Case Study Notes HOW DISNEY MAKES MONEY PARKS, EXPERIENCES & CONSUMER PRODUCTS A previous Disney Case used the company's financial statements Parks, Experiences & Consumer Products revenue includes to determine how Disney makes money. A few pertinent points ticket sales to Disney theme parks and cruises, merchandise sold have been summarized here as they relate to this Disney Case. at The Disney Store retail locations, and more. The segment's Disney has four operating segments--Media Networks, Parks, revenues have been on a general upward trend. It seems rea- Experiences & Consumer Products, Studio Entertainment, and sonable that this segment is subject to the success of the other Direct-to-Consumer & International. The table below shows the three segments, with the Studio Entertainment segment's suc- proportion of Disney's total revenues and operating income that cess having the greatest imapct. Data shows that popular charac- come from each segment. ter movies, like Finding Nemo, significantly increase purchases of products related to the film. Disney also centers most of its Disney Segment Revenues and Operating Income new theme park and experience entertainment on recent movie All Data from Fiscal Year 2018 in Millions, Except Percentages success like the Star Wars park in Disneyworld. In your analy- Revenues % of Total Operating Income % of Total sis, consider the changes in operating margins in this sector. Media Networks 21,922 36.5% 7,338 46.7% PECP 24,701 41.1% 6,095 38.8% Studio Entertainment 10,065 16.7% 3,004 19.1% -738 -4.7% MEDIA NETWORKS The company owns and operates a number of media networks, including ESPN, Disney, and ABC. With the advent of Netflix, Hulu, and Amazon Prime, consumers have completely changed how they view and consume media content. Using ratios like operating margin and asset turnover, think about how you believe Disney may be able to compete in this changing market. DCTI 3,414 5.7% Eliminations -668 Total 59,434 Source: The Walt Disney Company Annual Report (10-K) -10 15,689 A NOTE ON RATIOS AND COMPARISONS . STUDIO ENTERTAINMENT During routine medical examinations, patients often have their This is the company's movie making business. Movie making is blood drawn and tested. Blood test results are displayed in a often considered an "eat what you kill business. This means table of numbers. Each number is a ratio that specifies how that movie makers are judged on the value of their current cre- much of a particular substance was found in a particular mea ation. A number of trends in this segment significantly impact sured volume of blood. In isolation the results are not partic- the company as a whole. Revenue growth is spotty with notice- ularly useful. To make better use of the data, test results are able periods of up and down. Assets have increased through compared to data from other similar healthy individuals as a three purchases of competitive studios: Pixar, Marvel, and Lucas reference and benchmark. Films. For this segment, focus on three things: the number of Financial ratios act like a blood test for a company. They films produced, the operating margin, and the average reve- often give analysts advance notice of operating or financial dan nue per film. gers being experienced by companies when compared against their healthy peers. But what exactly constitutes a peer. DIRECT-TO-CONSUMER & INTERNATIONAL Disney has four discrete operating segments. No other com The Direct-to-Consumer & International segment includes busi- pany in the world has a similar structure. Consequently, we nesses like ESPN+, Disney+, and Hulu streaming services. These are not likely to find a strict comparable company to serve as businesses generate revenue from subscription fees charged to a benchmark for ratio comparison. Very few companies have customers/subscribers for Disney's DTC streaming services. For peers that are strictly similar. this segement, focus on programming and production costs, as well as technical support costs. CASE CLUES The four case questions are tied to particular ratio segments and can be answered by limited assessment of Disney's ratios. The following clues may be useful in answering the final case question. The Walt Disney Company has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. Each of these segments operates within different environments. Case Questions To answer these case questions, use the Terminal Tutorial and Case Study Notes provided on the next pages. O ls Disney liquid compared to its peers? Does Disney manage its assets effectively compared to its peers? Does Disney's debt load suggest trouble paying its creditors? Compare Disney's profitability to its peers. Case Study Notes HOW DISNEY MAKES MONEY