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DreamWorks Animation Reports Strong Q1 2016 Results

Jeffrey Katzenberg-led studio reports revenue increase of 14 percent to $190 million with segment gross profits improving 31 percent to $70 million 

DreamWorks Animation’s ‘Kung Fu Panda 3’ has reached $514 million at the worldwide box office to date and contributed feature film revenue of $30.9 million for the quarter ended March 31, 2016.

On the heels of its impending $3.8 billion sale to Comcast-owned NBCUniversal, DreamWorks Animation has released a new financial report detailing the studio’s earnings for the first quarter of the year.

While investors and analysts had expected reasonable sales growth but small net gains overall, DWA posted a substantial profit with revenue up 14 percent, to $190 million. Net income of $13.8 million reversed a larger loss in the same quarter a year ago, and earnings of $0.16 per share were well over the $0.01-per-share forecast.

Feature film revenue fell by more than 25 percent, to $94.3 million, with segment gross profits dropping by nearly a third. Although Kung Fu Panda 3 opened to strong results in late January, distributor 20th Century Fox has not yet recouped its marketing and distribution costs, and so DreamWorks didn't report any revenue during the first quarter. Home contributed $18.3 million in revenue, with almost seven million home entertainment units sold, but few other big wins helped push DreamWorks Animation’s numbers higher.

The television series and specials segment, however, saw sales more than triple, jumping to $57 million. The company delivered more episodes under licensing arrangements with streaming giant Netflix for episode-based content, and gross profits rose six-fold as marketing expenses fell and revenue rose.

The quarterly conference call presenting the studio’s earnings was unusually brief, with DWA head Jeffrey Katzenberg delivering a 10-minute address before turning the call over to DreamWorks Animation CFO Fazal Merchant, who discussed Q1 results in further detail. Notably, the Q&A session usually held at the end of the call with investors and industry analysts was pre-empted.

“I am happy to report another strong quarter of financial results,” Katzenberg said, “which I believe reflect continued execution on our strategy of transitioning DreamWorks Animation into a global family entertainment company.” He also expressed confidence in Comcast, saying that “they will continue to build on the foundation we've established over the past 22 years.”

Further commenting on the deal, which is expected to close later this year, Katzenberg said, “It is business as usual for us. I will continue to be leading the company and working diligently each and every day with our team to ensure that we are executing toward our strategic goals.”

The full press release is shown below:

DreamWorks Animation Reports Strong First Quarter 2016 Results With Revenues Increasing 14% To $190 Million And Segment Gross Profit Improving 31% To $70 Million

-  DreamWorks delivers first quarter operating income of $14 million

-  DreamWorks reports first quarter diluted earnings per share of $0.16

GLENDALE, Calif., May 5, 2016 /PRNewswire/ -- DreamWorks Animation SKG, Inc. (Nasdaq: DWA) today reported revenues for the quarter ended March 31, 2016 of $190.4 million, representing an increase of 14.4% from the same period in 2015. In addition, DWA reported operating income of $13.8 million and net income attributable to DWA of $13.8 million, or $0.16 per diluted share for the quarter ended March 31, 2016.

"I am happy to report another strong quarter of financial results, which I believe reflect continued execution on our strategy of transitioning DreamWorks Animation into a global family entertainment company," said Jeffrey Katzenberg, Chief Executive Officer of DreamWorks Animation. "I'm excited to be passing the baton to Comcast, as I know they will continue to build on the foundation we've established over the past 22 years."

On April 28, 2016 NBCUniversal, a division of Comcast Corporation, announced the acquisition of DreamWorks Animation. Under the terms of the agreement, DreamWorks Animation stockholders will receive $41.00 in cash for each share of DreamWorks Animation common stock. The agreement has been approved by the Board of Directors of DreamWorks Animation and Comcast, and the controlling shareholder of DreamWorks Animation has approved the agreement by written consent. The transaction is expected to close by the end of 2016, subject to receipt of regulatory approvals in the U.S. and abroad, as well as the satisfaction of other customary closing conditions.

First Quarter Review:

DWA's first quarter revenues of $190.4 million increased 14.4% versus the prior-year period driven by performance in the Television Series and Specials, Consumer Products and New Media segments.

Beginning in the quarter ended March 31, 2016, DWA changed the method by which intellectual property costs are charged to the Consumer Products segment to provide better comparability to peers and to be similar to the method used in the Television Series and Specials segment while minimizing segment volatility. As a result, the Consumer Products segment no longer bears amortization of capitalized production costs for the use of Film and TV segment intellectual property. Instead, the Consumer Products segment is charged a royalty fee which will compensate the originating segment for the use of intellectual property. There is no change to DWA's consolidated financials, as DWA's ultimate revenues and the amortization of capitalized production costs remain unchanged. This methodology impacts segment reporting only.  All prior-year period figures have been updated to reflect this new methodology.

