Operator

Welcome to the DreamWorks Animation earnings conference. (Operator Instructions) I would

now like to turn the conference over to our host, DreamWorks Animations Investor
Relations, Mr. Rich Sullivan.
Rich Sullivan
Thank you. Good afternoon, everyone and welcome to DreamWorks Animations first quarter
2009 earnings conference call. With me today is our Chief Executive Officer, Jeffrey
Katzenberg and our President and Chief Financial Officer, Lew Coleman and our Chief
Operating Officer, Ann Daly. 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 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 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.
With that, I would like to now hand the call over to DreamWorks Animation President and
Chief Executive Officer, Jeffrey Katzenberg. Jeffrey?
Jeffrey Katzenberg
Thanks Rich and good afternoon everyone. I will begin with a few comments about our
recent performance before Lew discusses our quarterly results and Ann sheds some insight
into our home video business. Then we will get to your questions.
With our strongest first quarter ever, 2009 is off to a great start. Madagascar Escape to
Africa is a blockbuster by every measure and our results for the quarter were primarily
driven by its performance in international box office and domestic home video. Its
international box office has reached approximately $415 million bringing worldwide box
office totals to nearly $595 million. Even in the face of the recession our titles continue to
perform very well in home video. Madagascar II was released on DVD and Blue Ray
domestically on February 6th and was one of the top two titles for the quarter in revenue and
sales and rentals combined.

Both Madagascar II and Kung Fu Panda are among the best performing titles in the past 12
months. On the feature film side, our most recent release, Monsters v. Aliens, opened on
March 27 in both 3D and traditional CG and having passed $175 million is on track to reach
around $200 million in domestic box office. In fact, it will be the single highest grossing
movie domestically of 140 new films that have been released since the end of July last year.
Together with Madagascar II, the third highest grossing movie domestically in that same
time frame, it is clear that DreamWorks Animation is performing at the top of the charts.
MVA marks our third consecutive blockbuster theatrical release in under a years time. We
made progress towards our goal of averaging approximately $200 million in the domestic
market for our releases and attaining a level of theatrical consistency that we strive for as a
company.
As evidenced by the strength of our first quarter results, our financial performance is
beginning reflect consistency. Internationally, Monsters v. Aliens has grossed approximately
$145 million to date achieving mixed results in various territories, some positive and others
disappointing. It has had a very strong showing in several key territories such as the United
Kingdom, Australia and Spain. On the flip side, in Germany, France and Italy it hasnt
delivered the level of performance we have come to expect from our films.
While we acknowledge its overall international box office results remain below our
expectations to date, Monsters v. Aliens does remain among the highest grossing films in
2009 overseas.
Moving beyond our core business, we are making a great deal of progress on our new
initiatives. Just last month our first TV series, The Penguins of Madagascar, became the most
watched series premiere in Nickelodeons history and its ratings continue to be excellent
since then. Among kids 2-11 and kids 6-11, it is the second highest rated program on TV
since its premiere behind only Spongebob Squarepants. Looking to build on this success,
Nickelodeon has already ordered a pilot for a second series based on Kung Fu Panda.
Moving on to Broadway, we are thrilled that just yesterday Shrek the Musical received 12
Drama Desk nominations added to the 10 nominations it received last week for Outer Critic
Circle awards including best musical, tying with Billy Elliot for the most nominations of any
show this season. Additionally, the shows original cast recording debuted on billboards
original cast chart at number one and remains the best selling recording for any new show
this season.
On the heels of several very high grossing weekends at the Broadway box office we
announced last week plans to bring the first national performing show of Shrek the Musical
to Chicago next summer.

In Broadway, TV specials and TV series we have identified meaningful opportunities for our
content to generate incremental revenue outside of our theatrical releases.
I will now turn the call over to Lew to walk you through our quarterly results in greater detail.
Lew?
Lewis Coleman
Thank you Jeffrey. Good afternoon everyone. For the first quarter the company reported total
revenue of $246 million, resulting in net income of $62 million or $0.71 per share on a fully
diluted basis. This marks the companys best quarter ever driven by the success of
Madagascar IIs international box office and domestic home video and is a great example of
the economic benefit profitable fall films can provide for the following year.
In the quarter the title recorded $148 million of revenue or 56% of the total revenue earned
by the company. This amount was partly driven by the films performance in international
box office where it recorded approximately $340 million in the quarter. The theatrical
success was also aided by a 10% reduction in anticipated marketing costs from both the
foreign exchange benefit and an advantageous advertising market. As you know, marketing
expenses are paid by our distributor and netted against gross revenue so the lower cost had
a positive impact on both the first quarters revenue and the overall profitability of the film.
Madagascar II was released to the domestic home video market on February 6 th and the title
has sold 6.7 million units worldwide in the quarter making it one of the two most successful
DVDs of the year so far. Then overwhelming majority of these units was from the domestic
market due to the films release date.
Kung Fu Panda, the companys 2008 summer release contributed $34 million of revenue in
the first quarter primarily from international home video. By the end of the quarter the title
reached 14.2 million units sold on a worldwide basis.
Monsters v. Aliens, the companys 2009 release, contributed $11 million in the quarter
mostly from consumer products. Released domestically on March 27, the film, not
surprisingly, did not recoup the up front marketing expense by months end. To date
Monsters has reached approximately $320 million of worldwide box office. Speaking of
which, we would like you to note that beginning this year the company no longer recognizes
international box office received from its distributors under [30 days] or less. Given MVAs
release schedule in the last of the fall films the effect of this change on revenue timing this
year will be minimal.
The companys 2007 films contributed $27 million of revenue in the first quarter driven by
Bee Movie international [and television], Its 2006 films contributed $21 million of revenue
from domestic and international free television.

