DreamWorks Animation SKG, Inc.

(DWA) Q3 2008 Earnings Call October 28, 2008 5:00 pm ET

Operator
Thank you for standing by and welcome to the DreamWorks Animation earnings call.
(Operator Instructions) At this point, I would like to turn the call over to your host, Mr.
Richard Sullivan. Please go ahead.
Rich Sullivan
Thank you and good afternoon, everyone. Welcome to DreamWorks Animations third
quarter 2008 earnings conference call. With me today are our Chief Executive Officer, Jeffrey
Katzenberg, and our President and Chief Financial Officer, Lew Coleman. This call will begin
with a brief discussion of the quarterly financials disclosed in todays press release, followed
by an opportunity for you to ask questions. I would like to remind everyone that todays
press release is available on our website, www.dreamworksanimation.com.
Before we begin, we need to remind you that certain statements made on 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 uncertainties, including those
contained in the companys annual and quarterly reports, as well as in other filings with the
SEC. I 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. And with
that, I would like to now turn the call over to DreamWorks Animation Chief Executive Officer,
Jeffrey Katzenberg. Jeffrey.
Jeffrey Katzenberg
Thanks, Rich and good afternoon, everyone. Thank you for joining us today. I just want to
mention if you detect a change in the tone of my voice today, its not my happiness over the
markets performance but I am getting over a bad cold. The main news for the quarter was
the incredible success of Kung Fu Panda. As we discussed last quarter we had high
expectations for the film overseas and did spend a little bit more than usual on advertising
support to take advantage of its global appeal. This ended up paying off nicely, as Kung Fu
Panda has reached nearly $450 million in international box office to date, breaking records
across Europe, Latin America, and Asia during the quarter.
It became one of only four films this year to surpass the $400 million mark in foreign
grosses, thanks largely to its impressive runs in the U.K., France, Korea, China, Germany,
and Italy. We couldnt be more pleased with its performance and continue to view the
international theatrical market as a growth area for the company.

Kung Fu Panda has now reached over $630 million on a global basis, becoming our most
successful original film. The title will be released into the U.S. home video market on
November 9th, followed by its international rollout throughout the next two months.
We believe Kung Fu Panda's outstanding theatrical performance and critical acclaim position
it well for a successful home entertainment release this holiday season.
Accompanying Kung Fu Panda on DVD and Blu-Ray will be a brand new, 22-minute
companion story titled Secrets of the Furious Five. Narrated by Jack Blacks Po, it tells the
back story of the characters of the Furious Five in what we believe is among the most
extensive bonus content ever created for a home video release. Retailers are pricing the
double pack at around $25 and we anticipate that consumers will recognize this as an
exceptional added value.
On November 4th, we are also set to release on to DVD last years successful holiday
special, Shrek the Halls, which marked our foray into the non-theatrical special content
business. Over 21 million viewers tuned in for the television premiere of Shrek the Halls,
making it one of the most watched shows of 2007. We look forward to its DVD release next
week and to seeing it re-air on ABC in prime-time next month.
Beyond home entertainment, we have our second theatrical event of the year, the release of
Madagascar: Escape to Africa into U.S. theaters on November 7th. Families across the world
are looking forward to the return of their favorite Central Park Zoo characters in the sequel
to our 2005 hit. Audience reaction to the film has been strong and we have high
expectations for its box office performance.
Also in the next few weeks, Shrek the Musical will begin its preview performances in New
York before officially opening at the Broadway Theater on December 14th. The show had a
very successful run in Seattle last month and critical response so far has been supportive.
While we do not expect Shrek the Musical to have a significant impact on earnings through
2009, its success we believe could be a source of meaningful value and growth in future
years.
Additionally, we continue to look ahead with enthusiasm to March 27th when we release
2009s first big event film, Monsters Versus Aliens, into theaters in 3D. We remain confident
that there will be an adequate number of 3D capable screens in the marketplace for
Monsters Versus Aliens to serve as a valuable proof of concept for the industry as a whole. It
has been a very successful year so far for DreamWorks Animation and we are hopeful that
we will see a continuation of that success in these next two very busy months for the
company.
Finally, I would like to discuss an important item as it relates to our board of directors. Today,
David Geffen will be stepping down from the board. As one of DreamWorks' original

