DreamWorks Animation SKG, Inc.

(DWA) Q4 2008 Earnings Call February 24, 2009 4:30 pm

ET
Operator
Ladies and gentlemen, thank you for standing by and welcome to the DreamWorks
Animation earnings conference call. (Operator Instructions) I would now like to turn the
conference over to our host, Mr. Rich Sullivan with Investor Relations for DreamWorks. Please
go ahead, sir.
Rich Sullivan
Thank you. Good afternoon, everyone and welcome to DreamWorks Animations fourth
quarter 2008 earnings conference call. With me today is 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 the 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 may vary 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 other filings with the SEC. I would
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 President and
Chief Financial Officer, Lew Coleman. Lew.
Lewis W. Coleman
Thank you, Rich and good afternoon, everyone. I would like to highlight a few items before
handing it over to Jeffrey. In the fourth quarter, the company reported $200 million of total
revenue resulting in net income of $52 million, or $0.58 per share on a fully diluted basis.
This brings the companys 2008 revenue to $650 million and net income to $142 million, or
$1.57 per share. While the blockbuster success of Shrek the Third in 2007 makes the yearover-year comparison difficult, its important to note that 2008 was our most successful nonShrek year as a public company. In fact, box office receipts from Kung Fu Panda and
Madagascar: Escape to Africa together exceeded $1.2 billion, a 12% increase over our 2007
total.

Of the $200 million of revenue in the quarter, Kung Fu Panda contributed $102 million, or
about half, primarily from its release in the home video market. Through the end of 2008, we
sold approximately 11.2 million units of Panda worldwide, exceeding the guidance we gave
on our December analyst day. This number excludes approximately 0.5 million units shipped
to two customers that subsequently declared bankruptcy. Several key territories, including
Italy, the Nordic region, Australia, Japan and France were not released prior to December and
will be reflected in the first quarter of 2009.
Our second theatrical release of 2008, Madagascar 2, has now reached over $580 million of
worldwide box office. The revenue effect of approximately $250 million of this box office was
recognized in the fourth quarter. As a result, the title was recouped and contributed $24
million of revenue, including consumer products and the normal cost reimbursement from
our distributor.
Over The Hedge, the companys 2006 summer release, contributed approximately $23
million of revenue for the quarter, primarily from domestic network and international free
television.
The companys remaining films contributed $43 million of revenue, largely driven by strong
catalog home video performance.
Additionally, Shrek The Musical and Shrek The Halls contributed approximately $8 million of
revenue to the quarter. Through the end of 2008, Shrek The Halls sales approximate 1.8
million units on a worldwide basis net of returns.
Costs of revenues for the quarter equaled $117 million and its important to note that many
of the new business initiatives we discussed are having and will continue to have an impact
on our financials. In fact, almost 20% of this quarters cost of revenue is unrelated to film
amortization and represents costs associated with initiatives like Broadway and India, as well
as ongoing film development expenses.
In addition, product development, primarily associated with the start-up of our virtual world,
is now impacting our costs, totaling approximately $1 million for the quarter.
Lastly, because of the dramatic change in market conditions due to the economy, we
updated our Kung Fu Panda ultimate accordingly. While our ultimates are continuously
updated as the normal course of business, the severity of the market changes made this
quarters change larger than is typical, so while the title performed very well relative to
others in the market, the economic conditions of the last few months were not anticipated
when we amortized the costs for the film earlier in the year. This resulted in a one-time
amortization catch-up of approximately $8 million reflected in this quarters cost of revenue.

Moving on to the remainder of the income statement, selling, general and administrative
expenses for the quarter totaled $28 million, including approximately $9 million of stock
compensation. And interest income was $2 million, bringing the total interest income for the
year to $9 million.
Taxes for the quarter included a benefit of approximately $11 million relating to the
resolution of a prior years FIN-48 tax reserve, and resulted in an EPS benefit of
approximately $0.12.
Total diluted shares outstanding for the year were approximately $91 million and there were
no additional repurchases in the fourth quarter.
For the full year 2008, we repurchased 6.8 million shares for $185 million and we have
approximately $50 million remaining under our current board authorization.
Turning to the balance sheet, the company ended 2008 with $263 million in cash and cash
equivalents. In the year, we spent approximately $20 million on our campus expansion and
plan to spend between 70% and 80% of the remaining $55 million in 2009.
Looking ahead, the first quarter of 2009 will be driven primarily by Madagascar 2s
international box office and domestic home video. The title was released on home video in
the U.S. on February 6th and results for the first three weekends were very strong. In fact,
the title sold approximately 5 million units in the domestic market through last weekend,
making it the largest release of the year by far.
Because of its box office level and the fact that its a sequel, we would expect this titles
initial release to track below that of Kung Fu Panda.
However, its success to date is a clear indication that the home video market for our product
remains encouraging. Its also important to note that due to the titles home video release
schedule, the majority of the international initial release will be recognized in the second
quarter. I am happy to say though that the only international territory that falls in the first
quarter, Mexico, has performed quite well. The remainder of the year will largely be
determined by the performance of Monsters Versus Aliens which opens in the U.S. on March
27th.
As you know, the film is the companys first 3D theatrical release and we believe there are
sufficient screens available worldwide to reach the attendance levels necessary to make a
good return on our investment. Moreover, were optimistic about the films performance in
traditional CG as well.

