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DreamWorks Animation Warns of Q2 Loss, SEC Probe

11 Jul, 2005 By: Erik Gruenwedel

Citing a need to analyze unconvincing retail response to Shrek 2 and Shark Tale DVD sales, DreamWorks Animation today announced that it expects to post second quarter (ended June 30) net losses upwards of 9 cents per common share. The independent business unit of DreamWorks SKG, which will report full second-quarter results in August, had previously projected a flat quarter.

In addition, DreamWorks Animation downgraded fiscal-year 2005 net earnings guidance of $1 to $1.25 per share to between 80 cents to 90 cents per common share.

DreamWorks confirmed it is subject to six class action lawsuits alleging violations of federal securities laws against both the company and select officers and directors. The company, which contends the suits are without merit, also announced it was cooperating with the Securities and Exchange Commission's “informal inquiry” into concerns regarding securities trading practices and disclosures of its first-quarter financial results May 10.

Last month, DreamWorks SKG shareholders filed suit alleging that over-inflated projections of Shrek 2 DVD sales had caused a $25 million drop in revenue expectations and a 20-cent-per-share decline in first-quarter earnings.

Finally, the studio cited adverse market conditions for the decision by its principal shareholders — CEO Jeffrey Katzenberg, David Geffen and Vulcan Capital (headed by Microsoft co-founder Paul Allen) — to temporarily suspend a planned $500 million secondary offering of their Class A common stock, previously announced in March.

In a conference call with investors, Kris Leslie, DWA CFO, said the studio spent the past eight weeks working with distribution partner Universal Studios Home Entertainment analyzing sales performances at both domestic and international home video markets.

DreamWorks Animation concluded that the initial retail success of Shrek 2 “certainly contributed” to its ongoing potential at retail, but that “broader underlining issues” as to how the title and catalog fare are being managed at retail resulted in lower inventory levels and higher returns.

She said the returns could be attributed to the overall number of titles available in the market and how retail deals with titles when they become catalog.

Leslie said the studio would increase its reserve budget for 2004 releases and adjust sales forecasts accordingly.

Retail analyst Dennis McAlpine, with McAlpine Associates, Scarsdale, N.Y., disputed notions of a poor retail performance for Shrek 2, and opined that many retailers just aren't keeping titles on hand the way they used to.

“The Wal-Marts and Best Buys of the world are not going to sit on inventory anymore,” McAlpine said. “If the stuff hasn't moved after a certain period of time they are going to send it back to [the studios] and get their money out.”

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