founders, Davids vision for and commitment to the company has been absolutely vital
throughout its 14-year history. Without him, there would be no DreamWorks Animation. He
leaves his post as a director with the entire companys deepest gratitude. We look forward to
working with David as a trusted advisor going forward, and on a personal note, I would like
to thank David, always a mentor and my best friend, for his incredible wisdom, leadership,
and guidance. David, you will remain the guardian angel of DreamWorks Animation.
With that, I will turn it over to Lew before we take your questions. Lew.
Lewis W. Coleman
Thank you, Jeffrey and good afternoon, everyone. I would like to highlight a few items before
we take your questions. In the third quarter, the company reported total revenues of $152
million resulting in net income of $37 million, or $0.41 per diluted share. Revenue was
mainly driven by the companys latest three releases, Kung Fu Panda, Shrek The Third, and
Bee Movie. Kung Fu Panda contributed $63 million of revenue, driven by its international box
office performance. Due to the one-month lag in international reporting from our distributor,
approximately $385 million, or 93% of the films international box office receipts, fell in the
third quarter.
Shrek The Third contributed $33 million of revenue, primarily from earlier than expected
international pay television. Whereas revenue for this market has historically spread over
several quarters, the majority of Shrek the Thirds international pay television fell in the third
quarter. In addition, the title reached an estimated 20.5 million home entertainment units
net shipped worldwide through the end of the third quarter.
Bee Movie contributed $27 million of revenue, driven by domestic pay television. The film
reached an estimated 7.5 million home entertainment units net shipped worldwide through
the end of the third quarter.
Cost of revenues for the third quarter equaled approximately $76 million, resulting in a gross
profit -- in our 15% gross profit margin.
SG&A was approximately $30 million, including $10 million of stock compensation expense.
SG&A for the quarter also included non-cash items of approximately $2 million, resulting
from Roger [Enricos] transition to non-executive Chairman and the acceleration of
depreciation related to the remodeling of the companys Glendale campus.
The remaining increase is primarily comprised of both new business initiatives and the
continued growth in the number of stock compensation grants under the annual grant
permit.

As previously referenced, the company has a number of new business initiatives underway,
including 3D, Broadway, television, and online opportunity. We look forward to updating you
on the progress of these initiatives in the coming months, starting with our analyst day on
December 11th.
Results for the quarter also included a tax benefit of $0.03 per share on a fully diluted basis.
Earnings for the fourth quarter will be largely driven by the home entertainment
performance of Kung Fu Panda, which will be released this November. While the film has
been very successful overseas, several territories contributing to its international box office
total have not typically generated significant home video revenue.
Looking at other events in the quarter, our fall film, the sequel to Madagascar, is schedule
for release on November 7th. Because our distributor must recoup its up-front marketing and
distribution expenses before reporting revenue to us, we do not expect to see significant
revenue from the distribution of this film until 2009. Also, Shrek the Musical will be released
on Broadway this December, and success live theater can be a very profitable business but
we dont expect Shrek the Musical to have a meaningful impact on the companys earnings
in 2008 or 2009.
Finally, I would like to update everyone on our share repurchase program. Year-to-date, the
company has purchased $185 million, or 6.8 million shares, at an average price per share of
approximately $27.20. And we have approximately $53 million remaining under our current
board authorization.
With that, wed be happy to take your questions.
Question-and-Answer Session
Operator
(Operator Instructions) We will go to the line of Jessica Reif-Cohen, Merrill Lynch. Go ahead.
Jessica Reif-Cohen - Merrill Lynch
Thank you. I have a couple of questions -- the first one is given your balance sheet, would
you consider a dividend?
Jeffrey Katzenberg
Are you going to give us all the first?
Jessica Reif-Cohen - Merrill Lynch

Do you want them all? Ill give them all.

