DreamWorks Animation (DWA) is set to post its fourth-quarter earnings report after the market closes on Tuesday. Here's what investors should watch for in the results.
A profit swing and a sales dip
Overall, Wall Street expects to see a 10% drop in DreamWorks' revenue, to $236 million, along with a major turnaround in profit to $0.33 a share. The sales dip should come as the home entertainment releases of Turbo and The Croods fail to match the 2012 success success that was powered by the film Madagascar 3, which grossed more than $750 million globally.
And while Turbo was a slight disappointment at the box office this time, it won't cause the type of huge writedown that torpedoed DreamWorks' results in 2012. That's the reason behind expectations that the company will swing to a profit this quarter after booking an almost $1-per-share loss in the year-ago period.
Along those lines, investors should look for progress in the company's push to diversify away from the risky movie business. In a bid to produce a steadier stream of profits and sales, DreamWorks reorganized its business in the third quarter into four units: films, TV, consumer products, and other. It also signed a massive deal with Netflix (NASDAQ: NFLX) that includes blockbusters like The Croods and Turbo, but also more than 300 hours of fresh TV content. Look for updates on these diversification projects, which should help push feature film revenue down from the uncomfortably high 60% of sales that it has averaged over the last three years.
A kinder calendar
Meanwhile, this year is looking much stronger for DreamWorks' feature films. It has three movies on tap for 2014, starting off with Mr. Peabody & Sherman next month. After that, the company will release a sequel to How to Train Your Dragon in June, followed by the animated film Home around the Thanksgiving holiday.
The good news for DreamWorks is that these films will see much less competition than 2013's slate did. Mr. Peabody & Sherman, for example, is the only animated film set to be released in March. And How to Train Your Dragon 2 will face a much less crowded release calendar that includes zero competition from Disney's (NYSE: DIS) Pixar studio, which will not have a movie out this year for nearly the first time in a decade. DreamWorks CEO Jeffrey Katzenberg said in the conference call last quarter that competition was virtually "clearing the way" for Dragon 2 to have a solid launch. That suggests investors should expect a robust revenue outlook from the company as part of its announcement on Tuesday.