Dreamworks Animation SKG, Inc. (DWA)

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DreamWorks Animation SKG, Inc. (DWA)

Q4 2008 Earnings Call

February 24, 2009 4:30 pm ET


Rich Sullivan - Investor Relations

Jeffrey Katzenberg - Chief Executive Officer, Director

Lewis W. Coleman - President, Chief Financial Officer, Director

Ann Daly - Chief Operating Officer


Drew Crum - Stifel Nicolaus

Michael Morris - UBS

Richard Greenfield - Pali Capital

Ralph Schackart - William Blair

Ingrid Chung - Goldman Sachs

Jake Hindelong - Monness, Crespi, Hardt & Co.

David Miller - Caris & Company

Doug Creutz - Cowen & Company

Vasily Karasyov - J.P. Morgan

Barton Crockett - Lazard Capital Markets

Tuna Amobi - Standard & Poor’s

Robert Fishman - Banc of America

Brian Shipman - Jefferies & Company



Ladies and gentlemen, thank you for standing by and welcome to the DreamWorks Animation earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Rich Sullivan with Investor Relations for DreamWorks. Please go ahead, sir.

Rich Sullivan

Thank you. Good afternoon, everyone and welcome to DreamWorks Animation’s fourth quarter 2008 earnings conference call. With me today is our Chief Executive Officer, Jeffrey Katzenberg, and our President and Chief Financial Officer, Lew Coleman. This call will begin with a brief discussion of the quarterly financials disclosed in today’s press release, followed by an opportunity for you to ask questions. I would like to remind everyone that the press release is available on our website, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking statements may vary from actual results and are subject to a number of risks and uncertainties, including those contained in the company’s annual and quarterly reports, as well as other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statements.

And with that, I would like to now turn the call over to DreamWorks Animation President and Chief Financial Officer, Lew Coleman. Lew.

Lewis W. Coleman

Thank you, Rich and good afternoon, everyone. I would like to highlight a few items before handing it over to Jeffrey. In the fourth quarter, the company reported $200 million of total revenue resulting in net income of $52 million, or $0.58 per share on a fully diluted basis. This brings the company’s 2008 revenue to $650 million and net income to $142 million, or $1.57 per share. While the blockbuster success of Shrek the Third in 2007 makes the year-over-year comparison difficult, it’s important to note that 2008 was our most successful non-Shrek year as a public company. In fact, box office receipts from Kung Fu Panda and Madagascar: Escape to Africa together exceeded $1.2 billion, a 12% increase over our 2007 total.

Of the $200 million of revenue in the quarter, Kung Fu Panda contributed $102 million, or about half, primarily from its release in the home video market. Through the end of 2008, we sold approximately 11.2 million units of Panda worldwide, exceeding the guidance we gave on our December analyst day. This number excludes approximately 0.5 million units shipped to two customers that subsequently declared bankruptcy. Several key territories, including Italy, the Nordic region, Australia, Japan and France were not released prior to December and will be reflected in the first quarter of 2009.

Our second theatrical release of 2008, Madagascar 2, has now reached over $580 million of worldwide box office. The revenue effect of approximately $250 million of this box office was recognized in the fourth quarter. As a result, the title was recouped and contributed $24 million of revenue, including consumer products and the normal cost reimbursement from our distributor.

Over The Hedge, the company’s 2006 summer release, contributed approximately $23 million of revenue for the quarter, primarily from domestic network and international free television.

The company’s remaining films contributed $43 million of revenue, largely driven by strong catalog home video performance.

Additionally, Shrek The Musical and Shrek The Halls contributed approximately $8 million of revenue to the quarter. Through the end of 2008, Shrek The Halls sales approximate 1.8 million units on a worldwide basis net of returns.

Costs of revenues for the quarter equaled $117 million and it’s important to note that many of the new business initiatives we discussed are having and will continue to have an impact on our financials. In fact, almost 20% of this quarter’s cost of revenue is unrelated to film amortization and represents costs associated with initiatives like Broadway and India, as well as ongoing film development expenses.

In addition, product development, primarily associated with the start-up of our virtual world, is now impacting our costs, totaling approximately $1 million for the quarter.

Lastly, because of the dramatic change in market conditions due to the economy, we updated our Kung Fu Panda ultimate accordingly. While our ultimates are continuously updated as the normal course of business, the severity of the market changes made this quarter’s change larger than is typical, so while the title performed very well relative to others in the market, the economic conditions of the last few months were not anticipated when we amortized the costs for the film earlier in the year. This resulted in a one-time amortization catch-up of approximately $8 million reflected in this quarter’s cost of revenue.

Moving on to the remainder of the income statement, selling, general and administrative expenses for the quarter totaled $28 million, including approximately $9 million of stock compensation. And interest income was $2 million, bringing the total interest income for the year to $9 million.

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