Jeffrey Katzenberg
No, Ill give you -- there is no -- we have not considered taking such an action right now and I
think that like all businesses in the world right now today, having a strong balance sheet we
consider a very important and valuable asset of the company and obviously we are going to
continue to watch very, very carefully the world economy, the domestic economy, and most
of all to keep DreamWorks Animation in a very, very strong position in terms of being wellfinanced. So we feel very comfortable where we are right now.
Jessica Reif-Cohen - Merrill Lynch
Okay, sounds like no dividend. I have three more questions, just so you know -- the next one
is could you discuss what the foreign exchange impact was on the third quarter and any
comment on what a strengthening dollar will mean for you guys?
Jeffrey Katzenberg
In the third quarter, I dont know, Lew, is there any specific impact for the third quarter?
Lewis W. Coleman
You know, I dont think theres a big significant impact in the third quarter. The foreign
exchange rates weakened obviously in September but were fairly -- remained fairly strong in
June and July, so off the top of my head I dont think there was a big effect.
Jeffrey Katzenberg
And I think the variable will come more now in the fourth quarter here with the release of
Madagascar into worldwide theatrical as well as the Kung Fu Panda DVD on a worldwide
basis. And we are seeing two impacts on it -- one, our costs, we are seeing some savings
coming through on the cost side of it and also seeing impact on the revenue side of it.
I would think that in looking at Madagascar, we would still suggest that the way to look at
the international theatrical business, certainly in this next six months, is to look at it pretty
much on the same basis that we have over the last two to three years, which is if you use
about a 1.5 multiple on our domestic number, we still feel like thats going to very much fall
within the range for us.
Jessica Reif-Cohen - Merrill Lynch
All right, and then I was wondering if you would let us know how many shares does David
Geffen and his charities control?

Jeffrey Katzenberg
Somebody will scramble to get that information for you, Jessica, because its not something
-Jessica Reif-Cohen - Merrill Lynch
Okay, so while you are looking, the last question I have is about Bee Movie -- the [inaudible]
was surprisingly high and I was just wondering, did you lock into that before the movie was
released?
Jeffrey Katzenberg
Yes.
Jessica Reif-Cohen - Merrill Lynch
Okay.
Jeffrey Katzenberg
Yes, there was both pay TV and a network TV sale that were made in advance of release of
the film that were affected by the performance.
Lewis W. Coleman
Jessica, back on your question about Davids share holding, at the end of the quarter, David
held about 5.75% of the stock, which had about 22.16% of the voting rights because of the B
shares.
Jessica Reif-Cohen - Merrill Lynch
So should we expect you guys to buy this or come on to market?
Lewis W. Coleman
No, I dont think you should -- I mean, obviously David can do what he wants. David is bound
by a shareholder agreement between he and Jeffrey which we have filed in the past, which
specifies that neither of them will reduce their shares beyond a point where combined, there
is less than 50% of the voting stock. And that shareholder agreement is still in effect.
Jessica Reif-Cohen - Merrill Lynch
Thank you.

Operator
Next in the queue is Barton Crockett from J.P. Morgan.
Barton Crockett - J.P. Morgan
Okay, great, thanks for taking the question. I was wondering if you could comment on the
economic environment in DVD sales -- did you see anything in the DVD sales in this past
quarter that suggests any impact from the economy or not? And then as you look at Panda,
how do you think about the economic impact there and also the competitive situation? You
know, it doesnt look terribly competitive except for WALLE the next week but if you could
comment on that, that would be great. Thanks.
Jeffrey Katzenberg
I think we start with the DVD sales so far to date in this quarter I think have held up very
well and we have seen good performance by the big titles. And as -- so far, the DVD market
has performed well. In terms of Kung Fu Panda, we think its well-placed, got a great date,
its a strong property, seems to have a very good appeal in terms of our market research
and we are cautiously optimistic.
Barton Crockett - J.P. Morgan
Okay, thats great. And then I was intrigued by your comment about 3D, that you are
confident that you will have I think essentially enough screens to have a valuable proof of
concept for the industry as a whole for Monsters Versus Aliens. Could you elaborate on what
you mean by that? Is that a way of saying that you think the 1,000 screens that we have
now is enough to give you proof of concept, or do you expect there to be more screens?
Jeffrey Katzenberg
I guess what I would say is that yes, there will be more screens. Theres some good
continued progress that is being made, particularly on the DCIP front but obviously financing
in todays market is very different than anybody anticipated three or six months ago. So I do
expect that there will continue to be installations made and I guess all I was saying in terms
of proof of concept is this is a long-term commitment and a long-term strategy for
DreamWorks Animation. As you know, our investment on a per property basis is about $15
million or so. We feel that the upside opportunity on Monsters Versus Aliens will more than
cover that opportunity [as they are two more than cover that] incremental investment weve
made.
But the real home run for this is as there is deeper penetration and we get up into the place
where I expect by the time Shrek comes out, Shrek 4 comes out 15 months later, where

