) % |
| Home entertainment distribution | 209 | | | 185 | | | 13 % |
| | |
| Other | 650 | | | 613 | | | 6 % |
| Total revenues | 1,632 | | | 2,651 | | | (38) % |
| Operating expenses | (1,175) | | | (1,850) | | | 36 % |
| Selling, general, administrative and other | (585) | | | (722) | | | 19 % |
| Depreciation and amortization | (94) | | | (80) | | | (18) % |
| Equity in the income (loss) of investees | (2) | | | — | | | nm |
| Operating Loss | $ | (224) | | | $ | (1) | | | >(100) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Revenues - TV/VOD distribution
The decrease in TV/VOD distribution revenue was due to lower sales of episodic content.
Revenues - Theatrical distribution
The decrease in theatrical distribution revenue was due to the performance of The Marvels in the current quarter compared to Avatar: The Way of Water and Black Panther: Wakanda Forever in the prior-year quarter. Other titles released in the current quarter included Wish while the prior-year quarter included Strange World.
Revenues - Other
The increase in other revenue was driven by higher revenue at Lucasfilm’s special effects business.
Operating expenses
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Programming and production costs | $ | (990) | | $ | (1,605) | | 38 % |
| Distribution costs and cost of goods sold | (185) | | (245) | | 24 % |
| $ | (1,175) | | $ | (1,850) | | 36 % |
The decrease in programming and production costs was due to lower production cost amortization attributable to the decreases in theatrical and, to a lesser extent, TV/VOD distribution revenues, partially offset by an increase in film cost impairments.
The decrease in distribution costs and cost of goods sold was driven by lower theatrical distribution costs, partially offset by an increase at Lucasfilm’s special effects business.
Selling, general, administrative and other
Selling, general, administrative and other costs decreased $137 million, to $585 million from $722 million, primarily due to lower theatrical marketing costs reflecting fewer significant releases in the current quarter.
Operating Loss from Content Sales/Licensing and Other
Operating loss from Content Sales/Licensing and Other increased $223 million to $224 million from $1 million primarily due to lower theatrical distribution results.
Items Excluded from Segment Operating Income Related to Entertainment
The following table presents supplemental information for items related to the Entertainment segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
TFCF and Hulu acquisition amortization(1) | $ | (353) | | | $ | (480) | | | 26 % |
Restructuring and impairment charges(2) | — | | | (69) | | | 100 % |
Gain on sale of a business | — | | | 28 | | | (100) % |
| | |
| | |
(1)In the current quarter, amortization of intangible assets was $282 million and amortization of step-up on film and television costs was $68 million. In the prior-year quarter, amortization of intangible assets was $318 million and amortization of step-up on film and television costs was $159 million.
(2)Charges for the prior-year quarter related to exiting our businesses in Russia.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Sports
Operating results for Sports are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Revenues | | | | | |
| Affiliate fees | $ | 2,669 | | | $ | 2,653 | | | 1 % |
| Advertising | 1,351 | | | 1,262 | | | 7 % |
| Subscription fees | 415 | | | 379 | | | 9 % |
| Other | 400 | | | 346 | | | 16 % |
| Total revenues | 4,835 | | | 4,640 | | | 4 % |
| Operating expenses | (4,599) | | | (4,501) | | | (2) % |
| Selling, general, administrative and other | (341) | | | (296) | | | (15) % |
| Depreciation and amortization | (11) | | | (10) | | | (10) % |
| Equity in the income of investees | 13 | | | 3 | | | >100 % |
Operating Loss | $ | (103) | | | $ | (164) | | | 37 % |
Revenues - Affiliate fees
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| ESPN | | | | | |
| Domestic | $ | 2,339 | | $ | 2,328 | | — % |
| International | 265 | | 256 | | 4 % |
| 2,604 | | | 2,584 | | | 1 % |
| Star (India) | 65 | | 69 | | (6) % |
| $ | 2,669 | | $ | 2,653 | | 1 % |
Domestic ESPN affiliate revenue was comparable to the prior-year quarter as an increase of 6% from higher contractual rates was offset by a decrease of 6% from fewer subscribers.
The increase in international ESPN affiliate revenue was due to an increase of 41% from higher contractual rates, partially offset by decreases of 20% from fewer subscribers and 13% from an unfavorable Foreign Exchange Impact.
Revenues - Advertising
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| ESPN | | | | | |
| Domestic | $ | 1,118 | | $ | 1,138 | | (2) % |
| International | 49 | | 52 | | (6) % |
| 1,167 | | 1,190 | | (2) % |
| Star (India) | 184 | | 72 | | >100 % |
| $ | 1,351 | | $ | 1,262 | | 7 % |
Lower domestic ESPN advertising revenue was due to decreases of 1% from lower rates and 1% from fewer impressions. These decreases reflected the timing of College Football Playoff (CFP) games relative to our fiscal period, partially offset by the benefits from the timing of the week 17 NFL game that aired in the current quarter compared to the second quarter of the prior year and the simulcast of certain NFL games on the ABC Network. The timing of CFP games reflected the airing of three CFP host games compared to the airing of two host games and two semi-final games in the prior-year quarter.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
The increase in Star advertising revenue in the current quarter compared to the prior-year quarter was due to higher impressions, partially offset by lower rates. Higher impressions were due to increases in average units delivered and average viewership, both of which reflected the airing of more hours of ICC cricket programming compared to the prior-year quarter.
Revenues - Subscription fees
Subscription fees increased $36 million, to $415 million from $379 million, due to increases of 6% from higher rates and 3% from more subscribers.
Revenues - Other
Other revenue increased $54 million, to $400 million from $346 million, due to higher sub-licensing fees from ICC cricket programming.
Key Metrics
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of ESPN+(1), and we believe these metrics are useful to investors in analyzing the business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change Better (Worse) |
| December 30,
2023 | | September 30,
2023 | | December 31,
2022 | | Dec. 30, 2023 vs.
Sept. 30, 2023 | | Dec. 30, 2023 vs. Dec. 31, 2022 |
Paid subscribers(1) at (in millions) | 25.2 | | 26.0 | | 24.9 | | (3) % | | 1 % |
Average Monthly Revenue per Paid Subscriber(1) for the quarter end | $ | 6.09 | | $ | 5.34 | | $ | 5.53 | | 14 % | | 10 % |
(1)See discussion on page 50 —DTC Product Descriptions, Key Definitions and Supplemental Information.
Average Monthly Revenue Per Paid Subscriber - First Quarter of Fiscal 2024 Comparison to Fourth Quarter of Fiscal 2023
ESPN+ average monthly revenue per paid subscriber increased from $5.34 to $6.09 due to increases in retail pricing and higher advertising revenue.
