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by an opportunity for you to ask questions. I'd like to remind everyone that, that press
release is available on our website, the web address, 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 company's annual and quarterly reports, as well as in -- as well as with
other filings with the SEC. I encourage all of you to review the risk factors listed in these
documents. The company undertakes no obligation to update any of its forward-looking
statements.
And with that, I would like to now turn the call over to DreamWorks Animation's President
and Chief Financial Officer, Lew Coleman. Lew?
Lewis W. Coleman - President, Chief Financial Officer and Director
Thanks, Rich, and good afternoon, everyone. For the third quarter of 2012, the company
reported total revenue of approximately $186 million, resulting in net income of $24 million
or $0.29 per share on a fully diluted basis. This strong performance was driven by the
continued success of Madagascar 3 at the international box office, as well as approximately
$0.08 per share in the quarter related to television revenue from a number of films,
including a new multi-title catalog deal with the BBC.
Taking a look at our primary drivers of revenue, Madagascar 3 contributed revenue of
approximately $47 million to the quarter. It grossed approximately $640 million in
worldwide box office through the end of September, opening in key territories during the
third quarter, including Australia, Italy, Japan, the Nordic region and Spain. Madagascar 3's
performance in Germany and the U.K. will contribute revenue to the company in the fourth
quarter.
Puss in Boots contributed revenue of approximately $45 million to the quarter, primarily
from worldwide pay TV. By the end of the quarter, it had reached an estimated $5.6 million
net home entertainment units sold worldwide.
Kung Fu Panda 2 contributed revenue of approximately $9 million to the quarter, primarily
from international pay TV. It reached an estimated $6 million net home entertainment units
sold worldwide by quarter-end.
Our library contributed revenue of approximately $51 million to the quarter, primarily from 3
items. As I mentioned, we entered into a deal with the BBC, extending the international free
TV rights for a number of catalog titles. For most of the titles, this is an extension of an
existing license term, so the revenue is recognized upfront. International free TV revenue
from both How to Train Your Dragon and Shrek Forever After also contributed to our third
quarter library. The other category contributed approximately $30 million of revenue to the
[ph] quarter. Shrek The Musical in London, How to Train Your Dragon Arena Spectacular and
How to Train Your Dragon TV series each contributed approximately equal amounts. As a
reminder, our non-feature film business delivers significantly lower profit margins than our
core business. Also included in the other categories, revenue from our existing deal with
Gaylord Hotels.
Finally, our acquisition of Classic Media closed on August 29, contributing $4 million of
revenue to the company, primarily from home entertainment. This had no material impact
to net income in the third quarter. Purchase price for Classic Media was approximately $155
million. Approximately 60% of this amount is for intangible assets that will be amortized
over the next 10 to 15 years, resulting in an annual expense of approximately $6.5 million.
The remainder is for non-depreciable assets, including goodwill and intangibles with
indefinite lives.
Moving onto the remainder of the income statement. Cost of revenues for the quarter
equaled $114 million, resulting in gross profit of approximately $72 million. Clarity around
the future distribution channels for our How to Train Your Dragon TV series, including
opportunities out of MIPCOM, allowed us to continue to capitalize several million dollars of
production costs for the show during the third quarter.
Selling, general and administrative expenses for the third quarter totaled $36 million,
including approximately $3 million of stock-based compensation expense. The year-overyear increase in SG&A can be attributed primarily to professional fees related to the
establishment of Oriental DreamWorks and our acquisition of Classic Media, as well as other
new business initiatives.
Turning to taxes. The company's income tax expense for the third quarter was
approximately $14 million. Our combined effective tax rate, which is our actual tax rate
coupled with the effect of our tax sharing agreement with a former stockholder, was
approximately 34.5% in the third quarter. We expect our full year combined effective tax
rate to be in the mid-30s.
Moving onto the balance sheet. The company ended the third quarter with a cash balance of
$131 million. Amounts borrowed under our credit line, primarily for the purchase of Classic
Media, were $200 million, which we subsequently paid down to $165 million.
Our diluted share count for the third quarter was 85 million shares, and our remaining share
repurchase authorization is $125 million. Looking ahead, we expect the company's fourth
quarter results to be driven by Madagascar 3's continued international box office
performance and its home video release.
