Toon division focuses on future to boost bottomline

After snapping a string of disappointing earnings reports in May, DreamWorks Animation again failed to meet Wall Street’s expectations during its second quarter. But Jeffrey Katzenberg had a plan up his sleeve to distract analysts on Tuesday.

The toon studio’s chief revealed, during a conference call after the close of trading, the “aggressive exploration” into a TV or digital network for DWA programming, including films and TV shows, adding that while it was still too early to disclose any further details, there was “a lot of interest and a lot of opportunity” in the launch of a channel.

“With the consistent success of our films in international markets, the (DreamWorks Animation) brand has really begun to come into its own and has real value” and “strong identification in the consumer marketplace,” Katzenberg said. “That creates the opportunity to create a branded family channel.”

The channel is among several ways DWA is looking to grow in the future and diversify beyond relying solely on animated film releases, Katzenberg said, as the company reported revenue of $162.8 million and net income of $12.8 million (down from $218 million and $34 million) for the second quarter that wrapped June 30. DWA averages about feature toon releases a year.

Although much of the company’s upcoming third quarter will be driven by the success of “Madagascar 3: Europe’s Most Wanted,” the film’s rollout contributed to DWA’s bottom line over the past three months.

Pic, now the seventh-highest grosser of the year, has earned more than $501 million worldwide since its release June 8 and will begin its release in major foreign territories after the Summer Olympics.

During the quarter, “Puss in Boots” generated $22.8 million in revenue, mostly from home entertainment; film has sold an estimated 5.2 million homevideo units worldwide to date. “Kung Fu Panda 2″ contributed $46.4 million in revenue during the period, mostly from domestic pay TV deals, and has sold 5.7 million homevid units worldwide. Meanwhile, “Megamind” earned $1.4 million during the quarter, selling 5.5 million homevid units through the quarter.

DWA’s library now includes “Shrek Forever After,” which collected $27.4 million during the quarter. All other titles generated $10 million, of which “Shrek the Musical,” in London, was the biggest contributor.

The musical has “done OK,” according to Katzenberg. “We didn’t hit the bull’s-eye with it, but it was a good opportunity for us and we’ve learned a lot from it.” Instead, he’s high on the company’s growing arena business, which has launched a live touring show based on “How to Train Your Dragon.”

DWA has opted not to distribute its own films once its deal with Paramount ends at the end of the year, although Par is interested in reupping the pact at a fee higher than the 8% it currently receives. Studio is in discussions with Sony for a new film pact. Par will still release “Rise of the Guardians” on Nov. 21 but does not yet have a distribution partner for March’s “The Croods” and “Turbo” in July.

Studio has 10 toons in some form of production, with nine more in development, including a third “Kung Fu Panda.”

Katzenberg declined to discuss any future deal but did say the company was engaged in discussions “with multiple studios” over a distribution agreement and would likely wrap up talks by Labor Day.

“Our distribution will be handled by a major,” Katzenberg said. “We will not be handling that independently.”

The latest earnings results come after DWA acquired Classic Media, home to Casper the Friendly Ghost, for $155 million in July. With Classic it’s already adapting “Mr. Peabody and Sherman,” out on Dec. 25, 2013.

“We have a bit of a gold mine here,” Katzenberg said of the purchase. “When you look at what the very talented and smart people have done mining (the Marvel library) for the 21st century, they’ve done an exemplary job taking classic IP and making it relevant for today,” he said. “What Marvel has done for the action hero genre, that’s what we intend on pursuing (for family audiences). This library has greater breadth and depth than theirs.”

DWA will continue to operate Classic as it has been, but is exploring ways to merge DWA’s consumer products biz with the kids character house.

The focus now is on identifying ways to exploit Classic’s vast library of characters, including the Lone Ranger, which Disney is adapting into a summer tentpole for 2013, produced by Jerry Bruckheimer and starring Johnny Depp.

DWA will benefit financially from the sale of merchandise tied to the pic and products that Classics releases around the character.

“To have (the character) in the hands of Jerry Bruckheimer, Johnny Depp and the Walt Disney Co. is exactly the kind of thing we will look to replicate with other titles in the library,” Katzenberg said. The film “is a very good thing for us, and there are many more to be done with the titles. … There are a lot of valuable rights available to be exploited.”

Katzenberg said DWA would consider other investments like Classic in the near future. But for now, it’s also looking at growing its characters through TV show spinoffs, like a “How to Train Your Dragon” TV show, its first on Cartoon Network. Such projects would also help sustain DWA’s consumer products business year-round.

DWA is also expanding into the casual gaming and apps market while growing its overseas presence, especially in China, through Oriental DreamWorks. Company also recently announced plans to build an indoor theme park at New Jersey’s American Dream mall, near the Meadowlands football stadium.

The company’s results follow a 26% increase in revenue in the first quarter after falling 21% in the fourth and 15% in the third quarter last year. Also in the first quarter, profits rose 3.2% after declining 71.5% and 51% in the fourth and third quarters, respectively.

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