In closing, Madagascar 2s success has positioned the company well headed into 2009, and
coupled with a strong performance from Monsters Versus Aliens, its possible for us to
achieve year-over-year growth in earnings.
With that, I will turn it over to Jeffrey.
Jeffrey Katzenberg
Thanks, Lew. Good afternoon, everyone. I have a few additional remarks and then well get
right to your questions. As Lew pointed out, 2008 was a very successful year for
DreamWorks Animation. In fact, it was the second best year in box office performance in the
companys history following very closely behind 2004 when we released Shrek 2, the highest
grossing animated movie of all time and the third highest grossing movie of all time.
To me, our greatest accomplishment in 2008 was the consistency in our film performance, a
goal weve been striving very hard to achieve. Kung Fu Panda and Madagascar 2 finished in
the third and seventh best -- as the third and seventh best performing films for the year.
Kung Fu Panda, our most successful original film ever, surpassed $630 million, $415 million
of which came from overseas.
Critical acclaim was also overwhelming for the title -- it broke records as the animation
industrys Ani Awards all-time highest-nominated film and then won 11 categories, including
best picture, best directing, and best lighting.
On November 9th, we released Kung Fu Panda into the home video market, where it became
the third best-selling title behind only The Dark Knight and Iron Man, giving it one of the
years very best box office to DVD conversion ratios. We believe its strong performance is an
indication of a few things.
First, consumers uniquely appreciate and highly value our titles and recognize them as
must-own purchases. And second, CG product continues to perform well despite cyclical
factors that have weighed on the home video market as a whole.
Our second box office blockbuster of 2008 was Madagascar 2, which to date has reached
approximately $180 million domestically and over $400 million internationally. Its worldwide
gross will continue to grow when its released in Japan on March 14th.
On February 6th, we released the title into the domestic home video market and it has been
the years biggest release so far and we expect it to remain among the top selling titles of
2009.
So despite the weakened economic environment, our product continues to perform well at
the box office and in home video. Our performance in 2008 has positioned us nicely for

future strength and has also solidified our franchise strategy for years to come. With the
addition of the Kung Fu Panda franchise, we are now in a position to release sequels in 2010,
11, and 12.
We talked at length about how our franchise building strategy can deliver a great deal of
value to the company and we saw examples of this throughout 2008. Most recently, Shrek
The Musical opened in December in New York City. We are pleased with its performance to
date, particularly over the past few weeks, as ticket sales have continued to grow. We also
saw great success in our TV specials business, with the network re-airing of Shrek the Hall
and its strong performance in the DVD market. In 2009, we are working to extend the reach
of our other franchises on television.
In addition to our Madagascar Penguins series produced for Nickelodeon, which airs next
month, we expect to air four TV specials this year -- Secrets of the Furious Five in two days
from now; a Monsters Versus Aliens Halloween special; a Madagascar Christmas special; and
then the return of Shrek The Halls.
As you can see, we are well on our way with many of the new business initiatives we
presented to you at our analyst day this past December. We think that each and every one
of these new initiatives have the potential to drive both meaningful revenue and earnings
growth.
As Lew pointed out, we have already begun spending on a number of these new areas which
has had an impact on cost in the fourth quarter. And while these additional costs will
continue for the next several quarters, we expect that as early as the fourth quarter of this
year, 2009, we will begin to see incremental revenue and profit from several of these
investments. We are confident that the future upside and growth opportunities from these
initiatives will result in a significant return on the investments we are making today.
Looking ahead to our next big event, Monsters Versus Aliens opens domestically on March
27th in both 3D and traditional CG, delivers the cutting edge animation, subversive comedy
and all-star voice talent that DreamWorks Animation audiences have come to know and
love. It offers moviegoers a brand new, very exciting in-theater experience which we believe
will reset the bar for what to expect from a CG animated film.
Monsters Versus Aliens is the very first feature film we are releasing in 3D and the first film
that has been entirely authored in 3D from its inception. Of the more than 7,000 screens on
which it will play. We anticipate in excess of 2,000 3D screens to be available by March 27th,
including 147 in Imax. We believe this number will be more than enough to allow our film to
serve as a proof of concept and to propel the new format forward.
So far, 2009 is off to a great start for DreamWorks Animation -- we are firing on all cylinders
and looking forward to a busy and productive rest of the year.