While the majority of the domestic home video results will be contributed to the fourth
quarter, its international release will be divided between the next 2 quarters, with major
territories like Germany, the U.K. and Australia coming in the first quarter of 2013. These 3
territories accounted for approximately half of our total international home video units on
both Kung Fu Panda 2 and Shrek Forever After, which, like Madagascar 3, were sequels
released theatrically during the summer. We also expect worldwide free TV revenue for both
Shrek Forever After and How to Train Your Dragon to contribute to the company's fourth
quarter results. As a reminder, we expect the company's combined library and other
revenue to be down year-over-year in 2012.
The other big event in the fourth quarter is Rise of the Guardians in theaters on November
21. As previously disclosed, the average cost of our 2012 films is $145 million, excluding
incentive compensation, making Guardians more expensive than the generic DreamWorks
Animation film. We expect to fall within our worldwide P&A range of $150 million to $175
million. We also expect the revenue contributions from consumer products on Guardians will
be in the low-single digits.
As we ramp up to produce 3 films every year, we expect our production cost to return to
approximately $130 million per picture in 2013, with opportunities for further savings as we
roll out our recently completed animation and lighting tools.
It's been a very busy year for the company, and we do plan to provide a long-term business
model discussion by way of an Analyst Day early in the new year.
With that, I will turn it over to Jeffrey before we take your questions.
Jeffrey Katzenberg
Thanks, Lew, and good afternoon, everyone. It's clearly been a busy quarter here at
DreamWorks Animation. In addition to the fantastic performance of Madagascar 3 at the
international box office, we had a number of important strategic developments. These
include closing our Classic Media acquisition, signing a definitive agreement for Oriental
DreamWorks, entering a new distribution agreement with Twentieth Century Fox and
increasing our line of credit to $400 million. As Lew said, we look forward to updating you
with greater details about each of these in the coming months.
Turning to Madagascar 3, it has now surpassed $216 million at the domestic box office and
$502 million overseas for a worldwide total of approximately $720 million, making it the
fifth highest grossing film of the year on a global basis. In a number of territories, it is now
the biggest animated title of all time. In others, it is the highest grossing film of 2012. In
total, Madagascar 3 opened at #1 in 50 markets. It is now DreamWorks Animation's second
highest grossing international performer ever and it recently opened in the U.K. and
Germany to great results.
On October 16, Madagascar 3 made its home entertainment debut on DVD and Blu-ray, and
is off to a good start. We will continue to monitor how the title performs over the holiday
season. But with its tremendous performance at the box office, we are optimistic.
Next big event for the company is the release of an original film, Rise of the Guardians, on
November 21. We believe Thanksgiving week will be a great launching pad for our family
title, and we expect Guardians to remain in theaters as a strong film throughout the holiday
season and into 2013.
However, this is a later release date than usual for us, so we expect to see a different play
pattern from its theatrical run than we've historically seen from our other fall releases. We
look forward to seeing how audiences around the globe respond when it comes to theaters
next month.
I'd like to provide of brief update on some of our growth and expansion initiatives. First is
our television series, Dragons: Riders of Berk debuted last month on Cartoon Network,
where it is consistently rated #1 with boys' aged 2 to 11 in its premium time slot on
Wednesdays at 8 p.m.
We introduced DreamWorks Classics at MIPCOM earlier this month, and we are already
finding valuable opportunities for both Dragons: Riders of Berk and our up-and-coming
Turbo TV series. Second is our DreamWorks Theatrical Live Productions. The U.S. tour How
to Train Your Dragon Live Spectacular is garnering excellent critical acclaim as it makes its
way around the country. And we have announced that Shrek The Musical will play in
London's West End through February 2013.
Lastly, a few words on distribution. As you know, during the third quarter, we announced our
new distribution agreement with Twentieth Century Fox. Fox is an ideal partner for us. They
represent a more favorable economic arrangement. We believe that their robust distribution
platform will allow DreamWorks Animation to continue to grow over the next 5 years.
So with that, we'd be happy to take your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And, first, we'll go to the line of Ben Swine -- or Swinburne with
Morgan Stanley.
Benjamin Swinburne - Morgan Stanley, Research Division
Jeffrey, I was wondering, now that you've closed Classic and also have, I guess, a little bit
of time working with the Fox folks on next year, if you could just give us any additional
thoughts on what you think might be different with Fox versus Paramount as you go out -go to market next year on your releases? And also, on the classic front, anything you'd add
to what you've already commented on the opportunities with that deal, now that you
probably have better access to information and a better sense of what that asset could do
for you. Especially with Lone Ranger next year, which I think is the one most investors are
focused on, what's the opportunity with that property?
