Entertainment has always had winners and losers, and for a long time, DreamWorks Animation (NASDAQ:DWA) has fought to maintain its relevance in the movie production realm. Coming into Tuesday afternoon's second-quarter financial report, DreamWorks investors were bracing for another round of severe losses but hoping that the studio's revenue would pick up dramatically from year-ago levels. As it turned out, DreamWorks managed to do even better than that, managing to narrow its adjusted losses and seeing an even bigger bump in sales than most investors expected. Let's take a closer look at DreamWorks Animation and see whether its restructuring efforts are finally starting to pay off for investors.
DreamWorks Animation keeps moving forward
In its second-quarter results, DreamWorks Animation did a good job of surpassing the expectations of its shareholders. Revenue climbed by nearly 40% to $170.8 million, doing even better than the 36% growth rate that investors had hoped to see. On the net income front, DreamWorks took a restructuring charge of $20.9 million, but after excluding the impact of that extraordinary item, adjusted net losses of $11.6 million worked out to $0.13 per share, just half the loss in the consensus forecast.
Looking more closely at the report, feature films played a key role in DreamWorks' success, with revenue from the segment climbing 26% and gross profit jumping by nearly a quarter. The film Home was the biggest performer for the company, but home-entertainment revenue from older films like How to Train Your Dragon 2 also contributed toward DreamWorks' gains. The real standout among segments, though, was the television division, where revenue almost tripled to $54.5 million as DreamWorks succeeded in licensing more episodes of its content. Sales from consumer products declined by more than 30%, but the New Media segment posted solid gains, including a tripling of gross profits compared to the year-ago quarter.
CEO Jeffrey Katzenberg was pleased with the company's progress. "The appetite for premium content across platforms continues to grow both domestically and internationally," Katzenberg said, "and it's clear DreamWorks Animation is well-positioned to capitalize on the growing demand."
Can DreamWorks Animation keep moving forward?
In the long run, DreamWorks Animation's restructuring efforts will make a big difference in determining whether the company can keep improving. Charges for the quarter totaled $20.9 million, with $10.9 million going toward depreciation and amortization charges associated with the studio having closed its facility in Redwood City. Of the rest, $7.6 million was related to excess staffing and other costs of changing its slate of feature films, while $2.4 million came from employee termination and other labor costs.
Yet when you look at the studio's list of future films, the pace of production has clearly slowed considerably. The company expects to release the next installment of the Kung Fu Panda series in January, but the Captain Underpants movie won't come out until early 2017, and the next How to Train Your Dragon movie is currently slated for release in mid-2018. That will pressure not only film results but also the associated consumer products division, which relies on popular new content to drive sales of toys, clothing, and other merchandise.
That clearly puts the onus on the booming television segment to pick up the slack for DreamWorks in the months and years to come. Successful licensing arrangements are a great way to make greater use of the intellectual property that any content creator makes, and DreamWorks can take lessons from its larger peers to maximize its profit potential for adapting to the small screen.
DreamWorks shareholders expressed their concern about the latest numbers, with the stock falling 5% in the first hour and a half of after-hours trading following the announcement. To convince investors of its future strategy, DreamWorks will need to demonstrate that it can direct its efforts into higher-quality content that's more profitable. With all the competition in entertainment, that's a tall task, but DreamWorks certainly has the potential to turn things around and thrive if things go its way.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation. 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.