70%, 80% plus of our admissions can and will be in 3D. It will be a very different
environment a year or two later.
So its not ideal. We wish there would -- we would have reached much, much higher
deployment by the time of the release of MVA but as I said, its still I think an offer very, very
good opportunity to launch this whole new generation of movie-going.
Barton Crockett - J.P. Morgan
Okay, thats great. Thats helpful. Ill leave it there. Thanks a lot.
Operator
Ingrid Chung, Goldman Sachs.
Ingrid Chung - Goldman Sachs
Thank you. Good afternoon. I have a few questions, the first one is following up on your
comments on Bee Movie, it sounds like theres no change to your view on ultimate profit for
the film and I just wanted to check if that is the correct assumption.
And then the second question I had was I was wondering if you could talk about Shrek the
Musical advanced ticket sales and how those are trending, and if Shrek the Musical is
successful, what would be the next property that you think would fit naturally to adapt for
Broadway?
And then lastly, I was going to ask about merchandising for Panda and Mad 1 in terms of
home video -- do you see big box retailers like Walmart using it as a major traffic driver for
Christmas?
Lewis W. Coleman
On Bee Movie, most of the big revenue windows have been hit now and so we have a pretty
clear picture of where the profitability is, and I did say profitability. So we are comfortable
even though its low margin that there is no write-off on Bee Movie.
The other thing going on with Bee Movie is that when we have to look at a write-off, we have
to discount the cash flows. When we dont write it off, we dont discount the cash flows and
so theres been enough room in Bee Movie to produce a low margin but a reasonable
amount of profit. So I dont expect to see anything other than what you have seen to date.
Jeffrey Katzenberg

On to the Shrek musical, the pre sales to date are what I would think is sort of characterize
as on track and what I mean by that is that we are just getting into the holiday sales season
and its really too soon to be really predictive of what that is going to mean in the long run,
but they are solid. And you know, we are excited about the show and we are looking forward
to getting it on its feet and our preview is in about 10 days or so.
You know, I think this world is no different than any other these days, which is the proof is in
the pudding. When the show is up and running, if people like it, the word of mouth is really
going to determine ultimately the level of success that it enjoys.
And as to a next property to be honest, we want to get one up and successful and before we
charge on to the next one, and its a very, very big and demanding enterprise. Its been a
very significant effort by the whole company, particularly Bill [Dinaski], who runs creative for
DreamWorks Animation, has really devoted a tremendous amount of his time on the show
and I think the results are going to be more than worth that investment. But as I say, we
really want to get a hit under the belt before we worry about the next one.
In terms of your question about Madagascar 1, it will be marketed, the DVD will be marketed
at retail as part of our Madagascar 2 and Kung Fu Panda push into the home video
marketplace in the fourth quarter. Thats one of the great things about these sequels, is that
theres a halo effect that is created and we certainly expect to see a real up-tick on our Mad
1 DVD sales.
Ingrid Chung - Goldman Sachs
Okay, great. Thank you.
Operator
David Miller, Caris & Company.
David Miller - Caris & Company
Good afternoon. Lew, two questions for you and then a follow-up for Jeffrey, if I may -- the
$64 million in revenues that you recognized primarily from international box office receipts
of Panda, are you pretty much done there? Should we expect any more flow-through into the
current quarter or are you pretty much done? And then also, were there any [inaudible] fees
rather recognized in the quarter? And then I have a follow-up, thanks.
Lewis W. Coleman
David, there were no [tap-wear] fees recognized in the third quarter, and I think I indicated
that we had recognized approximately $385 million of international receipts on Panda, which

represented 93% of the total receipts to date, so youve got about 7% additional, plus
theres some dribs and drabs filling out there. So -David Miller - Caris & Company
Okay, wonderful.
Lewis W. Coleman
-- been recognized, theres little pieces coming in the fourth quarter.
David Miller - Caris & Company
Okay, great and then also Jeffrey, I think it might have been two quarters ago, maybe it was
last quarter, where you were at least rhetorically prognosticating a $5 up-charge for
Monsters Versus Aliens. Just given the current environment, given the overall murkiness
surrounding DCIP, do you still think thats realistic? Are you still lobbying for $5? Do you see
smoothing that down to perhaps $3 or $4? Just curious as to your thoughts there. Thanks.
Jeffrey Katzenberg
Well, David, I think everything is different today than it was six months ago for all of us and
we are not ignoring things that are going on in the marketplace. Having said that, there are
several other things that we look to to give us some indication as to whether that $5
premium is going to hold up. Theres a very big Disney release in Bolt coming in 3D later in
November and theres some -- you know, we continue to watch closely what is happening
with IMAX, which has been playing very, very strongly in the last couple of months. As you
know, thats a much more significant up-charge than $5.
And so there are places and things and events for us to closely monitor that I think will be
good indicators to us. My hope is that we are offering the consumer an experience that is
exceptional, significantly beyond anything they have experienced in a movie theater before
and I am hoping they will see that value and value it as we do, as a $5 premium.
David Miller - Caris & Company
Thank you.
Operator
Michael Morris, UBS.
Michael Morris - UBS