Jeffrey Katzenberg
So on the Fox front, I think it's early for us really to -- we've begun working on our first
release with them, which will be Croods, on March 21 of next year, and I think we're going
through the very methodical process of getting a good integration between our operations
and their operations. And I think it's early for us to be able to make any predictions or
projections about what the benefits may be from the association. In terms of Classic Media,
we just continue to be very excited about what seem to be -- just a whole sort of menu of
activities and opportunities with them. We saw great response coming out of putting our 2
brands together, as well as our libraries, at MIPCOM. And on the feature film side of it, we've
got 4, 5 properties in the works that were in the works before our acquisition that are
moving along and a couple of more that have already presented themselves to us. Certainly,
Lone Ranger, which is a mega release from Disney, in next summer is something we have
good expectations for. And I'm not sure that we have any way of putting dollars and cents
around that for you, which is maybe what you're asking. Rich, I don't think we've tried to...
Rich Sullivan - Head of Corporate Finance
Yes, not yet.
Jeffrey Katzenberg
Quantify that yet. So we have ongoing participations and merchandising and some other
revenues coming from it, but I don't think we have a grasp on what that is yet.
Benjamin Swinburne - Morgan Stanley, Research Division
Okay. And then, if I could just quickly follow up on the catalog deal this quarter at the BBC.
Can you give us any sense for what the duration of that agreement is and maybe what titles
or at least the number of titles it includes. I think that was something that, at least, we
hadn't had on our radar screen.
Lewis W. Coleman - President, Chief Financial Officer and Director
It's about 12 titles.
Rich Sullivan - Head of Corporate Finance
Yes. Ben, I mean, it covered a lot of our older titles. It's about 12 of them in total, and it
was an extension of a pre-existing deal. When -- because of the way obviously accounting
for television works. When we extended that deal, the avail date became immediate and
that caused us to recognize the revenue and the value of that extension immediately and
that's causing that $0.08 in the quarter, at least, primarily.
Operator
So the next -- we'll go to the line of Barton Crockett with Lazard Capital.
Barton E. Crockett - Lazard Capital Markets LLC, Research Division
The Library and Other [ph] line is interesting here, given the variance in the quarter in
Classic Media. I know you don't like to guide too specifically on quarters. You did say, for the
year, it's going to be not matching the 2011 number. I was wondering if that guidance about
not matching 2011 -- does that include the Classic Media contribution in the fourth quarter?
And is there any way to kind of roughly kind of get a sense of how meaningful that is when
we look at that quarter?
Lewis W. Coleman - President, Chief Financial Officer and Director
Barton, that does not include -- Classic Media is now broken out as a segment, and it is not
included in Library.
Barton E. Crockett - Lazard Capital Markets LLC, Research Division
Okay. So any sense of how meaningful that's going to be once you get a full quarter of it?
Lewis W. Coleman - President, Chief Financial Officer and Director
I think what we owe you is sort of a broader view of Classic Media, which we will try to do
when we have an Analyst Day early next year.
consumer products opportunity as part of that film. So very specifically, we have a very
ambitious program built around Turbo next summer. We have a very ambitious program
built around Dragons the following summer. Same thing for Trolls the following summer. And
right now are looking at, although we're not fully locked down, for there being a third
Dragons that would come the following summer. So it's our intention that at least one of our
films each year going forward have a very big, important consumer products opportunity in
the DNA of the film itself. And so to -- so part of it is having it creatively as part of our
moviemaking. And Bill Damaschke, our chief creative officer, really took this on as an
opportunity and a challenge a couple of years ago, and he has done a really excellent job of
delivering that. On the operational side of it, in the, hopefully, the coming weeks, you'll start
to see that we are staffing up in this area and bringing in some very, very high-caliber
manpower to start to make sure we get the full opportunity and that we can get the full
value out of it, but you will see this become a bigger and bigger part of the company and
included in that now are a whole other set of opportunities that have come with Classic
Media. So this will become a bigger part of DreamWorks going forward than it has been.
Operator
Yes, and that is from Tony Wible with the Janney Montgomery Scott.
Anthony Wible - Janney Montgomery Scott LLC, Research Division
I was hoping you could give us an update on Oriental DreamWorks? I know you guys are
working on Panda there. But how soon will we see some of the other production come to
market? And if you could just give us a sense on where you are with building up the studio.