With that, we will open this up for questions. Rich.

Rich Sullivan
Great. Operator, please provide the instructions for allowing a question and we will take our
first question.
Question-and-Answer Session
Operator
(Operator Instructions) First we go to the line of Drew Crum with Stifel Nicolaus.
Drew Crum - Stifel Nicolaus
Thanks. Good afternoon, everyone. Just a question on Monsters Versus Aliens -- Jeffrey, any
update on presumed ticket premiums for the film, and just give us a sense as to your
expectations for P&A spend -- is it going to be consistent with the notional model?
Second question, I just want to get a sense as to the catalog sales on Madagascar, given the
sequel release in the fourth quarter. And then finally, just a housekeeping item -expectations for D&A in 2009? Thanks.
Jeffrey Katzenberg
Okay, so let me see here -- P&A spend in line with previous releases, so no change on that.
In terms of pricing on 3D, we still anticipate that in most of the market, not just domestically
but also internationally, there will be a meaningful up-charge. We expect it to be in the $5
for the domestic market.
And then Ann, do you want to talk about the Mad catalog sales?
Ann Daly
Madagascar 1 catalog sales were very strong for us, primarily in the fourth quarter around
the theatrical release. There were programs that were in place in the first quarter but most
of the volume came last year with the theatrical release.
Drew Crum - Stifel Nicolaus
Have you seen any pick-up since you released the sequel?
Ann Daly

On the catalog?
Drew Crum - Stifel Nicolaus
Yes.
Ann Daly
Yes, we have.
Jeffrey Katzenberg
Good, and then the last one here -- somebody was scrambling.
Rich Sullivan
Drew, you asked a question about -Drew Crum - Stifel Nicolaus
Depreciation and amortization for 2009.
Rich Sullivan
Yeah, I assume that when you asked that question, youre not talking about film
amortization, youre talking about non-film amortization?
Drew Crum - Stifel Nicolaus
Correct.
Rich Sullivan
Mostly its just the building and the capital expenditures. Though while we are doing some
campus expansion, which will start to hit, it should be fairly consistent year over year.
Drew Crum - Stifel Nicolaus
Okay. Thanks, guys.
Operator
Next we turn to the line of Michael Morris with UBS. Please go ahead.

Michael Morris - UBS

Thank you. You referenced the DVD sales of Madagascar 2 at about 5 million units through
last weekend. Can you share how that compares with another film, say Kung Fu Panda,
through the same period?
And then also with the $8 million amortization catch-up you referenced, what kind of impact
does that have on the margin for Kung Fu Panda and how should we be thinking about
margins going forward kind of relative to historical titles? Is it -- should we be taking several
hundred basis points out of our assumed margins for these films in the future? Thanks.
Jeffrey Katzenberg
Okay, so Michael, what I think well do is have Ann Daly first talk to the Madagascar 2 DVD
release and then Lew will talk about the margins, so -Ann Daly
The Madagascar 2 release initial sales through the first 10 days of release were almost on
part with what happened with Kung Fu Panda. The sales that we are seeing now, the 5
million, probably will represent maybe anywhere from 65% to 75% of the total volume that
well see, primarily because it is a sequel, which is -- Kung Fu Panda was not, and also
because Kung Fu Panda had the advantage of being in the holiday selling period. But all in
all, we feel very, very strong out of the gate.
Jeffrey Katzenberg
I mean, Michael, again just to put it in perspective, the fact that in its first three weeks of
sales would be on par with Kung Fu Panda, given that its a sequel, which are traditionally a
step down, in a more difficult selling period in a more difficult market we though was very,
very strong.
And Lew, do you want to talk about -Lewis W. Coleman
Michael, the $8 million adjustment in the fourth quarter was essentially a catch-up of the
second and third quarter over amortization, so if you look at it in the fourth quarter, the
amortization resulted in a sort of catch-up margin. If you look at it for the whole year, you
can sort of get an idea about what the margin was going to be. We dont disclose margins
but clearly the reduction in DVD volume has resulted in a decline in margins in our film
ultimates.
Michael Morris - UBS