Average Monthly Revenue Per Paid Subscriber - First Quarter of Fiscal 2024 Comparison to First Quarter of Fiscal 2023
ESPN+ average monthly revenue per paid subscriber increased from $5.53 to $6.09 due to increases in retail pricing and higher advertising revenue.
Operating expenses
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Programming and production costs | | | | | |
| ESPN | | | | | |
| Domestic | $ | (3,389) | | $ | (3,649) | | 7 % |
| International | (306) | | (270) | | (13) % |
| (3,695) | | (3,919) | | 6 % |
| Star (India) | (684) | | (326) | | >(100) % |
| (4,379) | | (4,245) | | (3) % |
| Other operating expenses | (220) | | (256) | | 14 % |
| $ | (4,599) | | $ | (4,501) | | (2) % |
Domestic ESPN programming and production costs decreased in the current quarter compared to the prior-year quarter due to lower CFP rights costs attributable to the timing of games relative to our fiscal periods.
Higher international ESPN programming and production costs were attributable to a new contract for soccer programming rights and an increase in production costs due to inflation, partially offset by a favorable Foreign Exchange Impact.
The increase in Star programming and production costs reflected higher rights costs for ICC cricket programming due to an increase in average costs per match and more matches aired.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Other operating expenses decreased $36 million, to $220 million from $256 million, primarily due to lower technology and distribution costs.
Selling, general, administrative and other
Selling, general, administrative and other costs increased $45 million, to $341 million from $296 million, reflecting the comparison to the gain on the sale of an interest in our X Games business in the prior-year quarter and an unfavorable Foreign Exchange Impact.
Operating Loss from Sports
Operating loss decreased $61 million, to $103 million from $164 million, due to an improvement at domestic ESPN, partially offset by lower results at Star and, to a lesser extent, international ESPN.
Supplemental revenue and operating income
The following table provides supplemental revenue and operating income (loss) detail for Sports:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Supplemental revenue detail | | | | | |
| ESPN | | | | | |
| Domestic | $ | 4,073 | | | $ | 4,049 | | | 1 % |
| International | 363 | | | 358 | | | 1 % |
| 4,436 | | | 4,407 | | | 1 % |
| Star (India) | 399 | | | 233 | | | 71 % |
| $ | 4,835 | | | $ | 4,640 | | | 4 % |
Supplemental operating income (loss) detail | | | | | |
| ESPN | | | | | |
| Domestic | $ | 255 | | | $ | (41) | | | nm |
| International | (56) | | | 3 | | | nm |
| 199 | | | (38) | | | nm |
| Star (India) | (315) | | | (129) | | | >(100) % |
| Equity in the income of investees | 13 | | | 3 | | | >100 % |
| $ | (103) | | | $ | (164) | | | 37 % |
Items Excluded from Segment Operating Income Related to Sports
The following table presents supplemental information for items related to the Sports segment that are excluded from segment operating income:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
TFCF acquisition amortization(1) | $ | (96) | | | $ | (97) | | | 1 % |
| | |
| | |
(1)Amortization of intangible assets
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Experiences
Operating results for the Experiences segment are as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Revenues | | | | | |
| Theme park admissions | $ | 2,982 | | | $ | 2,641 | | | 13 % |
| Resorts and vacations | 2,118 | | | 1,980 | | | 7 % |
| Parks & Experiences merchandise, food and beverage | 2,103 | | | 1,980 | | | 6 % |
| Merchandise licensing and retail | 1,341 | | | 1,355 | | | (1) % |
| Parks licensing and other | 588 | | | 589 | | | — % |
| Total revenues | 9,132 | | | 8,545 | | | 7 % |
| Operating expenses | (4,480) | | | | (4,139) | | | (8) % |
| Selling, general, administrative and other | (925) | | | (899) | | | (3) % |
| Depreciation and amortization | (622) | | | (643) | | | 3 % |
| Equity in the loss of investees | — | | | (2) | | | nm |
| Operating Income | $ | 3,105 | | | $ | 2,862 | | | 8 % |
Revenues - Theme park admissions
Theme park admissions revenue growth was due to increases of 10% from higher average per capita ticket revenue and 3% from attendance growth. Attendance growth reflected an increase at our international parks attributable to higher attendance at Shanghai Disney Resort and Hong Kong Disneyland Resort, partially offset by a decrease in attendance at Disneyland Paris. Shanghai Disney Resort was open for all of the current quarter compared to 58 days in the prior-year quarter as a result of COVID-19 related closures. At our domestic parks, an increase in attendance at Disneyland Resort was largely offset by a decrease at Walt Disney World Resort.
Revenues - Resorts and vacations
Higher resorts and vacations revenue was primarily due to increases of 3% from higher average ticket prices for cruise line sailings and 2% from additional passenger cruise days.
Revenues - Park & Experiences merchandise, food and beverage
Parks & Experiences merchandise, food and beverage revenue growth reflected increases of 5% from higher volume and 1% from guest spending growth. Higher volume was attributable to an increase at our international parks and experiences due to growth at Shanghai Disney Resort and, to a lesser extent, at Hong Kong Disneyland Resort.
Revenues - Merchandise licensing and retail
Lower merchandise licensing and retail revenue was due to decreases of 4% from retail and 1% from an unfavorable Foreign Exchange Impact, partially offset by an increase of 4% from licensing. Lower retail revenue was due to a decrease in online sales. The increase in licensing revenue was attributable to higher sales of products based on Spider-Man and Mickey and Friends, partially offset by a decrease in sales of products based on Star Wars.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Key metrics
In addition to revenue, costs and operating income, management uses the following key metrics to analyze trends and evaluate the overall performance of our theme parks and resorts, and we believe these metrics are useful to investors in analyzing the business:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Domestic | | International(1) | | Total(1) |
| | Quarter Ended | | Quarter Ended | | Quarter Ended |
| | Dec. 30,
2023 | | Dec. 31,
2022 | | Dec. 30,
2023 | | Dec. 31,
2022 | | Dec. 30,
2023 | | Dec. 31,
2022 |
| Parks | | | | | | | | | | | |
| Increase (decrease) | | | | | | | | | | | |
Attendance(2) | — % | | 11 % | | 30 % | | 13 % | | 8 % | | 12 % |
Per Capita Guest Spending(3) | 4 % | | 8 % | | 12 % | | 24 % | | 2 % | | 10 % |
| Hotels | | | | | | | | | | | |
Occupancy(4) | 85 % | | 88 % | | 80 % | | 67 % | | 84 % | | 83 % |
Available Hotel Room Nights (in thousands)(5) | 2,547 | | 2,520 | | 799 | | 799 | | 3,346 | | 3,319 |
Change in Per Room Guest Spending(6) | 1 % | | 1 % | | 3 % | | 4 % | | 1 % | | 2 % |
(1)Per capita guest spending growth rate and per room guest spending growth rate exclude the impact of changes in foreign exchange rates.