The remaining film catalog and other items contributed approximately $24 million in
revenue including $10 million from Shrek the Musical. As anticipated, this production is still
operating at a loss, approximately $0.02 in this case, which we expect will continue into the
second quarter. Given our current expectations we continue to believe it will have little
impact on revenue for the year.
Moving on to the remainder of the income statement, cost of revenue for the quarter
equaled $156 million resulting in gross profit of $107 million or a 41% margin. Selling,
general and administrative expenses for the quarter totaled $21 million including
approximately $6 million of stock compensation. This SG&A amount is down from the
companys run rate but we expect it to return to a more normalized level going forward.
Taxes, including the $16 million payable under our tax agreement with [inaudible] was $24
million. This yields a 28% effective tax rate which we expect to maintain for the balance of
the year.
Total diluted shares outstanding for the quarter were approximately 88 million reflecting 1.3
million shares repurchased for approximately $25 million. To date the company has now
repurchased 2.3 million shares for $46 million. We announced today our Board has
authorized a buyback of up to $150 million worth of additional shares.
The company ended the quarter with $261 million of cash and cash equivalents. Looking
ahead, the remainder of the years earnings will be driven by Madagascar IIs international
home video, Monster vs. Aliens worldwide home video and paid television from our 2008
films.
Madagascar IIs international home video release will provide revenue for the title for the
second and third quarters of the year although at slightly lower margin per unit than the
domestic release. At its current level of theatrical performance, Monsters v. Aliens will begin
to contribute to earnings in the second half of the year around its release into the home
video market.
We also expect to see contributions from the television specials, Monster v. Aliens Halloween
and Madagascar Santa in the fourth quarter.
Lastly, I am pleased to announce on behalf of the Board that Jeffrey has extended his
employment contract through 2013. The Board believes that his continued leadership and
strategic vision are extremely valuable to the long-term success of DreamWorks Animation.
Jeffrey will continue to work for $1 of annual cash compensation. He will also receive an
additional grant of 900,000 shares of restricted stock and 1.6 million shares of stock
appreciation earnings issued at market strike price covering compensation for 2009 and
2010. One half of the stock options vest when DreamWorks Animations stock price averages

$32.315 in a one-year period within the next three years and the other half will vest when
DreamWorks Animations stock prices averages $36.53 for a one-year period in the next
three years. Jeffrey must also be employed for a three year period to receive the grant.
If we assume that the stock was issued at a price of $18.99, yesterdays closing price,
shareholders must achieve an appreciation of 70% before Jeffrey gets paid more than $1 per
year and 92% before he receives the entire grant. Additionally, the employment agreement
specifies there are no excise tax gross up provisions. Our compensation committee believes
that tying Jeffreys compensation directly to producing value for the shareholders first was
appropriate.
With that I will turn it back to Jeffrey.
Jeffrey Katzenberg
Thanks Lew. I have a few additional items before we turn to your questions. As our first
release in the new format and by far the highest grossing 3D release in history, Monsters v.
Aliens in 3D has been and continues to be hugely successful for DreamWorks Animation and
the industry as a whole.
Nearly 60% of its worldwide box office has come from 3D. As 3D establishes itself as an
exciting new growth opportunity, there is no question that Monsters v. Aliens is serving as a
catalyst that the industry needs on the cost, revenue and distribution side.
Most importantly it is giving increasing momentum to the movement and accelerated the
installation of 3D screens on a worldwide basis. Despite not reaching the number of 3D
screens we had hoped we would see, due primarily to the state of the economy, Monsters v.
Aliens performance in 3D has been nothing short of outstanding.
On the [inaudible] side it exceeded almost everyones expectations proving that consumers
are definitely willing to pay a premium price for a quality in-theater experience. In fact, 88%
of those polled who saw the film in 3D agreed that the premium experience was worth the
additional cost of admission. So while ticket prices didnt reach the levels we had initially
anticipated, we continue to believe that ticket premiums on future releases will be higher as
more consumers appreciate the enhanced 3D experience.
Before turning to Q&A, Ann and I would like to address a couple of issues that may be top of
mind for many of you. The first two deal with Monsters v. Aliens and the third was our overall
home video business.
First, will there be a sequel to Monsters v. Aliens. Theatrically it is too early to tell. We will
wait until it concludes its remaining weeks at the box office including its release in Japan.
Because it is a block buster domestically and in several important international territories we

have already begun working on ancillary value creation opportunities that will begin to
establish it as a franchise. We already have a commitment for a prime time television
special, Monsters v. Aliens Mutant Pumpkins from Outer Space which will air on NBC this
October and then be released in home video next year.
In addition, we have interest in and have begun development on a TV series based upon its
characters. Whether or not it will become a theatrical sequel for us like Shrek, Madagascar
or Kung Fu Panda has yet to be determined. I would like to put this international performance
into perspective by just looking back at our first Shrek film.
After grossing approximately $217 million in the international box office, Shrek did go on to
become a blockbuster, global franchise for us.
The second issue is our expectations for Monsters v. Aliens in home video. Clearly 3D has
allowed theaters to once again differentiate themselves from the home viewing experience.
Some have expressed concern that this higher quality theatrical experience will somehow
adversely impact consumers desire to own the title or that 3D might make the DVD less
attractive.
Specifically, some have taken a dire point of view as to how Monsters v. Aliens box office
results will translate to home video. We dont agree. In fairness, this is somewhat new
territory and the truth is nobody knows for sure but the opinion we hold today is based upon
very current research as well as a few historical facts.
Both exit polls and reviews for Monsters v. Aliens have been comparable or better than our
most recent hit Madagascar II. As we have done on each of our feature films, we conducted
extensive focus group research following the release of Monsters v. Aliens to gauge
consumer reaction and their purchase intent.
According to that research, people who saw it in 3D have the same level of interest in
owning the DVD as those who saw it in traditional CG. Additionally, more than half of the
consumers who have purchased our DVDs over the last three years have actually never
seen the film in the theater to begin with. Historically, the large majority of our DVDs are
purchased by moms and dads who recognize the unique value of our products.
Because of the durability, repeatability and portability of our hit titles DreamWorks
Animations DVDs more closely resemble toy purchases than movie purchases. This fact
gives us confidence that the majority of our consumers instead of looking to replicate the
theatrical experience are purchasing an item that kids will literally watch dozens and dozens
of times in a variety of locations.
We do not have any reason to believe today that the introduction of 3D will alter the
dynamics of our home video business. Furthermore, we expect Monsters v. Aliens to perform