Okay, so thats -- on a go forward basis -Lewis W. Coleman

So what Im saying is dont take a run-rate off the fourth quarter because that would be
incorrect, because a good chunk of it was catch-up in the second and third quarter. And to
the overall question, should you be assuming slightly lower margins in this DVD market for
our films in general, the answer is yes.
Michael Morris - UBS
Can you tell me approximately, say how much the margin came down on a normalized basis
-- not the fourth quarter, but just as you look back to the second and third quarters?
Lewis W. Coleman
You know, we really dont disclose margins and part of it is that we dont necessarily allocate
expenses among individual products, so its sometimes misleading to disclose the margins. I
think its safe to say that margins are coming down, mostly due to the home video business
and also a bit overall because as we swing into more international sales of settlement rates
for the box office are a bit lower there, so as the mix changes in our business as we
described in December, youre beginning to see some decline in margins.
Michael Morris - UBS
Okay. Thank you.
Operator
Next we turn to the line of Richard Greenfield with Pali Capital.
Richard Greenfield - Pali Capital
One housekeeping point -- just on the $8 million, how do we think about what the proper
effective tax rate is, just to think about what that one-time non-cash charge meant to your
numbers? And then two, just a more fundamental question -- your stock has obviously been
under quite a bit of pressure. You stopped buying back, or you did not buy back stock, I
believe, Lew said in the quarter. Whats your thought process on share buy-back. I know
youve been concerned about the float historically. Was it purely the environment that held
you back from buying back the stock? What would make you think about it given where the
stock is going, and then a larger structural question of as investors do not seem to be
terribly excited about film businesses in the current environment for the DVD world, what
are your options or what are you thinking about in terms of addressing the kind of valuation
of your stock?

Jeffrey Katzenberg
Okay, so Lew, Ill let you do the tax one and -Lewis W. Coleman
Okay. Rich, the tax issue is a little bit difficult to characterize because on the one hand, we
have clearly sort of had a fairly conservative tax position with reserves because youve seen
some tax reserve changes for the last three or four quarters. This one I think I would think of
as bigger than most, and in that respect, in terms of its size, its probably not quite as
repeatable.
In terms of the share repurchase stuff, it turns out, particularly given the way we scheduled
the investor conference, that we really didnt have a clean time where we felt comfortable
based upon what we knew and what we had disclosed to really get a bunch of share
repurchasing done in the fourth quarter. Our attitude toward share repurchases remains
unchanged. We think its still a good way to return money to the shareholders and we do
think the price of the stock is particularly attractive today.
Jeffrey Katzenberg
So on my side, Rich, and just in terms of the overall issue of valuation, as you well know, we
spent a fair amount of time out with the buy side the end of last year and again the
beginning of this year. I think that there has been a tremendous amount of hesitation until
there is greater clarity as to trends in our business.
What we have seen now in the past eight to 10 weeks since we met with on our analyst day,
have been sort of two things. First Ill take the theatrical window and say -- and just
characterize the business from Christmas time to date as something around spectacular. The
industry as a whole is up over 25% over these last eight weeks. Business could not be
stronger, and its not up just in gross but its also up in admissions, something that I dont
think the movie business has seen for some time. And I believe that is a reflection of the
marketplace and is the movie business behaving counter-cyclically, which it has done
historically. So the box office is very, very strong and I think is going to end up being very
opportune for the release of Monsters Versus Aliens and for the 3D platform.
Moving to the DVD market, where the greatest stress and the greatest anxiety has been
expressed, we have now had two test points that have occurred, one of which we are
disclosing for the first time today -- or actually, both of which we are disclosing for the first
time today, which is that when we were with the both sell and buy side in December, we
projected 10 million units, over 10 million units for Kung Fu Panda and in fact have come in
over 11 million units, which again in this marketplace, we thought showed a very, very good
strength for our product. And now secondly, here we are today with another test place for