(2)Attendance is used to analyze volume trends at our theme parks and is based on the number of unique daily entries, i.e. a person visiting multiple theme parks in a single day is counted only once. Our attendance count includes complimentary entries but excludes entries by children under the age of three.
(3)Per capita guest spending is used to analyze guest spending trends and is defined as total revenue from ticket sales and sales of food, beverage and merchandise in our theme parks, divided by total theme park attendance.
(4)Occupancy is used to analyze the usage of available capacity at hotels and is defined as the number of room nights occupied by guests as a percentage of available hotel room nights.
(5)Available hotel room nights is defined as the total number of room nights that are available at our hotels and at Disney Vacation Club (DVC) properties located at our theme parks and resorts that are not utilized by DVC members. Available hotel room nights include rooms temporarily taken out of service.
(6)Per room guest spending is used to analyze guest spending at our hotels and is defined as total revenue from room rentals and sales of food, beverage and merchandise at our hotels, divided by total occupied hotel room nights. In the third quarter of the prior fiscal year, the Company revised its method of allocating revenue on the sales of Disneyland Paris vacation packages between hotel room revenue and admissions revenue. The new method resulted in a decrease in the percentage of revenue allocated to hotel rooms. If we had applied the new method in the prior-year quarter, the impact would have been a decrease of approximately $17 million in the prior-year quarter.
Operating expenses
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Operating labor | $ | (2,000) | | $ | (1,789) | | (12) % |
| Infrastructure costs | (797) | | (722) | | (10) % |
| Cost of goods sold and distribution costs | (904) | | (912) | | 1 % |
| Other operating expense | (779) | | (716) | | (9) % |
| $ | (4,480) | | $ | (4,139) | | (8) % |
Higher operating labor was primarily due to inflation. The increase in infrastructure costs was driven by higher operations support costs and increased costs for new guest offerings. Higher other operating expense was primarily attributable to inflation, increased costs for new guest offerings and higher operations support costs.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Selling, general, administrative and other
Selling, general, administrative and other costs increased $26 million, to $925 million from $899 million. The increase included the impact of inflation and higher costs for new guest offerings, partially offset by the comparison to a loss in the prior-year quarter on the disposal of our ownership interest in Villages Nature.
Depreciation and amortization
Depreciation and amortization decreased $21 million, to $622 million from $643 million, due to lower depreciation at our domestic parks and experiences.
Operating Income from Experiences
Segment operating income increased from $2,862 million to $3,105 million due to growth at our international parks and resorts.
Supplemental revenue and operating income
The following table presents supplemental revenue and operating income detail for the Experiences segment:
| | | | | | | | | | | | | | | | | |
| Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Supplemental revenue detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 6,297 | | | $ | 6,072 | | | 4 % |
| International | 1,476 | | | 1,094 | | | 35 % |
| Consumer Products | 1,359 | | | 1,379 | | | (1) % |
| $ | 9,132 | | | $ | 8,545 | | | 7 % |
Supplemental operating income detail | | | | | |
| Parks & Experiences | | | | | |
| Domestic | $ | 2,077 | | | $ | 2,113 | | | (2) % |
| International | 328 | | | 79 | | | >100 % |
| Consumer Products | 700 | | | 670 | | | 4 % |
| $ | 3,105 | | | $ | 2,862 | | | 8 % |
CORPORATE AND UNALLOCATED SHARED EXPENSES
| | | | | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) | |
| (in millions) | December 30,
2023 | | December 31,
2022 | | | |
| Corporate and unallocated shared expenses | $ | (308) | | $ | (280) | | (10) % | | | |
Corporate and unallocated shared expenses increased $28 million for the quarter, from $280 million to $308 million, primarily due to higher rent expense and inflation.
FINANCIAL CONDITION
The change in cash and cash equivalents is as follows:
| | | | | | | | | | | | | | | | | |
| | Quarter Ended | | % Change
Better
(Worse) |
| (in millions) | December 30,
2023 | | December 31,
2022 | |
| Cash provided by (used in) operations | $ | 2,185 | | | $ | (974) | | | nm |
| Cash used in investing activities | (1,246) | | | (1,292) | | | 4 % |
| Cash used in financing activities | (8,006) | | | (1,043) | | | >(100) % |
| | |
| | |
| | |
| | |
| Impact of exchange rates on cash, cash equivalents and restricted cash | 79 | | | 164 | | | (52) % |
| Change in cash, cash equivalents and restricted cash | $ | (6,988) | | | $ | (3,145) | | | >(100) % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Operating Activities
Cash provided by operations increased $3,159 million to $2,185 million for the current quarter compared to cash used in operations of $974 million in the prior-year quarter. The increase was due to lower film and television production spending reflecting the impact of the guild strikes in the current quarter, the timing of payments for sports rights and lower collateral payments related to our hedging program. These increases were partially offset by the deferral of fiscal 2023 federal and California tax payments into the current quarter pursuant to relief provided by the Internal Revenue Service and California State Board of Equalization as a result of 2023 winter storms in California.
Produced and licensed programming costs
The Entertainment and Sports segments incur costs to produce and license film, episodic, sports and other content. Production costs include spend on content internally produced at our studios such as live-action and animated films, episodic series, specials, shorts and theatrical stage plays. Production costs also include original content commissioned from third-party studios. Programming costs include content rights licensed from third parties for use on the Company’s sports and general entertainment networks and DTC streaming services. Programming assets are generally recorded when the programming becomes available to us with a corresponding increase in programming liabilities.
