DWA's Q4 isn't looking so flush
Swings to $21.3 mil loss; expects 'Shrek' to drive '07Profits were "Flushed Away" by DreamWorks Animation during its fourth quarter, but the company's financial results managed to float past the best expectations of Wall Street.
The company took a $109 million charge in the quarter because of the less-than-stellar performance of "Flushed," which has earned a disappointing $175 million at the worldwide boxoffice.
A year ago, DWA took a $29 million charge for "Wallace & Gromit: The Curse of the Were-Rabbit." That movie and "Flushed" were made with Aardman Animations, and DWA has since severed its relationship with the studio.
DWA reported a $21.3 million loss in the fourth quarter compared with a $63.2 million profit in the same frame a year ago, when "Madagascar" DVD sales were strong and a one-time tax benefit hit the books.
Revenue for the quarter was $204.3 million, compared with $172.9 million a year ago. Analysts expected about $159 million. On a per-share basis, DWA lost 20 cents compared with the 42 cents that analysts were expecting, a monstrous overperformance that enthused some analysts.
Despite the strong financial performance, DWA shares fell 3% on Tuesday to $26.80, perhaps the fault of a worldwide swoon in stock prices triggered by a meltdown in China's markets.
Executives were optimistic during a conference call with analysts, suggesting that the weak market for DVDs a few years ago that sent DWA shares reeling has now recovered.
CEO Jeffrey Katzenberg said he expects about 10 CG-animated films to be released on DVD from his company and its competitors this year and about the same number in 2008. "That's a significant thinning of the market," he added.
Katzenberg said this year's results will be driven by "Shrek the Third," set for release May 18. The company's other 2007 bow, "Bee Movie" starring Jerry Seinfeld, is set for Nov. 2 but won't account for meaningful revenue until next year.
Katzenberg said "Shrek the Third" will spark a "big event at retail," when the first two "Shrek" DVDs will be marketed to consumers as individual items and via multiple-item sets. "Just about every variation in packaging … maybe even backwards," he said.
Curiosity surrounding the "Shrek babies," as Katzenberg put it, should translate into significant buzz and generate "unique merchandise opportunities."
Merrill Lynch analyst Jessica Reif Cohen said that "Shrek the Third" will mark "an inflection point in DWA's operating fundamentals, which should benefit from a much stronger slate over the next two years."
Still undecided are opportunities for next-generation DVDs, which DWA president Lew Coleman said is a "very, very small" market, as is digital delivery of movies.
Katzenberg said the latter won't contribute any meaningful revenue this year or next, "but we do, and will be, supporting digital delivery."
He also said there are no plans to embrace 3-D theatrical releases or re-embrace hand-drawn animated feature films, as executives at the Walt Disney Co. say they intend on doing.
DWA said the biggest contributor of revenue in the fourth quarter was "Over the Hedge," which brought in $104.1 million primarily through DVD sales. The title sold 9.8 million units worldwide through last year.
Next was "Madagascar," which contributed $36.2 million in revenue through DVD and international pay TV. "Madagascar" had sold 22.2 million DVD units through last year.
"Shrek 2" generated $31.1 million in revenue, while "Shark Tale" and "Wallace & Gromit" provided $9.5 million and $8.6 million, respectively.
Next year, DWA is planning "Kung Fu Panda" starring Jack Black and a "Madagascar" sequel, prompting Katzenberg to declare: "For the first time since going public, we will be executing on the business model that we first envisioned, releasing one original film and one sequel."