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Edited Transcript of DIS earnings conference call or presentation 9-Nov-17 9:30pm GMT

BURBANK Nov 10, 2017 (Thomson StreetEvents) -- Edited Transcript of Walt Disney Co earnings conference call or presentation Thursday, November 9, 2017 at 9:30:00pm GMT

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The Walt Disney Company - SVP of IR

* Robert A. Iger

The Walt Disney Company - Chairman and CEO

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* Jason B Bazinet

Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst

Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst

Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst

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Operator [1]

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Welcome to the Walt Disney Company Fiscal Full Year and Q4 2017 Earnings Conference Call. My name is Victoria, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

And I will now turn the call over to Lowell Singer, Senior VP of Investor Relations. Lowell, you may begin.

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Good afternoon, and welcome to the Walt Disney Company's Fourth Quarter 2017 Earnings Call. Our press release was issued about 25 minutes ago, and is available on our website at www.disney.com/investors.

Today's call is also being webcast, and a copy of the webcast and a transcript will also be available on our website.

Joining me for today's call are: Bob Iger, Disney's Chairman and Chief Executive Officer; and Christine McCarthy, Senior Executive Vice President and Chief Financial Officer. Christine will lead off, followed by Bob and then we'll be happy to take your questions.

So with that, let me turn the call over to Christine to get started.

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Thanks, Lowell, and good afternoon, everyone. Excluding certain items affecting comparability, earnings per share were $1.07 for the fourth quarter and $5.70 for the full year.

Our fiscal 2017 results came in roughly in line with last year, which is consistent with the guidance we provided in early September, although they were adversely affected by 3 notable items: First, the impact of Hurricane Irma on our Parks business; second, the impact of canceling the animated film, Gigantic; and third, the impact at BAMTech of a valuation adjustment to support the programming rights that were prepaid prior to the acquisition.

In aggregate, these 3 items reduced fourth quarter and full year segment operating income by about $275 million or approximately $0.11 in earnings per share.

At Parks and Resorts, operating income was up 7% in the quarter due to an increase at our international operations, partially offset by lower operating income at our domestic operations. The impact of Hurricane Irma, which I'll discuss in more detail in a moment, adversely affected total segment operating income by 14 percentage points.

Results at our international operations continues to improve, led by growth at Disneyland Paris and Shanghai Disney Resort. Disneyland Paris benefited from the resort's 25th anniversary celebration and a more favorable tourism environment, which drove higher attendance, guest spending and hotel occupancy.

Shanghai Disney's operating income growth was due to higher attendance and, to a lesser extent, lower marketing cost compared to the fourth quarter last year.

I'm pleased to note that Shanghai Disney Resort generated positive operating income during its first full fiscal year of operations, which comfortably surpassed our expectations of breakeven through its first year.

At our domestic operations, operating income was 6% below prior year due to lower results at Walt Disney World, which were adversely impacted by Hurricane Irma, partially offset by growth at Disney Cruise Line, Disneyland Resort and Disney Vacation Club. Hurricane Irma disrupted our operations in Florida, forcing the closure of Walt Disney World parks for 2 days and the cancelation of 3 Disney Cruise Line itineraries and the shortening of two others. We estimate the aggregate impact of the hurricane was about $100 million in operating income or about a 16 percentage point adverse impact the year-over-year growth at our domestic operations.

Operating margins at our domestic operations were down 170 basis points compared to Q4 last year, and we estimate they were adversely impacted by about 220 basis points due to the hurricane.

Attendance at our domestic parks was up 2% in the quarter, reflecting favorable guest response to new attractions, particularly Avatar Flight of Passage at Disney's Animal Kingdom, and Guardians of the Galaxy - Mission: Breakout at Disney California Adventure, and the unfavorable impact of the hurricane on Walt Disney World (inaudible) .

We estimate the hurricane had an adverse impact on the year-over-year change in domestic parks' attendance of about 3 percentage points.

Per capita spending was comparable to prior year. Per room spending at our domestic hotels was up 4% and occupancy was down 3 percentage points to 84%.

So far this quarter, domestic resort reservations are pacing down 1% compared to prior year and reflect reduced room inventory due to conversions and ongoing room refurbishments while booked rates are up 9%.

At Media Networks, lower operating income in the fourth quarter was a result of lower equity income and the decline of broadcasting while cable operating income was comparable to prior year.

Equity income was lower in the quarter due to higher losses from our investments in BAMTech and Hulu and lower income at A+E Television Networks.

With the closing of our BAMTech acquisition on September 25, BAMTech's results will now be consolidated within our Cable Networks business.

At Broadcasting, double-digit growth in affiliate revenue and lower programming expenses were more than offset by lower advertising revenue and a decrease in operating income from program sales.