The Company’s film and television production and programming activity for the quarters ended December 30, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | |
| | Quarter Ended |
| (in millions) | December 30,
2023 | | December 31,
2022 |
| Beginning balances: | | | |
| Produced and licensed programming assets | $ | 36,593 | | | $ | 37,667 | |
| Programming liabilities | (3,792) | | | (3,940) | |
| 32,801 | | | 33,727 | |
| Spending: | | | |
| Programming licenses and rights | 2,710 | | | 3,547 | |
| Produced film and television content | 1,800 | | | 3,751 | |
| 4,510 | | | 7,298 | |
| Amortization: | | | |
| Programming licenses and rights | (4,590) | | | (4,539) | |
| Produced film and television content | (2,562) | | | (3,317) | |
| (7,152) | | | (7,856) | |
| Change in produced and licensed content costs | (2,642) | | | (558) | |
|
|
| Other non-cash activity | (7) | | | (178) | |
| Ending balances: | | | |
| Produced and licensed programming assets | 34,134 | | | 37,566 | |
| Programming liabilities | (3,982) | | | (4,575) | |
| $ | 30,152 | | | $ | 32,991 | |
The Company currently expects its fiscal 2024 spend on produced and licensed content, including sports rights, to be approximately $24 billion compared to fiscal 2023 spend of $27 billion.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Investing Activities
Investing activities consist principally of investments in parks, resorts and other property and acquisition and divestiture activity. The Company’s investing activities for the quarters ended December 30, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | |
| Quarter Ended |
| (in millions) | December 30,
2023 | | December 31,
2022 |
| Investments in parks, resorts and other property: | | | |
|
|
|
|
Entertainment | $ | 309 | | | $ | 273 | |
Sports | — | | | 6 | |
Experiences | | | |
| Domestic | 571 | | | 519 | |
| International | 244 | | | 219 | |
|
Total Experiences | 815 | | | 738 | |
|
|
| Corporate | 175 | | | 164 | |
Total investments in parks, resorts and other property | 1,299 | | | 1,181 | |
|
Cash used in (provided by) other investing activities, net | (53) | | | 111 | |
| Cash used in investing activities | $ | 1,246 | | | $ | 1,292 | |
Capital expenditures at the Entertainment segment primarily reflect investments in technology and in facilities and equipment for expanding and upgrading broadcast centers, production facilities and television station facilities.
Capital expenditures at the Experiences segment are principally for theme park and resort expansion, new attractions, cruise ships, capital improvements and technology. The increase in the current quarter compared to the prior-year quarter was due to higher spend on new attractions and cruise ship fleet expansion.
Capital expenditures at Corporate primarily reflect investments in corporate facilities, technology and equipment.
The Company currently expects its fiscal 2024 capital expenditures to total approximately $6 billion compared to fiscal 2023 capital expenditures of $5 billion. The increase in capital expenditures is primarily due to higher spending at Experiences, in part due to continued investment in our Disney Cruise Line business.
Financing Activities
Financing activities for the quarters ended December 30, 2023 and December 31, 2022 are as follows:
| | | | | | | | | | | |
| Quarter Ended |
| (in millions) | December 30,
2023 | | December 31,
2022 |
|
|
|
|
|
Change in borrowings | $ | 737 | | | $ | (134) | |
|
|
|
Activities related to noncontrolling and redeemable noncontrolling interest(1) | (8,610) | | | (722) | |
Cash used in other financing activities, net | (133) | | | (187) | |
Cash used in financing activities | $ | (8,006) | | | $ | (1,043) | |
(1)Activities related to noncontrolling and redeemable noncontrolling interests in the current and prior-year quarter were due to payments for redeemable noncontrolling interests in Hulu and BAMTech, respectively (see Note 1 to the Condensed Consolidated Financial Statements).
See Note 5 to the Condensed Consolidated Financial Statements for a summary of the Company’s borrowing activities during the quarter ended December 30, 2023 and information regarding the Company’s bank facilities. The Company may use cash balances, operating cash flows, commercial paper borrowings up to the amount of its unused $12.25 billion bank facilities and incremental term debt issuances to retire or refinance other borrowings before or as they come due.
See Note 11 to the Condensed Consolidated Financial Statements for a summary of dividends declared and shares authorized for repurchase in fiscal 2024. There were no dividends or share repurchases in fiscal 2023.
The Company’s operating cash flow and access to the capital markets can be impacted by factors outside of its control. We believe that the Company’s financial condition is strong and that its cash balances, other liquid assets, operating cash flows, access to debt and equity capital markets and borrowing capacity under current bank facilities, taken together, provide adequate resources to fund ongoing operating requirements, contractual obligations, upcoming debt maturities as well as future capital
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
expenditures related to the expansion of existing businesses and development of new projects. In addition, the Company could undertake other measures to ensure sufficient liquidity, such as raising additional financing, reducing or not declaring future dividends; reducing capital spending; reducing film and episodic content investments; or implementing furloughs or reductions in force.
The Company’s borrowing costs can also be impacted by short- and long-term debt ratings assigned by nationally recognized rating agencies, which are based, in significant part, on the Company’s performance as measured by certain credit metrics such as leverage and interest coverage ratios. As of December 30, 2023, Moody’s Investors Service’s long- and short-term debt ratings for the Company were A2 and P-1 (Stable), respectively, Standard and Poor’s long- and short-term debt ratings for the Company were A- and A-2 (Positive), respectively, and Fitch’s long- and short-term debt ratings for the Company were A- and F2 (Stable), respectively. The Company’s bank facilities contain only one financial covenant, relating to interest coverage of three times earnings before interest, taxes, depreciation and amortization, including both intangible amortization and amortization of our film and television production and programming costs. On December 30, 2023, the Company met this covenant by a significant margin. The Company’s bank facilities also specifically exclude certain entities, including the Asia Theme Parks, from any representations, covenants or events of default.
MARKET RISK
The Company is exposed to the impact of interest rate changes, foreign currency fluctuations, commodity fluctuations and changes in the market values of its investments.
Policies and Procedures
In the normal course of business, we employ established policies and procedures to manage the Company’s exposure to changes in interest rates, foreign currencies and commodities using a variety of financial instruments.
Our objectives in managing exposure to interest rate changes are to limit the impact of interest rate volatility on earnings and cash flows and to lower overall borrowing costs. To achieve these objectives, we primarily use interest rate swaps to manage net exposure to interest rate changes related to the Company’s portfolio of borrowings. By policy, the Company targets fixed-rate debt as a percentage of its net debt between minimum and maximum percentages.
Our objective in managing exposure to foreign currency fluctuations is to reduce volatility of earnings and cash flow in order to allow management to focus on core business issues and challenges. Accordingly, the Company enters into various contracts that change in value as foreign exchange rates change to protect the U.S. dollar equivalent value of its existing foreign currency assets, liabilities, commitments and forecasted foreign currency revenues and expenses. The Company utilizes option strategies and forward contracts that provide for the purchase or sale of foreign currencies to hedge probable, but not firmly committed, transactions. The Company also uses forward and option contracts to hedge foreign currency assets and liabilities. The principal foreign currencies hedged are the euro, Japanese yen, British pound, Chinese yuan and Canadian dollar. Cross-currency swaps are used to effectively convert foreign currency denominated borrowings to U.S. dollar denominated borrowings. By policy, the Company maintains hedge coverage between minimum and maximum percentages of its forecasted foreign exchange exposures generally for periods not to exceed four years. The gains and losses on these contracts are intended to offset changes in the U.S. dollar equivalent value of the related exposures. The economic or political conditions in a country have reduced and in the future could reduce our ability to hedge exposure to currency fluctuations in the country or our ability to repatriate revenue from the country.
Our objectives in managing exposure to commodity fluctuations are to use commodity derivatives to reduce volatility of earnings and cash flows arising from commodity price changes. The amounts hedged using commodity swap contracts are based on forecasted levels of consumption of certain commodities, such as fuel oil and gasoline.
