Thank you, and good morning, everyone. I'm Steven Cah all, media and cable analyst at our Wells Fargo TMT Summit, and we're fortunate to be joined by Hugh Johnston, The Walt Disney Company's Chief Financial Officer. Hugh, thank you for joining us.
Happy to be here.
There's a lot of debates that I want to get into this morning, but I thought just to start out, we could level set things. You reported the end of fiscal 2025 last week, provided additional guidance for fiscal 2026, including the double-digit EPS, excluding the 53rd week, and the double-digit EPS growth for fiscal 2027. Let's get your high-level expectations and key initiatives for the year ahead, and then we can dive into some of those debates.
Yeah, happy to talk about that. First, as Steve noted, we reported what I would consider to be strong earnings for the fourth quarter and for the full year. Full year was up 19% on an EPS basis. Actually, the last three years, our CAGR on EPS has been 19%. I have talked a little bit about being an earnings compounder, and that is really what we are trying to do, just continually pile on one strong year after another. In terms of, as we look to 2026, the strategies that we are following, number one, we really do have quite a strong film slate. Feel good about that. Zootopia 2 is coming up, Avatar behind that, Devil Wears Prada 2, there is a Moana movie. Lots of things happening on the film slate front, which is always good news for the Walt Disney Company.
In addition to that, we continue to drive our DTC business. We're obviously looking to grow that aspirationally at double digits, and I think there's reasons to believe that we can do that. A couple of years ago, I talked about hitting double-digit margins in that business, and we're looking to do that in 2026. ESPN, obviously, the biggest thing going on there is our launch of a DTC product, which is off to a very, very good start. Experiences, of course, we're continuing to invest in that business, and that business continues to perform very well. Put all of that together, it was clear to us that we could guide to double-digit EPS on an apples-to-apples basis.
In addition to that, deliver strong cash flow for the year, resulting in strong cash returns of a 50% increase in the dividend, as well as a doubling of share repurchase to $7 billion.
Often I hear with Disney that it's the content that sort of drives the sentiment, but it's parks that drives the earnings. I think maybe what's most topical after last week is just what the trends are in domestic parks attendance. They declined, I think, a little bit in the fiscal fourth quarter, but you did indicate you're seeing bookings up. I think 3% was the comment last week. What can you tell us about the health of the consumer that you're seeing and just the overall story for demand for parks?
Yeah, our consumer, as you know, tends to be at the higher-income deciles, and those consumers continue to do well. We certainly broadly feel good about where the consumer is. Obviously, with the parks, we did have a strong year last year. We guided originally to 6%-8% OI growth or earnings growth and delivered 8%. In fact, we hit $10 billion of operating income for the year, and it's the first time we've ever hit $10 billion. We certainly feel very, very good about that. The domestic parks, which is always a question people tend to focus on, also did well. Domestic grew earnings 8% for the year and 9% in the fourth quarter. From an earnings perspective, we felt good. In terms of attendance, last year, the domestic parks were down 1% on attendance.
Now, recall, there was a lot of concern going into the year based on the Epic park that was coming out in Orlando. We felt like we had it managed, and in fact, it came in within our expectations. We were down one on attendance for the year, but there was also a one-point drag from a hurricane that occurred in the first quarter last year. Net, we were basically flat on attendance. In the fourth quarter, really a very similar story. For domestic parks overall, we were down 2%, and Walt Disney World was actually down 1%. Certainly from an attendance standpoint, it really came in very much in line. The thing you have to keep in mind with the parks is we tend domestically to run at pretty high capacity utilization. When we're adding new attractions, you'll see attendance jumps.
In a year where we're not adding something new, we're basically going to be about level. Over the long run, you'll see us, I think, balance attendance growth with pricing growth. In any given year, it could be more geared towards one versus the other. In addition to attendance, per caps were actually quite good last year. We saw per caps domestically grow 5%. Certainly felt very, very good about that. From the standpoint of bookings, as you noted in the first quarter, our expectation is for bookings to grow 3%. Bookings is an important metric from the perspective that it obviously gives us some insight into the future, but one thing that's important to realize is only about 40% of the people who attend our parks actually stay on one of our properties.
