Shrek Wreck at DreamWorks

Shares plunge after the studio admits it netted no <I>Shrek 2</I> retail sales in the quarter.
Author:
Publish date:

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.

The weak quarter puts more pressure on the studio's next release,

Madagascar

, to do well at the box office when it opens May 27, ahead of Memorial Day weekend. It will also lead to further questions on the animation business in general and how many cartoons audiences can bear. Shares of

Pixar

(PIXR)

slipped 2% late Tuesday even though the company posted blowout numbers last week.

But at least one industry observer called questions about the broader animated-movie market overblown.

Paul Dergarabedian, president of box-office tracking firm Exhibitor Relations in Los Angeles, said, "When a movie has a very strong theatrical release, there's usually a ripple effect for DVD sales." He noted that while his company doesn't track DVD sales, "There are not enough adjectives to describe the success of Shrek 2 at the box office."

At $108.2 million,

Shrek 2

last year had the second highest opening weekend of all time, second only to

Spiderman 2

. Asked if the DVD market was oversaturated with animated product, he said that in general, parents really never have enough family fare.

That said, DreamWorks slashed 2005 earnings guidance to $1-$1.25 a share. Wall Street was expecting $1.88.

The news came at the end of a trading day that saw the stock plunge 5% in heavy volume after

Newsweek

reported the company would post weak numbers.

The news couldn't come at a worse time for early investors like

Microsoft

(MSFT) - Get Report

co-founder Paul Allen, who hoped to recoup his investment in the company thorugh a planned secondary offering. The deal was to follow the release of

Madagascar

.

On the upside,

Shark Tale

generated $142 million of revenue in the quarter from international theatrical and worldwide home video. To date, the film's worldwide theatrical revenue has surpassed $365 million.

DreamWorks generated $377 million in cash, primarily driven by the success of its 2004 releases, and ended the period with $445 million in cash and cash equivalents, largely driven by

Shark Tale

, according to the company.

DreamWorks dropped $2.06 to $36.44 before plunging to $30.20 after hours.