Katz’s slipped disc

SEC probe, 'Shrek' shortfall dog D'Works

NEW YORK — Call it a Shrek wreck.

A confluence of ogrely DVD news pummeled DreamWorks Animation Monday and had Wall Street wailing over big picture woes — like what the studio’s second DVD shortfall in two months means for rivals like Disney and Warners.

Because of the shortfall in DVD revenues, the studio announced it was slashing profit forecasts.

Making matters worse, DreamWorks announced that it isfacing a Securities and Exchange Commission inquiry into trading in its securities and the disclosure of its first-quarter results — as well as six shareholder lawsuits.

Company said it intends to cooperate fully with the SEC inquiry.

The studio declined to give any reason why there are so many returns of its DVDs of “Shrek 2” and “Shark Tale.”

Industry players have cited a shift whereby DVD releases are mimicking theatrical openings — a big bang, then gone. Shelf space is limited, and studios are churning out more and more discs between new releases, library fare and TV product. Consumers may be running short on space. DVRs, video-on-demand and vidgames may play a part.

“There are a lot of different moving parts that are going on right now, and I don’t think that anybody can yet really make any conclusions,” CEO Jeffrey Katzenberg said during a conference call.

He and chief financial officer Kris Leslie said it’s too early to define the problem, nor would they speculate on whether it’s a permanent shift or a temporary blip.

“It would be, I think, a big mistake to try and assess it today,” Katzenberg said. DreamWorks shares plunged 15% in early trading Monday. The stock, which went public last fall, ended the session down 13%, or $3.54, at $23.27 — a new low. The shares had vaulted past $42 at their high in December.

As a result of the dip, DreamWorks said it would put on hold a $500 million secondary stock offering.

Company said Katzenberg, David Geffen and Paul Allen will revisit the offering “when market conditions warrant a transaction.” Until then, investors will have to wait to extract any more cash from the studio. The promise of cash back, especially for Allen, was a big driver of the IPO.

DreamWorks revised its break-even forecast for the second quarter to a loss and slashed its full-year profit estimate by at least 20%.

Monday’s debacle follows a similar jolt in May, when DreamWorks Animation missed its first-quarter numbers, citing lower than expected sales for “Shrek 2” DVDs. Katzenberg said Monday that the May hit was primarily domestic, while the new revisions were due largely to shortfalls overseas.

DreamWorks was slapped with a handful of class-action lawsuits after its first revelations.

Marketplace shift?

Katzenberg acknowledged again during Monday’s call that DreamWorks had indeed overestimated “Shrek 2” quarterly library sales, which was part of the initial problem. But he also said he now thinks there are greater forces at work.

“We started to see how the marketplace was shifting, and then saw a second title and yet then a third title come into the marketplace and realized that this was not a ‘Shrek 2’ issue so much as it is a market issue,” he said.

Several weeks ago, Pixar cut its second-quarter earnings projections by a third due to lower than anticipated homevid sales of “The Incredibles.”

He didn’t respond to a question on whether the barrage of bad news warranted management changes at DreamWorks.

“The company has been working closely with our distribution partners to conduct an extensive review domestically and in several major international territories to gather more information about the performance of our homevideo titles, including their sales movement, inventory levels at retail as well as actual and anticipated returns,” Leslie said.

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