in a similar fashion and at a comparable tie ratio as our past titles after adjustments have
been made for the 3D premium.
Now to discuss the issue of our home video business relative to the overall industry I would
like to turn the call over to Ann Daly. Ann?
Ann Daly
Thanks Jeffrey. In addressing the strength of our home video business I hope to provide some
insight on two key metrics in particular; our unit sales volume and our average net revenue.
We are coming off two very successful home video releases in the past six months which
together with our solid performance of our titles in the theatrical market place demonstrate
the continued strength of CG film content across the board.
Year-end 2008 and first quarter 2009 industry reports both show a decline in consumer
spending on DVD purchases and rentals. However, our content seems to stand apart from
the rest of the market as we have continued to see strong results for our products.
While consumers are spending less on home video products across most genres, animation
and our titles in particular continue to out perform the market. As has been reported, in the
first quarter of 2009 Madagascar II was one of the top two DVDs in consumer spending in
the domestic market. In terms of units sold, CG animation titles consistently have the
highest sales through conversion ratios and both Kung Fu Panda and Madagascar II
performed better than the average for all animation titles.
We use the term conversion ratio in the domestic market to mean the estimated number of
units sold to consumers over a 26 week initial release period divided by the films domestic
box office. For example, in the first quarter of 2009 conversion ratios for most film genres
have decreased by double digits year-over-year but animation continues to be the best
performing genre in this market with Madagascar II performing at approximately the same
level as last years animation ratio.
In addition to the strong unit sales volume on Kung Fu Panda and Madagascar II our average
net revenue per unit remains in line with historical levels. These results conflict with recent
reports concerting that our DVD sales performance is singularly driven by deep discounting
on our titles which negatively impacts our margin and brand image. This is simply not the
case with our products.
DreamWorks Animation titles continue to command premium pricing on the market. A
review of average retail pricing for standard definition DVDs shows that for the past three
consecutive years there is less than a 2% price difference between our titles and other
premium animation titles from Disney and Pixar. As you know, we do not control the retail
pricing of our products. Retailers make pricing decisions based on a variety of factors

including an assessment of their own financial goals as well as how customers will respond
to their product and promotional offerings.
That said, both DreamWorks Animation and Pixars new release titles enter the market with
similar pricing. Last quarters Kung Fu Panda and Wall-E had average retail pricing of just
under $17. In the first quarter of 2009 average retail pricing for Madagascar II and Disneys
Bolt was just also under $17. Both brands maintain very similar, non-promotional pricing
usually just under $20 as well as similar traditional promotional pricing of approximately
$15.
In addition, we have found it highly valuable to take advantage of special event retail
programs designed to provide consumers with extraordinary value on a wide variety of
brand name products particularly around the Thanksgiving and Easter shopping holidays.
Our DVD titles have been selectively featured as part of these retail programs along with
other high demand DVD titles and as with any other program we do not control retail pricing
on our titles when they are included in these events.
We have experienced meaningful sales lift on our titles when they are part of these all-store
consumer shopping events and most importantly despite these events our average net
revenue per unit is in line with historical levels. In fact in our domestic business which
represents approximately 60-70% of our total new release sales, we have been able to
maintain or improve our net revenue per unit on a year-over-year basis.
Specifically, we maintained approximately the same average net revenue per unit for 2008s
Kung Fu Panda as we did on 2007s Shrek the Third. Better yet, on Madagascar II we have
seen an 8% increase in average net revenue per unit compared to Kung Fu Panda. This is
one of the most important aspects of our domestic DVD business today. The strong sales
performance of Madagascar II and Kung Fu Panda was delivered while maintaining or
improving net revenue per unit.
We attribute this increase to a variety of factors including maintaining overall marketing
spending to remain in line with our recent historical percentages as well as high consumer
demand for our premium priced product configurations which accounted for over 20% of unit
sales in Kung Fu Panda and approximately 35% on Madagascar II. We believe that no other
animated title in recent history has generated a higher percentage of its unit volume from
premium priced SKUs than Madagascar II which demonstrates the strength of our titles and
our brand particularly in this economic climate.
Turning to the international side of our business, however, when we compare Kung Fu Panda
and Madagascar II to Shrek the Third we are seeing lower average net revenue per unit. This
is primarily driven by foreign exchange which has had a significant impact on the dollars we
are generating per unit even though our wholesale pricing at the local currency level has
remained constant.

