Zoo's zippy for toon unit

DreamWorks Animation got its first bit of good news in a while Thursday, as better-than-expected performance for “Madagascar” products helped it beat lowered expectations the company set last month.

But with “Shrek 2″ still reeling from returns in the DVD market and strong-performing “Madagascar” not yet paying back costs for distributor DreamWorks Pictures, toon company relied entirely on licensing revenue and library sales for its modest perf.

Results sent DreamWorks Animation stock up 3% in after-hours trading, first significant boost the stock has gotten since problems with “Shrek 2″ DVD sales began in its first-quarter earnings report. Those troubles later led to several shareholder lawsuits and an SEC investigation.

Company generated $35.4 million in revenue in the quarter ending June 30, with $18 million coming from library titles and $12 million in licensing and merchandising sales for “Madagascar.”

Net loss was $3.7 million, or 4¢ per share. When it lowered guidance last month, company said it expected a loss of between 7¢ and 9¢ per share.

Both figures took a huge dive from last year, when boffo perf of “Shrek 2″ led to a $146 million profit on $300 million in revenue.

Due to increased reserves for DVD returns, DreamWorks Animation didn’t recognize any revenue for “Shrek 2″ or “Shark Tale” last quarter and doesn’t expect to for the rest of the year.

Despite not meeting company’s own expectations, both titles have sold well in homevideo, with “Shrek 2″ shipping 35 million units and “Shark Tale” 13 million.

“Madagascar” has been a strong performer in a tough summer at the box office, particularly in international markets. Movie has made $189 million domestically and $238 million overseas, with bows still to come in Japan, Italy and Scandinavia.

Because DreamWorks Pictures recoups all of its marketing and distribution costs before passing revenue onto the animation studio — minus an 8% distribution fee — DreamWorks Animation doesn’t expect to start recognizing revenue from the theatrical release of “Madagascar” until the fourth quarter.

Pic also hits homevideo in November, which should make for a strong holiday season for the company after a tough first three quarters.

Its second theatrical release, “Wallace and Gromit: The Curse of the Were-Rabbit,” will be released in October, but DreamWorks Animation execs are keeping expectations low.

In a conference call with analysts, chief financial officer Kris Leslie said the pic, produced by Aardman Studios, won’t have an impact on 2005 results unless it grosses less than $170 million worldwide, in which case DreamWorks Animation may have to write off some of its production costs.

In response to investor concerns, execs said they’re analyzing problems in the homevideo market that led to the “Shrek 2″ shortfall along with Universal, which distributes its DVDs. Thus far, they haven’t reached any firm conclusions beyond widely believed nostrums that shelves are crowded and titles are cycling through stores more quickly.

“While we all know the movie business is by nature hard to predict, it’s reasonable to conclude recent changes in the homevideo market caught us and many others in the industry by surprise,” chairman Roger Enrico said. “We’re now more knowledgeable about how to approach the reality of the new, more dynamic marketplace.”

DreamWorks Animation shares were up 1% at $24.11 before earnings were announced, following which they rose 3% in after-hours trading.

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