Thank you. On the international distribution, I believe that your take is less in terms of the
total box office receipts in percentage terms relative to what you take in the U.S. Is that
accurate and if so, can you maybe give us some details on how that breaks down and
whether that is something that you think could change over time in your favor or if it is
something pretty static?
And then second of all, I think you mentioned Shrek the Halls in your prepared remarks. I
think it contributed about $25 million in revenue last year. Whats your expectation for this
year? Thanks.
Jeffrey Katzenberg
So on the first one, Michael, international tends to settle in the low 40% area, in the 40, 41,
42% film rental, which is 10 points lower than what we tend to see out of the domestic
market. Thats not changed. Thats held fairly consistent now the last 24, 36 months. We
dont see any big change in that looking forward for the next 12 months.
In terms of Shrek the Halls, I dont know -Rich Sullivan
Mike, I think when we -- we actually havent disclosed a specific number for Shrek the Halls
but I think in the quarter that was reported, it made up roughly about half of the other
income and that quarter was around $50 million, so it would put it in the low 20s, if thats
what you are looking for. But we havent specifically disclosed that relationship.
Jeffrey Katzenberg
And just in terms of how it is going to, what to look for in the fourth quarter this year, the
answer is we dont know. This is new territory for us. Its a very unique property and we are
in a pretty strong push behind it but we really dont yet have any real insight as to what its
performance is going to be.
Rich Sullivan
Mike, just one other point there -- obviously its going to be driven by whatever that title
does in home video. Its important to remember that with ABC, we split those home video
units with ABC, so -Jeffrey Katzenberg
The revenue from it.
Rich Sullivan

The revenue from it.

Michael Morris - UBS
Is there a certain threshold before you start taking revenue on that?
Jeffrey Katzenberg
No.
Michael Morris - UBS
Okay.
Operator
Ralph Schackart at William Blair.
Ralph Schackart - William Blair
Good afternoon. Two questions, one for Jeffrey, one for Lew; Jeffrey, there seems to be some
debate on how meaningful the Blu-Ray cycle is going to be in the eyes of digital distribution.
Just curious since player price points are coming down and the PS3 is rolling out more so on
a worldwide basis, any early reads on the cycle, how its progressing from your vantage
point?
And then for Lew, Im just looking at D&A of $10 million plus in the quarter. For modeling
purposes, will this be a good estimate to use going forward until the campus remodeling
project is completed?
Jeffrey Katzenberg
On the Blu-Ray front, the good news is it is growing, certainly bringing down the cost of
these units into the fourth quarter I think is going to be a big boost for the platform. We have
what we think is going to be an outstanding offer on Kung Fu Panda in Blu-Ray, so we are
very supportive of it. Weve seen some meaningful sales of Blu-Ray on Iron Man and so
again, its -- cant quite see yet where it all leads but certainly the indications to date have
been very positive for it.
Lewis W. Coleman
Ralph, Im not sure I understood your question exactly because Im not sure where the 10%
came from. Could you repeat it?

Ralph Schackart - William Blair

$10 million in absolute dollars.
Lewis W. Coleman
For SG&A?
Ralph Schackart - William Blair
For depreciation and amortization.
Lewis W. Coleman
Yeah, its going to be a little lumpy here. Part of what happened is that as we have
remodeled some of our older buildings, weve had to write off the unamortized portion of
depreciation. Conversely, as we build new buildings, we will eventually sort of increase our
depreciation so I think the way to think about it as sort of a gentle u-curve here over the
next five or six quarters.
So a little bit higher because of some demolition expenses this time, and then it will take a
little while before the campus construction sort of catches up with higher depreciation in
maybe three or four quarters. So thats how I would think about it.
Ralph Schackart - William Blair
Great, thats helpful. Thanks, guys.
Operator
Drew Crum, Stifel Nicolaus.
Drew Crum - Stifel Nicolaus
Thanks. Good afternoon, everyone. Jeffrey, I wonder if you could comment on the expected
screen count for Madagascar 2 in the domestic market and just your overall strategy in
terms of the international release schedule?
Jeffrey Katzenberg
Sure. I would say right around 7,500 prints will be playing in about 4,000 locations, which is
really sort of the pattern for a super high release this time of year. And internationally, we
have -- it will roll out between actually this weekend, in which we start in Russia, and we will

