DreamWorks Animation to invest $85 million to upgrade studio


MUMBAI: DreamWorks Animation SKG will be spending approximately $85 million over the next two years to expand and improve its animation studio in Glendale, California in order to accommodate general business growth, including 3D expansion. The project began during the second quarter of 2008.

For the quarter ended June 30, 2008, DreamWorks Animation SKG, Inc. reported total revenue of $140.8 million and net income of $27.5 million, or $0.30 per share on a fully diluted basis. This compares to revenue of $222.5 million and net income of $61.8 million, or $0.60 per share on a fully diluted basis, for the same period in 2007.

"Last month, Kung Fu Panda delivered DreamWorks Animation’s best-ever domestic opening for an original film. Having recently crossed the $200 million mark at the domestic box office, it is now our most successful non-sequel since the Company went public," stated Jeffrey Katzenberg, CEO DreamWorks Animation. "Kung Fu Panda’s performance has exceeded expectations not only domestically but also internationally, where it continues to achieve record-breaking openings across both Asia and Europe."

To date, Kung Fu Panda has grossed approximately $210 million at the domestic box office, making it the fourth most successful film of the year.

Internationally, the film has set box office records for animated openings in several key territories, including South Korea, Russia, Australia, Mexico and China, where it has become the most successful animated film in that country’s history. In total, the film has reached over $510 million in worldwide box office.

For the quarter, Kung Fu Panda contributed $46.4 million of revenue. In addition to consumer products and revenue from the Company’s distributor, revenues included a non-recurring benefit from the completion of a strategic relationship, which accounted for slightly less than half of the film’s contribution in the period.

Shrek the Third, the Company’s 2007 summer blockbuster, contributed approximately $29.9 million of revenue to the quarter, primarily driven by a domestic pay television payment. Through the second quarter, the film reached an estimated 20.3 million home entertainment units shipped worldwide, net of actual and estimated future returns.

The Company’s 2007 fall release, Bee Movie, contributed approximately $25.5 million of revenue to the quarter, driven by international home entertainment performance. The film reached an estimated 7.1 million units shipped worldwide through the second quarter, net of actual and estimated future returns.

Flushed Away, the Company’s 2006 fall release, and Over the Hedge, the Company’s 2006 summer release, delivered $7.3 million and $5.4 million of revenue, respectively, primarily from international pay television.

Wallace & Gromit: The Curse of the Were-Rabbit, the Company’s fall 2005 release, contributed approximately $5.3 million of revenue to the quarter, primarily from international free television. Library and other titles contributed $21.0 million of revenue to the second quarter, driven by international free television and continued catalogue home entertainment performance.

Cost of revenue for the quarter equaled $75.2 million while selling, general and administrative expenses totaled $27.6 million, including $8.6 million of stock compensation expense.

Results for the quarter also included a tax benefit of approximately $9.4 million related to the Company’s tax sharing agreement with a stockholder, which resulted in a lower effective tax rate. This benefit was partially offset by a $8.0 million increase in cost for the income tax benefit payable to the stockholder (as shown on the consolidated statement of income before the line item, "income before income taxes"), resulting in an overall net increase to net income of $1.4 million, or approximately $0.02 per share on a fully diluted basis.

Looking ahead to the remainder of the year, the Company’s third quarter results are expected to be driven by Kung Fu Panda’s continued box office performance. To date, the film has been released in the majority of international territories, including Japan on July 26, 2008 and has generated approximately 60% of its box office receipts overseas. Because the Company’s distributor reports international results on a 30-day lag, a significant portion of the film’s international performance is expected to be recognized in the third quarter.

Due to its strong performance, the Company believes that Kung Fu Panda is on track to become DreamWorks Animation’s most successful original film of all time worldwide. That said, the title’s international box office performance has benefited from favorable foreign exchange rates. While this generally increases the Company’s revenues as expressed in dollars, it also results in higher international theatrical marketing costs for the film. As a result, the Company anticipates that the worldwide theatrical marketing expense will be meaningfully higher than it has observed historically. This change will increase the amount that the Company’s distributor needs to recoup and, consequently, lower the Company’s revenue in the third quarter.

Given the current foreign exchange rate environment, the Company expects that its worldwide theatrical marketing expense will remain at a higher level than it has previously experienced.

Kung Fu Panda will be released into the domestic home entertainment market this November and will likely be the primary contributor of revenue in the fourth quarter. The Company’s fall release, Madagascar: Escape 2 Africa, is scheduled to open domestically on November 7, 2008. The Company does not anticipate generating significant revenue in the fourth quarter from the title, as its distributor may not have recouped its upfront marketing and distribution costs.

In addition to results for the quarter, the Company announced an authorization for future repurchases of up to $150 million of its outstanding Class A common stock. These repurchases may be made in the open market, in block trades, or in privately negotiated transactions. Year to date, the Company has repurchased approximately $88.0 million, or 3.7 million shares, at an average per-share price of approximately $24.00.