It is useful in terms of both per caps and attendance, but you cannot just directly connect one to the other. That said, when we see bookings up as we did, we have right now at 3%, and the full year is up as well. We are certainly feeling good about where parks is likely to go in 2026.
Just to follow up on that, with fiscal fourth quarter attendance down 2%, Disney World down 1%, but bookings pacing up 3%.
Correct.
Does it kind of imply just a continuation or maybe an improvement off the trend that you saw in the September quarter?
I think it's really probably a continuation more than anything else. Even as we think more broadly about the experience of segment for the year, you know we have two cruise ships coming on, and as a result of that, there's a lot of one-time cost in the first half of the year, which suggests the earnings is likely to be more back-end loaded than you would typically see.
Just to go back to your comment on the higher-income decile, where you tend to index to on the consumer side, and you talked about the strong per caps spend you saw in the year, I think you've had this yield-based approach to managing your domestic parks over the last few years. Some of the work we've done suggests that's a lot of the reason those margins have been so strong. Can you speak a bit about the yield-based approach and what that means for how you manage the assets?
Yeah, we do very much focus on how to basically generate incremental revenue, both at the ticket price level, as well as food and beverage and merchandise and all the ancillary services that we offer, like Lightning Lane and VIP tour guides and those types of things. The team has really gotten increasingly better at getting that yield up, particularly in years where we're not adding capacity in a particular park. That's going to be the primary growth driver, is all of that yield focus. In addition to that, we're actually investing in creating dynamic pricing. We're doing it in Paris right now. We've been doing it for about a year. It's off to a very good start, but we're really going to make sure we optimize it before we bring it into the domestic park.
That's probably something that you won't see this year, but you may see in the subsequent years.
Is the kind of airline pricing model the best way to think about it?
I'd like to not think about it that way, to be honest with you. Yeah, similar. We already do it in the hotels to some degree, so this is basically just bringing it in the parks, but done in a way that obviously doesn't create guest experience issues or consumer negative feedback and all of that. Frankly, so far in Paris, we haven't seen any.
When it comes to adding capacity, cruise is certainly the area where we're seeing that most pronounced. Can you talk about the expansion of the cruise operations and how to think about what that can mean for profit growth that experience?
Yeah, so in the near term, we're adding two ships. One is coming on November 22nd, and then the second one is coming on in March. Obviously, there's some one-time cost associated with those, as well as some dry dock costs that we've got coming into the first half of this year. It will absolutely be an important growth driver for us. Cruise is not the only growth driver. We're investing in the parks broadly. This coming year, there'll be a Frozen addition to our Paris business. Getting beyond 2026, Walt Disney World will see two Cars-based attractions. Animal Kingdom will have an Indiana Jones as well as an Encanto attraction added to it. Shanghai will see a Spider-Man attraction added to it as well. There will be a Lion King-themed area in Paris as well.
We really are investing broadly to drive the parks business because, as I talk about this notion of being an earnings compounder, we need to put that CapEx in in order to drive that double-digit earnings growth that we're seeking to maintain.
You did not mention Abu Dhabi in that list of projects, but I know that one is a little longer term, but certainly significant. I think the term at the Investor Day a couple of years ago was turbocharging for the parks, with maybe this as the biggest single piece of it. Maybe a bit on Abu Dhabi and then what else you are working on to expand the international footprint.
Yeah, Abu Dhabi obviously represents a massive opportunity for us, and we have a partner that's really putting up the capital on it. From a deal structure standpoint, we like the approach. The important thing about Abu Dhabi is if you sort of just plot out the world, the one place in the world where we didn't have a major presence was that particular geographic region, which taps into India, taps into Eastern Europe, taps into Africa. It gives us an opportunity to access really a couple of billion people that it was hard to get to a Disney experience for. Couldn't be more excited about the opportunity there. It's going to take some years, obviously. These parks are massive, massive projects that take some time to put together.
