Disney(DIS.US)FY26Q1 Earnings Call: This year's streaming business goal is to achieve a 10% profit margin

Recently, Disney (DIS.US) held its FY26Q1 earnings call. The company stated that significant progress has been made in developing its streaming business into a profitable industry. Last year, the streaming business achieved a profit margin of 5%, with a goal of reaching 10% this year.

The company mentioned that it has been investing in this area for some time, continuously integrating international content and product technology in its streaming operations. Several years ago, quarterly losses reached $1 billion. However, this situation has now improved significantly.

Additionally, Disney announced that this quarter, revenue increased by 12%, while profits grew by over 50%. From this perspective, the company has fully leveraged operational efficiency advantages. Moving forward, it will continue to improve operational efficiency while investing in international content development and technological upgrades to further enhance product quality.

Regarding the licensing agreement with OpenAI, users will be able to generate approximately 250 30-second videos of Disney characters using Sora. These videos will not contain real voices or faces, the agreement term is three years, and the company will receive licensing revenue.

At the same time, the company stated that it will not specify the exact launch date of Sora. The technology details are still being worked out, and it is expected to be launched sometime within FY2026. Currently, content length remains limited to 30 seconds, and whether this will be extended in the future is not a current priority.

As for why the full-year guidance will accelerate in the second half, management explained that the quarterly differences in the Entertainment segment are mainly due to the release schedule of content and products. Compared to last year, more online programs will be launched in Q2, leading to changes in comparable operating profit. The core reason for the acceleration in the second half is a stronger lineup of theatrical releases: “The Devil Wears Prada 2,” “The Mandalorian,” “Grog,” as well as “Toy Story 5” and the live-action “Moana.”

The company also believes it currently has excellent IP resources and sees no need to acquire more IP at this time. The focus will remain on continuing to develop the value of existing IP.

Regarding international visitors, management explained that because international tourists stay at Disney hotels less frequently, the company’s visibility on international visitor data is limited. However, it will use other indicators to assess this and will allocate promotional and marketing resources more toward domestic audiences to maintain high visitor levels.

Q&A Analyst Questions and Answers

Q1: Bob, over the years, you’ve facilitated some important IP deals for Disney. Now, as an observer, do you think the IP owned by Warner Bros. and HBO is of considerable value? Does this perception influence your strategy to better monetize Disney’s top IP?

A: I believe that the competition for control over WBO should make investors realize the enormous value of Disney’s IP assets. The core is that the company owns very strong brand and series content assets, and ESPN is also an important part of that value.

Looking back at the acquisition of Fox, I think we had great foresight in many aspects. We recognized the need to own more IP, which is why we signed the deal. The announcement was in 2017, and the transaction was completed in 2019.

Comparing the acquisition price of WBO, our valuation of Fox at the time was very reasonable. From our current business development perspective, our advantages are clear. Most importantly, this fully demonstrates the huge value of these intellectual properties beyond the screen.

In just the past two years, we have invested $6 billion in film production, with total investments reaching $37 billion. These investments have created enormous value, and their impact is long-lasting.

For example, “Zootopia 2” and “Avatar: Fire and Ash” have brought huge revenue to Disney+, with both initial viewership and user watch time being very impressive.

Regarding our theme parks, we will open the “Frozen Snowland” themed area in Paris in a few months. Also, our influence in the “Star Wars” series should not be underestimated. The “Zootopia” themed area at Shanghai Disney Resort is massive, and its value is incalculable. The proportion of visitors coming specifically to see the “Zootopia” area is very high.

Therefore, I believe we currently have excellent IP resources and see no need to buy more IP. The focus will remain on further developing the value of these IPs; we just need to continue creating our own content, and we already have a large amount of story material to build upon.

Q2: Regarding the lack of public information on users: Can you help us better understand the real reasons behind the 13% growth in SVOD subscription revenue? Can you provide specific data breakdowns for the US and international markets? Additionally, what is your outlook for subscription and advertising revenue trends for the remainder of this year?

A: First, of course, is pricing strategy (raising prices); second is the development of North American and international markets; third is the success of product bundling—“double product bundles,” “triple product bundles,” and “Max bundles” have all performed well, increasing user engagement and generating substantial revenue.

Q3: We are particularly interested in the development trend of domestic theme parks. It seems relevant data has improved, with visitor numbers and per capita spending even rebounding. Could you please elaborate on Disney World’s performance in this context? You recently mentioned some specific trends. Regarding current reservation levels, do you think this can serve as an effective indicator for future demand?

A: Walt Disney World performed strongly this quarter. Last year’s hurricane impact created a low base, leading to a surge in visitors this year. Additionally, ticket prices remain high, and visitor numbers continue to grow.

For the full year, bookings increased by 5%, mainly in the second half. From this perspective, the growth momentum is very positive.

Q4: The earnings report did not mention the adjusted EPS growth for FY2027. Should we assume this growth remains in double digits, or will it be revised again in the future? The same question applies to capital expenditures.