PARKS, EXPERIENCES & CONSUMER PRODUCTS A previous Disney Case used the company's financial statements Parks, Experiences & Consumer Products revenue includes to determine how Disney makes money. A few pertinent points ticket sales to Disney theme parks and cruises, merchandise sold have been summarized here as they relate to this Disney Case. at The Disney Store retail locations, and more. The segment's Disney has four operating segments--Media Networks, Parks, revenues have been on a general upward trend. It seems rea- Experiences & Consumer Products, Studio Entertainment, and sonable that this segment is subject to the success of the other Direct-to-Consumer & International. The table below shows the three segments, with the Studio Entertainment segment's suc- proportion of Disney's total revenues and operating income that cess having the greatest imapct. Data shows that popular charac- come from each segment. ter movies, like Finding Nemo, significantly increase purchases of products related to the film. Disney also centers most of its Disney Segment Revenues and Operating Income new theme park and experience entertainment on recent movie All Data from Fiscal Year 2018 in Millions, Except Percentages success like the Star Wars park in Disneyworld. In your analy- Revenues % of Total Operating Income % of Total sis, consider the changes in operating margins in this sector. Media Networks 21,922 36.5% 7,338 46.7% PECP 24,701 41.1% 6,095 38.8% Studio Entertainment 10,065 16.7% 3,004 19.1% -738 -4.7% MEDIA NETWORKS The company owns and operates a number of media networks, including ESPN, Disney, and ABC. With the advent of Netflix, Hulu, and Amazon Prime, consumers have completely changed how they view and consume media content. Using ratios like operating margin and asset turnover, think about how you believe Disney may be able to compete in this changing market. DCTI 3,414 5.7% Eliminations -668 Total 59,434 Source: The Walt Disney Company Annual Report (10-K) -10 15,689 A NOTE ON RATIOS AND COMPARISONS . STUDIO ENTERTAINMENT During routine medical examinations, patients often have their This is the company's movie making business. Movie making is blood drawn and tested. Blood test results are displayed in a often considered an "eat what you kill business. This means table of numbers. Each number is a ratio that specifies how that movie makers are judged on the value of their current cre- much of a particular substance was found in a particular mea ation. A number of trends in this segment significantly impact sured volume of blood. In isolation the results are not partic- the company as a whole. Revenue growth is spotty with notice- ularly useful. To make better use of the data, test results are able periods of up and down. Assets have increased through compared to data from other similar healthy individuals as a three purchases of competitive studios: Pixar, Marvel, and Lucas reference and benchmark. Films. For this segment, focus on three things: the number of Financial ratios act like a blood test for a company. They films produced, the operating margin, and the average reve- often give analysts advance notice of operating or financial dan nue per film. gers being experienced by companies when compared against their healthy peers. But what exactly constitutes a peer. DIRECT-TO-CONSUMER & INTERNATIONAL Disney has four discrete operating segments. No other com The Direct-to-Consumer & International segment includes busi- pany in the world has a similar structure. Consequently, we nesses like ESPN+, Disney+, and Hulu streaming services. These are not likely to find a strict comparable company to serve as businesses generate revenue from subscription fees charged to a benchmark for ratio comparison. Very few companies have customers/subscribers for Disney's DTC streaming services. For peers that are strictly similar. this segement, focus on programming and production costs, as well as technical support costs. CASE CLUES The four case questions are tied to particular ratio segments and can be answered by limited assessment of Disney's ratios. The following clues may be useful in answering the final case question. The Walt Disney Company has four operating segments: Media Networks, Parks, Experiences & Consumer Products, Studio Entertainment, and Direct-to-Consumer & International. Each of these segments operates within different environments. Case Questions To answer these case questions, use the Terminal Tutorial and Case Study Notes provided on the next pages. O ls Disney liquid compared to its peers? Does Disney manage its assets effectively compared to its peers? Does Disney's debt load suggest trouble paying its creditors? Compare Disney's profitability to its