It will very likely be the most technologically advanced park that we have once we do get it up and running, and we're super excited about that. In addition to that, as I mentioned before, we're investing in attractions across all of the parks. On top of that, the cruise ship business is really a spectacular business for us. Earns nice returns. The guest experience scores are by far the highest of any place in the Walt Disney Company. It does wonderful things for the brand. People that go on cruises, they tend to be repeat customers over and over and over again. We certainly feel great about that. Our market share in cruises is relatively low. We're a premium player, but we really do have an opportunity to go much, much further with cruises.
It is the opportunity to tap a lot of international markets that otherwise would not be as easy for people to get into. The beauty of a cruise ship is if you drop it into a market, and if it does not work well, you can basically move the boat someplace else and drop it into another market. We will be up to, by 2031, I think it is 13 ships. We have got lots more capacity coming there. The good news is we tend to fill it very, very quickly. With the two cruise ships that we are adding right now, you normally think with that much capacity coming on, your capacity utilization rates would go down. Right now, the capacity utilization is holding steady. Even with the incremental capacity, we are filling it up very, very quickly.
I think of experience as the biggest profit center of the company and also kind of the biggest share of where Disney sits in the consumer wallet. Switching gears to DTC, I think about that as where kind of the competition for engagement and time sort of you're top of the funnel with all your content in one place in Disney+ and the expansion into other things. I would love to also level set how you're thinking about the DTC strategy as it's evolving. I think the guide for the year is double-digit top-line growth, the 10% SVOD margin. I think you said you expect the margin to improve in chunks, not VIPs, over time.
No, that's exactly the way we're thinking about it. If you think about the journey that we've been on with DTC, go back when the product was launched, and it's only a handful of years ago that it was launched. The goal was first to achieve scale as quickly as we could. We did do that. We produced an enormous amount of content, and in addition to that, priced it very aggressively. We did achieve scale. Our recent numbers show that we're at about 195 million subscribers globally right now. That said, there's still opportunity to expand on that sub-base. As we think about the strategy, our strategy is really to offer breadth in terms of the product offering. Some of our competitors are very deep in general entertainment. They have very, very deep libraries.
We obviously, in making our own IP, have a tremendously deep library as well. In addition to general entertainment, we have all-family entertainment. We have news. We have sports. There are opportunities to do other things with the service down the road. If you think about the potential for commerce on the site, if you think about the potential for gaming at some point on the site, there is an opportunity to do things in a much broader way to become sort of the everyday thing that consumers use when they wake up in the morning, they tap into Disney+, and then they stay with us all day. When they want to interact in any way with The Walt Disney Company, this becomes the portal for that. We certainly feel good about the IP that we have. We feel good about the breadth that we can offer.
The DTC business, my expectation is we'll continue to grow in margin in chunks. In addition to that, as I've said, we're looking to get that top-line growth up around the double-digit level because, frankly, it's a business that has enough growth opportunity that we should be able to do that. In terms of margin improvement in the future, the way I think about it is we need to be thinking in percentage points, not basis points. That's, as I think, over the next three or four or five years, that's the trajectory that we're trying to put the business on.
Is the revenue growth the biggest driver to the chunky margin expansion, or are there additional margin?
No, I think it's revenue, but it's also to the degree that we can drive engagement up, that actually allows us to improve retention to the degree that engagement and retention are high. Marketing is a place where we can actually look to reduce our spending relative to where we are right now. In addition to that, SG&A is an opportunity for us. As we put the two services together into one, there'll be some SG&A opportunities. They're not massive, but they're not insignificant either. Where we will invest is in technology as well as local content internationally. In terms of those investments, I don't expect the growth in those expense items to exceed the revenue growth rate. We'll still get P&L leverage out of that as well. Certain areas I think are going to be reduced.