Our objectives in managing exposures to market-based fluctuations in certain retirement liabilities are to use total return swap contracts to reduce the volatility of earnings arising from changes in these retirement liabilities. The amounts hedged using total return swap contracts are based on estimated liability balances.
It is the Company’s policy to enter into foreign currency and interest rate derivative transactions and other financial instruments only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into these transactions or any other hedging transactions for speculative purposes.
COMMITMENTS AND CONTINGENCIES
Legal Matters
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company has exposure for certain legal matters.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Guarantees
See Note 14 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K.
Tax Matters
As disclosed in Note 9 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K, the Company has exposure for certain tax matters.
Contractual Commitments
See Note 14 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K.
OTHER MATTERS
Accounting Policies and Estimates
We believe that the application of the following accounting policies, which are important to our financial position and results of operations, require significant judgments and estimates on the part of management. For a summary of our significant accounting policies, including the accounting policies discussed below, see Note 2 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K.
Produced and Acquired/Licensed Content Costs
We amortize and test for impairment of capitalized film and television production costs based on whether the content is predominantly monetized individually or as a group. See Note 7 to the Condensed Consolidated Financial Statements for further discussion.
Production costs that are classified as individual are amortized based upon the ratio of the current period’s revenues to the estimated remaining total revenues (Ultimate Revenues).
With respect to produced films intended for theatrical release, the most sensitive factor affecting our estimate of Ultimate Revenues is theatrical performance. Revenues derived from other markets subsequent to the theatrical release are generally highly correlated with theatrical performance. Theatrical performance varies primarily based upon the public interest and demand for a particular film, the popularity of competing films at the time of release and the level of marketing effort. Upon a film’s release and determination of the theatrical performance, the Company’s estimates of revenues from succeeding windows and markets, which may include imputed license fees for content that is used on our DTC streaming services, are revised based on historical relationships and an analysis of current market trends.
With respect to capitalized television production costs that are classified as individual, the most sensitive factor affecting estimates of Ultimate Revenues is program ratings of the content on our licensees’ platforms. Program ratings, which are an indication of market acceptance, directly affect the program’s ability to generate advertising and subscriber revenues and are correlated with the license fees we can charge for the content in subsequent windows and for subsequent seasons.
Ultimate Revenues are reassessed each reporting period and the impact of any changes on amortization of production cost is accounted for as if the change occurred at the beginning of the current fiscal year. If our estimate of Ultimate Revenues decreases, amortization of costs may be accelerated or result in an impairment. Conversely, if our estimate of Ultimate Revenues increases, cost amortization may be slowed.
Production costs classified as individual are tested for impairment at the individual title level by comparing that title’s unamortized costs to the present value of discounted cash flows directly attributable to the title. To the extent the title’s unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess.
Produced content costs that are part of a group and acquired/licensed content costs are amortized based on projected usage, typically resulting in an accelerated or straight-line amortization pattern. The determination of projected usage requires judgment and is reviewed on a regular basis for changes. Adjustments to projected usage are applied prospectively in the period of the change. Historical viewing patterns are the most significant input into determining the projected usage, and significant judgment is required in using historical viewing patterns to derive projected usage. If projected usage changes we may need to accelerate or slow the recognition of amortization expense.
Cost of content that is predominantly monetized as a group is tested for impairment by comparing the present value of the discounted cash flows of the group to the aggregate unamortized costs of the group. The group is established by identifying the lowest level for which cash flows are independent of the cash flows of other produced and licensed content. If the unamortized costs exceed the present value of discounted cash flows, an impairment charge is recorded for the excess and allocated to individual titles based on the relative carrying value of each title in the group. If there are no plans to continue to use an individual film or television program that is part of a group, the unamortized cost of the individual title is written down to its
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
estimated fair value. Licensed content is included as part of the group within which it is monetized for purposes of impairment testing.
The amortization of multi-year sports rights is based on projections of revenues for each season relative to projections of total revenues over the contract period (estimated relative value). Projected revenues include advertising revenue and an allocation of affiliate revenue. If the annual contractual payments related to each season approximate each season’s estimated relative value, we expense the related contractual payments during the applicable season. If estimated relative values by year were to change significantly, amortization of our sports rights costs may be accelerated or slowed.
Revenue Recognition
The Company has revenue recognition policies for its various operating segments that are appropriate to the circumstances of each business. Refer to Note 2 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K for our revenue recognition policies.
Pension and Postretirement Medical Plan Actuarial Assumptions
The Company’s pension and postretirement medical benefit obligations and related costs are calculated using a number of actuarial assumptions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement, which we evaluate annually. See Note 10 to the Consolidated Financial Statements in the 2023 Annual Report on Form 10-K for estimated impacts of changes in these assumptions. Other assumptions include the healthcare cost trend rate and employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase.
The discount rate enables us to state expected future cash payments for benefits as a present value on the measurement date. A lower discount rate increases the present value of benefit obligations and increases pension and postretirement medical expense. The guideline for setting this rate is a high-quality long-term corporate bond rate. The Company’s discount rate was determined by considering yield curves constructed of a large population of high-quality corporate bonds and reflects the matching of the plans’ liability cash flows to the yield curves.
To determine the expected long-term rate of return on the plan assets, we consider the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension and postretirement medical expense.
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments
The Company is required to test goodwill and other indefinite-lived intangible assets for impairment on an annual basis and if current events or circumstances require, on an interim basis. The Company performs its annual test of goodwill and indefinite-lived intangible assets for impairment in its fiscal fourth quarter.
Goodwill is allocated to various reporting units, which are an operating segment or one level below the operating segment. To test goodwill for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of a reporting unit exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions and changes in projected future cash flows of the reporting unit.
The quantitative assessment compares the fair value of each goodwill reporting unit to its carrying amount, and to the extent the carrying amount exceeds the fair value, an impairment of goodwill is recognized for the excess up to the amount of goodwill allocated to the reporting unit.
The impairment test for goodwill requires judgment related to the identification of reporting units, the assignment of assets and liabilities to reporting units including goodwill, and the determination of fair value of the reporting units. To determine the fair value of our reporting units, we generally use a present value technique (discounted cash flows) corroborated by market multiples when available and as appropriate. The discounted cash flow analyses are sensitive to our estimated projected future cash flows as well as the discount rates used to calculate their present value. Our future cash flows are based on internal forecasts for each reporting unit, which consider projected inflation and other economic indicators, as well as industry growth projections. Discount rates for each reporting unit are determined based on the inherent risks of each reporting unit’s underlying operations. We believe our estimates are consistent with how a marketplace participant would value our reporting units.
