Image: DreamWorks Animation.
Hollywood is the center of the entertainment universe, and the flood of coming theatrical releases from industry giants like Disney (DIS 0.16%) has refocused attention on the movie industry. Yet as part of its longer-term strategy, DreamWorks Animation (DWA) has reined in its ambitions and instead looked to concentrate on making sure that a more limited schedule of releases gives the studio the time it needs to ensure success. Coming into Thursday's third-quarter financial report, DreamWorks investors were expecting a modest loss on fairly encouraging revenue growth. Yet what DreamWorks gave them was a much stronger sales number, and on an adjusted basis, the company turned a small profit for the quarter. Let's look more closely at DreamWorks Animation to see how it got things right in its report.
Home is where DreamWorks Animation's heart is
DreamWorks Animation's third-quarter results continued to help build positive momentum for the movie studio. Revenue soared 43% to $259.2 million, outpacing even last quarter's 40% growth pace and coming in well ahead of the 14% growth rate that most investors were expecting. On a GAAP basis, DreamWorks posted a modest loss of $3.5 million, but after taking out restructuring charges and other one-time items, adjusted earnings of $0.02 per share were a big improvement on the consensus forecast for a $0.04 per share loss.
Taking a closer look at the numbers, the success of the feature film Home continued to pay dividends for DreamWorks. Home was released for digital download in late June, and DVDs for home use became available in late July. The company sold 4.7 million home-entertainment units of the film, and it brought in nearly $50 million, or almost a third of the segment's overall total revenue of $157.9 million. Penguins of Madagascar was the other big revenue source for the quarter, bringing in nearly $40 million largely from pay television sales.
Once again, though, DreamWorks saw success in other areas as well. The television segment was a big hit for DreamWorks, as revenue more than tripled to $50.7 million due to an increase in the number of episodes the company was able to deliver to viewers. Consumer products sales more than doubled to $27 million, as a variety of licensing arrangements brought in considerably more money than in the year-ago quarter. The New Media segment also enjoyed substantial growth, with sales more than doubling to $20.7 million as DreamWorks attributed gains to brand sponsorship arrangements and licensing revenue related to the AwesomenessTV initiative.
CEO Jeffrey Katzenberg celebrated DreamWorks' results, noting that the quarter's impressive performance was "highlighted by strong top-line growth and meaningful segment gross profit across all of our businesses." Katzenberg knows that the company has further to go, but he thinks DreamWorks can move forward and achieve its goals both for the year and in the long run.
What's ahead for DreamWorks Animation?
In particular, DreamWorks has become more optimistic about its full-year results. In the conference call following the release, CFO Fazal Merchant said that the company now expects its full-year adjusted operating income and cash flow to exceed its initial guidance for breakeven results, with new expectations for results in excess of $30 million.
At the same time, DreamWorks Animation has also done a good job of keeping its balance sheet in solid condition to give it the flexibility it needs in its restructuring efforts and its overall business. The company said that it has $360 million available on its revolving credit facility, along with nearly $89 million in cash to give it a total of almost $450 million of liquidity.
Still, the challenge DreamWorks has is keeping itself relevant. Disney has flooded the market with a host of theatrical and television-based content, and the entertainment giant has also done exceptionally well at leveraging its content into peripheral sales of consumer products and revenue from its theme parks. Just as Disney relies on ESPN and other television outlets for a substantial portion of its sales, DreamWorks anticipates tapping television for expansion opportunities well into the future.
Going forward, DreamWorks will have to keep executing well in order to continue its rebuilding efforts. For now, though, the company has successfully kept itself on target, and that's good news for those who had initially feared that DreamWorks might not be able to recover from tough times.
