HOLLYWOOD — Wall Street got a lesson in the unpredictability of show business Tuesday as lower-than-expected sales for “Shrek 2” on homevideo in the first quarter caused DreamWorks Animation to miss earnings expectations and sent its stock plunging more than 21%.
Following a huge DVD bow for “Shrek 2” in November, DreamWorks execs admitted they overestimated sales in the first quarter and shipped too many units, resulting in significant returns. Ultimately, DreamWorks Animation recognized no revenue from the hit sequel this quarter, although it said film is still on track to sell between 4 million and 6 million units in 2005 on top of 2004’s 34 million.
For the full year, company reduced its revenue expectations by $25 million due to the “Shrek 2” shortfall.
Total revenue in the first quarter was $167 million, with $142 million coming from “Shark Tale,” which hit homevideo in the quarter and recognized some revenue from its fall theatrical run. Another $9 million came from licensing and merchandise for “Shrek 2,” with the rest reflecting homevideo sales of library titles, primarily the original “Shrek.”
Net income for the quarter was $46 million.
While performance was much better than a $25 million loss on $41 million revenue a year ago, it came in far below Wall Street expectations.
” ‘Shrek 2’ was the third highest-grossing film domestically of all time, and that created unique opportunities and challenges,” CEO Jeffrey Katzenberg told investors in a conference call. “As a result, in retrospect we overestimated first-quarter library sales. We learned lessons from that and we’re hoping for a few more hits of this magnitude so we can implement the lessons learned.”
Earnings also were hit by higher production costs on “Shark Tale” than Wall Street had expected. While DreamWorks execs have said CGI pics would cost between $110 million and $130 million, chief financial officer Kris Leslie conceded “Shark Tale” cost $150 million due to infrastructure at company’s Glendale facility, where it was the first film produced. Previous DreamWorks CGI pics were made at its PDI subsid in Northern California.
Leslie said costs on “Madagascar” would be back down between $110 million and $130 million, however.
Soothing investor fears
In an effort to allay investor concern, DreamWorks Animation provided earnings guidance for the first time. Company said it would make between $1 and $1.25 in earnings per share for the year; 44¢ of that came in the first quarter and the rest is all expected in the fourth quarter, when it will recognize theatrical and DVD revenue from “Madagascar,” as well as strong library sales for the holidays.
Theatrical revenue for DreamWorks Animation pics is delayed by several months from bow as distributor DreamWorks must first recoup marketing, as well as an 8% distribution fee.
Katzenberg said he remains very optimistic about “Madagascar,” noting it is the only PG film opening Memorial Day weekend and there are no other family films he considers competitive throughout June.
Company is planning a secondary stock offering soon after “Madagascar” opens, primarily to help major shareholder Paul Allen cash out.
Shares in DreamWorks Animation closed down 5% at $36.50 Tuesday, as word of the disappointing earnings leaked out before the market closed, and fell an additional 17% in after-hours trading.