For example, the British Pound declined in value by almost 29% against the U.S. dollar
between the time we released Shrek the Third and Kung Fu Panda on DVD in the U.K. During
the same time period the Euro declined by 15% and when we released the title in territories
such as Germany, Spain and the Netherlands in the fourth quarter of 2008 these changes in
foreign exchange clearly had an adverse impact on Kung Fu Panda versus our average net
revenue per unit on Shrek the Third.
When we release Madagascar II in these territories we expect to see a continuing impact
from foreign exchange on our results in the second half of this year.
Regarding our international DVD business it is also worth noting that while we have seen
explosive growth in the theatrical box office from territories such as Russia and China these
markets do not generate home video revenue at levels similar to more established
territories. For example, Russia and China together accounted for approximately 11% of our
international box office on Kung Fu Panda but together generated less than 3% of our
international DVD business.
These and other licensee territories delivered lower revenue per unit and although our
business in these territories is increasing it has the effect of lowering our average net
revenue per title. For example when looking at Kung Fu Panda in the fourth quarter we had a
larger than typical contribution from these licensee countries in that time frame which
clearly had the effect of presenting a lower average revenue per unit in our year-end results.
However, Kung Fu Panda was released in Australia, Japan, Italy, France and the Nordic
regions during the first quarter and with these territory results now included we have seen
its revenue per unit increase from year-end.
Through the end of the first quarter Kung Fu Pandas revenue per unit is now on par with
Shrek the Third at the same point in time in its initial release after factoring the impact of
foreign exchange.
So, our domestic business remains in line with last years in both volume and net revenue
per unit and our international business earned less on a per unit basis than our domestic
business primarily due to foreign exchange and growing licensee volumes. While it is likely
that the economy is going to present some short-term ups and downs we have continued to
see DreamWorks Animation DVDs perform at the top of the market in line with our prior
year results.
With that lets get started with your questions.
Question-and-Answer Session
Operator

(Operator Instructions) The first question comes from the line of Jessica Reif-Cohen Bank of
America/Merrill Lynch.
Jessica Reif-Cohen Bank of America/Merrill Lynch
Shrek the Musical when should we see the touring company impact the financials?
Jeffrey Katzenberg
It wont launch until the second quarter of next year. I dont know Lew when it will
Lewis Coleman
You wont see much of an impact from the touring show because we will essentially
capitalize the expenses. We estimate the expenses will be substantially less than the
expenses incurred on Broadway and can probably give you some information on that as we
get into the first and second quarter next year and have a better idea of what it is. It should
have minimal impact until we release the show in Chicago.
Jessica Reif-Cohen Bank of America/Merrill Lynch
So when the touring show finally starts to affect would it be like after more than one tour?
How many touring shows do you need before you see an impact?
Lewis Coleman
What we have decided to do is bring up one touring show. Its first stop is in Chicago. It will
play during the summer of 2010 and then it will start its tour around the country for at least
the next two years. We havent made a decision on the second touring show yet nor have
we made a decision on the sit down show. I think the best thing to do in thinking about the
touring show by itself is to think about it having no significant impact in 2010 and a positive
impact in 2011.
Jessica Reif-Cohen Bank of America/Merrill Lynch
You said something about SG&A will normalize in coming quarters. Im just curious if you can
quantify that?
Lewis Coleman
I can quantify it a little bit for you. At the end of the fourth quarter we had some large stock
grants that were granted at the IPO which essentially vested and therefore were no longer
carried as a 123R expense. Conversely, we have a new stock grant that I just told you about
in renewing Jeffreys contract which will start to accrues a 123R expense this quarter. My

statement I think was that essentially the SG&A blipped down in the first quarter. A good
chunk of that was the effect of no stock comp expenses or lower stock comp expenses. It
will sort of make up that difference in the second quarter so we are urging you to sort of
think about a traditional run rate, not the first quarter run rate in SG&A.
Jessica Reif-Cohen Bank of America/Merrill Lynch
How long does your DVD deal with HBO run?
Jeffrey Katzenberg
I think 2014.
Jessica Reif-Cohen Bank of America/Merrill Lynch
The TV pilot you just announced is that Monsters v. Aliens?
Jeffrey Katzenberg
No there were two different things. We are actually well into production on the pilot for Kung
Fu Panda for Nickelodeon. What I said is we have had interest expressed by a couple of
companies to do a series on MVA and we have actually begun development on it. So that is
in the works.
Operator
The next question comes from Drew Crum - Stifel Nicolaus.
Drew Crum - Stifel Nicolaus
Jeffrey I wonder if you could give us some additional color on Monsters v. Aliens in the
international territories? What happened in some of the markets you highlighted? Was it
fewer 3D screens or it just didnt resonate with movie goers? Any additional color there?
Jeffrey Katzenberg
I will tell you we are a little befuddled. I cant tell you we have an answer on this one. It is so
fascinating because it is not even like a pattern of one area of the world we are seeing where
Kung Fu Panda performed extremely well, out performed in Asia, for instance. This is a mix
within actually regions in the world. So how do you have Spain which played extremely well
next door to France which didnt? We had Eastern Europe and places where it played
extremely well. So we are still digging in and trying to really understand it. Both Germany
and France were big disappointments for us. Our distributor and our partners in those

