2nd 'Hedge' fund drives DWA Q1

No sequel, though earnings exceed Street expectations

For the second consecutive quarter, DreamWorks Animation cited "Over the Hedge" as a primary revenue driver, though CEO Jeffrey Katzenberg said there won't be a sequel.

"It was close. An almost," he said in an interview after his company posted earnings that blew past Wall Street's expectations.

Katzenberg also reiterated his admiration for 3-D movies and his plans to make 3-D versions of all DWA feature films beginning in 2009.

"It's a pretty big effort," he said. "It's a game-changer not only for us but the entire industry."

He also dismissed concerns raised by analysts that the lackluster response to the Walt Disney Co.'s "Meet the Robinsons" suggests that the allure of computer-generated films is waning.

Further bucking traditional dogma, Katzenberg said that "Shrek the Third" might benefit from the stiff competition it will have being sandwiched between the latest installments in the "Pirates of the Caribbean" and "Spider-Man" franchises.

"The high tide is going to raise all the boats," he said, predicting a U.S. boxoffice record this year. "There's a lot of excitement for all three movies, and the audience is ready for the summer fun to begin."

The CEO, however, was a bit more cautious during a conference call Tuesday, telling analysts that "we're facing some very tough competition, and there is no way to predict how it will affect our performance."

Prudential Equity Group analyst Katherine Styponias said Tuesday that she expects "Shrek" to gross from $75 million-$80 million in its opening weekend.

DWA reported first-quarter net income of $15.4 million, up from $12.3 million in the same frame last year on revenue that rose 56% to $93.7 million.

The results included a $6.8 million tax benefit related to a tax-sharing agreement with Paul Allen's Vulcan investment group. The benefit partially was offset by a $5.8 million increase in the income tax benefit payable to Vulcan.

"Hedge" contributed $33.1 million in revenue during the quarter, mostly through home video. Through the first quarter, the company shipped 12.6 million units of the title, taking into account actual and estimated future returns.

"Shark Tale" contributed $18.1 million, mostly by way of domestic network TV distribution, and "Shrek 2" donated $17.5 million, primarily via international TV. "Madagascar," which has a sequel planned for release next year, contributed $6.4 million, mostly from home video sales.

The movies made with former partner Aardman Animations — "Wallace & Gromit: Curse of the Were-Rabbit" and "Flushed Away" — were good for $9.4 million and $1.2 million, respectively.

DWA previously had taken a $29 million charge for the underperformance of "Wallace & Gromit" and one for $109 million for "Flushed Away." The $1.2 million "Flushed Away" revenue came from merchandising and licensing because, while the movie took in $176 million in worldwide ticket sales, it wasn't enough to fully recoup distributors.

The company said it has shipped 5.8 million "Wallace & Gromit" DVDs, also net of actual and estimated future returns.

DWA added that it has purchased 1.2 million of its shares for $35 million during the first quarter and is authorized to repurchase about $115 million more through Aug. 31, 2008.

DWA shares were up 2.3% on Tuesday to $29.94 and kept rising in after-hours trading. The stock has risen 45% in the past nine months.
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