DreamWorks Animation SKG, Inc. (
Q3 2011 Earnings Call
October 25, 2011 16:30 a.m. ET
Richard Sullivan – Head - Corporate Finance
Jeffrey Katzenberg – CEO
Lewis W. Coleman – President and CFO
Benjamin Swinburne – Morgan Stanley
Vasily Karasyov – Susquehanna Financial
David Miller - Caris & Company
Benjamin Mogil – Stifel Nicolaus & Company, Inc.
Barton Crockett – Lazard Capital Markets
Richard Greenfield – BTIG
Chris Marvin – Barclays Capital
Tony Wible – Janney
Marla Backer – Hudson Square Research
Tuna Amobi – Standard & Poor’s Equity Group
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Welcome to the DreamWorks Animation Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder this conference is being recorded.
I would now like to turn the conference over to host, Mr. Rich Sullivan. Please go ahead, sir.
Thank you and good afternoon everyone. We apologize for a few minutes late. Welcome to DreamWorks Animation’s Third Quarter 2011 Earnings Conference Call. With me today is our Chief Executive Officer, Jeffrey Katzenberg and our President and Chief Financial Officer, Lew Coleman.
This call will begin with a brief discussion of our quarterly financials disclosed in today’s press release followed by an opportunity for you to ask questions. I’d like to remind everyone that the press release is available on our website that web address www.dreamworksanimation.com.
Before we begin, we need to remind you that certain statements made in this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainty including those contained in the Company’s annual and quarterly reports as well as other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents. The Company undertakes no obligation to update any of its forward-looking statements.
With that, let me turn the call over to DreamWorks Animation’s President and Chief Financial Officer, Lew Coleman. Lew?
Thanks, Rich and good afternoon everyone. For the third quarter, the Company reported total revenue of approximately $161 million resulting in net income of $20 million or $0.23 per share on a fully diluted basis. As we have said in the past, both the timing of our feature film releases and the number of our films in any given year cause our financial results to fluctuate, which can make year-over-year comparisons less relevant.
In this case, the third quarter where our financial results reflect the earlier release of Kung Fu Panda 2 in 2011 compared to Shrek Forever After in 2010 on a similar international box office performance level.
Taking a closer look at key drivers of revenue for the quarter, Kung Fu Panda 2 contributed revenue of approximately $39 million primarily from its performance at the international box office.
Our fall 2010 release, Megamind contributed revenue of approximately $26 million primarily from domestic pay-TV. Through the end of the quarter, the title reached an estimated 4.6 million net home entertainment unit sold worldwide.
Our other two 2010 movies Shrek Forever After and How to Train Your Dragon contributed approximately $15 million and $9 million revenue to the quarter respectively, primarily from international pay-TV and worldwide home video.
By the end of the third quarter, Shrek Forever After and How to Train Your Dragon had each reached an estimated 9 million net home entertainment unit sold worldwide.
Our film catalog and other items contributed approximately $71 million of revenue to the quarter, including $19 million in revenue from non-film businesses.
Moving on to the remainder of the income statement, cost to revenues for the quarter equaled a $108 million, resulting in approximately $53 million in gross profit. Selling, general and administrative expenses for the quarter totaled $27 million, including approximately $6 million of stock-based compensation expense.
Turning to taxes, the Company’s income tax expense for the third quarter was approximately $8 million. Our combined effective tax rate, which is our actual tax rate coupled with the effect of our tax sharing agreement with a former stockholder was approximately 27% for the quarter. We expect our full year combined effective tax rate to be slightly under 30%.
Moving onto the balance sheet, the Company ended the third quarter with a cash balance of approximately $150 million. We expect our cash balance to decline over the next three quarters due to production and development costs that are ramping up as we get ready for another three film year in 2013 as well as up coming tax and other payments.
The Company’s diluted share count for the quarter was approximately $85 million and our remaining share repurchase authorization is $125 million.
Looking ahead to the fourth quarter, we expect financial results to be driven by three events. First is a theatrical release of Puss In Boots, which opens domestically on Friday and in a majority of its international territories by the end of December.
A few remaining markets are scheduled to open in the first quarter of 2012, including Japan, Korea, Hong Kong and the Nordic Region.
Second is the home entertainment release of Kung Fu Panda 2, which enters the US market on December 13th. And the third is the release of several of our television specials into the home entertainment market.
With that I’ll turn the call over to Jeffrey.
Thank you and good afternoon everyone. As Lew mentioned, our third quarter results were driven primarily by the blockbuster success of Kung Fu Panda 2, the number one animated movie of the year. It has surpassed $664 million at the worldwide box office and is the fourth highest grossing movie of 2011 on a global basis.