countries loved the movie, had big expectations for them and were genuinely surprised.
Unfortunately we dont have an answer for it yet but believe me we are on the case.
Drew Crum - Stifel Nicolaus
Moving on to Penguins and Madagascar, can you maybe discuss how you intend to monetize
that property and as far as timing what we should look for there?
Jeffrey Katzenberg
I think you will see beginning in the first quarter of 2010 in partnership with Nickelodeon a
rollout of a very ambitious merchandising and licensing program to support it. It really has
been explosive. The reaction to the show has just been outstanding and Nickelodeon just
simply could not be more excited and enthusiastic about it. We share that merchandising
and licensing revenue on a 50/50 split with them. DreamWorks handles the distribution of
that if you will and we share together in the profits of it.
Drew Crum - Stifel Nicolaus
You have about $260 million of cash on the balance sheet and I know in the past you have
said you are more comfortable with keeping about two films worth on the balance sheet.
Your thoughts on uses of cash going forward?
Lewis Coleman
I think our thoughts on uses of cash is the same as they have always been. We are happy to
keep a fairly low risk balance sheet because our operating model is a bit risky and as we get
excess cash we continue to believe things like share repurchases are a good way to use the
cash for the shareholders.
Operator
The next question comes from James Marsh Piper Jaffray.
James Marsh Piper Jaffray
Is there any plan to try to provide some type of 3D solution in the home video market? I
talked to another player to discuss providing color code or [inaudible] glasses along with the
DVD to provide some type of 3D experience. Secondly, if Penguins is so popular why not just
try to spin that off and have an original movie there? Is that something you would consider?
Lastly, if you could remind us what was left on that previous buyback authorization?
Jeffrey Katzenberg

Ill do the first two and let Lew do the third. In terms of 3D solution in the home, there are
some very, very exciting things that are coming from the consumer electronics companies.
Recently we saw some work coming out of Korea in particular that really sort of set up a new
high bar for this. The roll out of that will be over an extended period of time but there is big
ambition and I think a lot of enthusiasm for it. I think this will be driven first and foremost by
sports and video gaming but clearly our product is going to have very high value as these
companies start to enter into the market.
We have a couple of fun ideas up our sleeve which we are going to stay mysterious about in
terms of some things that we are going to look to do when Monsters v. Aliens comes to
home video later this year and a way in which we might be able to do some fun things with
3D in the home.
So we see promise in it. I think it is long-term before you see the high quality experience on
a mass basis in the home.
In terms of the Penguins going now from movie to TV and back to movie, anything is
possible. We have only been on the air at Nick now for about 5-6 weeks so we are all just
catching our breath on just how overwhelming the success has been for that. So we will see.
Lewis Coleman
As I mentioned, we repurchased about $46 million worth of stock year-to-date. That left us
with about $7 million unused in our last $150 million commitment which we got last July.
That was the unused portion that rolled into the new $150 million authorization that we
discussed.
Operator
The next question comes from Doug Creutz - Cowen & Company.
Doug Creutz - Cowen & Company
Jeffrey, back at the Analyst Day you had indicated you expected to grow earnings in 2009
over 2008. Given everything you said today are you willing to reaffirm that?
Jeffrey Katzenberg
Yes.
Operator
The next question comes from Benjamin Swinburne Morgan Stanley.

Benjamin Swinburne Morgan Stanley

I wanted to go back to some of the home video net revenue you were making in your
prepared remarks. It sounded like on Panda there was a sequential increase. I was
wondering if you could quantify that for us relative to 4Q and then secondly Lew you
mentioned, I dont know if it was an accounting change, but Bee Movie and Flushed Away
were both up sequentially quite a bit and those pay windows and free windows hit earlier
than we thought. Was there any change in the accrual timing on the accounting for either of
those two films in the quarter?
Lewis Coleman
The answer to your second question first, no. We get that revenue reported sometimes
earlier than anticipated. That was the case with Bee Movie.
Jeffrey Katzenberg
There was no change in accounting as far as those windows. We only changed the
international box office timing. We didnt change any of the other international or domestic
things.
Ann Daly
To your first question, the issue with the home video results on Kung Fu Panda in the fourth
quarter of 2008 largely has to do with the release pattern of that title. So those results
included a significant number of licensee territories reporting in addition to the domestic. We
had the overall effect of depressing the net revenue per unit in those results. Once you have
the entire world reporting as you do now for this quarter you see that average had an
increase in line with historical levels.
Benjamin Swinburne Morgan Stanley
Was the timing of the releases in those markets somewhat unique to Panda given the
international field or is that pretty standard for you?
Ann Daly
Pretty standard.
Benjamin Swinburne Morgan Stanley
The industry data everyone is focused on the DVD front which shows sell through under
pressure but rental holding up relatively well, to play that out over the next several years I
realize CG and animation is doing very well in a relative sense but Im wondering if you can

talk about the ability of the studios and DreamWorks to affect the economics of those two
channels for you? If the Netflix of the world and the rental business continues to out perform
and take share overall can you go back? What is your ability to go back and sort of readdress
the split as that business evolves?
Jeffrey Katzenberg
Again I can only respond to our segment of the business. All of those trends are not trends
that are affecting us. It is why frankly we took as much time today because to try and frame
for you as we talked about a number of times over this last year our DVD business is just
simply performing at a different sort of metrics than the rest of the industry. By the way for
the other high end DVD titles, it is not singularly us alone. It is our category. The fact that
you have Madagascar performing 8% up from Kung Fu Panda, that you see our category as a
whole has not declined at all year-over-year I think goes to this larger idea that we have
been trying to articulate here which is our purchases by mom and dad and it is more
analogous to the way they look at and value purchases in the toy because it is going to be
seen 100 times by kids and it is very durable and portable and all of those things.
Id have to say we have now been through one of the most difficult, challenging and
turbulent times in the home video business over these last 9 months. We have two
blockbuster titles that just simply have not been impacted in the same way the industry has
been. We think that is unique to our category and our product.
Operator
The next question comes from Ingrid Chung - Goldman Sachs.
Ingrid Chung - Goldman Sachs
I have a couple of questions on 3D. You said that 60% of your worldwide box office came
from 3D for MVA. I was wondering if you could give us the percentage in the U.S. basically
trying to back into attendance statistics for MVA. I was wondering if you could give us some
attendance statistics and compare that with past DWA films. The last question on 3D now
that you have proof of concept for 3D I was wondering if you could get the exhibitors to pay
for the glasses going forward?
Jeffrey Katzenberg
I think one is that it is 60% of our domestic box office came from 3D so if I said 60% from
worldwide which I do think I said let me correct it and say it is 60% from domestic. I dont
have the percentage at hand on the international number. It is not that high. The second
thing is to admission we just dont have that data at hand yet. Our distributor knows that we
obviously are interested to get it and it is too soon and they dont have enough data in to be