us, very specifically for the Madagascar 2 DVD, and -- which has to be characterized as very
strong. And so these are the two kind of key components I think that the buy side have been
looking for. I am hoping that they will have the same confidence out of this that we do and
we certainly look at our stock today and think that its under-valued.
Richard Greenfield - Pali Capital
Is there any point where if you dont get the return from shareholders that you would more
actively think about strategic alternatives?
Jeffrey Katzenberg
I dont think thats a -- thats too wide open a conversation, Rich, and Ive got too many
people waving at me in the room dont answer that!.
Rich Sullivan
On that note, thanks, Rich. Next question.
Operator
Next we turn to the line of Ralph Schackart with William Blair. Please go ahead.
Ralph Schackart - William Blair
Good afternoon. A couple of questions, if I could; first, Jeffrey, just sort of from a big picture
macro standpoint, how is sort of the industry looking at 3D ticket pricing, balancing sort of
the recession and the unfortunate events that are going on with some huge blockbusters
that are coming out, largely starting with MVA in March?
Jeffrey Katzenberg
Well you know, I think, Ralph, that again just look at the marketplace today -- the
performance of Coraline this past weekend, 80% of its $11 million gross came from its 3D
screens, which represented less than half of its screen. Its gross to date I think was -- was it
60% of its total gross was out of its 3D screens? You look at the performance of IMAX -people within this bargain, which going to the movies is the single greatest bargain that
exists for a diversion for recreational purposes kind of in the world right now today within
that choice, offering people a premium experience, you know, is something that they have
responded very aggressively too. We believe that with these releases of next round of
blockbuster movies, led by Monsters Versus Aliens, which we think raises the bar for what it
means to see a 3D film, that there will be a wide demand at a $5 premium for our product
throughout the country and the rest of the world.

Ralph Schackart - William Blair

Great, thats helpful. And then just in terms of the DVD end market, more on a macro
picture, obviously your titles, both new release and catalog, are holding up pretty well in a
tough market, but can you give a little more granularity on what has happened in the market
since the analyst day, if its fair to look at holiday versus Q1 and both toward new releases
as well as catalog? Im just trying to get
Jeffrey Katzenberg
Again, if I just think -- we dont want to opine on the rest of the industry. I think youve heard
from other companies in terms of their business there. Theyve been pretty down on it,
talking about it both secularly and cyclically and that has not been our experience. We are
not finding the same resistance or deterioration in the marketplace that you have heard
from other companies that are dealing with much larger volumes, more diversity of product,
different types of catalog. Weve had very good performance of our catalog in the fourth
quarter. We continue to see good performance from our catalog so far this year, and our two
titles, our two primary titles, Panda and Madagascar, theyve just performed very, very well.
Ralph Schackart - William Blair
Great, and then one last one and Ill turn it over -- of the 11 million plus of the Kung Fu Panda
DVDs, how many were Blu-Ray and is Blu-Ray at this point meaningful to sort of the
premium pricing to help offset sort of the standard definition decline?
Jeffrey Katzenberg
Its a very small part of our business to date. Remember, our movies are primarily a
mom/family purchase and we like the Blu-Ray platform in it but its not a meaningful
percentage of our business. The place where we see much, much more impact on our
business are with the two packs that weve had to offer, so whether its the two-pack of
Kung Fu Panda with the Secrets of the Furious Five, or the Madagascar two-pack with the
extra Madagascar Penguins offer in it, these products which we did have premium offers
have sold extremely well and they have been a very meaningful part of our volume.
Ralph Schackart - William Blair
Great. Thanks, Jeffrey.
Operator
Next we turn to the line of Ingrid Chung with Goldman Sachs.
Ingrid Chung - Goldman Sachs

Sure, thanks. Good afternoon. So my first question is on Kung Fu Panda revenue -- I was
wondering if there was significant consumer products revenue in the KFP number. And also I
know its calculate on gross revenue but I was wondering if you could give us some color in
terms of DVD ASPs.
And then my second question is around the Penguins TV show -- we know it debuts after the
Kids Choice Awards on March 28th and it looks like the sneak peek brought in blockbuster
numbers over Thanksgiving. We were just wondering if there was some way that you can
monetize the debut of the show. We know Nick gets the ad revenue but what kind of
merchandising are you going to have around that?
Jeffrey Katzenberg
First one, Rich.
Rich Sullivan
Ingrid, the $100 million plus of Kung Fu Panda revenue this quarter was predominantly
driven by home video. However, there was some residual IBO revenue in there as well, so I
mean -- weve given you the units of 11.2. I think roughly about 85% of the total revenue
was home video, so you should be able to figure out what the ASP is from there.
Jeffrey Katzenberg
And on the Penguins TV show, the merchandising opportunities of that will follow and will
probably be in the -- they will start to ramp up in the fourth quarter and then well roll out
over a 18-month period of time, so there will not be any immediate impact or benefit to us in
the second quarter.
Ingrid Chung - Goldman Sachs
Okay, great. Thank you.
Operator
Next we turn to the line of Jake Hindelong with Monness, Crespi, Hardt.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Great. Good afternoon. Just to follow-up first on the last question with the ASPs can you
address just the promotional activity in the fourth quarter, and then pricing on Madagascar 2
DVD versus the Kung Fu Panda?
Ann Daly

