You will be redirected back to your article in seconds

The Strategy Strengthening DreamWorks Animation Stock

Jeffrey Katzenberg's diversification efforts are helping insulate his company from the volatile film biz

DreamWorks Animation’s stock price went on a tear since reporting better-than-expected earnings last week, up 26% (before falling back a bit Wednesday). Here’s why: The diversification strategy the company announced a couple of years ago is finally paying off.

As CEO Jeffrey Katzenberg explained Tuesday at the Morgan Stanley Technology, Media & Telecom conference, TV was now DreamWorks’ most valuable segment, whereas three years ago the company was “barely in the TV business.”

DWA’s diversification was intended to lessen the reliance on its high-risk feature film business, including a transition from traditional pay TV licensing to a focus on subscription video on demand (SVOD) services, and the acquisition of YouTube content provider AwesomenessTV.

This strategy has really begun to kick in effectively over the past year. In the full-year results reported last week, DWA’s revenue mix was significantly more diverse than in prior years, generating record revenues despite a middling year on the feature film side:

Click Image for Large Preview

What made the difference was significantly higher TV revenue, as well as increasing contributions from its Consumer Products and New Media divisions. The chart below shows the percentage contribution from these segments, which illustrates the diversification even more starkly:

Click Image for Large Preview

As you can see, feature film revenues dropped to just 57% of the total, down from the high 70s just a few years ago, while television revenues were a quarter of the total in 2015, up from just 10% three years earlier.

Netflix becomes DWA’s largest distributor

The diversification in revenues isn’t just about segments, but also about destinations. Whereas pay TV and broadcast TV channels were major outlets for much of its content in the past, DWA made a conscious shift to new digital platforms in the past few years. Its 10-K filing from last week summarizes its new strategy crisply:

“We expect that television market revenues from licensing arrangements with digital subscription-based services will generally replace the traditional pay television arrangements.”

This past year, DWA’s relationship with Netflix, which is easily the largest of these new arrangements, became its biggest distribution channel of all by revenue, bigger than its relationship with primary theatrical distributor Fox:

Click Image for Large Preview

DWA’s Netflix revenues tripled from around $100 million in 2014 to around $300 million in 2015, as it both produced significantly more original television content for the SVOD service, and licensed a big chunk of its theatrical library. For context, that $300 million is 50% higher than combined revenues from “Home” and “The Penguins of Madagascar” in 2015.

Margins in new segments are high, too

One worry about new revenue streams is always dilution of margins in the core business, but that isn’t happening here. Gross margins in the television segment in 2015 were equal to those in the feature film segment, at 37%, and margins outpaced feature films over the last three years in aggregate.

Beyond Netflix, AwesomenessTV is also producing both great revenue growth and increasingly strong margins. DWA paid a total of around $110 million for its acquisition of ATV, but this business is now generating over $70 million a year in revenue, with gross margins in 2015 of 56%, higher than any of DWA’s other segments. The chart below shows gross margins for DreamWorks’ segments, of which new media represents primarily the AwesomenessTV business:

Click Image for Large Preview

The feature film business has always been the least predictable of these segments, but with two other major segments now delivering strong and growing margins on a more consistent basis, the company is on much sounder footing going forward. Even Consumer Products, the company’s merchandising and IP licensing business, is growing. There, an investment in new “experiences” around shopping malls and cruise ships is helping to drive new revenues with very little incremental cost to DWA.

Significant uncertainties remain

These revenues and profits should help insulate the company somewhat from the uncertainties of the feature film business. However, those uncertainties themselves haven’t gone away. For all that went well in 2015, DWA had to push back a major theatrical release (“Kung Fu Panda 3”) into the following year to avoid going up against the “Star Wars” franchise, and its only remaining theatrical release (“Home”) was poorly reviewed and didn’t do as well as other DWA franchise launches including “Shrek,” “Madagascar” and “Kung Fu Panda.”

The new “Panda” film has provided a bright start to 2016, but the “Trolls” picture coming in November comes with some uncertainty as well. DWA’s strategy of pairing sequels with originals each year going forward should buoy performance somewhat – none of its sequels has ever grossed less than half a billion dollars – but with a budget of at least $125 million per feature, flops still cost the company dearly.

The other risk is that the company is putting too many eggs in the Netflix basket. Though not subject to the vagaries of box office receipts, DWA’s Netflix relationship is arguably vulnerable to uncertainties of a different kind. Netflix’s business is inherently opaque from the outside, and management may conclude that DWA’s properties are not meeting its goals, and cut spending in future years.

Though the company takes pains to point out that Netflix is not its only digital distributor, it’s by far the largest, and a significant cut in spending would be at least as damaging as a flop in theaters. For now, though, the relationship looks to be on a solid footing, as does the company as a whole.

Jan Dawson is the founder and chief analyst at Jackdaw Research, an advisory firm which covers the consumer technology market.

More Biz

  • Times Up Hollywood

    Time's Up Entertainment Announces New Industry Mentoring Initiative

    Time’s Up Entertainment, an affiliate of the Time’s Up coalition of women across industries working to improve workplace safety, has announced the “Who’s in the Room” industry mentoring initiative. The program’s goal is to increase the presence of people of color from diverse backgrounds in the entertainment industry’s executive ranks. Funded by a $500,000 grant from [...]

  • Tom Cruise as Ethan Hunt in

    Paramount Inks Deal for Theme Park in South Korea

    Paramount Pictures has announced a deal to install a studio-branded theme park in an entertainment resort being developed in South Korea. The agreement was struck between Paramount and Mohegan Gaming & Entertainment, which owns the Inspire Integrated Entertainment Resort in the South Korean city of Incheon. Mohegan has invested KRW 2.8 trillion ($2.4 billion) in [...]

  • Davan Maharaj Mel Gibson

    L.A. Times Publisher's Lawyer Was Accused of Extorting Mel Gibson

    The attorney who negotiated a $2.5 million exit package for L.A. Times publisher Davan Maharaj was previously accused of using secret recordings to extort actor Mel Gibson. Surreptitious recordings also figure in the Maharaj case. NPR reported on Wednesday that Maharaj taped Tronc chairman Michael Ferro. According to the report, Ferro was heard on the [...]

  • 'Blurred Lines' Suit Ends With $5

    'Blurred Lines' Suit Ends With $5 Million Judgement Against Robin Thicke, Pharrell Williams

    After five years, the legal battle over the copyright of the Robin Thicke’s 2013 hit “Blurred Lines” has ended, with Marvin Gaye’s family being awarded a final judgment of nearly $5 million against the song’s primary writers, Robin Thicke and Pharrell Williams, according to CNN and other reports. The pair were accused of copyright infringement [...]

  • WME Veteran Ari Greenburg Promoted to

    WME Veteran Ari Greenburg Promoted to President of Talent Agency

    WME veteran Ari Greenburg, one of the original Endeavor staffers who helped build the talent agency that became an industry powerhouse, has been promoted to president. Greenburg will oversee all daily operations across WME and its offices in Beverly Hills, New York, Nashville, London and Sydney. The promotion recognizes the role that Greenburg has played [...]

  • Alison Wenham Steps Down as CEO

    Alison Wenham Steps Down as CEO of WIN

    After 12 years at the helm of the Worldwide Independent Network, a global trade organization for the independent music industry, Alison Wenham is stepping down as Chief Executive, it was announced today. Prior to joining WIN full time in 2016 Alison was CEO of The Association of Independent Music (AIM), which she started in 1999. [...]

More From Our Brands

Access exclusive content