able to translate this to admission. It is not on hand yet and we cant do that translation for
you.
In terms of the glasses, I think you are going to continue to see the whole economic
equation here is going to perfect itself should I say over the next 12 months. I think between
Up, the Ice Age in 3D, the Zemeckis movie, A Christmas Carol and the James Cameron movie
Avatar through the release of these mega titles the equation of these economics are going
to continue to improve and perfect themselves. The question of pricing at the box office we
anticipate it will continue to go up and eventually reach the $5 premium that we talked
about. We think that the way in which these costs, the glasses cost, fees, etc. are things that
are going to still be in fluctuation but I think will become more and more favorable. The cost
of the glasses alone you should know are projected to go from $0.81 down to closer to $0.50
in the next 12 months. So even the issue of what we are arguing over is going to decline
40%.
Ingrid Chung - Goldman Sachs
So you said it would go down to $0.50?
Jeffrey Katzenberg
Yes from $0.81 to $0.50 in the next 12 months.
Operator
The next question comes from Richard Greenfield - Pali Capital.
Richard Greenfield - Pali Capital
Ann you said the $8.99 price point that a lot of us saw on Madagascar II basically two
months after it was released on DVD you are basically implying that was an internal store
decision, basically using it as a loss leader rather than your decision to drive volume by
reducing wholesale to retailers? I just want to make sure I have that right. Jeffrey, as you
create more franchises where consumers have already bought a DVD in a franchise how do
you think about the dramatic rise in Red Box and Netflix on the business and the whole trade
off between consumers deciding to rent versus purchase when you look at how many Red
Boxs are planning to be installed around the country over the next 12 months versus a year
or two ago? Any changes, there has been various speculation, but any changes or plans to
change the 2010 release schedule or is the free movie locked and loaded for next year?
Ann Daly

Let me address the first question. We participate in those programs but the thing I would say
is the pricing to consumers does not always indicate what revenue we are making on a per
unit basis. Typically what happens is there are promotional marketing funds of a finite
amount that are provided to our customers and there are some guidelines for those usage.
There is also freedom within those programs for the retailer to apply those funds as they see
fit. I think that is what you are seeing there.
Jeffrey Katzenberg
Onto the issue of Redbox and Netflix, even digital downloads, I think these all are changing
dynamics for the DVD business as a whole and for general movie releases as a whole. I think
they are miniscule in terms of their value or their impact either in the positive or the
negative for our titles. People are not interested in renting our titles. They have never been
interested. It is a very small part of our business. They either dont want them or they want
to own them. It is why when you look at the percentage of our business in terms of rental
and other downloads through Apple and Netflix and everything else it is tiny compared to
the rest of the industry because they know that if they want it they want it in order to be
able to run it 50-100 times and to be able to have the portability of it. We constantly ask this
in our research. I talked about these focus groups we just did on Monsters v. Aliens. This was
less than two weeks ago.
We were really buoyed is the only way I can say it by the enthusiasm of our customers who
want to own our products. They continue to see it as a very, very, very high value. As to our
release play for 2010 it is locked and loaded and no plans for any changes and we are very
pleased with the development of the play and we would look to probably have some kind of
presentation of the play in the early fall to our investors.
Operator
The next question comes from David Miller - Caris & Company.
David Miller - Caris & Company
According to my models here it looks like the theatrical contribution for Madagascar II was
roughly $23 million ahead of what I had estimated and Im wondering if the P&A expense
number was $23.5 million less than what I should have estimated? Im wondering with that if
you would be willing to disclose what the global P&A expense number was for Madagascar
II?
Jeffrey Katzenberg
I think I came close to doing it. I think I said that it was 10% lower than we had given you
guidance for. Our last guidance was $175 less 10% will about get you there.

Operator
The next question comes from Michael Morris UBS.
Michael Morris - UBS
On Madagascar II could you share with us the split on the revenue side between what came
from the international box office and what came from your home video? Also, on that
marketing expense thank you for that number, the $17 million. What are you seeing on the
marketing expense for Monsters v. Aliens? Are you seeing a similar 10% reduction there?
How should we think about that relative to the $175 in our models going forward? Also, how
did that impact the margins? Is your ultimate revenue boosted now by 17.5? Is that the
same margin as you amortized negative or did you recognize that entire 17.5?
Jeffrey Katzenberg
Why dont I take the middle question which is on MVA I think that we saw a more normalized
P&A cost on MVA, a combination of the first 3D film and the uniqueness of bringing that to
the worldwide market and so we should see our costs really sort of more in line with what we
have traditionally seen. Also the original titles tend to usually be a little bit more challenged
for us in marketing and maybe we are a little bit more insecure is probably a better way of
saying it. We dont want to leave any stone unturned on it. So to answer your question, yes
we saw some nice savings on Mad II. MVA returns to more normalized levels. When we look
out to 2010 right now today based on where the market place would seem to be both in
currency and in media buying opportunities we think there is a better opportunity for
savings for us on our three titles next year.
So we think we will see improvement in that margin next year. Now Im going to let someone
who is smarter than me answer number one and three.
Lewis Coleman
The question related to the disclosure of the IBO as you know our distributor doesnt report
our revenue to us in that fashion. They report it to us by title which means you are taking all
the costs of distribution through multiple channels and netting against all the revenue
coming in from multiple channels. What I can tell you which will give you the ability to make
a rough estimate is that of the $415 million of international box office that Mad II received,
$340 million of it was essentially used this quarter in terms of generating for the company.
That should give you a rough estimate of how much IBO is there. Then the majority of the
remainder is home video.
Jeffrey Katzenberg

