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February 07, 2008

Dreamworks: Good Quarter But No Catalyst For Awhile

Dreamworks Animation reported better than expected 4Q07 results. EPS of 98 cents beat the 75 cent consensus even after backing out a tax benefit. Revenues of $290 million were ahead of the $285 million consensus and many recent estimates in the $265 million range. The upside came from higher than expected DVD sales of Shrek 4, which came in at 15.6 million versus expectations of 13 million. DVDs are very high margin so upside is good news for current results. It is worth noting that Shrek 4 DVD unit sales are well behind Shrek 3 which might negatively impact investor's views of future tie ratios on DWA's movie releases, especially sequels.

Shrek 4 produced $180 million of the $290 million in reported revenue. Madagascar produced $24 million and Over The Hedge $13 million, both benefiting form revenue in far out windows like pay TV and foreign TV. Bee Movie produced $12 million from merchandising but the box office revenue won’t be recognized until next quarter. Management did say that depending on DVD sales (due in stores later this quarter) Bee Movie would be profitable. No write down so far. Library titles produced about $64 million of revenue. Again for comparison, on its conference call Disney said that Toy Story merchandising was a $400 million business in 2007....

....Other important news out of the press release which was discussed on the conference call concerned the release schedule. DWA postponed its planned fall 2009 release until March 2010. This puts three releases in 2010 including Shrek 4 in May and another film in November. I believe this leaves just one film in 2009, the 3-D release of Monsters vs. Aliens. 2009 financial results, however, will be driven by the Madagascar sequel due in theatres this November.

The upside surprise in EPS and revenues and better than expected Shrek 4 DVD sales may pop the stock tomorrow but I don’t think it is anything to get excited about. If I were long I'd be a seller on that pop. The only sustained upward move of significant magnitude will come if Kung Fu Panda, to be released on June 6th, proves to be a big hit. It might be but I think it is too soon to play DWA on that basis

Posted by Steve Birenberg at February 7, 2008 09:39 AM in DWA