DWA

Dreamworks Animation SKG, Inc. (DWA)

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DreamWorks Animation SKG (DWA)

Q4 2012 Earnings Call

February 26, 2013 4:30 pm ET

Executives

Rich Sullivan - Deputy Chief Financial Officer

Jeffrey Katzenberg - Co-Founder, Chief Executive Officer, Director and Chairman of Nominating & Governance Committee

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

Richard Sherman - Director

Analysts

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Christopher Merwin - Barclays Capital, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Tuna N. Amobi - S&P Equity Research

Presentation

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the DreamWorks Animation Quarter 4 2012 Earnings Conference Call. [Operator Instructions]

And as a reminder, this conference is being recorded. You may access the AT&T Executive replay service at any time after 4:30 this afternoon, and it'll be running through March 13 at midnight. And you may access the replay service at any time by dialing 1 (800) 475-6701, and entering the access code of 279175. International participants may dial (320) 365-3844.

At this time, I'd like to turn the conference over to our host from DreamWorks Animation, Mr. Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you, and good afternoon, everyone. Welcome to DreamWorks Animation's Fourth Quarter and Full Year 2012 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 a brief discussion of the quarterly financials disclosed in today's press release, followed by an opportunity for you to ask questions. I'd like to remind everyone that the press release is available on our website, that web address, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made in this call may constitute forward-looking statements. Forward-looking statements can vary materially from the 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 in 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'd like to now turn the call over to DreamWorks Animation Chief Executive Officer, Jeffrey Katzenberg. Jeffrey?

Jeffrey Katzenberg

Thanks, Rich. Good afternoon, everyone, and thank you for joining our call. DreamWorks Animation reported a loss of $83 million in the fourth quarter of 2012 and $36 million in the full year. This is primarily driven by several charges we took in the quarter, including an impairment of Rise of the Guardians and a number of write-offs associated with changes to our future release slate. Lew will discuss the details of these changes and charges in a few minutes.

Rise of the Guardians was released on November 21, 2012. It has grossed over $100 million at the domestic box office and over $300 million on a worldwide basis. With an unprecedented number of profitable DreamWorks-branded CG films, to have Guardians as a financial loss to the company is certainly a disappointment. This is particularly true because of how proud we are of the movie itself. The audience response to the film was strong, which is demonstrated by the fact that it delivered 4.2x multiple off of its opening weekend and also garnered and A cinema score rating. Still, Guardians did not reach the box office levels required of our film.

Fortunately, earlier in 2012, we also saw one of the greatest successes for the company, our summer film, Madagascar 3. It grossed nearly $750 million to become the eighth biggest movie of the year on a worldwide basis and our best-performing international film ever. We released it on DVD and Blu-ray on October 16, and it joined Puss in Boots among the top-10 best performing titles of the year domestically. In an overall home video market that showed signs of stability in 2012, after 8 consecutive years of decline, DreamWorks Animation's domestic home video tie ratios improved year-over-year in 2012 even as overall animation ratios fell by 15%.

So clearly, we saw a number of positives in 2012 within our core business. However, one of the new challenges we face is heightened competition for family audiences, not from other CG animated films, but actually from broad 4 quadrant movies. This increased competition makes the need for quality release dates critically important. While finding optimal windows for our films is not a new strategy for us, today it is more challenging. Going forward, we're very focused on dating our pictures in a way that gives each one the best possible opportunity for success at the box office. This is reflected in the recent changes we made to our slate.

At the strong recommendation of Fox, our distributor, we announced that Mr. Peabody & Sherman has a new release date of March 7, 2014. Our partners at Fox loved what they saw of the film late last year and believe releasing it this November would be a mistake based on the especially crowded release schedule. Fox is particularly high on the early March release date, where they have had huge success with their Ice Age franchise. We are both confident that its new date best positions Mr. Peabody & Sherman for success at the box office.

We also decided to remove Me & My Shadow from our 2014 slate and give it more time in development. This is one of the most exciting and ambitious ideas we've had, and its challenges are reflective of its creative and technical aspirations. Despite having a great creative concept, Me & My Shadow is not where it needs to be at this stage of production. And as you've heard me say in the past, we'll not release a movie before its time. Our 2014 slate is now set for all 3 titles: Mr. Peabody & Sherman on March 7, How to Train Your Dragon on June 20 and Happy Smekday! on November 26. Beyond 2014, we have a lot of great choices for our future film lineup, and we will keep you posted on our slate in the coming months.

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