As discussed in our Critical Accounting Policies and Estimates section of our fiscal 2023 Annual Report on Form 10-K, the carrying amounts of our entertainment and international sports linear networks reporting units exceeded their fair values and we recorded non-cash goodwill impairment charges of approximately $0.7 billion in the fourth quarter of fiscal 2023. The entertainment linear networks reporting unit goodwill after impairment is approximately $8 billion and the international sports
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
linear networks reporting unit goodwill was fully impaired. In addition, the fair value of our entertainment DTC services reporting unit exceeded its carrying amount by less than 10%. Goodwill of the entertainment DTC services reporting unit is approximately $45 billion.
Based on our annual assessment performed in the fourth quarter of fiscal 2023, for our entertainment linear networks reporting unit, a 25 basis point increase in the discount rate or a 1% reduction in projected cash flows used to determine fair value would result in an incremental impairment charge of approximately $0.3 billion.
For our entertainment DTC services reporting unit, a 25 basis point increase in the discount rate used to determine fair value would result in an impairment of $0.5 billion, and a 1% reduction in projected cash flows would result in a decrease in the excess fair value over carrying amount by approximately $0.9 billion.
Significant judgments and assumptions in the discounted cash flow model used to determine fair value relate to future revenues and certain operating expenses, terminal growth rates and discount rates. Changes to these assumptions, shifts in market trends, or the impact of macroeconomic events could produce test results in the future that differ, and we could be required to record additional impairment charges.
In addition, changes to our business strategy, including entering into a joint venture arrangement or the sale of a business, could result in impairment charges.
To test other indefinite-lived intangible assets for impairment, the Company first performs a qualitative assessment to determine if it is more likely than not that the carrying amount of each of its indefinite-lived intangible assets exceeds its fair value. If it is, a quantitative assessment is required. Alternatively, the Company may bypass the qualitative assessment and perform a quantitative impairment test.
The qualitative assessment requires the consideration of factors such as recent market transactions, macroeconomic conditions and changes in projected future cash flows.
The quantitative assessment compares the fair value of an indefinite-lived intangible asset to its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized for the excess. Fair values of indefinite-lived intangible assets are determined based on discounted cash flows or appraised values, as appropriate.
The Company tests long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances (triggering events) indicate that the carrying amount may not be recoverable. Once a triggering event has occurred, the impairment test employed is based on whether the Company’s intent is to hold the asset for continued use or to hold the asset for sale. The impairment test for assets held for use requires a comparison of the estimated undiscounted future cash flows expected to be generated over the useful life of the significant assets of an asset group to the carrying amount of the asset group. An asset group is generally established by identifying the lowest level of cash flows generated by a group of assets that are largely independent of the cash flows of other assets and could include assets used across multiple businesses. If the carrying amount of an asset group exceeds the estimated undiscounted future cash flows, an impairment would be measured as the difference between the fair value of the asset group and the carrying amount of the asset group. For assets held for sale, to the extent the carrying amount is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. Determining whether a long-lived asset is impaired requires various estimates and assumptions, including whether a triggering event has occurred, the identification of asset groups, estimates of future cash flows and the discount rate used to determine fair values.
The Company has investments in equity securities. For equity securities that do not have a readily determinable fair value, we consider forecasted financial performance of the investee companies, as well as volatility inherent in the external markets for these investments. If these forecasts are not met, impairment charges may be recorded.
Allowance for Credit Losses
We evaluate our allowance for credit losses and estimate collectability of accounts receivable based on historical bad debt experience, our assessment of the financial condition of individual companies with which we do business, current market conditions, and reasonable and supportable forecasts of future economic conditions. In times of economic turmoil, including COVID-19, our estimates and judgments with respect to the collectability of our receivables are subject to greater uncertainty than in more stable periods. If our estimate of uncollectible accounts is too low, costs and expenses may increase in future periods, and if it is too high, costs and expenses may decrease in future periods. See Note 3 to the Condensed Consolidated Financial Statements for additional discussion.
Contingencies and Litigation
We are currently involved in certain legal proceedings and, as required, have accrued estimates of the probable and estimable losses for the resolution of these proceedings. These estimates are based upon an analysis of potential results,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
assuming a combination of litigation and settlement strategies and have been developed in consultation with outside counsel as appropriate. From time to time, we are also involved in other contingent matters for which we accrue estimates for a probable and estimable loss. It is possible, however, that future results of operations for any particular quarterly or annual period could be materially affected by changes in our assumptions or the effectiveness of our strategies related to legal proceedings or our assumptions regarding other contingent matters. See Note 13 to the Condensed Consolidated Financial Statements for more detailed information on litigation exposure.
Income Tax
As a matter of course, the Company is regularly audited by federal, state and foreign tax authorities. From time to time, these audits result in proposed assessments. Our determinations regarding the recognition of income tax benefits are made in consultation with outside tax and legal counsel, where appropriate, and are based upon the technical merits of our tax positions in consideration of applicable tax statutes and related interpretations and precedents and upon the expected outcome of proceedings (or negotiations) with taxing and legal authorities. The tax benefits ultimately realized by the Company may differ from those recognized in our future financial statements based on a number of factors, including the Company’s decision to settle rather than litigate a matter, relevant legal precedent related to similar matters and the Company’s success in supporting its filing positions with taxing authorities.
New Accounting Pronouncements
See Note 17 to the Condensed Consolidated Financial Statements for information regarding new accounting pronouncements.
DTC PRODUCT DESCRIPTIONS, KEY DEFINITIONS AND SUPPLEMENTAL INFORMATION
Product Offerings
In the U.S., Disney+, ESPN+ and Hulu SVOD Only are each offered as a standalone service or together as part of various multi-product offerings. Hulu Live TV + SVOD includes Disney+ and ESPN+. Disney+ is available in more than 150 countries and territories outside the U.S. and Canada. In India and certain other Southeast Asian countries, the service is branded Disney+ Hotstar. In certain Latin American countries, we offer Disney+ as well as Star+, a general entertainment SVOD service, which is available on a standalone basis or together with Disney+ (Combo+). Depending on the market, our services can be purchased on our websites or through third-party platforms/apps or are available via wholesale arrangements.
Paid Subscribers
Paid subscribers reflect subscribers for which we recognized subscription revenue. Subscribers cease to be a paid subscriber as of their effective cancellation date or as a result of a failed payment method. Subscribers to multi-product offerings in the U.S. are counted as a paid subscriber for each service included in the multi-product offering and subscribers to Hulu Live TV + SVOD are counted as one paid subscriber for each of the Hulu Live TV + SVOD, Disney+ and ESPN+ services. In Latin America, if a subscriber has either the standalone Disney+ or Star+ service or subscribes to Combo+, the subscriber is counted as one Disney+ paid subscriber. Subscribers include those who receive a service through wholesale arrangements including those for which the service is distributed to each subscriber of an existing content distribution tier. When we aggregate the total number of paid subscribers across our DTC streaming services, we refer to them as paid subscriptions.