Jeffrey Katzenberg
So there really are 2 aspects to Oriental DreamWorks. One is the film company itself, and
we are actively moving forward on the animation studio. We have actually acquired a
company in China that -- 37 Entertainment, which is an animation, existing animation house
there that's been doing some television work for us that got about 175 employees and is a
kind of a great foundation for us to build on. They are located in Shanghai. So we have
acquired them, and we've now begun the process of starting to train and ramp up the
operation there. Our current plan is that we will be making Kung Fu Panda 3 as a true coproduction, meaning 1/3 of the production of Kung Fu Panda 3 will be done at our studio in
Shanghai, and the balance will be done here at the studio using the current creative
leadership that we've had on the movie. So that will actually allow us to have a film in the
marketplace. We're looking at right now the first quarter of 2016, so Kung Fu Panda 3,
tentatively is scheduled for Golden Week in China in 2016. Our first original production in
China will come in 2017, and we are planning on a film per year following that. So then
separate from that is Dream Center, which is outside and now is a separate entity from
Oriental DreamWorks. And that is the real estate development in downtown Shanghai, an
entertainment center there. And we will have more to share with you on that when we see
you next year. But it's progressing along, and we don't really have enough facts and figures
and details to model a -- model it for you on terms of what it might mean to DWA.
Operator
now have enough product that we could form a block, and that is very appealing and a very
attractive to a number of the big players.
Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division
Okay. And following up on your acquisition of Classic Media, does that mean that you're now
open to possibly add acquisitions, I don't know, HIT Entertainment or something like that?
Or do you feel like now you're strategically complete at this point?
Jeffrey Katzenberg
Well, we will continue to look for opportunities. There are things that we are specifically
pursuing today that we see as very complementary to what we're doing. HIT Entertainment
is not on our hit list, but there are things that we are looking at.
Operator
That is from Chris Merwin with Barclays.
Christopher Merwin - Barclays Capital, Research Division
So I just had one on UltraViolet. I think, from our seat, the biggest challenge on UltraViolet
is really adoption. How do you get consumers to accept UltraViolet as an industry standard
and then how do you get that digital content to the TV. I mean, obviously, some people can
do it through gaming consoles or connected TVs, but certainly that's not -- not every
household has that capability. So what steps are you really taking to promote UltraViolet
and ultimately digital sales for your titles?
Jeffrey Katzenberg
Well, I have to say that's one of the things that we are excited about in terms of our new
distributor at Fox. As you know, Jim Gianopulos has been a driver and a leader, and I would
happily use the word visionary in this regard. He's probably been one of the most
aggressive people in probing and looking and seeing how best to move into new markets
and how to get to trade dollars for dollars, not dollars for cents. So we are very much
following their lead right now, and we're excited about their roadmap.
Christopher Merwin - Barclays Capital, Research Division
Great. And just a follow-up, I think Puss in Boots, it looks like it did $5.6 million in units. Is
there any way you could break out digital from that?
Jeffrey Katzenberg
I don't know what the digital is, and Ann Daly is not with us here today. So I think we'll
have to get back to you on that.
Operator
That is from Richard Greenfield with BTIG.
Richard Greenfield - BTIG, LLC, Research Division
A couple of questions. One, I just wanted to follow up on the BBC deal. You mentioned it -- I
think Lew mentioned it as a significant driver of the quarter in that library line. We're just
wondering whether you could give any quantification of roughly what percentage of the
quarter that one-time item was? And then just, two, I think it's been a little over 2 weeks
that you've had Mad 3 in the market in the U.S. Jeffrey, you mentioned the word optimistic,
but I was just wondering if you could give us an early sense of unit sales or directionally
how it's doing versus some of the other titles that you've released after a couple of weeks
during a Q4 period?
Jeffrey Katzenberg
Well, I think we -- I think it was $0.08 in the quarter...
Rich Sullivan - Head of Corporate Finance
Yes.
Jeffrey Katzenberg
For the BBC.
Rich Sullivan - Head of Corporate Finance
It was BBC and a few smaller deals like the BBC but $0.08 in the quarter...
Lewis W. Coleman - President, Chief Financial Officer and Director
Yes. BBC was, by far, the dominant piece.
Rich Sullivan - Head of Corporate Finance
Yes.
