DreamWorks Animation (NYSE:DWA) reported first-quarter earnings yesterday after the market close. Let's see how Pixar's (NASDAQ:PIXR) dedicated foe performed this time around.

The company achieved net income for Q1 of $45.7 million ($0.44 per diluted share) vs. a net loss of $25.5 million ($0.33 per diluted share) one year ago. Revenue more than quadrupled to $167 million this time around, compared to the $40.8 million attained in the first quarter of 2004. That's some good growth, and here's another thing that's pretty cool: Free cash (cash flow from operations minus capital expenditures) bloomed brilliantly, jumping to $375.5 million after collecting a huge receivable compared to last year's flow of $5.2 million.

So, we have some positive numbers to enjoy here; going from a net loss to net income is certainly reason to celebrate. Unfortunately, the release discusses some surprisingly bad news that can do nothing but disappoint even the most casual observer.

It appears that Katzenberg was way overconfident (which he's possibly been before) about the DVD sales prospects for Shrek 2. Here's the relevant quotation: "Shrek 2, despite being on track to become one of the biggest selling home video releases of all time, did not meet the company's retail sales expectations for the first quarter." That isn't something investors want to hear; after all, Shrek is DreamWorks Animation's major representative to Wall Street. The company went on to say that the returns from retailers wiped out any booking of video revenue for Q1, although the goofy green guy did bring in some licensing and merchandising monies.

Granted, DreamWorks Animation is still a young public pup, but come on, guys, you know better -- let's see some better projections in the future to keep those returns minimal. On the bright side, Shark Tale gobbled up a good chunk of salty revenues on its own, helping to minimize the earnings damage done by the DVD disappointment. Nevertheless, shares traded down 15% at one point during the after-hours session yesterday.

So, what is an investor to do? Balk and go elsewhere, maybe to Pixar? Well, Pixar may arguably be both a stronger brand and player in the computer-animated arena. And I will say that I was somewhat shocked at this Shrek debacle. But I think the long-term future of DreamWorks Animation still holds the potential for good returns, and would be appropriate for a well-diversified portfolio. Katzenberg will learn from this (I hope) and better prepare his company in the area of forecasting future demand for a product; this skill is just too important to a company that depends on single features.

And even though the guidance given of full-year earnings-per-share coming in between $1.00 and $1.25 is not exactly what the "wise" were reportedly looking for (reportedly north of $1.80 per share), I think the anticipation of a third Shrek film, in conjunction with the reasonable expectation of more animated successes (e.g., Madagascar), are proper justifications for patience. In fact, check out this notice of an upcoming project involving Jerry Seinfeld.

DreamWorks Animation is not alone in wanting to make wonderful computer-image cartoons; besides Pixar, the animator has Disney (NYSE:DIS), News Corp. (NYSE:NWS), and Time Warner (NYSE:TWX) to deal with. As John Reeves wrote in a recent commentary, this is the biggest obstacle for the company going forward. That's OK, though, it's a tough player; just don't title your next film about the troll Shrek Returns, Jeffrey. I think we've had our fill of returns.

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Fool contributor Steven Mallas owns shares of Disney. The Fool has a disclosure policy.