International Disney+ (excluding Disney+ Hotstar)
International Disney+ (excluding Disney+ Hotstar) includes the Disney+ service outside the U.S. and Canada and the Star+ service in Latin America.
Average Monthly Revenue Per Paid Subscriber
Hulu and ESPN+ average monthly revenue per paid subscriber is calculated based on the average of the monthly average paid subscribers for each month in the period. The monthly average paid subscribers is calculated as the sum of the beginning of the month and end of the month paid subscriber count, divided by two. Disney+ average monthly revenue per paid subscriber is calculated using a daily average of paid subscribers for the period. Revenue includes subscription fees, advertising (excluding revenue earned from selling advertising spots to other Company businesses) and premium and feature add-on revenue but excludes Pay-Per-View revenue. Advertising revenue generated by content of one streaming service that is accessed through another streaming service (for example, Hulu content accessed through Disney+) is allocated between both services. The average revenue per paid subscriber is net of discounts on offerings that carry more than one service. Revenue is allocated to each service based on the relative retail or wholesale price of each service on a standalone basis. Hulu Live TV + SVOD revenue is allocated to the SVOD services based on the wholesale price of the Hulu SVOD Only, Disney+ and ESPN+ multi-product offering. In general, wholesale arrangements have a lower average monthly revenue per paid subscriber than subscribers that we acquire directly or through third-party platforms.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Supplemental information about paid subscribers:
| | | | | | | | | | | | | | | | | |
| (in millions) | December 30,
2023 | | September 30,
2023 | | December 31,
2022 |
| | | | | |
| Domestic (U.S. and Canada) standalone | 53.8 | | 55.5 | | 58.5 |
Domestic (U.S. and Canada) multi-product(1) | 23.7 | | 22.6 | | 20.8 |
| 77.5 | | 78.1 | | 79.3 |
| | | | | |
International standalone (excluding Disney+ Hotstar)(2) | 53.7 | | 55.3 | | 49.5 |
International multi-product(3) | 11.5 | | 10.8 | | 8.1 |
| 65.2 | | 66.1 | | 57.7 |
| | | | | |
Total(4) | 142.7 | | 144.2 | | 136.9 |
(1)At December 30, 2023, there were 19.8 million and 3.9 million subscribers to three-service and two-service multi-product offerings, respectively. At September 30, 2023, there were 20.3 million and 2.3 million subscribers to three-service and two-service multi-product offerings, respectively. At December 31, 2022, there were 19.6 million and 1.2 million subscribers to three-service and two-service multi-product offerings, respectively.
(2)Disney+ Hotstar is not included in any of the Company’s multi-product offerings.
(3)Consists of subscribers to Combo+.
(4)Total may not equal the sum of the column due to rounding.
SUPPLEMENTAL GUARANTOR FINANCIAL INFORMATION
On March 20, 2019 as part of the acquisition of TFCF, The Walt Disney Company (“TWDC”) became the ultimate parent of TWDC Enterprises 18 Corp. (formerly known as The Walt Disney Company) (“Legacy Disney”). Legacy Disney and TWDC are collectively referred to as “Obligor Group”, and individually, as a “Guarantor”. Concurrent with the close of the TFCF acquisition, $16.8 billion of TFCF’s assumed public debt (which then constituted 96% of such debt) was exchanged for senior notes of TWDC (the “exchange notes”) issued pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to an Indenture, dated as of March 20, 2019, between TWDC, Legacy Disney, as guarantor, and Citibank, N.A., as trustee (the “TWDC Indenture”) and guaranteed by Legacy Disney. On November 26, 2019, $14.0 billion of the outstanding exchange notes were exchanged for new senior notes of TWDC registered under the Securities Act, issued pursuant to the TWDC Indenture and guaranteed by Legacy Disney. In addition, contemporaneously with the closing of the March 20, 2019 exchange offer, TWDC entered into a guarantee of the registered debt securities issued by Legacy Disney under the Indenture dated as of September 24, 2001 between Legacy Disney and Wells Fargo Bank, National Association, as trustee (the “2001 Trustee”) (as amended by the first supplemental indenture among Legacy Disney, as issuer, TWDC, as guarantor, and the 2001 Trustee, as trustee).
Other subsidiaries of the Company do not guarantee the registered debt securities of either TWDC or Legacy Disney (such subsidiaries are referred to as the “non-Guarantors”). The par value and carrying value of total outstanding and guaranteed registered debt securities of the Obligor Group at December 30, 2023 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| TWDC | | Legacy Disney |
| (in millions) | Par Value | | Carrying Value | | Par Value | | Carrying Value |
| Registered debt with unconditional guarantee | $ | 34,903 | | $ | 35,470 | | $ | 8,143 | | $ | 7,968 |
The guarantees by TWDC and Legacy Disney are full and unconditional and cover all payment obligations arising under the guaranteed registered debt securities. The guarantees may be released and discharged upon (i) as a general matter, the indebtedness for borrowed money of the consolidated subsidiaries of TWDC in aggregate constituting no more than 10% of all consolidated indebtedness for borrowed money of TWDC and its subsidiaries (subject to certain exclusions), (ii) upon the sale, transfer or disposition of all or substantially all of the equity interests or all or substantially all, or substantially as an entirety, the assets of Legacy Disney to a third party, and (iii) other customary events constituting a discharge of a guarantor’s obligations. In addition, in the case of Legacy Disney’s guarantee of registered debt securities issued by TWDC, Legacy Disney may be released and discharged from its guarantee at any time Legacy Disney is not a borrower, issuer or guarantor under certain material bank facilities or any debt securities.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS — (continued)
Operations are conducted almost entirely through the Company’s subsidiaries. Accordingly, the Obligor Group’s cash flow and ability to service its debt, including the public debt, are dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Obligor Group, whether by dividends, loans or otherwise. Holders of the guaranteed registered debt securities have a direct claim only against the Obligor Group.
Set forth below is summarized financial information for the Obligor Group on a combined basis after elimination of (i) intercompany transactions and balances between TWDC and Legacy Disney and (ii) equity in the earnings from and investments in any subsidiary that is a non-Guarantor. This summarized financial information has been prepared and presented pursuant to the Securities and Exchange Commission Regulation S-X Rule 13-01, “Financial Disclosures about Guarantors and Issuers of Guaranteed Securities” and is not intended to present the financial position or results of operations of the Obligor Group in accordance with GAAP.