Others will be increased, but at a rate of growth less than revenue.
How do we think about just the app convergence over time? Disney+ is the native kind of Disney experience. Hulu came through an acquisition process, so less of sort of a clean sheet, and now we're starting to see those be more tightly integrated. How do you think about that strategy? Importantly, what does it mean for the margins and the profits of the segment?
Yeah, the way I think about sort of the unified app experience is, first and foremost, it's really for the consumer. Right now, it's a little bit hard for the consumer. Disney+ is there. We've got the Hulu tile on right now. A lot of people still kind of their habit is to go through Hulu, or their habit is to go through ESPN. The idea is ultimately to make it super easy for the consumer. If I want news, if I want sports, any of those entertainment options, Disney+ is the portal in which you go in. What does that mean? I think it means that the ease of use will drive increased engagement. We certainly would feel very positively about that. It will increase retention and reduce churn.
In addition to that, as we take it internationally even more assertively over time, I think it offers us the opportunity to add international subs in a substantive way because it does scale the business in effect, and as a result, it makes the offering much clearer for consumers.
What's the gating factor to that operational integration? Just customer experience?
More than anything, we just need to get the technology. It's getting the product right. We've been investing in that. Adam Smith, who came over to us from Google, has actually done a terrific job building out the product. It is literally building a product. We're doing it the way you would do technology products traditionally. You put something out there, and then you just steadily improve it over time. That's really what that team is doing. They're working double time to get it done.
Let's talk about content for a little bit. It's interesting the path we've gone through on content spend in the media industry. I remember, I think it was in 2021, kind of the peak content guide, which was over $30 billion. That was pre-Strikes, kind of post-COVID, maybe the peak of the gold rush. I think this year the guidance is for around $24 billion. Excluding sports, how do you just think about the right mix of total content spend, how you spread that across the studios since it is really the lifeblood of Disney?
Yeah, so if you take our $24 billion, which is up about $1 billion year over year, it splits about half sports and then half the entertainment side of the business. I think that mix is likely to hold reasonably well. If anything, entertainment may grow a little bit faster than sports. As we think about where the growth will likely be in content, more than anything, I think you'll see us investing in local content that is very specific to certain markets. We've got a strategy around expanding internationally with individual markets that we find attractive, and we think we have the right to grow. If you think about it, we have rights to succeed from the perspective of Disney content, which travels globally and is well received.
We need to supplement that with local content to ensure that we keep engagement high and we keep retention high. The strategy is very much to do that. In terms of where we were a few years ago at the $30 billion, really, I think almost everyone was, in a lot of ways, overproducing at that time. We've talked about the fact that we were, and frankly, we weren't happy with some of the quality because we were pushing so hard to produce content. I think we've got it dialed in pretty well right now. I think you'll see content expense continue to grow, but it'll grow at a rate that's substantially slower than the revenue of the DTC business.
Just to go deeper on that, kind of dialed in on quality. I mean, Disney has such iconic studios with Disney, Pixar, Marvel, Lucas. How do you think about allocating capital even between those? Andor was probably my favorite show of the year so far, but each of those studios is kind of in a different point in its life cycle.
Yeah, it's an interesting question. Obviously, we go in with a point of view, and strategically, we're touching different market segments. We're obviously evaluating those market segments and allocating based on where we think the growth may be. There's also an element to it of where are the best ideas coming from. As an old CFO, one of the things I've often said is money does not attract ideas. Ideas attract money. In a lot of ways with the storytelling we do, it's really where the best ideas come from and the judgment of our operating executives in the entertainment business to allocate the capital based on where they think we're likely to have the highest level of success.
Just lastly on content, you have a big piece of content coming at the end of the year with Avatar. Just wondering if you've seen it yet.
I've seen pieces of it. I haven't seen the entire piece. It is absolutely spectacular. It also costs a lot of money to make, but it is absolutely spectacular. We're certainly optimistic about the movie from the standpoint of being a repeat of what you've seen Jim Cameron do in the past. As I said, those movies aren't, they're not cheap.