On the savings on the prints and ads which I think was the third question, most of that, in
fact all of it flows through to us. Essentially what happens is that Paramount pays for the
prints and the ads, pays back itself from its share of the rentals or the total share of the
rentals and then gives us the net amount. So obviously if you reduce the prints and ads and
increase the revenue we receive from Paramount.
Michael Morris - UBS
Does that revenue come through, whatever the margin is say roughly 50% of what you
recognize on the bottom line or is that kind of a surprise?
Jeffrey Katzenberg
It is essentially treated as any other revenue coming in. What you are essentially doing is
lowering your cost of distribution which indirectly increases the amount of revenue you
generate on receipts. Receipts then apply the same amortization rate of any other revenues
coming in the business. So you would apply the same amortization rate to match the
revenue regardless of [inaudible].
Lewis Coleman
But it is essentially more revenue than you would have gotten otherwise which improves the
margins.
Michael Morris - UBS
So the margin did improve sequentially just based on the surprisingly higher
Jeffrey Katzenberg
Yes.
Operator
The next question comes from Barton Crockett - Lazard Capital Markets.
Barton Crockett - Lazard Capital Markets
I wanted to ask a little bit more color about how we should think about the DVDs for
Monsters v. Aliens? There is a lot of cross talk here in terms of attendance lower than you
would have otherwise thought for box office at this level because of the benefit of the 3D up
charge domestically. When all is said and done do you think the DVD units for MVA are going
to be closer to what they were for Kung Fu Panda level or closer to a Bee Movie level? Can
you give us at least that level of color?

Jeffrey Katzenberg
Again, I think it would be wrong for us to speculate on that. Again all I can say is that what
we have seen from our additional research we have done is a very high rating of the movie,
in terms of the ambition to own it, of Madagascar II. How that is going to reflect itself in
actual volume we dont know. New territory for us.
Barton Crockett - Lazard Capital Markets
It sounds like from what you are saying it feels closer to the Kung Fu Panda and Madagascar
level than a Bee Movie level.
Jeffrey Katzenberg
I did not say those words. You said those words.
Barton Crockett - Lazard Capital Markets
I was also wondering in terms of last quarter you had a big disparity in terms of cash flow
from operations versus net income where cash flow was negative. Part of that I thought was
an issue with timing of receipts for Kung Fu Panda DVDs. I thought that would kind of
reverse itself this quarter. Im not sure we really saw it. Did we see it? Is there some cash
flow that is yet to come or did come in the quarter from the Kung Fu Panda DVD?
Lewis Coleman
I think you are thinking about the cash flow right. Obviously there was a big change in
working capital related to the [inaudible] that sits in our balance sheet in the fourth quarter.
You also have to remember that we did spend cash this quarter to buy back shares in the
amount of about $50 million, a little shy of that, and we also had some expenditures related
to the campus as well that we also spent in the quarter. So there are a couple of things
offsetting that but you are right, the receivable is deferred, reflected in the first quarter and
offset by other purchases.
Jeffrey Katzenberg
Also a little more expense having pre-production right now for next year. You have to
remember we are spending most of our money this year.
Barton Crockett - Lazard Capital Markets
The share repurchase is there a duration on that?
Jeffrey Katzenberg

No.
Operator
The next question comes from Tuna Amobi - Standard & Poors.
Tuna Amobi - Standard & Poors
With regard to the overall 3D build out do you think the performance of Monsters v. Aliens
domestically are you still optimistic on the 7,500 total screen projection a year out from now
or do you think that Monsters strong performance domestically could make that number
conservative?
Jeffrey Katzenberg
I dont know if that number is conservative but I still have a lot of confidence we will see that
kind of roll out. I can tell you that a report I got yesterday is by the end of the month of May
they will be up to 3,000 screens. There continues to be a very steep rate of deployment out
there. I think you will see it through this year and going into next summer again with some
major blockbuster releases including Dragons and Shrek, the next Toy Story. It will be a big
year for 2010 and I think exhibitions has seen just as loud and clear as they possibly can
what the rewards are for it. Their business is in great shape today. It would be great to be an
exhibitor right now.
Tuna Amobi - Standard & Poors
So what do you think is the major hurdle? It seems like the capital markets are starting to
open up now and you just alluded to the strong year-to-date performance at the box office. I
would think that with Monsters having performed the way it should the roll out should start
to pick up pace from where we are today.
Jeffrey Katzenberg
I think you will see a lot of momentum on this starting in June and July. The deals are in place
on DCIT from the studios and I think everybody is very enthusiastic about it. They expect the
capital to actually again I talked to the bankers in the last couple of days and they remain
optimistic they will be able to deliver the capital for these deals in the second quarter and
we will see deployment go very quickly. I think right now today Real D alone has 8,000
screens on order.
Tuna Amobi - Standard & Poors
Let me switch gears to some of the longer-term initiatives you outlined on Analyst Day. I
dont know if you have anything to report yet. The online virtual world, parks, live