roll out throughout the year. And with many of the big international territories falling in the
late November, December period.
You know, one of the things that did happen to us I think people noted is that Harry Potter
moving out of the marketplace, which is obviously had very -- a big impact for us here
domestically, that the bigger impact actually is internationally where the Potter franchise
remains really the top of the top and their moving out of the Christmas holiday period has
left a very big void there, and one that we have done our very best to fill for them.
Drew Crum - Stifel Nicolaus
Okay, thanks. And on the SG&A line item, it was near $30 million in the quarter. Is that a fair
run-rate going forward? I know theres a lot of moving parts in that number this quarter but
just kind of a normalized run-rate on a quarterly basis, your expectations there?
Lewis W. Coleman
Drew, you know, the line has been growing but you saw a bit of a jump this quarter. Part of
that jump was a couple of the unusual items that I called out for about $2 million. But I do
expect, given our investment in some of the new businesses and ultimately given our
investment in some of the new buildings, I expect that to sort of continue to increase more
like it did in the first, second quarters than necessarily what you saw in the third quarter.
So a little bit higher growth rate in the third quarter than I would build in going forward but I
would build in a growth rate.
Jeffrey Katzenberg
And Drew, what I would add is that we have, as I think you know, an investor meeting in
December in New York and I think one of the priorities for us at that meeting will be to really
give everybody a sense of these new business initiatives that we have ongoing here in this
and I think that will help give people a better sense of where our SG&A is, because for our
primary production of our movies and the running of our business, you know, we remain -our SG&A is actually remaining pretty stable and the places where there is growth are really
more reflective of some of these new business opportunities, which as I say well give some
detail on when we see you in December.
Drew Crum - Stifel Nicolaus
Okay, thanks.
Operator
Tuna Amobi, Standard & Poors.

Tuna Amobi - Standard & Poors

Thank you very much. I have three questions as well. I guess I should take them one at a
time or I can go at all of them at the same time.
Rich Sullivan
Fire away.
Tuna Amobi - Standard & Poors
All right. So the first one is on Panda -- given the international box office ratio, it seems like it
has the highest international ratio to date of all of your films. So Im just kind of wondering,
any lessons that you learned? What would you attribute to that success and what lessons do
you think it can replicate here for some of your other titles?
The second question would be on 3D -- I was wondering if we can get an update on where
you stand currently with the $85 million you talked about, and if you foresee that your
investments in 3D, given the efficiencies that might accrue, do you foresee that could lead
to ramping up the number of films that you produce on a yearly basis?
And lastly, perhaps for Jeffrey, I was wondering if perhaps you can comment on the
Paramount relationship, given what has happened with DreamWorks and signing with
Universal. I realize that you have a few more years with Paramount so Im just kind of
wondering if you can update us on how you think about that relationship and any possible
other considerations you might be considering at this time.
Jeffrey Katzenberg
Great. Okay, so let me start with the last question first, which is the Paramount relationship
for DreamWorks Animation -- remains very strong. They have done an outstanding job in
servicing the distribution of our product, as I think seen by the results. You know, they have
a very, very strong marketing and distribution organization there and they have supported
DreamWorks Animation in a first-class manner. And we expect them to continue to do so
going forward and we do not anticipate any change in the relationship with Paramount.
Again, I just have to say they have done an excellent job for us and they have treated us
well.
On to Panda, I think that if you actually go in there and sort of dissect it a bit, what we have
seen is something unique about this particular title, which is that it has played outstandingly
throughout Asia, stronger than any of our other films have and that does to a very large
degree represent the unique performance of this movie at a higher multiple. You know, this
is at about 1.8 or 1.9 times our domestic performance, where our other movies have played