In the fourth quarter, we saw some lower retail pricing, which was the result of the
competitive environment that you normally see in the fourth quarter between retailers, so I
believe the average selling price at retail in the fourth quarter was around -- probably in the
high $16 range for the product. In the first quarter, we are seeing a higher price point on our
Madagascar product. Were seeing the single being priced around $18 and as Jeffrey
mentioned earlier, we saw our premium product, which was doing very, very well, being
priced over $20, and that represented a higher percentage of sales than we have ever seen
on any release up until this time, so very happy with that.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Okay, thank you. And then separately, just on the upcoming release of Monsters Versus
Aliens, when do you think the first opportunity is going to be for the public to see more of
the film, see the entire film and for investors to get a full review?
Rich Sullivan
Were going to be doing an investor screening, as is typical for our films, most likely the
March 21st weekend for you guys in New York and a similar one in L.A., so youll be able to
see the full film then.
Jake Hindelong - Monness, Crespi, Hardt & Co.
Thank you.
Operator
Next we turn to the line of David Miller with Caris & Company.
David Miller - Caris & Company
Lew, a question for you -- in terms of the revenue recognition schedule for Madagascar 2
theatrically, not on DVD but theatrically, is most of that juice from the international
territories going to in fact fall in the current quarter, or do you see sort of a longer tail
happening, maybe a little bit of that revenue bleeding into the second quarter because the
Japanese opening occurs much later in the quarter? Thanks very much.
Lewis W. Coleman
David, I think the bulk of it is going to be in this quarter. Even though Japan is in the next
quarter, its the last territory I think that will open in the next quarter and as you know, our
expectations in Japan have not been huge.
David Miller - Caris & Company

Thank you.
Operator
Next we turn to the line of Doug Creutz from Cowen & Company.
Doug Creutz - Cowen & Company
Thanks. I think you mentioned in your prepared remarks that roughly 20% of your COGS in
the quarter were due to non-theatrical release sources -- could you give a little more color on
what the composition of the COGS were and were there associated revenues with those
COGS? Thanks.
Lewis W. Coleman
I tried in my remarks to be fairly careful about giving you an outline of what a good chunk of
those numbers were and Im a little bit -- its a little bit difficult to characterize them without
characterizing them with non-GAAP numbers. So I think what you ought to do is take a look
at those numbers. I can tell you historically they are running at least double what they have
in the past, the non-cost of goods amortized numbers, so it was a fairly big pick-up. They are
at a point where the bulk of those are not associated with revenue now and probably wont
be for the next two quarters, but probably will be in the fourth quarter. I think that sort of
combines partly what I said and partly what Jeffrey said. I hope thats a bit of a help to you.
Doug Creutz - Cowen & Company
Yeah, thanks.
Rich Sullivan
Next question, please.
Operator
Next we turn to the line of Vasily Karasyov with J.P. Morgan.
Vasily Karasyov - J.P. Morgan
Thank you. I have a question about margins again, if you dont mind. P&A, would you ever
consider re-evaluating the P&A budgets if the challenges in the home entertainment markets
persist? And not only domestically but also internationally? And if so, how much more do you
think you can cut out of it without hurting the opening weekend and title performance?
Thank you.

Jeffrey Katzenberg
Okay, so I would -- I think there are -- in terms of our P&A spend, we are I think seeing
different fluctuations that are occurring in different ways here, and it literally is month-tomonth. So we can have a currency conversation and things are fluctuating one way. We can
look at our ability to make better buys and get more for our money. We are aggressive about
that and about managing these costs, and I think what we dont want to say yet today is
there a specific target number that we have in mind, other than to say it is top of mind and
we are looking to take every single advantage we can as a major buyer of media, both to
support the theatrical and the home video window.
But again, I have to say you characterized the conversation at the beginning by saying with
the difficulties in the home video market, and I just have to say again, we are an offensive
player in this arena right now, not a defensive one, and we are seeing good results from
being an offensive player.
Vasily Karasyov - J.P. Morgan
Okay, thank you. So you are buying more audience for the same dollar value?
Jeffrey Katzenberg
Yes.
Vasily Karasyov - J.P. Morgan
Okay. Thank you.
Jeffrey Katzenberg
And seeing good impact on it.
Operator
Next we turn to the line of Barton Crockett from Lazard Capital Markets.
Barton Crockett - Lazard Capital Markets
Okay, great. Thanks for taking the question -- I was wondering if you could talk a little bit
about Shrek The Musical in terms of you described that you are pleased with the
performance at this point, I think particularly into this year. But I think some of the trade
presses described it at as maybe a little bit softer than at least the trade press would have
expected for a production of this magnitude.