The year-over-year decline in advertising revenue reflects lower impressions at the ABC network, lower political advertising at our owned stations and the absence of the Emmy Awards, partially offset by higher network rates.

Quarter-to-date, primetime scatter pricing at the ABC network is running 34% above upfront levels.

As I mentioned earlier, Q4 cable results were roughly comparable to the prior year. At ESPN, growth in affiliate revenue was offset by higher programming cost and lower advertising revenue. Higher spending on programming was primarily driven by a contractual rate increase for the NFL.

Ad revenue at ESPN was down low single digits in the quarter as higher rates were more than offset by a decrease in impressions.

So far this quarter, ESPN's cash ad sales are pacing down due in part to the timing of the college football semifinals and the impact of more game windows on other linear television networks.

Like last year, ESPN will air 3 of the New Year's 6 ballgames during the fourth quarter. However, this year, the 2 semifinal games will air during the second quarter, whereas they aired during the first quarter last year.

We remain very confident in the value of ESPN's programming, in particular, live, must-see exclusive events like College Football Playoff and in ESPN's ability to reach key audiences that advertisers covet.

Total Media Networks affiliate revenue was up 4% in the quarter due to growth at both Cable and Broadcasting. The increase in affiliate revenue was driven by 7 points of growth due to higher rates, partially offset by about a 3-point decline due to a decrease in subscribers.

We completed the renewal of a distribution agreement with Altice, which demonstrates the tremendous value of our network and positions us well as we head into future negotiations.

By the end of 2019, we expect to have new agreements in place covering about 50% of our subscriber base.

At the Studio, results in the fourth quarter reflect higher film cost impairments, lower operating income from television distribution, driven by the sale of Star Wars Classic titles in Q4 last year and lower revenue share from Consumer Products.

Operating income in our theatrical and home entertainment businesses was roughly comparable to the prior year.

At Consumer Products & Interactive Media, segment operating income was lower in the quarter due to a decrease in our merchandise licensing business.

While we saw nice growth in the sale of Cars and Spiderman merchandise during the fourth quarter, the growth was more than offset by strong sales of Star Wars, Frozen and Finding Dory merchandise in Q4 last year.

During the fourth quarter, we repurchased 33.6 million shares for $3.4 billion, and for the full year, we repurchased 89.5 million of shares for $9.4 billion.

So far this quarter, we have repurchased 6.5 million shares for approximately $650 million.

With fiscal 2017 now behind us, we are excited for the opportunities that lie ahead for our company, which Bob will discuss momentarily.

As we look at fiscal 2018 specifically, our earnings growth will be suppressed somewhat by a couple of factors. First, the consolidation of BAMTech and its ongoing investment in the business will adversely impact cable operating income by about $130 million compared to last year. This will affect our cable results for the first 3 quarters of the year, with roughly half of this BAMTech-related impact expected in Q1. We expect cable expenses to be up high single digits for the year, driven by the consolidation of BAMTech. However, excluding the impact of BAMTech, we expect underlying cable expenses to be up low single digits. Second, we expect our share of losses from our equity investment in Hulu to increase by more than $100 million for the year, driven by Hulu's investment in its digital MVPD service and higher content spending.

Given the timing of these investments, we expect about $70 million of that increase in equity losses in the first quarter.

At Consumer Products, a timing issue related to the recognition of minimum guarantee shortfall revenue will cause about $60 million in operating income to shift from Q1 into Q2. The timing issue stems from the fact that these contracts are measured at month end and our fiscal first quarter ends on December 30 this year, whereas it ended on December 31 last year.

And finally, we will continue to invest in our businesses in 2018, particularly at Parks and Resorts, where we are building 2 Star Wars lands. We expect these investments, among others, to drive fiscal 2018 consolidated CapEx higher by about $1 billion.

We continue to see attractive opportunities to deploy capital in a balanced way, whether it's through investment in our Parks and Resorts business, in support of our direct-to-consumer strategy or by returning capital to our shareholders. We have the flexibility because of our strong balance sheet.

For fiscal 2018, we expect to repurchase $6 billion in stock, which is close to what we've repurchased on average over the past 5 years.

And with that, I'll now turn the call over to Bob.

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Robert A. Iger, The Walt Disney Company - Chairman and CEO [4]

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Thanks, Christine, and good afternoon, everyone. I'd like to take you through our priorities in fiscal 2018 to frame up the new year, starting with our direct-to-consumer initiatives.

We believe creating a direct-to-consumer relationship is vital to the future of our media businesses, and it's our highest priority this year. Our decision to acquire control of BAMTech enables us to launch robust DTC offerings and immediately provides us the tools we need to stream video at scale, to acquire and retain customers, to greatly enhance our advertising opportunities on digital platforms and to use consumer data to provide a better user experience, while giving us the ability to grow revenue and increase the effectiveness of our digital marketing efforts.