more typically in the 1.5 to 1.6 or 1.7. As I say, primarily this came from Asia, in particular
China, which typically on our movies we would take in $3 million, $4 million, maybe $5
million range in terms of gross in China. This one was -- its the third biggest non-Chinese
title in the history of China, so it was exceptional, in the high $20 million, so I guess maybe
we should make more Asian themed movies.
And then your second question? Im sorry.
Tuna Amobi - Standard & Poors
The second question was on 3D -- well actually still on the answer you just gave, so it seems
like China was a big part of that story, right? Is there anything to do with the release of
[inaudible] beside -Jeffrey Katzenberg
No, I think its the subject matter here. This was a movie that our filmmakers and artists
actually made as a love letter to China and fortunately it was received just that way, and I
am sure Kung Fu Panda 2, they are very much looking forward to. In fact, we just came back
from a trip to China with the creative team. They were there last week and received as
heroes.
Tuna Amobi - Standard & Poors
Okay.
Jeffrey Katzenberg
So I just think its the uniqueness of that title.
Tuna Amobi - Standard & Poors
All right, and the last question was on the 3D ramp-up and the number of films.
Jeffrey Katzenberg
Well, we continue on track. All of our titles, starting with Monsters Versus Aliens, are being
authored in 3D and as I say, we continue to believe very, very strongly in the long-term
value in this new platform and think that it is going to have meaningful benefit and value to
us, both to our margin as well as to our gross profit.
Tuna Amobi - Standard & Poors

Sorry, Jeffrey, the question was more like do you think that the number, that your 3D
investment -- first of all, I would like to get a sense of where you are with the spending and
also, do you see the efficiencies that will help you to ramp up more than two films a year in
the future?
Jeffrey Katzenberg
No, I dont see that yet, so -Rich Sullivan
And Tuna, if you are talking about where we are in the spending, I am assuming you are
referring to the $85 million we talked about for the -Tuna Amobi - Standard & Poors
Correct.
Rich Sullivan
Yeah, Ill turn that question over to Lew but I think roughly, I believe we are about $12
million through the 85 by the end of the quarter.
Tuna Amobi - Standard & Poors
All right, great. Thats very helpful. Thanks a lot.
Operator
Jake Hindelong, Monness, Crespi, Hardt.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Good afternoon. Just a couple of quick questions -- first, could you comment on the timing of
the Kung Fu Panda home video release internationally? And if you look at the first two
quarters of the release, about how much of the revenue do you think would be split between
the fourth quarter and the first quarter?
Jeffrey Katzenberg
So the release internationally starts in November and pretty much in the major territories is
November, December and a few important territories come in January. Mexico, November;
Netherlands, November; U.K., mid-November; Brazil, mid-November; Germany, mid-

November; Spain, end of November; Denmark, Italy, Finland, Norway, Sweden, Australia,
Japan are all in December and France is in January.
Lewis W. Coleman
Dont forget the December -Jake Hindelong - Monness, Crespi, Hardt & Co.
Its on a one-month lag, correct?
Lewis W. Coleman
Yeah, well still on a one-month lag, so the December wont come in in this year.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Got it. Okay, and then just separately, as far as the Blu-Ray discussion is concerned, havent
heard much about Shrek 1 and 2 on Blu-Ray. What are your expectations there?
Jeffrey Katzenberg
No plans yet.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Very good. Thank you.
Operator
James Marsh, Piper Jaffray.
James Marsh - Piper Jaffray
Two quick questions here -- first on Kung Fu Panda home release, any sense of what you
think the mix in units might be between Blu-Ray and DVD? And then if you could just
comment on where the Blu-Ray pricing for Kung Fu Panda will be. I think you mentioned 23
for the DVD.
And Lew, just quickly on the tax rate, it looks pretty low there. I was just wondering if you
could address what that might look like going forward.
Lewis W. Coleman

