DWA

Dreamworks Animation SKG, Inc. (DWA)

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DreamWorks Animation SKG (DWA)

Q3 2012 Earnings Call

November 01, 2012 4:30 pm ET

Executives

Rich Sullivan - Head of Corporate Finance

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

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

Analysts

Benjamin Swinburne - Morgan Stanley, Research Division

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

Douglas Creutz - Cowen and Company, LLC, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

David W. Miller - Caris & Company, Inc., 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

Michael Corty - Morningstar Inc., Research Division

Presentation

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DreamWorks Animation earnings conference call. [Operator Instructions] Later, we will conduct a question-and-answer session. [Operator Instructions] And as a reminder, this call is being recorded and will be available for replay after 7 p.m. today through Wednesday, November 14, at midnight. You may access the AT&T playback service by dialing 1 (800) 475-6701 and entering the access code 260584. International participants, dial (320) 365-3844.

I would now like to turn the conference over to your host, Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you, and good afternoon, everyone. Welcome to DreamWorks Animation's Third Quarter 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 with a brief discussion of our quarterly financials disclosed in today's press release, followed by an opportunity for you to ask questions. I'd like to remind everyone that, that press release is available on our website, the web address, 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 can vary materially 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 in -- as well as with other filings with the SEC. I 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's President and Chief Financial Officer, Lew Coleman. Lew?

Lewis W. Coleman

Thanks, Rich, and good afternoon, everyone. For the third quarter of 2012, the company reported total revenue of approximately $186 million, resulting in net income of $24 million or $0.29 per share on a fully diluted basis. This strong performance was driven by the continued success of Madagascar 3 at the international box office, as well as approximately $0.08 per share in the quarter related to television revenue from a number of films, including a new multi-title catalog deal with the BBC.

Taking a look at our primary drivers of revenue, Madagascar 3 contributed revenue of approximately $47 million to the quarter. It grossed approximately $640 million in worldwide box office through the end of September, opening in key territories during the third quarter, including Australia, Italy, Japan, the Nordic region and Spain. Madagascar 3's performance in Germany and the U.K. will contribute revenue to the company in the fourth quarter.

Puss in Boots contributed revenue of approximately $45 million to the quarter, primarily from worldwide pay TV. By the end of the quarter, it had reached an estimated $5.6 million net home entertainment units sold worldwide.

Kung Fu Panda 2 contributed revenue of approximately $9 million to the quarter, primarily from international pay TV. It reached an estimated $6 million net home entertainment units sold worldwide by quarter-end.

Our library contributed revenue of approximately $51 million to the quarter, primarily from 3 items. As I mentioned, we entered into a deal with the BBC, extending the international free TV rights for a number of catalog titles. For most of the titles, this is an extension of an existing license term, so the revenue is recognized upfront. International free TV revenue from both How to Train Your Dragon and Shrek Forever After also contributed to our third quarter library. The other category contributed approximately $30 million of revenue to the [ph] quarter. Shrek The Musical in London, How to Train Your Dragon Arena Spectacular and How to Train Your Dragon TV series each contributed approximately equal amounts. As a reminder, our non-feature film business delivers significantly lower profit margins than our core business. Also included in the other categories, revenue from our existing deal with Gaylord Hotels.

Finally, our acquisition of Classic Media closed on August 29, contributing $4 million of revenue to the company, primarily from home entertainment. This had no material impact to net income in the third quarter. Purchase price for Classic Media was approximately $155 million. Approximately 60% of this amount is for intangible assets that will be amortized over the next 10 to 15 years, resulting in an annual expense of approximately $6.5 million. The remainder is for non-depreciable assets, including goodwill and intangibles with indefinite lives.

Moving onto the remainder of the income statement. Cost of revenues for the quarter equaled $114 million, resulting in gross profit of approximately $72 million. Clarity around the future distribution channels for our How to Train Your Dragon TV series, including opportunities out of MIPCOM, allowed us to continue to capitalize several million dollars of production costs for the show during the third quarter.

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