Question

Financial fraud is often uncovered by exploring financial statements. This is easier with a public company than a private one, as we will see by studying the fall of health technology cor- poration Theranos.

This case study’s pre-work article takes a close look at the startup Theranos which was founded and run by Elizabeth Holmes. It is a tale of a 19 year old female startup founder that led her company to a $6 billion evaluation by some in Silcon

Valley that turned into a story of lies and corruption.
This lesson is designed to help students become more fluent in interpreting financial statement ratios in order to learn more about a company. Using Theranos as a lens, the class activity examines how to construct an income statement and balance sheet. We’ll dive deeper into these statements and the value they can bring to investors. You’ll learn through reading the pre-work article the value of these statements to investors and

what happens when they are largely ignored.
The homework Case Study asks students to dissect the finan-

cial statements of The Walt Disney Company and describe its structure and drivers. You will be tasked with using the Bloomberg terminal to answer a set of 3 questions that are meant to prove an understanding of financial statements and how they can impact a person’s understanding of a comapny.

◼ FINANCIAL STATEMENTS / BLOOMBERG BUSINESSWEEK CASE STUDY

● DISNEY’S BUSINESS SUMMARY

The following text is an edited summary from Disney’s 2018 annual report (10-K) submitted by the company to the SEC.

The Walt Disney Company, together with its subsidiaries, is a diversified worldwide entertainment company with operations in four business segments:

̡ Media Networks
̡ Parks, Experiences & Consumer Products ̡ Studio Entertainment
̡ Direct-to-Consumer & International (DTCI)

● MEDIA NETWORKS

The Media Networks segment includes cable and broadcast tele- vision networks, television production and distribution oper- ations, domestic television stations and radio networks and stations. The Company also has investments in entities that operate programming, distribution and content management services, including television networks, which are accounted for under the equity method of accounting.

The businesses in the Media Networks segment principally generate revenue from the following:

• ̡ Fees charged to cable, satellite, telecommunications and digital over-the-top service providers

• ̡ The sale to advertisers of time in programs for commer- cial announcements (“ad sales”)

• ̡ Licensing fees for the right to use Disney’s programs, productions, and content (“program sales”)

  Operating expenses primarily consist of programming and pro- duction costs, participations and residuals expense, technical support costs, operating labor and distribution costs.

  ● PARKS, EXPERIENCES & CONSUMER PRODUCTS

  � Parks & Experiences
  Disney owns and operates the Walt Disney World Resort in Florida; the Disneyland Resort in California; Disneyland Paris; Aulani, a Disney Resort & Spa in Hawaii; the Disney Vacation Club; the Disney Cruise Line; and Adventures by Disney. The Company manages and has effective ownership interests of 47% in Hong Kong Disneyland Resort and 43% in Shanghai Disney Resort, both of which are consolidated in our financial state- ments. Disney also licenses intellectual property to a third party to operate the Tokyo Disney Resort in Japan. The Company’s Walt Disney Imagineering unit designs and develops new theme park concepts and attractions as well as resort properties.

  � Consumer Prodcuts
  The Consumer Products sub-segment licenses Disney’s trade names, characters and visual and literary properties to vari- ous manufacturers, game developers, publishers and retail- ers throughout the world. The sub-segment is also responsible for the sale of branded merchandise through retail, online and wholesale businesses. Disney also develops and publishes books, magazines, comic books, and games. As of the end of

fiscal 2018, Disney had substantially exited the vertical games development business.

The Parks, Experiences & Consumer Products segment gener- ates revenue primarily from:

̡ Sale of tickets for admission to theme parks
̡ Merchandise, food and beverages at theme park resorts

and cruise ships
̡ Hotel rooms, cruise vacations, and sales and rentals of

vacation club properties
̡ Royalties from IP licensing and sales of merchandise at

The Disney Stores, branded internet shipping sites, and

wholesalers
̡ Revenues from sponsorships and co-branding oppor-

tunities, real estate rent and sales, and royalties from Tokyo Disney Resort

Significant costs include labor, costs of goods sold, infrastruc- ture, supplies, commissions, and entertainment offerings.