Jeffrey Katzenberg
And on the specific performance of Mad 3, as you know, Rich, we don't like to do those
week by week numbers there other than just to say we've gotten off to a solid start. The
marketplace is performing decently for us. We've got some great runway space here going
into the holidays, since this is a much earlier release for us than we were last year with
Kung Fu Panda 3. I guess what I would say is we're much, much happier with our
performance this year than we were with Kung Fu Panda 3 last year, if that gives you a little
-- with Kung Fu Panda 2, sorry, getting ahead of myself there. So Kung Fu Panda 2 last year,
in the fourth quarter, we were in the December time frame and we're off to what we see as
a much better performance with our October release window. Everybody here is cringing in
the room.
Operator
And that is from Ben Mogil with Stifel, Nicolaus.
Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division
So just on the BBC deal, I'm kind of more curious, did you go up against -- did you have
interest in a deal from X Faud [ph] services? And is this deal at all changed for some of the
digital flexibility that you've got in the market?
Rich Sullivan - Head of Corporate Finance
Yes. It was just a standard extension, in terms [ph] extension, so no. It was just allowing
them to have availability to the catalogs [ph] for a longer period of time.
Jeffrey Katzenberg
Well, I -- really it's -- it's really what I said, which is, is that Thanksgiving, you have 5 days
of very, very good playing time there. You then go into what we fondly refer to out here as
the dog days of December. The early December time period are -- tend to be very low
performing weeks and then you bounce back up at Christmas time. So that is unlike the
pattern how we had played on our movies that come at the beginning of November and play
pretty strong and then they're finished by Thanksgiving.
Tuna N. Amobi - S&P Equity Research
So that -- that appears to be the main reason why you're a little bit more optimistic this
time. And I was looking for some comment as well on the number of 3D screens, how that
might compare to Madagascar?
Jeffrey Katzenberg
So just to be clear, Tuna, I am no more optimistic nor am I more pessimistic. I'm just
sharing with you that the play pattern of the film is unique. So, movie is great. We're very
proud of it, been previewing terrifically. But that's no different honestly than we've -- we're
on a good run here, and I think it's consistent in terms of the quality of the film to our last
few releases. In terms of 3D, it will be -- the number of 3D screens will be exactly on par
where we have been on our last 3 or 4 releases, so no change on that. If you look at the
performance of Madagascar 3, I'm just looking here because I know I have that on a piece
of paper. I think our 3D box office split, hold on, somebody is handling it to me here. There
we go. So the domestic 3D on Madagascar 3 was 35%, the international on Madagascar 3
was 53% and the worldwide combined was 48%. So it continues to be a very significant
contributor to our business.
Operator
And our last question comes from the line of Michael Corty with MorningStar.
Michael Corty - Morningstar Inc., Research Division
I had a question, a follow-up on some of the earlier comments during the prepared remarks.
You talked about expanding some of your opportunities for television like outside the U.S.
How would your new relationship with Fox play a role in how you pursue possible
opportunities in television in terms of syndication, whatnot, outside the U.S.?
Jeffrey Katzenberg
Well, I think we are looking to Fox as the port of first call in terms of any of the things that
we're pursuing internationally. They have expressed strong interest in representing the sale
of any of our product internationally should we go to a third-party. So that's one place of
opportunity. The other is that they have been very excited about the DreamWorks branded
channel as something that their international team seems to have a lot of enthusiasm for,
and we've had good momentum in our conversations with them. So we will look to find as
many ways as we can to partner with Fox. They are a very, very, very strong, powerful force
internationally in TV distribution. I think they have over 350 channels up and running today.
So it's hard to find a stronger, better force for us as we look at the international
marketplace.
Oh, can I please just say one thing to all of you that are calling from back in New York City?
We really appreciate your being with us today. We know this has been a really difficult
couple of days back there, and I'm sure there are some of you, if not many of you, that are
doing this by flashlight or candlelight or whatever it is taking to get back up and running.
And I just want you to know, from all of us out here, we appreciate everything that you
guys are going through there, and we're rooting for you to get back and up and running as
quickly as possible and just thank you for being here with us today.
Rich Sullivan - Head of Corporate Finance
With that, that's going to conclude our third quarter earnings conference call. I'd like to
remind everyone that a replay of this call will be available shortly at -- on our DreamWorks
Animation website, that web address again, www.dreamworksanimation.com. And if you
have any additional questions, please feel free to contact DreamWorks Animation's Investor
Relations department. Thanks again for participating. Be safe, and have a great evening.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your
participation and for using AT&T Executive TeleConference service. You may now disconnect.