At sports, this is probably the most transitional year that ESPN has had, maybe in a couple of decades, certainly in the last decade with the launch of the streaming app. It seems like it's off to a strong start. Can you talk about just how it's performed versus expectations and also the engagement trends that you're seeing in terms of some of that traction?
Yeah, so it really is off to a very strong start. We're quite pleased with it. First, from the standpoint of the product itself, because this is an enormous product launch for a brand that's obviously a superb brand. Really, when you do these things, first and foremost, you just want to make sure that you don't screw it up. You actually launch the product successfully, and you don't have a lot of technical issues and things like that. Thankfully, we didn't see any of those things. Second, in terms of the product features that we've put in, whether it's SportsCenter for You, and by the way, if you're a sports fan, in the app on Verts inside of the app, lower right-hand corner, check out SportsCenter for You. I wake up every morning. It's tailored to my teams.
It's AI-driven, and it really gives me about a five or six-minute snapshot of what happened last night. If you love sports, I think it's an absolutely fantastic piece of product. It's not just the SportsCenter for You piece. There are also game catch-ups. There are other highlights that are embedded inside. Really, a multi-view is another piece where you can actually sort of watch multiple games simultaneously or multiple versions of ESPN simultaneously. The product is really a significant advancement. It's not just taking ESPN's content and putting it on digital. It's adding lots of value. Of course, we have other things on in terms of fantasy, in terms of betting, in terms of merchandise opportunities. It really is very much a digital product that's much more interactive than sort of watching through the traditional way that people have watched sports.
Product-wise, I feel very, very good about it. In terms of the numbers, they're off to a very, very good start as well. Importantly, we're obviously interested in bundling as a part of this. 80% of the people who are subscribing at retail are subscribing with a bundle. That obviously benefits ESPN, but it also benefits the rest of our DTC business and will in driving engagement as well as retention. In terms of the people who are authenticating through their MVPDs or DMVPDs, we're getting a pretty high rate pretty quickly of people authenticating and playing with the app and wanting to watch their sports through the app. Overall, very, very happy with the start.
Do you think about the revenue opportunity here as incremental in terms of the data you're seeing that these are largely incremental subs or incremental engagement? Do you think it's preventing the decline of Linear? Or what does the early data show you about cannibalization of Linear versus incrementality?
Yeah, it's so early that it's hard to read. The objective we have here is to reach the sports fan how they want to be reached. If they want to come in through an MVPD or a DMVPD, great. They can authenticate, and they can engage with us that way. If they want to have a direct but full access to ESPN, ESPN Unlimited is a terrific way to engage with us. If they want more limited access, ESPN Select is a less expensive option and is also a terrific way to engage with us. In terms of incrementality, it's a little early to say that. I think though over time, because now with this direct relationship with the consumer, we'll have the opportunity to monetize those relationships in newer and different ways. We're obviously thinking about a lot of ideas on how we do that.
I'm optimistic it will be incremental to us over time.
I think you said 80% are in the bundle. Is that the trio bundle?
That's a trio bundle.
Something like it. What does that mean for just sports and DTC as a more combined entity?
Yeah, I mean, we know generally speaking, bundling works really, really well, whether it's bundling that we've been doing inside of the DTC service before we launched ESPN. ESPN is just another value add inside of the bundle. We are extremely optimistic about the level of retention that we're likely to get out of it. We can already see the engagement numbers move up when people are in the bundle.
Just lastly on sports, I think the NFL deal is pretty notable. I think you're the largest purchaser of NFL content. I think that they're your largest piece of content within the sports portfolio. Now we have this 10% stake in ESPN coming, which is the first time we've seen a league take ownership. What does that deal mean for the company? What does it mean for the sports business longer term?