Our first DTC product will be our ESPN-branded sports service, which will be called ESPN Plus. Launching in the spring, the product will be accessible through a new and fully redesigned ESPN app, which will allow users to access sports scores and highlights, stream our channels on an authenticated basis and subscribe to ESPN Plus for additional sports coverage, including thousands of live sporting events.

This one app experience will be a one-of-a-kind product, offering sports fans far more than they can get on any other app, website or channel, and immediately propelling ESPN in a new direction. We will demonstrate this app in early 2018 and also detail pricing and other elements to provide some perspective on the potential this represents to our company.

Additionally, we're leveraging BAMTech to launch a Disney-branded DTC service in the latter part of 2019, streaming the latest Disney, Pixar, Marvel and Star Wars feature films in the first pay window. Our studio will also produce 4 or 5 feature films a year exclusively for this service.

We're also planning to produce a number of original series for the new service and we're already developing a Star Wars live-action series, a series based on our popular Pixar Monsters franchise, a High School Musical series and a series for Marvel television, along with a rich array of other content, including new movies from our Disney Channel creative team as well as a variety of short form films and features from across our company. This service will also offer thousands of hours of Disney film and TV library product.

In the coming months, we'll share more specifics about content development, launch plans and investment levels.

Our strategic acquisitions have been a key driver of the historic achievements and performance we achieved over the last decade. We believe BAMTech is another game-changing acquisition, and we're confident in our ability to generate maximum value from it.

The acquisition of Marvel helped drive our studio's performance since 2009. The movies we've released in the Marvel Cinematic Universe, to date, have delivered an average global box office of more than $840 million each.

We have four new Marvel movies, in fiscal 2018, starting with Thor: Ragnarok, which has already has topped $500 million in worldwide box office since it premiered 2 weeks ago.

To put this early performance into perspective, the box office total for the entire run of our first Thor movie in 2011 was $449 million. Thor: Ragnarok is also one of the best reviewed Marvel movies to date.

We're very excited about Marvel's next great movie, Black Panther, which opens next February, and we're bringing the Avengers back in May with the release of Infinity War.

Our final Marvel movie of the year, Ant-Man and the Wasp, will be in theaters next July.

As you know, our acquisition of Pixar effectively revitalized our entire animation business, which is essential to the health of our company. Since that acquisition, the average global box office for our animated movies has risen to more than $665 million, and we've captured 9 of the 10 Oscars awarded for feature animation.

We'll release 2 new movies from Pixar in fiscal 2018. We're thrilled with the early reaction to Coco, which opens at Thanksgiving, and we're also looking forward to the summer release of The Incredibles 2.

We have big ambitions for the Star Wars franchise when we acquired Lucasfilm 5 years ago, and we're already exceeding our expectations. The Force Awakens and Rogue One alone delivered more than $3 billion at the box office, revealing the tremendous enduring appeal of this franchise and establishing a strong foundation for the future.

We're thrilled to have 2 new Star Wars movies in theaters during this fiscal year. The Last Jedi opens December 15. Ticket presales are strong, and the excitement will only intensify as we get closer to the release date. And we just wrapped production on Solo, our second standalone Star Wars movie, essentially a Han Solo origin story and given the huge popularity and global affection for this iconic character, we expect a lot of interest and enthusiasm when it opens over Memorial Day weekend.

We've got more great Star Wars movies already planned for years to come in addition to 2019 releases of Episode IX, we're very happy to announce that we just closed a deal with Rian Johnson, the Director of the Last Jedi, to develop a brand new Star Wars trilogy.

We continue to make significant investments required to drive long-term growth across our entire company. In our Parks and Resorts, for example, we commissioned 3 spectacular new cruise ships, which will all be completed between 2021 and 2023.

We're nearing completion on Toy Story Lands in Shanghai and Orlando, both of which will open by next summer, and major construction continues on our Star Wars Lands in Disneyland and Walt Disney World, which are on schedule to open in 2019.

We're also adding new attractions and hotels in our resorts around the world, along with cutting edge technology to enhance the guest experience.

We remain optimistic about our future, in part because quality truly does matter, and the quality of our content, our products and our services sets Disney apart. No other company in entertainment today is better equipped to meet the challenges of a changing world, or better positioned for continued growth, thanks to our collection of brands, our strong franchises and our unique ability to leverage IP across our entire company to maximize value and create new opportunities.

We'll continue to invest for the future and take the smart risks required to keep moving forward.

I'm now happy to turn the call over to Lowell, and then Christine and I will be happy to take your questions. Lowell?

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Okay Bob, thanks. Everyone, just as you know, we have been having some slight technical issues on the call, I think, with our host. So we have switched phones and if, for some reason, we get disconnected during the call, we will dial back in. So with that, we are happy to take the first question.