A: There is no latest update on FY2027 business outlook. You can assume we will not make any adjustments; otherwise, we would issue a timely announcement. So, there are no changes at this point.

Q5: Bob, as your tenure as CEO nears its end, you have quickly implemented many measures after succeeding Michael Eisner, which have had a profound impact on profit growth.

For example: you moved the broadcast rights for “Monday Night Football” from ABC to ESPN, creating dual revenue streams; additionally, you built a good relationship with Steve Jobs and ultimately acquired Pixar. As you prepare to hand over the reins, what areas do you think your successor can focus on to drive long-term company growth?

A: First, thank you for mentioning some of the measures I took as CEO. That was a long time ago. I am proud of what I did then, and also proud of many achievements afterward.

When I returned three years ago, the company faced many urgent issues. But anyone running a business knows that merely solving problems is not enough. You must prepare for the future and take concrete steps to create growth opportunities.

Compared to three years ago, the company is now in much better shape—because we implemented many reforms. At the same time, we created numerous growth opportunities, including investing in the “Experiences” business to further expand our presence in various regions and offshore markets.

In such a rapidly changing world, trying to maintain the status quo in any form would be a mistake. I am confident my successor will not do that. They will have the company’s strong foundation and many growth opportunities; people also expect them to continuously adapt and develop in this ever-changing environment.

Q6: From an operational perspective, you just mentioned completing a partnership with the NFL. How do you see the relationship and business development with the NFL evolving? Including potential renewal negotiations after one year. It’s still uncertain.

A: Regarding the NFL, the deal was completed earlier than expected, allowing for earlier integration and progress. The upcoming NFL season and ESPN’s first Super Bowl present a huge opportunity for ESPN.

This not only means ESPN can better operate the NFL Network and RedZone platform but also that ESPN will have more NFL-related content resources. We understand the value of these resources—especially for ESPN’s streaming business, which is crucial.

I will not comment on the future relationship between ESPN and the NFL. Just to clarify, under the current agreement, the NFL has the right to terminate the partnership by 2030. What will happen then is still too early to predict.

Q7: How is the progress of the streaming bundling strategy? Is the user growth of ESPN Unlimited mainly driven by bundled subscriptions or pay-TV authentication channels? What are the key drivers for user adoption in the next phase? Also, what are the key steps for Hulu integration this year?

A: We have made great progress in developing the streaming business into a profitable industry. We have developed various technical tools to enhance user experience and optimize business results; at the same time, we are promoting related services globally. I believe this lays the foundation for accelerated growth, and you may hear more about the company’s rapid development in the future.

When discussing growth factors, the key points are: first, continue providing high-quality content, especially in international markets; second, advance the technological improvements I just mentioned; third, as you asked, provide a unified app experience; fourth, launch new features like vertical videos and Sora-generated content, which we have discussed before.

So far, our bundled services with Disney+ and Hulu have effectively reduced user churn. Similarly, bundling with ESPN has also improved subscriber retention. We know that reducing churn is critical for performance improvement and business growth.

We are actively developing related technologies to offer a “one-stop experience”—even though consumers can still purchase Disney+ or Hulu separately. But we believe most consumers will use both services simultaneously to get a fully integrated experience. It is expected that this feature will be launched before the end of this year.

Q8: Regarding the specific scope of the OpenAI licensing partnership, how will the company plan and deliver user-generated AI content on its platform? Will this content mainly be used for vertical short videos? Will the increase in AI content affect the company’s demand for traditional new program production and existing content libraries?

A: The management explained that this partnership is essentially a licensing agreement with OpenAI, allowing users to generate about 250 30-second videos of Disney characters using Sora. These videos will not contain real voices or faces, the agreement term is three years, and the company will receive licensing revenue.

The company also has the right to incorporate these Sora-generated short videos into Disney+ as “curated highlights,” viewing it as an accelerated way to build short video and user-generated content capabilities on Disney+. This is driven by the significant growth of short videos and user-generated content on external platforms.

Management further expressed hope that in the future, Disney+ subscribers could directly use Sora tools within the platform to create short videos, thereby increasing engagement. They believe this will not substantially impact traditional content creation and existing content libraries. They see AI’s value in three main uses: assisting creative processes, improving efficiency, and strengthening connections with users—making interactions more in-depth and effective.

Q9: Has the company’s organizational structure been arranged for handover and long-term operation?

A: The first thing I did when I returned three years ago was to reorganize the company. The main goal was to strengthen responsibility mechanisms for the streaming business. Clearly, our production studios and TV departments have invested the most in content creation. I believe that the teams with the most investment should bear more responsibility for their spending’s impact on company performance.

The core is to reinforce accountability in streaming, linking content investment more directly to streaming profit and loss: by entrusting the global film and TV operations to Allen Bergman and Dana Walden, whose investments are directly related to the profitability of streaming.