What kind of weekly box tally -- can you give us any sense of what needs to happen to the
weekly box tally over the next couple of quarters to put this thing on a track to really spawn
a couple of the touring shows, which is I think where you really have the opportunity to
make money if it works.
Jeffrey Katzenberg
Well, thank you. Again, I think its hard for us to want to be predictive of the too-far-out on
the horizon. What we have seen is increasing performance week over week over week here
now for four weeks in a row. This past week ending on the 22nd is actually the third biggest
week that weve had on the show since we opened, including the two holiday weeks of
Christmas. And so we have seen very good trends on the box office to the show.
You know, I think there was fair amount of concern on everybodys part. We had a very weak
week the last week of January, which is traditionally the worst week -- you know, for 40
years its the worst week of the year for the entire industry and most of our competitors
were doing heavy, heavy discounting and two-for-one offers and a number of things that
propped their box office gross up. We did not think that was the right strategy for us and so
we saw a pretty steep dip in our number that week and I think it made everybody anxious,
us included, by the way. But we have literally seen us go from 500,000 to 636,000 to
765,000 and 850,000 this past week for us. Obviously this is a strong trend. We now head
into -- you know, when we get to mid-March and the Easter breaks begin, it starts the better
season for all of the Broadway theater business. So we think the worst is behind us. Love the
trend that we are seeing and as we said to you at our analyst conference, well be
comfortable rolling out what our future plans are when weve got a good six months under
our belt, which will be mid-summer.
Barton Crockett - Lazard Capital Markets
Okay, well, if it is -- if the weekly box stays in this range, is that on a trend where you would
feel comfortable doing the road shows, or does it need to grow a bit from here?
Jeffrey Katzenberg
These are really good numbers. We hope they will go up from here but to answer your
question, these are solid numbers for a show.
Barton Crockett - Lazard Capital Markets
Okay, great. Thank you.
Operator

Next we turn to the line of Tuna Amobi with Standard & Poors.
Tuna Amobi - Standard & Poors
Thank you very much. So just a philosophical question, Jeffrey, on the premium cable
window, particularly with the [inaudible] launch coming up later this year. So as you think
about that window, do you see -- what thoughts do you have on the capacity of the
marketplace to handle another premium cable channel and does that factor at all into your
strategy, release strategy into premium cable, particularly with Paramount being one of the
launchers of [inaudible]?
Jeffrey Katzenberg
Tuna, again, I am not 100% sure of what the question is. We have a very strong output deal
with HBO in which our product is given a very strong premium. If you are talking about dayand-date VOD, that is, in terms of our customers and our primary buyers who use these for
multiple, multiple plays in it, its a very small part of our business. Its not -- you know, I
think this is more of an issue for people who are in the rental business primarily, or at least
that is a very big part of their business. So I hope Ive answered your question.
Tuna Amobi - Standard & Poors
Yeah, thats helpful. Separately on the -- just maybe a question for Lew, on the ultimate
revisions for Panda, were there also any revisions for Madagascar or is that still a little bit
early? Have you revised your ultimates for Madagascar thus far based on the comment that
you made about Panda?
Lewis W. Coleman
You know, Tuna, we look at our ultimates obviously every month and we sort of look at them
very carefully every quarter as a part of the way we close our financial books. And we
probably make adjustments in 60% or 70% of our films every quarter. Some of it has to do
with when TV windows open, some of it has to do with sort of what we see but theres
always adjustments. Very seldomly do we adjust more than $1 million or so in a quarter, so
the adjustment we called out for you was unusual and doesnt happen very often. The rest of
them are very small and they are as likely to be up as they are down.
Tuna Amobi - Standard & Poors
Okay, thats helpful and just lastly, a housekeeping question -- a clarification, actually, on
the percentage of the non-theatrical COGS. So the $1 million per quarter product
development, was that factored into the 20% that you mentioned or is that additional?

