Shrek Wreck at DreamWorks

Updated from 4:35 p.m.

The DreamWorks DWA worries proved out Tuesday afternoon, as Jeffrey Katzenberg & Co. admitted they whiffed on Shrek 2.

DreamWorks plunged 17% in postclose action.

The Glendale, Calif., animation studio earned $46 million, or 44 cents a share, reversing the year-ago loss of $25 million, or 33 cents a share. Revenue jumped to $167 million from $41 million.

The numbers fell far short of the Wall Street analyst consensus estimate, which had called for earnings of 58 cents a share on revenue of $175 million. The culprit was the DVD sales performance of Shrek 2. DreamWorks had pushed the movie into stores in great volume, but returns were so hefty that the company failed to record any retail sales revenue on the movie this quarter.

On a postclose conference call, CEO Katzenberg explained how DreamWorks missed so badly with its Shrek 2 projections.

"In retrospect we overestimated first-quarter catalog sales," he said, adding that the movie has sold 35 million DVDs so far. The company won't see any revenue until home video distributors who are now overextended recoup their investment. Still, DreamWorks expects Shrek 2 to have sold 38 million to 40 million units by the end of the year.

Katzenberg also said Shrek 2's rate of sales during the fourth quarter was "unprecedented, and our expectations continued based on the first eight weeks."

Shrek 2 sold more than 11 million copies in its first three days of DVD sales last November. The first couple of weeks usually account for more than half of sales. Katzenberg pointed out that the film was the third highest-grossing film of all time and a breakout hit based on other benchmarks.

The company professed to see positives elsewhere. In the retail market, operating chief Ann Daly said, "We are seeing an expnsion of square footage" thanks to the decline in VHS space putting more DVDs on shelves.