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Operator [1]

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Our first question comes from Michael Nathanson from MoffettNathanson.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [2]

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I just have one for Bob, and it's a 2-parter. One is, because you didn't say -- we're not going to talk about press speculation. Your chance to actually address these stories this week in press, if you don't want to do that -- yes?

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Lowell Singer, The Walt Disney Company - SVP of IR [3]

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Michael, let me jump in. It's Lowell. I have some bad news and good news. The bad news is, as is our practice, we are not going to take any questions on press speculation, but the good news is, we'll give you another question.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [4]

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So Bob, I figured...

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Robert A. Iger, The Walt Disney Company - Chairman and CEO [5]

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Lowell could not be (inaudible) to say that.

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Michael Brian Nathanson, MoffettNathanson LLC - Founding Partner & Senior Research Analyst [6]

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So within your presentation a minute ago, you walked through your film strategy, and that was essentially fixing Disney's film content. So this week, Kevin Mayer was saying that if -- Disney needs to turn their attention to looking at TV, because that's where the challenges are. So I wonder, when you think about television, do you see the television challenge for you guys as having the right platform, the right model, or having the right content? So is there a context fix here that maybe, needs to be done as you did in film?

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Robert A. Iger, The Walt Disney Company - Chairman and CEO [7]

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Well, we think that the world today offers ample opportunity to monetize high-quality, call it, in-demand television programming. I think that's been demonstrated by a number of entities out there today. And if you look at consumption, which admittedly is fragmented, it's actually quite significant in terms of people's interest in consuming TV. We've had, over the last few years, we've had some disappointments on the ABC side, but we've been focused on turning that around. We're actually very pleased with the performance of The Good Doctor already, and we have 3 dramas in the mid-season that we're quite excited about as well, including a Grey's Anatomy spin-off. So I think it was -- we look at TV, we think yes, some improvement with -- from a quality perspective would be helpful, but we also think we've got great opportunities. We also have strong production and creative capabilities, both from the ABC production side, but also from the Disney television production side and from Marvel. And I mentioned in my earlier comments that we're in development on a Star Wars live-action series as well. So our intention as a company is to take advantage of the opportunities that exist out there today for good television and to produce more of it.

Operator [8]

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Our next question comes from Alexia Quadrani from JPMorgan.

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Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [9]

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I've got one for Bob, one for Christine, if I may. Bob, I guess, when you look at your film studios specifically, you've really outperformed with such a huge margin and the pipeline continues to look so robust. I guess, can more scale or acquisition facilitate further growth? Or does -- is your plate really full enough, given the successful studios and IP you already have?

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Robert A. Iger, The Walt Disney Company - Chairman and CEO [10]

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I appreciate the question, I think it's a bit, leading the witness a little bit, as it relates to the subject that Michael brought up earlier. There's -- I don't think that there's ever such a thing as having too much quality or too many strong franchises when it comes to films. We do not feel right now that we have a great need to add to the film slate that we have, because as you cited, we're doing just fine. That doesn't mean there isn't room for more, we just don't have a significant or urgent need for that. That said, we've also, as a company, demonstrated an ability to leverage success in this area, not just in our studio, but across various other businesses, particularly Consumer Products and Theme Parks. And so we're always going to be looking to, adding to the number of film franchises that we produce and own.

Alexia Skouras Quadrani, JP Morgan Chase & Co, Research Division - MD and Senior Analyst [11]

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And then Christine, I know it might be too early days, but I was wondering if there's any color you can provide on the investment spending associated with the 2019 direct-to-consumer launch. Any sort of early data you can give us in the way to frame how we should think about potential earnings adjustment, going into that product launch?

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Alexia, we have not yet finalized what the content spend is going to be and the cadence of it. But as Bob mentioned, we will be providing more information on that as it develops over the next few months.

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Operator [13]

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Our next question comes from Ben Swinburne from Morgan Stanley.

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Benjamin Daniel Swinburne, Morgan Stanley, Research Division - MD [14]

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Bob, now that you've got the Altice deal done, so your first renewal of this cycle is sort of behind you, and at least for this quarter, the subscriber new losses seem to have gotten less severe. How are you feeling about that business over the next couple of years? Is that a business that you think operating income should grow? Do you have the sort of confidence? I wonder if you could talk a little bit about the outlook for that business and how the OTT launch fits into it. And then, Christine, if I could just follow up on Alexia's question on the -- either forgone licensing or incremental programming. Are we able to say at least for fiscal '18 that we won't have a material impact from those 2 factors hitting earnings, since you didn't list them when you talked in your prepared remarks about sort of factors to be thinking about this year?