Before I took over, that business lost about $1.5 billion in the previous quarter and nearly $4 billion the year before. The results this quarter further prove that our efforts have paid off—over the past year, this business has turned a profit of over $1 billion, moving us toward becoming a more successful enterprise. This restructuring has indeed been effective.

While I cannot speak for my successor on how the organizational structure should be set up, I firmly believe that any organization must be built on establishing and maintaining accountability. This is crucial.

Q10: The company continues to invest in international content and product technology integration in streaming. How much do these investments weigh on profits, and how much operational leverage can be released in the future, reflected in next year and beyond?

A: We have indeed been investing in this area. Several years ago, quarterly losses reached $1 billion. But now, this situation has improved significantly.

Bob set a goal for us: first, to make streaming profitable; then, to increase its profit margin to double digits. Looking back at last year, our profit margin was 5%; this year, our target is 10%.

This quarter, revenue grew by 12%, and profits increased by over 50%. From this perspective, we have fully leveraged operational efficiency. We will continue to improve efficiency and invest in international content development and technological upgrades to further enhance product quality.

Of course, we need to balance: maintain rapid growth while improving operational efficiency. In our last discussion, we set a goal of achieving double-digit revenue growth. In fact, we achieved this in the first quarter, and we aim to sustain this momentum.

Q11: What is the driving factor behind the second-quarter comparable operating profit guidance for the Entertainment segment? Why is the full-year guidance accelerating in the second half? Also, has the narrowing decline in sports subscription revenue been mainly driven by ESPN streaming services? Is the bundling trend also improving?

A: Management explained that the quarterly differences in the Entertainment segment are mainly due to the release schedule of content and products. Compared to last year, more online programs will be launched in Q2, leading to changes in comparable operating profit. The core reason for the acceleration in the second half is a stronger lineup of theatrical releases: “The Devil Wears Prada 2,” “The Mandalorian,” “Grog,” as well as “Toy Story 5” and the live-action “Moana.”

Management believes these works will not only help the current year’s operating profit but also continue to generate value through consumer products and theme parks. “Zootopia 2” and “Avatar 3” are also scheduled to premiere on Disney+ before the end of this fiscal year.

Both “Zootopia” and “Avatar” series movies had initial viewership approaching 1 million on Disney+; the total watch time for the first “Zootopia” and the first two “Avatar” movies reached hundreds of millions of hours. If these movies debut on Disney+ before the end of this fiscal year, they will undoubtedly bring enormous value to the streaming service.

Q12: Regarding user-generated content related to Sora, when will it be launched on Disney+? Will the company extend the current 30-second limit to longer content in the future?

Additionally, how do changes in international visitors to theme parks impact operations? Do international visitors bring new demand? And what is the booking situation for Disney Adventure?

A: Management stated that there is no specific timeline for Sora’s launch. The technical details are still being worked out, and it is expected to be launched sometime within FY2026. Currently, content length remains limited to 30 seconds, and whether this will be extended in the future is not a current focus.

Regarding international visitors, management explained that because international tourists stay at Disney hotels less frequently, the company’s visibility on international visitor data is limited. However, it will use other indicators to assess this and will allocate promotional and marketing resources more toward domestic audiences to maintain high visitor levels.

Q13: How does the adjustment in the disclosure approach for the Entertainment division better reflect the company’s management of this business? What specific improvements does this change bring, and what information is it more conducive for investors to understand?

A: Management stated that the company views Entertainment as a whole in its operations. Continuing to split linear TV, streaming, and theatrical into separate discussions adds complexity and does not reflect the business reality, as fundamentally it’s just consumers migrating between different distribution channels. The content creation and distribution logic are unified: the company produces content and distributes it across multiple channels.

Management believes that such detailed splitting was more meaningful in the past but now offers less informational value. Therefore, they chose to adjust the disclosure approach to better align with actual operations and reduce unnecessary complexity.

Q14: From a long-term profit structure perspective, will the company’s profit structure become more balanced in five to ten years, or will it still be dominated by Experiences? How does the company assess the future relative contributions of these two main engines?

A: Management reviewed that in 2005, the theme park business had poor capital return on investment and limited expansion. Later, as the company acquired high-value IP like Pixar, Marvel, Lucasfilm, and 20th Century Fox, these IPs brought greater attraction and higher investment return certainty to the theme parks, supporting increased capital investment and improved returns.

Management emphasizes that the current Experiences business is broader and more diverse. Ongoing projects will further expand its scale and coverage. After visiting Abu Dhabi recently, they see huge potential in that region, given its geographic location reaching many people who have not visited Disney parks before, and the possibility of building in a more modern, technologically advanced way. They are very optimistic about the long-term growth of Experiences.

At the same time, they also highlight that the future of entertainment-related businesses is equally promising. Streaming profitability has improved significantly, and the film pipeline is strong. Therefore, in the future, these two engines will likely operate in a “healthy competition,” both capable of being the company’s primary profit drivers and achieving good growth under current investments and trends.