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| Results of operations (in millions) | Quarter Ended December 30, 2023 |
| Revenues | $ | — |
| Costs and expenses | — |
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| Net income (loss) | (172) |
| Net income (loss) attributable to TWDC shareholders | (172) |
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| Balance Sheet (in millions) | December 30, 2023 | | September 30, 2023 |
| Current assets | $ | 2,985 | | $ | 8,544 |
| Noncurrent assets | 3,070 | | 2,927 |
| Current liabilities | 7,804 | | 5,746 |
| Noncurrent liabilities (excluding intercompany to non-Guarantors) | 42,915 | | 43,307 |
| Intercompany payables to non-Guarantors | 150,067 | | 154,018 |
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Item 3. Quantitative and Qualitative Disclosures about Market Risk.
See Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note 15 to the Condensed Consolidated Financial Statements.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures – We have established disclosure controls and procedures to ensure that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and made known to the officers who certify the Company’s financial reports and to other members of senior management and the Board of Directors as appropriate to allow timely decisions regarding required disclosure.
Based on their evaluation as of December 30, 2023, the principal executive officer and principal financial officer of the Company have concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective.
Changes in Internal Controls – There have been no changes in our internal control over financial reporting during the first quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, the Company is engaged in certain legal matters, and the disclosure set forth in Note 13 relating to certain legal matters is incorporated herein by reference.
ITEM 1A. Risk Factors
For an enterprise as large and complex as the Company, a wide range of factors could materially affect future developments and performance. In addition to the factors affecting specific business operations identified in connection with the description of these operations and the financial results of these operations elsewhere in our filings with the SEC, the most significant factors affecting our business include the factors discussed in our 2023 Annual Report on Form 10-K under Item 1A, “Risk Factors” as updated below:
BUSINESS, ECONOMIC, MARKET and OPERATING CONDITION RISKS
Regulations applicable to our businesses may impair the profitability of our businesses.
Each of our businesses, including our broadcast networks and television stations, is subject to a variety of U.S. and international regulations, which impact the operations and profitability of our businesses. Some of these regulations include:
•U.S. Federal Communications Commission regulation of our television and radio networks, our national programming networks and our owned television stations. See our 2023 Annual Report on Form 10-K under Item 1 — Federal Regulation - Entertainment and Sports.
•Federal, state and foreign privacy and data protection laws and regulations.
•Regulation of the safety and supply chain of consumer products and theme park operations, including regulation regarding the sourcing, importation and the sale of goods.
•Land planning, use and development regulations applicable to our theme parks operations.
•Environmental protection regulations.
•U.S. and international anti-corruption laws, sanction programs, trade restrictions and anti-money laundering laws.
•Restrictions on the manner in which content is currently licensed and distributed, ownership restrictions or film or television content requirements, investment obligations or quotas.
•Domestic and international labor laws, tax laws or currency controls.
New laws and regulations, as well as changes in any of these current laws and regulations or regulator activities in any of these areas, or others, may require us to spend additional amounts to comply with the regulations, or may restrict our ability to offer products and services in ways that are profitable, and create an increasingly unpredictable regulatory landscape. In addition, ongoing and future developments in international political, trade and security policy may lead to new regulations limiting international trade and investment and disrupting our operations outside the U.S., including our international theme parks and resorts operations in France, mainland China and Hong Kong. For example, in 2022 the U.S. and other countries implemented a series of sanctions against Russia in response to events in Russia and Ukraine; U.S. agencies have enhanced trade restrictions, including new prohibitions on the importation of goods from certain regions and other jurisdictions are considering similar measures; U.S. state governments have become more active in passing legislation targeted at specific sectors and companies and applying existing laws in novel ways to new technologies, including streaming and online commerce; and in many countries/regions around the world (including but not limited to the European Union) regulators are requiring us to broadcast on our linear networks (or display on our DTC streaming services) programming produced in specific countries as well as invest specified amounts of our revenues in local content productions. In Florida, legislative, regulatory and other steps directed at the Company have been taken, which collectively have negatively impacted our ability to execute on our business strategy, and such steps, along with future potential legislative and regulatory actions, could negatively impact our costs and the growth and profitability of our operations in Florida.
Further, in response to the COVID-19 pandemic, public health and other regional, national, state and local regulations and policies impacted most of our businesses. Government requirements could be reinstated and new government requirements may be imposed to address COVID-19 or future health outbreaks or pandemics.
ITEM 5. Other Items
None of our directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement (as defined in Item 408(c) of Regulation S-K) during the quarterly period covered by this report.
ITEM 6. Exhibits
INDEX OF EXHIBITS | | | | | | | | | | | | | | |
Number and Description of Exhibit
(Numbers Coincide with Item 601 of Regulation S-K) | | Document Incorporated by Reference from a Previous Filing or Filed Herewith, as Indicated below |
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3.3 | | | | Exhibit 3.1 to the Current Report on Form 8-K of the Company filed November 30, 2023 |
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| 10.1 | | | | Filed herewith |
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10.2 | | | | Exhibit 10.1 to the Current Report on Form 8-K of the Company filed November 6, 2023 |
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10.3 | | | | Filed herewith |
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10.4 | | | | Filed herewith |
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10.5 | | Amendment dated December 21, 2023 to that certain Employment Agreement, dated as of December 21, 2021, by and between Disney Corporate Services Co., LLC and Horacio E. Gutierrez, as amended; and to that certain Indemnification Agreement, dated as of December 21, 2021, by and between The Walt Disney Company and Horacio E. Gutierrez, as amended † | | Exhibit 10.1 to the Current Report on Form 8-K of the Company filed December 22, 2023 |
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10.6 | | | | Filed herewith |
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10.7 | | | | Filed herewith |
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10.8 | | | | Filed herewith |
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10.9 | | | | Filed herewith |
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| 22 | | | | Filed herewith |
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| 31(a) | | | | Filed herewith |
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| 31(b) | | | | Filed herewith |
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| 32(a) | | | | Furnished |
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| 32(b) | | | | Furnished |
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| 101 | | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2023 formatted in Inline Extensible Business Reporting Language (iXBRL): (i) the Condensed Consolidated Statements of Income, (ii) the Condensed Consolidated Statements of Comprehensive Income, (iii) the Condensed Consolidated Balance Sheets, (iv) the Condensed Consolidated Statements of Cash Flows, (v) the Condensed Consolidated Statements of Equity and (vi) related notes | | Filed herewith |
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| 104 | | Cover Page Interactive Data File (embedded within the Inline XBRL document) | | Filed herewith |
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| * | This certification is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended or the Exchange Act. |
| † | Management Contract or compensatory plan or arrangement. |
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | THE WALT DISNEY COMPANY |
| | (Registrant) |
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| By: | | /s/ HUGH F. JOHNSTON |
| | Hugh F. Johnston, |
| | Senior Executive Vice President and
Chief Financial Officer |
February 7, 2024
Burbank, California
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