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Ben, I won't say too much about the Altice deal. I know you asked the business overall, but I will say that in that deal, we met or achieved our -- both our pricing and our distribution objectives, which bodes very well for negotiations that we will be having in 2019 and beyond -- actually '18 and beyond rather. Verizon in '18 and Charter in '18, [Tdirect] beyond that, and then Comcast beyond that. We're pleased with where we ended up. We're also pleased with trends that we're seeing on the OTT side, where we've seen a nice pickup in subs in the basically, the new players in the market. And what we're really heartened by is the fact that some of them are spending a fair amount and have just stepped up their marketing efforts aggressively. If you watch the World Series, you probably couldn't have missed the number of spots that were in almost every hour for -- I guess, it was YouTube, new OTT service. That we think is great. It's also interesting that these OTT -- the entrants in the OTT business are spending in live sports. They obviously believe that the sports fan is potentially a primary customer of new OTT services. And what we've seen as well is the millennials seem to be particularly interested in these services. I think it's a combination of pricing and the user-friendly nature of these services. As we've said call after call, we've had some sub-issues that we've been dealing with, but Christine's comment suggested that, while we've lost some subs in the quarter, the losses were not as deep as they have been in prior quarters. And we're not -- we're heartened by that as well, but it is one quarter. The other thing I want to note that's interesting, which ties into your question about the health of the business, is that Nielsen provided us with 2 weeks of data, which was essentially data about live consumption of sports across multiple platforms, including streaming and these OTT services. And what they told us was that, by including that, we had a 25% increase in total day ratings and a 29% increase among -- I think, in prime time. That was basically -- that includes out-of-home viewing as well. So we think that the trends that we're seeing, albeit they're still not lengthy trends, but are at least giving us some reason to feel good about the business. We've always felt we were positioned well in it because of ESPN and Disney and ABC. On a direct-to-consumer front, as we've said as well, that we're going into that business because we believed that our direct-to-consumer opportunities, given the technology that's out there, are significant and given the fact that we've got these great brands and franchises. And we think that what we're doing can easily be complementary to the multichannel services in the market, both the traditional ones and the new ones. And when you see the apps that we will demonstrate sometime after the first of the year, you'll see that we're coming up -- we're developing one app experiences, where ESPN's app will enable the highlights and scores that ESPN typically gives, will enable live streaming of the channels on an authenticated basis, and we'll also add a plus service, which will enable users to subscribe to, for an extra fee, to thousands more live sporting events a year.

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Ben, to answer your question on the 2018 spend, in my comments, I mentioned the BAMTech investment that was going to impact cable operating income by $130 million. That's BAMTech, but on a Disney DTC, we don't expect any significant items to impact spend in 2018.

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Operator [17]

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Jessica Jean Reif Cohen, BofA Merrill Lynch, Research Division - MD in Equity Research [18]

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Maybe (inaudible) a little bit, but can you talk a little bit about addressable or targeted advertising? Is it still off limits on the Disney DTC offer? And how do you think about the tipping point on adjustability across all Disney advertising-related platforms? And then just, Christine, if we could just follow up on some of the CapEx questions. Can you just talk about the cadence at all beyond fiscal '18? It was great to get the color for fiscal '18, but given the number of projects, Toy Story Land, Star Wars Land, the cruise ships, et cetera, at Shanghai, can you just talk about what fiscal -- beyond fiscal '18, fiscal '19 through '22 or '23, what the cadence might be?

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Jessica, on the first question, we're going to launch ESPN service in the spring. That obviously will be advertiser-supported. BAMTech as we said at your conference, and as I said in my remarks earlier, offers us some -- far more, I should say, capabilities when it relates to -- as it relates to addressable ads, live or inserted live on a dynamic basis into live sporting events. And so we feel that, that gives us a lot of capability that we haven't had before. Whether that extends, that capability extends to our other businesses in the non-direct-to-consumer, I'm not sure. We currently not planning to sell ads on the Disney service, but that's just in development. There may be some interesting possibilities in terms of sponsorships versus inserted ads. But as of now, we're not planning to have the programming that airs in the OTT -- in the, sorry, the DTC service, interrupted by commercials.

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Jessica, on CapEx, you see for this year that we gave the comment that you can expect CapEx for 2018 to be about $1 billion above the 2017 level. And once again, a lot of that spend is going into the completion of the 2 Star Wars Lands, and we're also completing Toy Story Land in Orlando and there's other initiatives that are in process around the globe. We've talked about the longer term menu, and I think at some of the meetings we've had, we've talked about both the longer-term plans for our Parks and Resorts business and developing out further on attractions and resorts. So I think it's fair to assume that we will continue to make investments in areas in which we see driving long-term value and long-term returns. So I would say, this is a business that we feel very confident in and the businesses is working right now at a very high level, and will continue to do so.

