Studio's earnings projection cut by a third
Pixar is trying to avoid pulling a DreamWorks.Steve Jobs’ animation powerhouse Thursday cut its earnings projection for the quarter ending Saturday by a third, blaming the shortfall on slower-than-expected homevid sales for “The Incredibles.” As a result, Pixar lowered its projected net income from $18 million to $12 million for the second quarter. News comes less than two months after its primary competitor, DreamWorks Animation, stunned Wall Street with an earnings miss it attributed to higher-than-expected DVD returns for “Shrek 2.” DreamWorks investors proved particularly angry because management gave no prior warning of the problem based on homevid sales data. As a result, DreamWorks Animation is facing a raft of class-action shareholder lawsuits. Though shortfall for “The Incredibles” was smaller, Pixar was clearly looking to avoid its competitor’s fate though a warning to investors. Move led to short-term pain, however, as Pixar stock plummeted 10% in after-hours trading. Company is increasing its reserves to account for expected returns from retailers of “Incredibles” homevideo. Pic, which hit DVD March 15, accounts for the overwhelming majority of Pixar’s revenue this year, as it has no theatrical release. Execs claimed the change in guidance was due to recent information from Disney, which handles homevid distribution for Pixar and splits revenue. “Recent sales data is tracking below Disney’s original estimates,” chief financial officer Simon Bax said in a conference call with analysts. However, sources close to Disney homevideo indicated that while “Incredibles” returns have been slightly higher than expected, they were not far off the Mouse House’s own projections. It’s unclear how promptly Pixar gets sales data from Disney and how it forms guidance based on the information. Nevertheless, investors couldn’t help but be concerned by an earnings revision so late in the quarter, especially in the wake of DreamWorks Animation’s problems. While DreamWorks has its own full inhouse video division to oversee much of the marketing, strategy, tracking and some sales of its product that is physically distributed and sold to a large extent by Universal, Pixar relies on Disney’s Buena Vista Home Entertainment to handle most aspects of the DVD biz. Outlook bright Second-quarter sales now are expected to be 7% lower than previous expectations, but Jobs said he expects “The Incredibles,” the bestselling DVD of 2005 to date, to ultimately generate homevideo revenue similar to that of Pixar’s “Monsters, Inc.” “Monsters, Inc.” generated a domestic box office gross of $256 million vs. $261 million for “The Incredibles.” The DVD of “Monsters, Inc.” has generated more than $400 million in consumer spending in the U.S. on rental and sale of about 22 million units since its release in September 2002, according to Daily Variety sister publication DVD Exclusive. “The Incredibles” has seen about $340 million in consumer spending on rental and the purchase of about 16 million copies in the U.S. alone in the first 90 days of release. Title would have to sell only another 4 million copies or so to generate another $60 million in spending to match “Monsters, Inc.” That’s a conservative projection, considering the title has yet to enjoy its first Christmas season in stores. Jobs attempted to put a positive spin on the news by noting it came in a small earnings quarter, when $6 million of net income made a significant difference. “If this was last quarter … a $6 million issue would not have warranted an update here at all,” he said. Pixar stock closed down 3% at $50.05 Thursday before the guidance adjustment was announced.
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