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DreamWorks Animation: Jeffrey Katzenberg’s Survival Plan Relies on Hit Toons

Jeffrey Katzenberg diverted his attention from his core business of making family films, and it contributed to DreamWorks Animation racking up a whopping $300 million in losses last year — nearly half of what it generated in overall sales.

“The last eight months have been the worst in the company’s 20-year history,” Katzenberg told Wall Street analysts on Feb. 24, as he licked his wounds and reflected on a period of painful cost-cutting that resulted in layoffs, the closure of DWA’s Northern California studio, and a serious re-examination of its creative choices. Analysts and stockholders don’t care about the past, however. They want to know whether Katzenberg has a plan for the future.

That future is dependent on hit movies, something DWA has been sorely lacking. The Glendale, Calif.-based animation company’s recent success largely has ridden on the back of its “How to Train Your Dragon” franchise, and its 2013 hit “The Croods.” Other than that, the studio has generated hundreds of millions of dollars in writedowns from films like “The Penguins of Madagascar,” “Mr. Peabody & Sherman,” “Turbo” and “Rise of the Guardians.”

Katzenberg has primarily been focused on growing the company’s television, consumer products and licensing, and digital businesses. But in order for those divisions to succeed, they must be driven by hit films. The disappointing performance of “Turbo,” for example, reduced interest in the movie’s Netflix series, hurt homevideo sales, and left Mattel holding a lot of unsold snail-shaped toy cars.

Analysts see diversification as a smart move for Katzenberg, considering a majority of DWA’s revenue still comes from films. Yet no one understands the importance of a hit franchise better than he does, having overseen animation at the Walt Disney Co. during its peak years.

Katzenberg is aiming to get DWA’s mojo back under the new leadership of Bonnie Arnold and Mireille Soria, the dynamic duo behind the “Dragon” and “Madagascar” franchises. The company already has shaken up its release schedule, choosing six films to bow between 2016 and 2018. The only release on DWA’s slate this year is March’s alien adventure “Home.”

Much is riding on the studio’s late-2016 offering “Trolls,” starring the colorful big-haired characters, which is seen as a major consumer-products play. In the meantime, DWA’s divisions are largely left to fend for themselves. Yet Katzenberg believes the company will still be able to break even in 2015. Here’s how:

Television: DWA is expected to generate between $200 million and $250 million this year (up from $100 million in 2013), with a profit margin of 30% from deals like its distribution of hundreds of hours of original series to Netflix.

Consumer Products and Licensing: After spending the past several years ramping up its consumer products business (partly to monetize its acquisition of Classic Media, which includes characters such as Casper the Friendly Ghost and George of the Jungle), the division reported $24 million in profits, up 28% over 2013, largely from “Dragon” merchandise. That’s expected to grow to $130 million this year, primarily from the exploitation of its library of characters, including those from “VeggieTales,” “Voltron” and “Dinotrux.”

Oriental DreamWorks: The Chinese joint venture is expected to start generating revenue for DWA once “Kung Fu Panda 3” is released in 2016. The toon has been granted co-production status in the country, which will put more B.O. coin into DWA’s coffers.

New Media: AwesomenessTV drives DreamWorks Animation’s digital business, and after Katzenberg acquired the company for $33 million in 2013 ($113 million when adding in performance bonuses for the founders), it’s turned out to be a good buy. DWA’s digital arm posted $25 million in fourth-quarter revenue last year, a gain of $21 million over the similar frame in 2013, due largely to AwesomenessTV’s original programming, sponsorships, licensing and advertising income.

The division was expected to generate more money from the sale of 25% of Awesomeness to Hearst late last year, and the launch of a digital channel this year that DWA and Hearst will jointly manage. DWA also is seeing success with DreamWorksTV, which has surpassed 250 million lifetime views, and ranks as the top family entertainment channel on YouTube, with growth exceeding that of Disney Channel, Nickelodeon and Cartoon Network.

All that said, Cowen and Company’s Doug Creutz is among several analysts who question the company’s ability to break even this year. He says his firm’s estimates are in line with DWA’s expectations, assuming “Home” doesn’t lose money. But he adds that “DWA faces an uphill battle in fixing its film performance,” given competition from rivals’ tentpoles and other animated films. “We won’t see the longer-term impact of recent changes until 2016 and even 2017,” he explains. “In the near-term, we think the trailers for ‘Home’ are among the least appealing we have seen from the company.”

S&P Capital IQ’s Tuna Amobi also isn’t convinced that Katzenberg’s new strategy will work. “They’ve put themselves in a better position to succeed, with a much more streamlined cost structure and less overhead,” he says. Ultimately, though, he notes, the company will need “one or two hit films” to execute its strategy, and he adds the one caveat everyone seems to agree on: “It all comes down to making good movies.”

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