Robert A. Iger, The Walt Disney Company - Chairman and CEO [21]

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The other thing to add to that is, when you look at the results of our international parks, Shanghai, as Christine cited, and the improvements that were seeing in Paris and the restructuring in Paris, as well as Hong Kong and in Tokyo, we have ample opportunity to continue to invest and continue to expand those businesses. And with the franchises that we have, and their popularity in these markets, the opportunity actually has increased significantly over the last few years.

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Operator [22]

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Our next question comes from Jason Bazinet with Citi.

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Jason B Bazinet, Citigroup Inc, Research Division - MD and U.S. Cable and Satellite Analyst [23]

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Just a question for Mr. Iger, not really talking numbers, but more philosophically. As you approach Disney DTC, have you decided, sort of the cadence that you're going to approach this opportunity? In other words, you could go and sort of spend large and sort of say there's only going to be 1 or 2 winners on the back-end of this evolution and Disney's going to be one of them. And other way you could it is, just sort of spend consistent with the revenue that, that new business generates. So it doesn't really contribute to earnings, maybe over the next 3 to 5 years. Can you just describe how you're thinking about the cadence of your approach?

Robert A. Iger, The Walt Disney Company - Chairman and CEO [24]

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Sure. Before I do that, I know that there's been a lot written about, whether this is aimed at being a Netflix killer, et cetera, and so on. By the way, they've been a good partner of ours. Our goal here is to be a viable player in the direct-to-consumer space, space that we all know is a very, very compelling space to be in. We also believe that our brands and our franchises really matter, as we've seen through Netflix and all our other platforms. And so that gives us an opportunity as well. We are working on the cadence that we will produce and sort of schedule product in this OTT service. We've not determined fully what that will be, although we've laid out, on a calendar basis a fair amount of specifics. We're still working to develop original movies and original TV shows and figure out what makes the most sense, part of it has to do with when they will be available. But I'd say that we're -- I don't want to say we're going to walk before we run, because we're going to, as I've said earlier, we're going to launch this thing pretty aggressively. But I think what you'll see is a ramp up over time of production spending. But we'll start with a product that we believe is representative of the great brands and franchises that we have, between Marvel and Disney and Pixar and Star Wars, and then grow from there.

Operator [25]

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Our next question comes from Todd Juenger from Sanford Bernstein.

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Todd Michael Juenger, Sanford C. Bernstein & Co., LLC., Research Division - Senior Research Analyst [26]

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I can't help but ask my respective question on entertainment OTT, I'm sorry. And then I have a quick one on consumer products as well. Actually, just picking up kind of where you left off, Bob. I'm just very curious to know how you're thinking about the role of the Disney brand. Obviously, very important to the service and what that means in terms of the type of content you envision ultimately, fits within that brand on the service. You've talked about a lot of Disney branded content specifically, and I heard you list, obviously, Marvel and Lucasfilm and Pixar. It begs the question, do you think about Freeform and ABC content as also fitting within Disney? And then, even when you start thinking of content that you could license in or otherwise get a hold of outside of your company, can you imagine that fitting in the service? Or is there just a need to stay narrowly defined, sort of as what -- all about the Disney brand and what that means? And then, quickly on, just on Consumer Products. Just, we had -- I was wondering how you think the Cars -- Cars has been the stalwart of Consumer Products for so long. You've had a new release of a movie. Just wondered how the results lived up to your expeditions in the Consumer Products side to that, and depending on your answer to that, any learnings here, if you think about other franchises, particularly in the animation space, have lasted a long time in the new world of the consumer opportunity there. Just any learnings from that would be great.

Robert A. Iger, The Walt Disney Company - Chairman and CEO [27]

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Okay, Todd. So this -- the service will be Disney-branded. It'll be, in other words, it will be Disney name. We haven't determined what the name is yet, but it will be Disney name. The product we have in Europe is called Disney Life, but we've not decided what this one will be yet. I think you have to think about it like you think about our Theme Parks, where they are Disney parks, but you go in and you see Marvel and Star Wars and Pixar, for instance. So it's a collection -- it will be a collection of just those brands. And if one of those series, whether it's from Marvel or Lucas, whatever, has standards -- first of all, nothing's going to be hard, nothing is going to be R. But has standards that don't necessarily fit completely with, I'll call them the G or G-rated Disney, there'll be ample filtering opportunities for people using it. So if you just want your kids to see the Disney-only product, that can easily be accomplished. We're not ruling out the possibility of licensing product from third parties for it provided the product fits with the Disney brand. As it relates to ABC and Freeform, we're going to continue to produce product for ABC and Freeform, and our production capabilities for programming like that, we'll also look to sell product to third parties including Hulu. And it's also possible by the way, that ABC Productions could end up producing for the Disney-branded service as well, we've actually talked about that a bit. But we're going to stick to Disney-branded service, and it will include Marvel, Pixar and Lucas brands within it, or Star Wars brands.