entertainment, I think you mentioned India and Intel as well. Are those still on the radar?
Anything we should be expecting on those fronts any time soon?
Jeffrey Katzenberg
They are all progressing and we will be reporting on them each and every one of those over
the next couple of months as plans solidify on them, as dates are set for the roll out of them
but all of those plans we outlined to you are progressing nicely.
Tuna Amobi - Standard & Poors
Im just trying to understand the reason behind the change in the international box office
revenue recognition. I think I heard you said it was going to have a minimal impact this year.
First, was that a change in estimate and also do you expect that to have an impact beyond
this year? How should we be thinking about the impact of that change on other titles?
Lewis Coleman
We basically had a one-month lag in getting our numbers from Paramount mostly because
we needed to check them fairly quickly given the nature of those numbers. We have been
very happy with sort of the quality of the numbers coming out of Paramount and felt that it
was no longer worth having a one-month lag. The effects of that internationally is that we
essentially will have 13 months but the fact of the matter is only having one film released
early in the year it will have no particular effect. It could have a modest effect in 2010 for
our fall films in that we might pick up some international box office in 2010 at the end of the
year that we would normally pick up in 2011 but I dont expect that to be particularly
significant.
Operator
The next question comes from Tony Wible - Janney Montgomery.
Tony Wible - Janney Montgomery
I was wondering if you could describe any of the benefits from Madagascar II to the earlier
release and if so what are your thoughts on the EPD release timing for Monsters v. Aliens?
Ann Daly
I would say domestic release was very advantageous for us just given what was happening
in the market place and the competitive set and I also think we got extraordinarily high and
as was mentioned earlier aggressive marketing behind the release. So yes I think that was of
significant value. It is also something we have historically seen in the first quarter so I
wouldnt characterize it as being something that was a first but it certainly was helpful.

Then as we look towards the fall with Monsters v. Aliens it has also been a very good DVD
release time frame and so I think that releasing in the fall is going to give us also an
advantage.
Jeffrey Katzenberg
To answer your question, for the first time ever for us our window is slightly shorter on
Madagascar II. That was singularly unique to this year, that title and where the holidays fell
and by the way it was only a week or two under wherewe will be back to a normalized
release on MVA and dont see any changes to the release window. I think that is what you
were asking.
Tony Wible - Janney Montgomery
On the other side, with the special coming up would you see an opportunity of releasing it
closer to the special to better capitalize on the P&A expense?
Jeffrey Katzenberg
Are you talking about Madagascar Santa?
Tony Wible - Janney Montgomery
No, the Monsters v. Aliens DVD release.
Ann Daly
No, we would keep those separate events.
Tony Wible - Janney Montgomery
Can we get any sense for what the final budget was on Monsters v. Aliens and specifically I
guess there have been reports that it was closer to $175 which is running higher than the
generic film model would suggest. Can we get any color?
Lewis Coleman
You are referring to the P&A on Monsters v. Aliens?
Tony Wible - Janney Montgomery
Not the P&A, the negative costs.
Lewis Coleman

The negative costs for the film were in line with our generic model assuming you added the
additional $15 million for the additional [CDs]. So the model we laid out on Analyst Day,
roughly topping going from $130-145 is the generic range we have given in Monsters v.
Aliens at this time.
Tony Wible - Janney Montgomery
For the TV special revenue, how much of the compensation will be ad time versus cash
compensation?
Jeffrey Katzenberg
We havent broken it out. I actually dont thinkI dont even know how to give it to you as a
percentage and we would have to be speculating on what the sales are going to be about
the DVD. If you can tell me how many units we are going to sell I will tell you what the
percentage will be.
Operator
The next question comes from Vasily Karasyov - J.P. Morgan.
Vasily Karasyov - J.P. Morgan
I have a question about your TV series. Did you think about taking it to the international
market and if you did would you care to ballpark the potential revenue opportunity there?
Jeffrey Katzenberg
The series will be taken to the international market by Nickelodeon.
Vasily Karasyov - J.P. Morgan
So it is part of the current deal?
Jeffrey Katzenberg
Yes they have worldwide distribution rights on it. As you know Nickelodeon operates in many
international territories and we would expect to see a roll out, the merchandising and
licensing program which is where our revenue comes from will be on a worldwide basis. As
you know, the performance of the film internationally has been very, very, very high. One of
the better performing ratios of our movies I think about 1.75 or something like that over
domestic. We expect to see a great reception for the series internationally. I know
Nickelodeon is very excited about it as well.

Operator
The next question is a follow-up from Richard Greenfield - Pali Capital.
Richard Greenfield - Pali Capital
Lew you gave a pretty detailed discussion of Jeffreys new employment contract. I was just
wondering, not that you are actively looking to sell the company but if a change in control
did occur prior to the 70-90% stock increases you mentioned that would need to occur for
the stock to vest what happens to those stock grants or restricted stock grants under a
change of control and how does that all work?
Lewis Coleman
Jeffreys contract has got a double trigger, what is known as a double trigger. On a change of
control we vest the performance side he needs to remain employed for the then total period
of three years to get the stock. If he in a change of control is subsequently fired we will get
the stock
Jeffrey Katzenberg
I dont like where this conversation has gone.
Lewis Coleman
He will not get reimbursed for any excise taxes and obviously in Jeffreys case where he
works for nothing for so long his excise tax differentiates.
Richard Greenfield - Pali Capital
So just to be clear
Lewis Coleman
There are incentives and dis-incentives is what I am saying.
Richard Greenfield - Pali Capital
So if the company was bought tomorrow for a significant price his stock would still not all
vest unless the performance issues were hit? Am I understanding that right?
Lewis Coleman

It depends on what price the company was sold for and a variety of other things. This is
fairly hypothetical.
Jeffrey Katzenberg
Nice Rich. Thanks.
Operator
There are no further questions in queue at this time. Please continue.

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