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DreamWorks Overestimates ‘Shrek 2' Take for Q1

10 May, 2005 By: Jessica Wolf

Scene from Shrek 2

DreamWorks Animation overestimated the performance of Shrek 2 on home video for the first quarter of 2005, resulting in lower-than-expected revenue for first three months of the year, company executives reported today.

Still, the quarter was overall a profitable one, noted company CFO Kristina Leslie, with $167 million in revenue, $46 million in net income and $0.44 per fully diluted share — compared to 2004 first quarter revenue of $41 million, a net loss of $25 million and a $0.33 net loss per diluted share.

Most of the company's first-quarter revenue came from international theatrical performance from Shark Tale, and 12 million video units sold since the title hit retail Feb. 8, Leslie said. About 10 percent of quarterly revenue came from the studio's catalog titles — a majority of that from continued sales of the original Shrek, she said.DreamWorks based its Shrek 2 sales projections for the first quarter on the sales the title posted in the fourth quarter of last year, said Ann Daly, DreamWorks COO. The overall market for catalog DVD titles did not support those projections, she said, noting Nielsen EDI research that points to a more than 10 percent downturn in catalog DVD sales overall.

“This [Shrek 2] sales shortfall resulted in a higher level of returns than we expected, as a result revenue earned by our distributor from Shrek 2 was less than costs incurred by our distributor, which resulted in DreamWorks Animation recording no revenue from Shrek 2 other than licensing and merchandise in the first quarter,” Leslie said.

Shrek 2 did bring in $9 million in licensing and merchandise revenue for Q1, she said.

It's likely DreamWorks won't see 2005 home video revenue from the title until the fourth quarter holiday sales season kicks in, Leslie added.

As of March 31, Shrek 2 has sold 35 million units on home video, according to the company. DreamWorks expects it to hit 38-40 million units by year-end. Previously, the company anticipated selling 55 million units of the title by the end of 2005.

On the company's earnings call CEO Jeffrey Katzenberg voiced faith in the “Shrek” franchise and DreamWorks' overall strategy of producing and releasing two profitable and high-quality CG-animated films per year. The “unique blockbuster characteristics of Shrek 2,” caused the company to overestimate first-quarter sales, he said.“We feel that the ‘Shrek' franchise at retail is as strong as ever.” Daly agreed.The original Shrek sold an additional 8 million units after the sequel hit theaters, which bodes well for the “Shrek” franchise, Daly said. Shrek 2 will get a boost when the planned third film hits theaters and when a direct-to-video “Puss in Boots” title hits the home entertainment market, she said.

DreamWorks has taken the unexpected return levels reported for Shrek 2 over the last few weeks and re-evaluated its overall revenue projections for the year.Due to its distribution agreement the company will not be able post profits for its upcoming theatrical release Madagascar, which opens May 27, until the fourth quarter of the year, Leslie said.

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