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So Todd, on your question on consumer products, specifically related to Cars. Cars is still a very strong franchise for us. So even though Cars 3, the theatrical release of the movie underperformed, and the performance of consumer products in this calendar year was a little bit lighter than we would have liked it to be, it's still one of our strongest franchises. And when we talk about some of the franchises that are over $1 billion annually, Cars is in there. And just another thing about 2018, for consumer products. We feel really, really good about the lineup we have going into this year. We have Star Wars Episode VIII - The Last Jedi. We deferred revenue in the fourth quarter into the first quarter, like we did with Episode VII for that. We also have a Han Solo movie coming out, named Solo in the spring quarters, and we've got 4 Marvel movies, including Avengers in the spring. We also have Mickey's 90th birthday. You should mark your calendar for this. It's November 18, 2018, but Mickey's 90th is something that the entire company's going to get behind, and that should also be good for our Consumer Products business.

Operator [29]

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Our next question comes from Steven Cahall from RBC.

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Steven Lee Cahall, RBC Capital Markets, LLC, Research Division - Analyst [30]

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Two for me. First, Bob, on direct-to-consumer. I was wondering if you have given any thought to the pricing strategy. Netflix has certainly been rewarded for strong subscriber growth, rather than necessarily revenue growth. So do you think you build more equity value by coming out with a product that's really inexpensive in the Disney-branded direct-to-consumer, in order to maximize sub growth early on? And then Christine, just on the buyback guidance. I think you did a little less than $9 billion in free cash flow this year, and you've got $1 billion-step up in CapEx, so that's $8 billion in free cash flow before any cash flow growth next year at the operating line. So why the big step down in the buyback year-on-year? Are you just trying to be conservative and give yourself some wiggle room as you go through the year? Is it a view to the share price, is it a view to build cash on the balance sheet? Any color there would be great.

Robert A. Iger, The Walt Disney Company - Chairman and CEO [31]

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Steven, we've given a lot of thought to pricing, to both the ESPN and the Disney-branded service, and I can't get specific with you yet. We haven't actually officially determined it, but we said we will be forthcoming with you on this sometime after the first of the year. I can say that our plan on the Disney side is to price this substantially below where Netflix is. That is, in part reflective of the fact that we'll have substantially less volume. You'll have a lot of high quality, because of the brands in the franchises that will be on it that we've talked about, but it'll simply launch with less volume, and the price will reflect that. It is our goal to attract as many subs as possible as starting out. We think we've got some interesting opportunities there given the affinity to Disney, whether it's with our Disney-branded credit card holders, our annual pass holders, people who are members of D23, people who own vacation club units at Disney, people who visit our parks frequently, there's a gigantic, potential Disney customer base out there that we're going to seek to attract, with pricing that is commensurate with, where that balances the quality of the brands and franchises that are in there, but also takes into account the volume. And that will give us an opportunity to grow in volume and to have the pricing over time, reflect the added volume as this product ages.

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Steve, on the buyback, that $6 billion is a number that, as I mentioned, is the average over the last 5 years, roughly the average over the last 5 years. As you saw both in 2017 and '16, we came in at a higher level than what we originally started out the year as. So if you want to view that as a conservative approach, we are early in the year, and we'll make adjustments as we go through the year, based on the business environment. But once again, we have increased the last couple of years from what we originally started out as.

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Operator [33]

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Our next question comes from Marci Ryvicker from Wells Fargo.

(technical difficulty)

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Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [34]

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(inaudible) a little more color on sports write-offs, if that's what they were, related to BAMTech. Was it a certain sport? Was this just technical? Just because there's much sensitivity around sports rights, right now. And then, second question, there was an article that came out at some point, talking about maybe there's a time when ESPN may not participate or have NFL rights, and maybe you're changing your distribution agreements to allow some sort of flexibility. Is there any (inaudible) .

Robert A. Iger, The Walt Disney Company - Chairman and CEO [35]

Okay. We lost you, Marci. Is that? Can you hear us?

(technical difficulty)

Marci Lynn Ryvicker, Wells Fargo Securities, LLC, Research Division - MD & Senior Analyst [36]

Can you hear me?

Robert A. Iger, The Walt Disney Company - Chairman and CEO [37]

So why don't we -- we got the 2 questions, so.

Lowell Singer, The Walt Disney Company - SVP of IR [38]

NFL, the NFL was one which, we're not going to comment on. We've had a long, healthy relationship with the NFL. It's important to ESPN, both the live games that we have on Monday night and all the shoulder programming that we do. Some of it or much of it licensed directly from the NFL, and we're not going to comment on anything related to the future relationship, or the, as it affects our distribution agreements.

