Hollywood had a tough year in 2014, with box office receipts falling off their 2013 pace. But even in an off year, the entertainment industry had winners and losers, and DreamWorks Animation (NASDAQ:DWA) has struggled particularly hard. Coming into Tuesday afternoon's fourth-quarter financial report, investors were braced for a massive restructuring charge related to DreamWorks' aggressive plans to reduce its annual film output and cut costs with an eye toward improving long-term profitability, improving its slate of core feature animated films while cutting costs. Even after taking that restructuring charge into account, though, DreamWorks Animation's actual results still disappointed investors, reflecting the ongoing struggles the company has had. Let's take a closer look at how DreamWorks Animation did during the quarter and what could be ahead for the company this year.
Why DreamWorks Animation stood still this quarter
DreamWorks Animation's headline numbers were even weaker than investors were prepared to see. Revenue climbed almost 15% to $234.2 million, but the consensus forecast among those following the company was for much higher sales growth -- more than 20%. Similarly, the expected restructuring charge led to a GAAP loss of $263.2 million, or $3.08 per share, compared to a modest profit in the year-ago quarter, and coming in worse than the $3.01 per share loss that investors expected. Even after adjusting for the charge, however, DreamWorks still posted substantial losses that came out to $0.75 per share.
Looking more closely at the report, DreamWorks faced a number of challenges. Feature film revenue climbed to $131.3 million, but the company had to take an impairment charge of nearly $40 million related to its releases of The Penguins of Madagascar and Mr. Peabody & Sherman. The majority of DreamWorks' film revenue for the quarter came from How to Train Your Dragon 2, which was released for home viewing in November. Even though Penguins hit the $358 million mark for worldwide box office, DreamWorks reported that distribution partner Fox hadn't reported any revenue to the company because Fox hadn't recouped its marketing and distribution costs related to the film.
Meanwhile, the Television Series and Specials segment saw revenue climb 7.7%, but writedowns of expected future revenue and higher upfront marketing costs more than wiped out the revenue growth, leaving the segment with a negative gross profit. The only bright spot for DreamWorks came from its Consumer Products segment, where sales soared 77.5% and gross profits rose to $6.1 million.
CEO Jeffrey Katzenberg tried to put the gloomy results into perspective. "Although 2014 was a challenging year for our company," Katzenberg said, "I am confident that our recent announcement to restructure our feature film business will enable us to deliver great films and better box office results, while improving the overall financial performance of our business."
What will 2015 bring for DreamWorks Animation?
Looking forward, though, DreamWorks faces a lot of uncertainty. The company will rely on its theatrical release of the movie Home to drive box office success, and the release of Penguins into the home-entertainment market could help the company salvage what it can from the film's disappointing performance on the theatrical front.
More importantly, though, DreamWorks needs its restructuring efforts to pay off. Katzenberg believes that 2015 will be a successful transitional year, noting, "We have a set of strategic imperatives in place designed to ensure sustainable and profitable growth over the long term." Yet with aggressive moves like slashing its workforce by nearly a fifth and reducing its release schedule by a third, DreamWorks is counting on getting more from less at least for the foreseeable future, and the company hopes that higher quality will result from its more focused efforts. Moreover, with takeover talks from toymaker Hasbro (NASDAQ:HAS) having broken down during the quarter, DreamWorks appears to be running out of viable strategic alternatives if its internal efficiency efforts don't pan out.
What makes DreamWorks' struggles even more painful is the contrast between its experience and that of rival Disney (NYSE:DIS). Disney has managed to capture several big animated film wins, with the blockbuster success of Frozen being only the most prominent.
For DreamWorks Animation to recover from its recent woes, the studio will have to execute strongly on its turnaround efforts while demonstrating to investors that it can get back to the creative vision that produced blockbusters like Shrek and Kung Fu Panda. Shareholders are losing their patience, however, and it'll be important for DreamWorks to show continued incremental progress throughout 2015 in order to keep investors confident that better times are ahead for the company.
Dan Caplinger owns shares of Walt Disney. The Motley Fool recommends DreamWorks Animation, Hasbro, and Walt Disney. The Motley Fool owns shares of Hasbro and Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.