A Spirited Perfect Ten

[Rodan75]

I've examined Disney's SEC filings and believe Disney included a few hundred million of MyMagic+'s costs in SG&A. This is supported by Disney's disclosure in FY2014 that:

Selling, general, administrative and other costs decreased $104 million from $1,960 million to $1,856 million due to the absence of development costs for MyMagic+ [emphasis added], partially offset by higher marketing and sales costs and higher pre-opening costs at Shanghai Disney Resort.​

In FY2014, P&R SG&A decreased by over 5% while other P&R expenses increased by approximately 7%. Prior to 2014, it's interesting to note that increases in SG&A outpaced other P&R costs.

In 1Q2015, SG&A increased by about 7%, similar to increases in other P&R expenses.

To me, it appears there was a ramp-up of MyMagic+ development costs recorded in SG&A that lasted a few years, which then ended in 2014.

Given what we know about the project, that doesn't seem inappropriate. But it is another way to make it harder for an outsider to see how much was truly spent on MM+.

 

[Brer Panther]

With all this talk about how much more Eisner did for the parks than Iger, do you think they'd be in better shape if Eisner was simply demoted to the President of Walt Disney Imagineering or something?

 

[MichWolv]

I've examined Disney's SEC filings and believe Disney included a few hundred million of MyMagic+'s costs in SG&A. This is supported by Disney's disclosure in FY2014 that:

Selling, general, administrative and other costs decreased $104 million from $1,960 million to $1,856 million due to the absence of development costs for MyMagic+ [emphasis added], partially offset by higher marketing and sales costs and higher pre-opening costs at Shanghai Disney Resort.​

In FY2014, P&R SG&A decreased by over 5% while other P&R expenses increased by approximately 7%. Prior to 2014, it's interesting to note that increases in SG&A outpaced other P&R costs.

In 1Q2015, SG&A increased by about 7%, similar to increases in other P&R expenses.

To me, it appears there was a ramp-up of MyMagic+ development costs recorded in SG&A that lasted a few years, which then ended in 2014.

Most likely, the costs that wound up in SG&A are not direct development costs, but instead are 1) training costs, 2) management and other overhead costs allocated to the project, 3) costs of wasted time and materials, 4) data conversion and analysis costs, and 5) ancillary costs such as developing instruction materials, negotiating contracts, leasing space for developers, etc.

 

[clsteve]

For accounting purposes, it is not "above board" to put things anywhere other than where they belong.

Enhancements are capital expenditures.
Performance and tuning is jargon that could be anything -- if it's routine stuff during operation, it's expensed; if it's the stuff needed to get the software ready for its intended use, it's capitalized.
Data migration is expensed.

There's judgment, to be sure, as to the line between an enhancement and normal maintenance. But it isn't "above board" to decide to just expense the cost of enhancements.

Honestly,I think you and I are just getting crossed on the difference in terminologies between acctg practices and similar usage in project terminology. Anything that's outside of the original contract is an enhancement requiring a change order to the Partner.

One thing to keep in mind is that these large projects are iterative - design and dev overlapping multi components - greying the design, dev. Plus, the majority of the tasks I was pointing to were post that Proof of Concept, feasibility stage for the capitalized product.

Besides, and please correct me if I'm wrong, most of the rules for capitalization of internally used software are to ensure things aren't over capitalized. They could have categorized the whole huge NextGen project, the internally, developed and partner contracted software and integration part, as a yty opex expense if they wanted to - nothing illegal about that.

 

[MichWolv]

Honestly,I think you and I are just getting crossed on the difference in terminologies between acctg practices and similar usage in project terminology. Anything that's outside of the original contract is an enhancement requiring a change order to the Partner.

If that's the way you're using "enhancement", then all enhancement costs during development should be capitalized.

Besides, and please correct me if I'm wrong, most of the rules for capitalization of internally used software are to ensure things aren't over capitalized. They could have categorized the whole huge NextGen project, the internally, developed and partner contracted software and integration part, as a yty opex expense if they wanted to - nothing illegal about that.

Nope. The accounting standards regarding capitalization of internal use software development are not optional. Simply expensing all such costs would not be in accordance with GAAP, and for a public company to knowingly issue financial statements that contain a material departure from GAAP is a violation of the security laws.

 

[CaptainAmerica]

Besides, and please correct me if I'm wrong, most of the rules for capitalization of internally used software are to ensure things aren't over capitalized. They could have categorized the whole huge NextGen project, the internally, developed and partner contracted software and integration part, as a yty opex expense if they wanted to - nothing illegal about that.

The standards err on the side of expense, but that doesn't mean you can expense whatever you want. Regardless, Disney's corporate policy is much less ambiguous.

My best guess at what those SG&A costs consisted of were labor. Lots and lots of labor. They had an entire "hypercare" team dedicated to the project rollout to train cast members, record and report bugs, etc. There was a long stretch of time when CMs were essentially double staffed at the front gates.