● STUDIO ENTERTAINMENT

The Studio Entertainment segment produces and distributes under the Walt Disney Pictures, Pixar, Marvel, Lucasfilm, and Touchstone banners. The segment is also involved in the devel- opment, production, and licensing of live entertainment events on Broadway and around the world.

The businesses in the Studio Entertainment segment gener- ate revenue from distribution of films in the theatrical distribu- tion, home entertainment, and TV/SVOD markets. This includes rentals from licensing motion pictures to theaters, sale of motion pictures to retailers and distributors, and other revenues col- lected from licensing and ticket sales.

Significant operating expenses include amortization of pro- duction, participations and residuals costs, marketing and sales costs, distribution expenses and costs of sales.

● DIRECT-TO-CONSUMER & INTERNATIONAL (DTCI)

The Direct-to-Consumer & International segment includes Disney and ESPN branded international television networks and channels, Direct-to-Consumer (DTC) businesses like ESPN+ Disney+, and Hulu streaming services, and equity investments. The equity investments include a 21% effective ownership in Vice Group Holdings.

The businesses in the DTCI segment generate revenue from fees charged to MVPD’s for the right to deliver Disney’s International Channels to their customers, ad sales on International Channels, and subscription fees charged to cus- tomers/subscribers for Disney’s DTC streaming services.

Operating expenses primarily consist of programming and production costs, technical support costs, operating labor, and distribution costs.

Case Questions

1 Using the information on the previous page, identify how Disney makes money, i.e. where it earns its revenue.

2 Using the Terminal Tutorial at the end of the case study, calculate each business segment’s contribution to Disney’s total revenue and operating income.

3 Using the information on the previous page and the data from question 2, what is the primary driver of revenue for each of Disney’s segments.

Answer 1

Answer 1

We can categorise Disney’s revenue model in to following parts:

1. MEDIA NETWORKS

1. Fees charged to cable, satellite, telecommunications and digital over-the-top service providers.
2. The sale to advertisers of time in programs for commercial announcements (“ad sales”)
3. Licensing fees for the right to use Disney’s programs, productions, and content (“program sales”)

2. PARKS, EXPERIENCES & CONSUMER PRODUCTS

1. Sale of tickets for admission to theme parks
2. Merchandise, food and beverages at theme park resorts and cruise ships
3. Hotel rooms, cruise vacations, and sales and rentals of vacation club properties
4. Royalties from IP licensing and sales of merchandise at The Disney Stores, branded internet shipping sites, and wholesalers
5. Revenues from sponsorships and co-branding opportunities, real estate rent and sales, and royalties from Tokyo Disney Resort.

3. STUDIO ENTERTAINMENT

1. Distribution of films in the theatrical distribution, home entertainment, and TV/SVOD markets.
2. Rentals from licensing motion pictures to theaters, sale of motion pictures to retailers and distributors, and other revenues collected from licensing and ticket sales.

4. DIRECT-TO-CONSUMER & INTERNATIONAL (DTCI)

1. fees charged to MVPD’s for the right to deliver Disney’s International Channels to their customers.
2. Ad sales on International Channels
3. Subscription fees charged to customers/subscribers for Disney’s DTC streaming services.

Answer 2. No financial data given for calculating contribution.

Answer 3.

Primary drivers of revenue for Disney are following:

1. Number of viewership for Media products & Programmes
2. Number of Programmes, productions and content produced
3. Number of Tickets sold for theme parks
4. Number of Theme Parks
5. Total Rooms in hotel properties and occupation rate
6. Total capacity of Cruises and occupation rate
7. Number of footfalls in Stores
8. Number of stores
9. Number of visits on website
10. Number of real estate properties
11. Total area of real estate properties
12. Number of Motion Pictures produced
13. Number Viewership for motion pictures
14. Number of motion pictures sold to retailers and distributors
15. Number of TV channels operated
16. Ad sales time
17. Price of ad per unit of time
18. Number of users of DTC streaming service