Yeah, we think it's obviously a very positive thing, which is why we work so hard to get a good deal done for both parties. The NFL obviously is incredibly popular and has phenomenal followership and fandom. In terms of the deal itself, there are a couple of elements to it, which we think will be really terrific for us. Number one, once the deal closes, we will take over the NFL network and all of the content that comes with the NFL network. That's true both for the network itself, but also to bring the network into ESPN. Opportunities to move content around that way. In addition to that, we'll be putting our two fantasy businesses together, which obviously offers us the opportunity to scale that.
In addition to that, to invest even more in services that will, I think, be very appealing to fantasy football fans. In addition to that, it gives us the opportunity to distribute Mark and distribute RedZone, which is obviously a super, super popular product. I think from that perspective, we'll basically be able to create more relationships with fans using RedZone as a vehicle. Separate from that, we do have a commercial agreement as well. The commercial agreement gives us more games. Obviously, that's terrific. We now have more NFL games on ESPN than we've ever had in the almost 50-year history of ESPN. From a financial perspective, when it closes, and that's probably about a year or year and change or so, the deal will be about a nickel accretive at the outset. Financially, feel great about it.
Strategically, feel great about it. We think it's just another tailwind for ESPN.
Finishing up our chat, excuse me, just on capital allocation and free cash flow. Fiscal 2026, $10 billion, including the CapEx guidance of $9 billion. You have a lot of cash tax movement in fiscal 2026, which I think implies underlying is an extremely strong growth year on the cash side. It's a question I've received from folks over the last week. I would love for you to unpack the strength in the cash flow guidance.
Yeah, it obviously begins with strong earnings growth. Double-digit earnings growth obviously creates a significant amount of additional cash. In addition to that, we are getting some tax benefit, as most other companies are. As a result, we're able to drive significant cash flow growth across the company. I do feel very optimistic about where we are from a cash flow perspective. We're looking to continue to drive cash flow growth in the coming years. Disney really is a company that's capable of being a cash machine. My expectation is that's exactly what we will be.
Cash machine. We can turn that into then capital allocation priorities. $7 billion buyback, I think, is the guidance for this year, which is 2x, give or take, last year.
Correct.
The 50% dividend raise, which I think raised a lot of eyebrows. Would love for you to speak about those two things in also the context of additional investments. You did Epic Games last year. You took in the rest of Hulu. Maybe you can put all of that into context for us here.
Yeah, happy to. I mean, as we think about capital allocation, very simply, obviously, our first priority is to ensure that we're investing in the business to make sure that the business continues to thrive and grow and basically enable that earnings compounding that I was talking about earlier. In addition to that, obviously, we're focused on paying and increasing the dividend over time. In addition to that, to the degree that we see small opportunities for tuck-in acquisitions and things like that, that's something that we've always done. Epic is a good example of that. Even after all that, because we're generating such strong cash flow, we certainly feel good about our debt levels at the level they're at right now. We're a single A. We're not looking to go any higher than that. We certainly don't want to sit on excess cash.
I think you'll see us continue to drive strong share repurchase into the future because we do have the ability to do it. Frankly, we do find that to be a good use of cash.
I'm a media analyst, first and foremost. Lately, I feel like I'm an M&A analyst, second. It's changing by the week. I think you got the question last week as to how Disney looks at kind of strategic mergers and acquisitions. Given that there is some real-time news flow around that, would love for you to just make a final comment as well.
Yeah, happy to talk about that as well. Okay, part of my job and our job is to look at everything. Of course, we're going to look at everything. That said, we're very, very happy with where the portfolio is right now. A lot of the things that people are talking about doing with other media companies, Bob Iger and the team did at Disney a number of years ago, whether it was Pixar or Lucasfilm or the Fox acquisition. We do not think we need to add additional IP into our portfolio. More broadly, we really do not see the need for major M&A. We're really very happy with the portfolio as it exists right now. I guess we'll sort of watch what happens with everyone else. We feel good about where we are.
Great. Hugh, I want to thank you for taking the time with us today.
All right. Thank you, Steve. Appreciate it. Thank you all.