 

[CaptainAmerica]

Quick math based on wildly rough estimates.

10 cast member per park per shift
2 shifts
4 parks
8 hours per shift
$10 per hour
365 days per year

$2.3M

 

[wogwog]

A good day not to be at MK. Spring break and these times..7 D Mine 140 Ice ladies 155 Space 120 Peter 105 Jungle 70 Haunted 70 Splash Down all while the day parade is occupying several thousand guests.

 

[HauntedMansionFLA]

Quick math based on wildly rough estimates.

10 cast member per park per shift
2 shifts
4 parks
8 hours per shift
$10 per hour
365 days per year

$2.3M

People don't realize how much it cost to run something like WDW with the fours parks, two water parks, all of the resorts, downtown Disney, transportation, the roads and all of the upkeep of everything - along with paying employees.

 

[wogwog]

Quick math based on wildly rough estimates.

10 cast member per park per shift
2 shifts
4 parks
8 hours per shift
$10 per hour
365 days per year

$2.3M

Don't forget about the kiosk attendants for months and months during test and rollout. A friend has a son who did this for months. The start of the project Disney had about 70 of them at the MK alone. When the system did not work very well the kiosk crew was quickly increased to over 300. This was just the MK.

 

[Funmeister]

Quick math based on wildly rough estimates.

10 cast member per park per shift
2 shifts
4 parks
8 hours per shift
$10 per hour
365 days per year

$2.3M

Good estimate but I think 10 Cast Members per shift is on the conservative side.

 

[CaptainAmerica]

Good estimate but I think 10 Cast Members per shift is on the conservative side.

I was trying to keep it to "front gate" and hypercare CMs only. It still might be a little light but I think it would definitely be a mistake to include kiosk attendants. I assume those costs are being absorbed right into the parks' operating budgets since they're new ongoing expenses rather than temporary rollout costs.

Of course, each resort's front desk also had some hypercare folks as well.

 

[CDavid]

Quick math based on wildly rough estimates.

10 cast member per park per shift
2 shifts
4 parks
8 hours per shift
$10 per hour
365 days per year

$2.3M

I know it's just an example, and I'm really really bad at math, but where do you get $2.3 million?

 

[CaptainAmerica]

I know it's just an example, and I'm really really bad at math, but where do you get $2.3 million?

Multiplication.

10 CMs * 2 shifts * 4 parks * 8 hours = 640 labor hours per day

640 * 10 = $6,400 dollars per day

$6,400 * 365 = $2.3M per year

 

[Nubs70]

It's a very interesting quantification game with huge projects like these that include a large service provider. On one hand, it's very easy to quantify the transition to and from capitalization because of the contract(s). Within a majority time and materials (TM) contract, very often the actual software product components can be fixed price - but only those, and only when there is very specific acceptance criteria in place that is independently verifiable.

That verification often takes place in one of the huge independent testing facilities, of which there are several around the country,where they can take the software and simulate 10's of thousand of users banging away on it. And for good reason- the service provider wants to get paid and wants a hard stop on anything fixed price. Too much risk for them otherwise. So, acceptance would happen long before any visible beta.

The vast majority of these projects are under TM contracts because success is largely out of the providers hands and dependent on the quality of the requirements, underlying infrastructure, staff competence and access provided by the contracting Company.

This is where the big overruns almost always happen - in the heavy TM phases like Performance and Tuning, Data Migration, and the user facing components. That's where the meter really starts running.

We all got to experience that first hand with MDE even after NextGen was in production- disappearing accounts and FP's after almost every maintenance patch, along with blue Mickeys, etc. That was after production rollout, after the delay of that rollout. How long that went on is probably the best indicator of how much the project overran its allocations.

I've been thinking about this a lot (20 hours of driving in 2 days will do that) because I have seen it before- where huge projects like these are under capitalized with the intent of yty operational monies to foot the bill as a way of hiding the true cost externally. It's totally above board to throw enhancements and P&T and the like into the yearly buckets. @ParentsOf4, you don't think Disney would want to keep the true full cost away from folks who would be asking questions about the return on that investment - they wouldn't do that, would they....?

The other thing that's unique: (and @WDW1974, kind of ironic) this project is almost a "reverse Shanghai." There's no mention of the Partner(s) in this anywhere externally - no "NextGen, powered by (insert Partner)" or NexGen, brought to you by (insert Partner)" or even the press releases saying "Disney and (insert Partner) have entered into an agreement to create the most advanced Guest Management Solution in the Industry."

Nothing

It's unusual because it's a good thing to show they've reduced the risk of the project by bringing in an expert. Plus, it's a way to share blame if the project doesn't go well or overruns. The "We put it in the hands of the experts" excuse.

And for the Provider, they want to be able to say "look at the great job we did at Disney - nobody else could do that". It's their strongest and best Marketing message - really their only way to differentiate themselves from the rest.