So on the BAMTech valuation adjustment, that was an adjustment to programming rights that were prepaid prior to the acquisition. And we're not going to be specific on it, but it does relate just to one rights deal, and we looked at it based on current performance and the duration of the contract, and we didn't think we had an enough time to recover the payments, so the contract was mark-to-market.

Operator [40]

Our next question comes from Tim Nollen from Macquarie.

Bob, I'd like to follow up on your comments on the really strong pickup in ratings from the streaming viewership. I know there's a summit being convened later this month by one of your peers. I just wonder if you have any comments to make on broader use of digital measurement in the TV ecosystem.

Robert A. Iger, The Walt Disney Company - Chairman and CEO [42]

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Well, I think, first of all, as I said earlier, it's just was 2 weeks, and we like the trend, obviously, but we have to give this more time. Frankly, we're not really surprised by it though, because we've known for a long time that out-of-home viewing of sports is significant. And the more granular or the more unimpeachable data we can get on that, the better, because it just confirms what we all know. We all watch sports wherever we are, or out of the home. It also confirms that sports on mobile platforms, which often is out of the home, is also growing in popularity. And this picks up a lot of that consumption. And the other thing it includes, it includes live sports viewership on new OTT entrants, on new OTT platforms. And there, too, in part because of the interest in those platforms for millennials, suggests that, that sports, live sports is very, very important to those platforms. And I think that's reflected in the fact that every one of these services that launched is launched with the rights to distribute ESPN, and into all of their customers. And because they know how vital it is, and as I said earlier, just the fact that these platforms are advertising in live sports, suggests they're going after the sports viewer or the sports fan, because they think that's a -- that has high potential for them as a customer. So we're, we feel good about what we're seeing. And while there's obviously been a lot of attention paid to ESPN and subs, et cetera, and so on, we've never lost our bullishness about ESPN. The brand is strong, the quality of their programming is strong. They are always opportunities to improve. We've -- just launching a new morning program, for instance, but we like where ESPN is these days. And we believe that one of the best things that we've got going for ESPN is the new technology in the marketplace that's enabling people to watch sports on more user-friendly platforms and wherever they are. And as we can measure that, and add to that, the technology that we need to monetize advertising in more effective ways, that's pretty good combination.

Operator [43]

Our next question comes from Barton Crockett from B. Riley.

Barton Evans Crockett, FBR Capital Markets & Co., Research Division - Analyst [44]

I was interested in looking at the bigger kind of impact of Hulu. So you've got some drag from your share of the losses in the earnings of Hulu, but you've also got a benefit from, you were selling them programming to some degree, you're getting subs from them, they pay you fees or some share of advertising. I was just wondering, when you net it all together, is this actually a net drag, or largely mitigated or maybe a net positive, if you look at the broader impact of Hulu?

Robert A. Iger, The Walt Disney Company - Chairman and CEO [45]

Talking over time or it's to date? Because we know to date....

Barton Evans Crockett, FBR Capital Markets & Co., Research Division - Analyst [46]

To date and obviously, over time, you think it works. But just right now, as you're kind of ramping up, I think there's some mitigation of the expenses there with some of the benefits.

Robert A. Iger, The Walt Disney Company - Chairman and CEO [47]

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So to date, the P&L impact of Hulu is positive to the company -- for the year, sorry, for the year, not to -- for fiscal 2017. It's positive to the company because the investment that we've made in it as it grows has been offset by the licensing fees that we've gotten for both our channels, but largely in 2017, because they didn't launch the service until late, and the licensing of programming to the standard Hulu service. And it was also an improvement from 2016. So in other words, we had growth to the bottom line, in Hulu from '16 to '17. Where our continued investment in Hulu is because we're confident in its ability to both grow in terms of its SVOD service, but also to grow as an OTT multi-channel operator. And we've seen some nice numbers there. Still, just the beginning, and we're not going to get specific about what those are. We've got new management at Hulu as well. Randy Freer's now running it, and I know he's certainly bullish about it. And we continue to believe that long-term, Hulu is a significant -- will be a significantly valuable investment for us. We also believe that we can grow our licensing to Hulu, talked earlier about television production. It's yet another opportunity for us.

Lowell Singer, The Walt Disney Company - SVP of IR [48]

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Thank you, Barton, and thanks, everyone, for joining us today. Sorry about some of the technical glitches. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can be found on our Investor Relations website.

Let me also remind you that certain statements on this call may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them, and we do not undertake any obligation to update these statements. Forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from the results expressed or implied in light of a variety of factors, including factors contained in our Annual Report on Form 10-K and in our other filings with the Securities and Exchange Commission.

This concludes the call. Have a good afternoon, everyone.

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Operator [49]

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Thank you, ladies and gentlemen. This concludes today's call. Thank you for participating. You may now disconnect.


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