Why Dreamworks Is Dropping

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Family-friendly entertainment sure can make for a brutal business.

DreamWorks Animation (NASDAQ: DWA  ) just cleaved $165 million from its fourth-quarter books, in a writedown that led to a $0.98-per-share profit loss. Analysts had been expecting a loss of just $0.03 a share.

The main culprit was a weak box office showing by last November's release of Rise of the Guardians. But the company also pulled another movie out of production, and took a second charge related to development writedowns. DreamWorks also announced layoffs of about 350 employees aimed at significantly cutting costs. 

CEO Jeffrey Katzenberg mentioned the tough competitive landscape in the company's conference call with analysts. "One of the new challenges we face is heightened competition for family audiences, not from other CG animated films, but actually from broad 4 quadrant movies," he said. The crowded field for family entertainment has made release-date scheduling much more critical. And that's why DreamWorks moved the film Mr. Peabody & Sherman from this November into next year.

This November is when Disney (NYSE: DIS  ) plans to release its sequel to Marvel's Thor, called The Dark World. Unlike DreamWorks, Disney met huge box office success last year, particularly with the launch of its Avengers franchise. The Avengers movie was the highest-grossing film of the year in the U.S. By comparison, DreamWorks' Rise of the Guardians was No. 31 on the list.

To reduce some of the risks of a box office disappointment like that, DreamWorks is cutting its head count and restructuring. The company's goal is to knock its costs down from the $150 million per film it usually spends to $120 million per film by the end of next year.

That lower cost profile will make huge swings in profitability like the one we just saw less likely. Still, with most of its revenue tied to the box office results of just three or so films a year, the animator has a tough climb ahead. And investors should expect plenty more volatility in its earnings.

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