Disney's gone to great lengths to make this an "all Disney" project externally. To make it that way, you pretty much have to contractually spell it out.....

In reference to "reverse Shanghai", WDW does not want you to know who helped build NextGen. It could start leading questions kind of like the place where $800MM ended up landing.

 

[Lord_Vader]

I agree it will have appeal to a lot of people. Where I'm a little skeptical is the number of high end restaurants being built and their size. The Boathouse is huge. They are also building a rather large Morimotto restaurant that seems promising to be pretty high end. Plus another steakhouse (STK) and whatever the Edison property turns out to be. These are the former PI club buildings. They are all pretty big. Combine all of the new stuff with the nice restaurants already there and its a lot of high end dining.

Current demand isn't likely enough for all that supply. I'm assuming the plan is to attract more convention visitors and locals too adding additional visitors. They won't be canabalizing the existing Disney style dining like T-Rex or RFC. 2 different demographic groups.

Most high end restaurants do not have the table turnover that lower end chains like T-Rex and Rainforest do, guests take longer to enjoy their visit so to handle expected volume they must be larger.

As for demand, when we visit July/August/X-Mas it is difficult to get into Shulas or Yaghtsman Steakhouse without the 180 day reservation in my experience so the demand may be there.

 

[CaptainAmerica]

As for demand, when we visit July/August/X-Mas it is difficult to get into Shulas or Yaghtsman Steakhouse without the 180 day reservation in my experience so the demand may be there.

And those are at resorts. DTD will have much higher demand than restaurants in resorts, though perhaps not as high as those in the parks.

 

[Funmeister]

I was trying to keep it to "front gate" and hypercare CMs only. It still might be a little light but I think it would definitely be a mistake to include kiosk attendants. I assume those costs are being absorbed right into the parks' operating budgets since they're new ongoing expenses rather than temporary rollout costs.

Of course, each resort's front desk also had some hypercare folks as well.

I agree. Was International Gateway (Epcot) as much a factor as much as a Main Gate?

I know it is minor considering the purpose of your point. lol

At the end of the day it was a crap load of money.

 

[clsteve]

If that's the way you're using "enhancement", then all enhancement costs during development should be capitalized.


Nope. The accounting standards regarding capitalization of internal use software development are not optional. Simply expensing all such costs would not be in accordance with GAAP, and for a public company to knowingly issue financial statements that contain a material departure from GAAP is a violation of the security laws.

That's why I think we're mixing terminology, since I agree with you. I absolutely agree that all costs up to the acceptance of the software product (minus some of the early design, "can we actually do this" effort prior to contracts)- absolutely to capex. It's the expense post acceptance - the big T&M expenses that overrun and are under-estimated. These are not adding functionality - capex, these are to get what's been built, capitalized and accepted to work - actually work in a true environment with real customers banging on the whole solution.

For example: to the Provider, having to re-design, re-build, re-test, re-implement an interface so it actually works when integrating all of the disparate legacy systems, migrating that data into the new data schema and everything collapses because the legacy data set isn't really what was in the original design....to the Provider it's an enhancement requiring a change order and more money. Not necessarily to the Customer, like Disney but an enhancement in the eyes of the Provider. There's no new functionality being built.

Or those occurring when it actually hits the hands of real users - not the small handful who participated in the true alpha and beta testing prior to acceptance - often the same ones who wrote the spec's for the system and approved the results of the feasibility. Things such as key information not displaying in the correct order to complete their job, or it's so slow to display that a reconfig where the data is virtually staged now must happen. Big issue to fix. Big expense, big change order and enhancement to the Provider - not new functionality.

Please correct me if I'm wrong. But, if E&Y came in for an audit and found that Disney categorized as capex those above expenses incurred to correct issues or get it to really perform, after Disney signed off on and accepted the product (and wrote the specs)... they might let them categorize them as capex, but they might have to explain why.

These are the types of things that do not have to be capitalized and can be recognized within the FY. They're also the things that blow the original estimates and cause the issues around budgets we were discussing.

Not pre-acceptance. Pre-acceptance is the honeymoon phase - with lots of flashy prototypes to show and blazing integrations of sanitized data sets. Post-acceptance - that's marriage, and that's maintenance. And that's expensive.

That's just been my experience and Disney is not alone in the corporate world for having gone through it.

 

[CaptainAmerica]

I agree. Was International Gateway (Epcot) as much a factor as much as a Main Gate?

I know it is minor considering the purpose of your point. lol

At the end of the day it was a crap load of money.

Yeah, like I said my post was wildly inaccurate and could have been 10% of that amount or ten times that amount. I just wanted to point out to some of the other posters that year-over-year savings due to the absence of NGE SG&A costs in the current year doesn't need to be some elaborate technological initiative, nor do you need to get into the weeds of capital accounting. Labor gets you there.