Lewis W. Coleman
Thats additional. I mean, essentially on the $1 million, clearly some people would capitalize
that against a product and then amortize it when its released. At this point, were expensing
that.
Tuna Amobi - Standard & Poors
Thank you. Thank you very much.
Rich Sullivan
Next question, please.
Operator
Next we turn to the line of Robert Fishman with Banc of America.
Robert Fishman - Banc of America
Thank you. Im calling on behalf of Jessica -- one question, just to clarify an earlier comment
-- on the 5 million units representing the 65% to 70% of the total Mad 2 units to date, was
that just for domestic units or was that on a worldwide basis? And then, if I may, can you just
discuss if you are seeing any different trends on the wholesale DVD pricing in the
international markets versus the domestic market, and if you can quantify the breakdown in
sales of the double pack for Kung Fu and the up-lift in pricing? Thanks.
Ann Daly
On the -- just to clarify, the 5 million units was domestic and the range was really 65% to
75% of the initial release period. Your second question had to do with the wholesale price in
international and we are seeing that, at least in our business, to be relatively stable. We
didnt see a material change in the fourth quarter from the previous quarter, so we are
happy with that result. And then I think you were asking about the two-packs. For Kung Fu
Panda, I think in our analyst presentation in December, we mentioned that we were seeing
the initial sales just under 30% of the mix and in Madagascar, that percentage has
increased. In the initial release days, we were seeing nearly 50% of the volume done in
those premium packs. And again, those premium packs were selling for -- in the $22 to
sometimes $25 range, even in this market. We thought that was very, very strong.
Jeffrey Katzenberg
So again, this really goes back to Rich Greenfields earlier question here, in terms of what we
are seeing in our business and how this sort of differentiates us from whats going on in the

sector as a whole. I just have to say again, not only are we seeing strong performance from
the title but our customers in an unexpected way are trading up for the premium product.
The fact that close to 50% of our volume on the Mad 2 were the premium two-pack is
something that is -- you know, you would think is counter to what might be going on in a
very difficult economic environment. But our consumers are seeing this as a great added
value and worth the extra charge, so its actually been very rewarding for us.
Rich Sullivan
Thanks, Robert. Next question, please.
Operator
Next we turn to the line of Brian Shipman with Jefferies.
Brian Shipman - Jefferies & Company
Thanks. Good evening. A couple of questions; first, can you talk about what your
assumptions are on Monsters Versus Aliens in terms of the up-sell to 3D in the 2,000 plus
theaters it will be available? And then second, you talked at the analyst day in December
about expecting 7,000 to 7,500 3D screens in the market by the time Shrek 4 hits theaters
in May of 2010. Are you still at that same expectation level or has that changed at all?
Thanks.
Jeffrey Katzenberg
So I think that to the first question, I think what Im comfortable saying is that at 15%
penetration at a $5 premium, we begin to see a return on our investment for the 3D rollout
of MVA and Im more than confident that we will see a performance that is significantly
higher than that.
At this point, all of these things are new and we are the first, and so I think today to sit here
and try and speculate or calculate whether our admissions are going to be at 20% or 30% or
40%, we just dont know. We have very solid capacity out there -- you know, 2,000 screens
have got a lot of seats in them and what we are seeing right now is the consumers are very
much making that extra effort to get to a 3D screen.
The other thing thats happened, which is -- and then the third thing, which is do I think well
get the rollout to the 7,000 screens by the time Shrek is released, the answer is yes. Theres
been a tremendous progress that has been made on the DCIP front, as well as other
financing opportunities that are now starting to present themselves for exhibition and for the
distributors, and I think you will see beginning in the second quarter a very, very strong pickup to the pace of 3D rolling out.

The last thing that has happened in this, which is actually another real pleasant surprise for
us, is the fact that internationally, the pace has picked up very dramatically. And right now
today, our distributor is projecting that there will be close to 1,600 3D screens in the
international market and we would expect to be able to play on somewhere between 70%
and 80% of those screens as the movie rolls out internationally. Thats twice what we had
thought when we met with you in December.
Brian Shipman - Jefferies & Company
Okay. Thank you.
Rich Sullivan
Thanks, Brian. Next question, please.
Operator
(Operator Instructions) We do have a question from the line of Lauren Schuker with The Wall
Street Journal. Please go ahead.
Rich Sullivan
Lauren, I think were going to take that -- I think we have a meeting with you afterwards to
take that offline, so this call is for analysts and investors. Well handle the media calls right
after this.
Operator
And with that, we have no further questions in queue.
Rich Sullivan
Well, thank you, then. That concludes todays fourth quarter earnings conference call. I
would like to remind everyone that a replay of this call will be available shortly on our
DreamWorks Animation website -- that address again, www.dreamworksanimation.com. If
you have any additional questions, please contact DreamWorks Animation Investor Relations
department. Thanks again for participating and have a great evening.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your
participation and for using AT&T executive teleconference service. You may now disconnect.