DreamWorks Animation (DWA) posted third-quarter earnings results last week. While they were just above Wall Street's expectations, the stock fell immediately following the announcement and is down nearly 40% so far this year.
Below are some highlights from management's conference call with analysts discussing DreamWorks' latest quarterly results.
1. How to Train Your Dragon 2 is going strong
"How to Train Your Dragon 2 has now opened at No. 1 in nearly 50 territories around the world. Having reached over $615 million at the global box office, Dragon 2 is the best performing animated film of the year and one of most critically acclaimed films in DreamWorks' history." -- CEO Jeffrey Katzenberg.
DreamWorks' CEO Jeffrey Katzenberg. Source: DreamWorks.
Dragon 2 completed its run in U.S. theaters before the third quarter began. But, thanks to a strong international box office performance, the movie is still racking up revenue.
And that's just the beginning for sales tied to Dragon 2: The film was recently launched into the digital home entertainment market, where it jumped to the top of the download list on Apple's iTunes store. Management also expects more than $60 million in consumer product sales tied to the franchise through next year.
2. DreamWorks (still) aims to reduce costs
"As we look at our slate for 2015 and 2016, we are committed to remaining flexible on the release dates we select for each film, which will help to ensure the best possible results at the box office. That said, $125 million still represents our normal course target production budget going forward." -- President Ann Daly.
It has been more than a year since management first said it wanted to bring production budgets down from $135 million per film on average to $125 million. This year's movie slate was supposed to the first batch under that new cost structure. However, scheduling shifts bumped expenses back up, and DreamWorks' next two films have big budgets of over $130 million each for the same reason. Management expects costs to drift down toward the target after that.
3. The television business has a bright future
"We have recently built a world-class animated television production business at a size and scale that is unprecedented, with contracted commitments for over 1,200 episodes of original animated television content." -- Katzenberg.
DreamWorks' TV business is tiny right now, bringing in just $14 million in revenue and $2 million of profit last quarter, less than 10% of the company's total sales and earnings. However, DreamWorks has committed to delivering tons of television content over the next few years, particularly to streaming video giant Netflix. That pipeline has management targeting substantial growth in this division, with revenue of over $200 million in 2015 and a healthy 30% profit margin.
4. Mr. Peabody & Sherman is still struggling
"Mr. Peabody & Sherman remains in an unrecouped position with our primary distributor, but we expect it to be recouped in 2015." -- Chief Financial Officer Fazal Merchant.
DreamWorks' first film of the year, Mr. Peabody & Sherman, disappointed at the box office and helped push the company into the red for the first and second quarters. The film's weak outing carried right on through to the home entertainment release. Early results of the launch were "softer than we had hoped," according to Daly. Management does have a marketing strategy in place to boost sales for the holiday season, though.
5. Penguins of Madagascar has a good shot at success
Management is confident that DreamWorks' final film of the year has a strong chance to perform well at the box office. Here is Katzenberg on the prospects for that title:
Penguins is one of the most highly anticipated family films in the coming fourth quarter. It's a broad comedy starring some of the funniest and best known characters in one of our most popular franchises. All early indications, including online buzz and response from family test audiences, are very strong. We are confident that its domestic release date of November 26 positions Penguins for a great launch here in the U.S. on Thanksgiving weekend.