Let me do the tax rate -- the $0.03 really came about because we re-filed a prior years
return based upon the fact that we had done a study on R&D credits, found out that we had
more R&D credits to take than we took. So in some respects, you can consider that a catchup, assuming we dont change our rate of R&D. And I guess on a little basis, we will continue
R&D, so well continue to get some of that tax credit.
Youve got to remember that we have to pass our taxes through the Vulcan sharing
agreement so partly what you see in the tax line and partly what you see in Vulcan needs to
be added together to see what the real tax rate is, quote unquote.
Jeffrey Katzenberg
And on the Kung Fu Panda home video, I dont think that Blu-Ray will be a meaningful
percentage of our sales. Again, its a growing platform and we are pricing it aggressively to
support the platform. And in terms of -- I think you were asking about the standard release
pricing, is that what you are asking?
James Marsh - Piper Jaffray
Right. I think you mentioned that the DVD was going to be priced at $23 and I kind of
assumed that it would be $30-ish, but I just wanted to double-check.
Jeffrey Katzenberg
Thats the two-pack, the double pack with the Furious Five. We expect the price to be
somewhere in the $20, $25 range, mid-$20 range in that. So for the single disc, it will be
under $20.
James Marsh - Piper Jaffray
Okay, and then just one last follow-up -- Jeff, you mentioned IMAX pricing, and I was just
wondering, you are going to be releasing these movies in IMAX, I presume, and then
assuming you do, how do you see that theatrical food chain kind of evolving as digital 3D
gets rolled out in more scale?
Jeffrey Katzenberg
Well, I think its going to continue to be the IMAX has actually started to grow in value and
importance, particularly as they have digital. Because the real gating issue for IMAX to date
has been the cost of a film print. It costs $45,000 to make a print for the theater, so there
was just a huge investment that you had to make on the distribution side, and so it made
the profitability, the return on investment of IMAX in the past has been a little sketchy. And

now that they are converting to and rolling out their new screens digitally, it becomes a
much, much more powerful and valuable platform.
People like seeing these movies in these special presentations and to date, the reaction that
weve been getting to the 3D work that we are doing here is exceptional. People are really
blown away by this. It is unlike anything that they have seen and it is more than they are
expecting.
So I think this is actually a very hopeful sign in terms of the potential for the theatrical
experience and the theatrical exhibition business as a whole.
James Marsh - Piper Jaffray
Great. Thanks very much.
Operator
Richard Greenfield, Pali Research.
Analyst for Richard Greenfield - Pali Research
This is [Ari Danes] for Rich. Thanks for taking the question. So back on 3D again, and I
apologize if you actually gave an updated number, but in the past you have talked about
2,500 to 3,000 3D screens up and running by the time Monsters Versus Aliens opens. Given
whats going on today, can you give us an updated number on where you think you might be
by the time the movie opens?
And then I have one more. Do you want me to -Jeffrey Katzenberg
Well let me just tell you, we dont have any update on that. Our distributor continues to feel
that that is an achievable number. At the same time, there are things that are going on with
DCIP and the financing of that that have lagged in terms of hitting some scheduled dates. So
far, not in a way that would jeopardize the 2,500 screens but its not a done deal and so we
are cautious about it.
Analyst for Richard Greenfield - Pali Research
And then -Jeffrey Katzenberg

I mean, having said that, there are right now in the marketplace today over 2,000 3D
screens on a worldwide basis. There are about 1,400 or so domestically right now.
Analyst for Richard Greenfield - Pali Research
Great. And then secondly, can you just give us a quick progress report on the Penguins
Nickelodeon series and when you expect the show to debut?
Jeffrey Katzenberg
The show is well into production. Weve seen finished episodes of it. It looks spectacular. I
know that Nickelodeon is very pleased and very excited about it and I think their
expectations are to launch it towards the end of the first quarter of next year.
Operator
Doug Creutz, Cowen & Company.
Doug Creutz - Cowen & Company
Thanks. Could you comment on whether Activision has the videogame rights to Kung Fu
Panda 2? And also more generally, when do you need to have a videogame partner secured
for your 2011 films so they have enough lead time for development? Thanks.
Jeffrey Katzenberg
Activision does -- we do have a deal with Activision for Kung Fu Panda 2, and so that takes
care of our 2011 release. Were right on schedule. And I believe all of our titles through Kung
Fu Panda 2 have a videogame deal done -- announced. Done and announced, right? I think
so. I know so.
Doug Creutz - Cowen & Company
All right. Thank you.
Operator
(Operator Instructions)
Rich Sullivan
Well I guess we have no more questions, so that concludes todays third quarter earnings
conference call. I would like to remind everyone that a replay of this call will be available
shortly and accessible on DreamWorks Animation website -- that address again,

www.dreamworksanimation.com. If you have any additional questions, please feel free to

contact DreamWorks Animation investor relations department. And with that, I thank you
again for participating and have a great evening.
Operator
That does conclude the call for today. Thank you for using the AT&T executive
teleconference service. Please disconnect at this time.