DreamWorks Animation (NASDAQ:DWA) has been working to become a more diversified entertainment company. It aims to generate revenue not just from risky theatrical releases, but also through television content and consumer product licensing deals -- just as Disney does.
DreamWorks made progress toward that goal in the third quarter, as it booked strong gains in each of its major business segments. CEO Jeffrey Katzenberg and his management team recently held a conference call with investors to discuss the third-quarter results. Here are a few key points for investors to know about DreamWorks' latest business trends.
Home is a popular movie download
"Home has sold the highest number of digital sell-through transactions worldwide of any DreamWorks title. It is also the second highest selling family film in the domestic home entertainment market released to date this year." -- Katzenberg
As usual, the biggest contributor to DreamWorks' sales growth was its feature film segment, which was powered by the strong performance of Home, its only release this year. The film is doing extremely well in the home entertainment release window: DreamWorks logged a company record 4.7 million unit sales of the movie through DVD and digital delivery. Thanks mainly to that success, management boosted their 2015 outlook for its movies segment.
However, Home is significantly less profitable than last year's How to Train Your Dragon 2. And so the feature film division's profit margin sank from 45% of sales last year to 35% this year.
Television is a major opportunity
"Television segment revenue more than tripled year-over-year to $51 million and segment gross profit increased to $15 million with margin expanding to 30%." -- Chief Financial Officer Fazal Merchant
DreamWorks' television business is anchored by its deal to deliver hundreds of hours of exclusive animated television content to streaming video giant Netflix (NASDAQ:NFLX). Those deliveries ramped up in the quarter, which is why sales and profits spiked higher. Management also affirmed their 2015 target of $250 million in television revenue and at least $75 million from this growing business line.
It is also likely that this Netflix partnership will deepen in the future, given how well the two companies' strategies sync up. "We are constantly in conversations with [Netflix] about things that we can incrementally do together, both in the near-term and in the long-term," Katzenberg said
Consumer products sales are rising
"The Consumer Products segment revenues more than doubled to $27 million with the segment gross profit increasing to $16 million in the quarter." -- Fazal
After a surprising slump last quarter, DreamWorks' consumer product division returned to growth in the third quarter. The company won several deals to license its brands to regional theme parks, and it also capitalized on its popular Dinotrux series on Netflix.
While it's too early to tell, the Netflix channel could become a strong platform for building interest in DreamWorks' brands at retailers around the world. Still, the consumer products division is projected to struggle this year. Management said its results are tracking only slightly ahead of the downbeat forecast they gave three months ago.
"We're looking forward to the release of Kung Fu Panda 3 and Trolls in 2016. We also expect to continue diversifying our revenue mix." -- Katzenberg
DreamWorks has two feature films slated for release next year, compared to just one in 2015. And while that suggests stronger overall growth, there are big risks around each release. Sure, Kung Fu Panda 3 is tied to an extremely successful franchise. But its Jan. 29 release date isn't typical for animated family films, which could pressure box office results. And foreign currency issues also promise to hold down international sales figures for the movie.
Next up is the musical comedy Trolls, due out near the end of the year. That film has a strong voice cast led by Anna Kendrick and Justin Timberlake. Yet as a new property, it will have a tougher time winning theater-goers' attention. Investors have to hope that Trolls follows in Home's profitable footsteps, as opposed to repeating last year's box office disappointments, Penguins of Madagascar and Mr. Peabody & Sherman.
Demitrios Kalogeropoulos owns shares of Netflix and Walt Disney. The Motley Fool owns shares of and recommends Netflix and Walt Disney. 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.