Revenues for the quarter ended March 31, 2016 from the Feature Films segment were $94.3 million, compared to $128.7 million in the prior-year period. Revenues in the quarter ended March 31, 2015 were favorably impacted by the worldwide pay television distribution of How to Train Your Dragon 2 and Mr. Peabody and Sherman, higher home entertainment sales and recoveries of $6.3 million from previously established home entertainment reserves related to sales through DWA's former primary theatrical distributor. Segment gross profit for the quarter ended March 31, 2016 of $26.1 million compares to $38.1 million in the prior-year period, primarily due to lower revenues.

Kung Fu Panda 3, which was released domestically on January 29, 2016 has reached $514 million at the worldwide box office to date.  The film contributed feature film revenue of $30.9 million for the quarter ended March 31, 2016, primarily earned from distribution outside of territories handled by the Company's primary distributor, Twenty-First Century Fox ("Fox").  Fox did not report any revenue to DWA in the quarter ended March 31, 2016 for the film as it had not yet recouped its marketing and distribution costs. DWA currently anticipates that Fox will recoup its marketing and distribution costs and begin reporting revenue to DWA during the quarter ending June 30, 2016.     

Home contributed feature film revenue of $18.3 million in the quarter ended March 31, 2016, primarily from the international pay television window and worldwide home entertainment market.  The film reached an estimated 6.9 million home entertainment units sold worldwide through the end of the first quarter, net of actual and estimated future returns.

The Penguins of Madagascar contributed feature film revenue of $1.6 million in the quarter ended March 31, 2016, primarily from worldwide home entertainment. Through the end of the first quarter, the film reached an estimated 4.6 million home entertainment units sold worldwide, net of actual and estimated future returns.

How to Train Your Dragon 2 contributed feature film revenue of $1.9 million in the quarter ended March 31, 2016, primarily from worldwide home entertainment. The film reached an estimated 9.7 million home entertainment units sold worldwide through the end of the first quarter, net of actual and estimated future returns.

Library titles contributed feature film revenue of $41.6 million in the quarter ended March 31, 2016, driven by licensing arrangements for the SVOD distribution of certain titles as well as worldwide television and home entertainment revenues for a number of titles including Mr. Peabody and Sherman.

Revenues for the quarter ended March 31, 2016 from the Television Series and Specials segment increased to $57.0 million, compared to $18.1 million during the prior-year period. The increase in revenues was attributable to a significantly higher number of episodes delivered under our episodic content licensing arrangements. Segment gross profit increased to $21.1 million from $3.5 million in the prior-year period. The increase was primarily driven by higher revenues and lower marketing expenses.

Revenues from the Consumer Products segment increased to $21.4 million in the quarter ended March 31, 2016, compared to $14.3 million in the same period last year. The increase was primarily due to revenues earned from location-based entertainment initiatives during the current quarter.  Revenue for both the current and prior year quarters also included contributions from merchandise licensing arrangements. Segment gross profit increased to $15.0 million from $9.4 million in the prior-year period, as revenues earned from our location-based entertainment initiatives have lower associated costs.

Revenues for the quarter ended March 31, 2016 from the Company's New Media segment were $15.2 million compared to $4.6 million during the three months ended March 31, 2015. This increase was primarily attributable to revenue generated from licensing and distribution of content, and to a lesser extent, brand sponsorship and talent management arrangements. Segment gross profit for the quarter ended March 31, 2016 increased to $6.5 million from $2.1 million in the prior-year period, primarily due to higher revenues.

For the quarter ended March 31, 2016, DWA posted operating income of $13.8 million, compared to an adjusted operating loss of $(3.4) million in the prior-year period, primarily due to higher revenues and segment gross profit. General and administrative costs in the current quarter of $60.3 million were relatively even with adjusted general and administrative costs in the prior-year period as higher costs related to the growth and expansion of the AwesomenessTV business were largely offset by a decrease in salaries and benefits as a result of our 2015 Restructuring Plan. Lastly, for the quarter ended March 31, 2016, the amount of selling and marketing expenses not allocated to the operating segments but included in operating income was $0.5 million.

Net income attributable to DWA for the quarter ended March 31, 2016 was $13.8 million, or income of $0.16 per diluted share. Net income in the current quarter included income from equity method investees of $2.5 million driven by positive contributions from Oriental DreamWorks.  Also, during the quarter ended March 31, 2016, the Company recorded a provision for income taxes of $1.1 million, or an effective rate of 8.5% for the quarter. Adjusted net loss in the prior-year period included a write-off of an equity method investment in the amount of $5.1 million in other expense (net).

For the three months ended March 31, 2016, adjusted(a) operating cash flow was $(47.8) million, compared to adjusted operating cash flow of $30.7 million in the prior-year period. The main sources of cash during the current quarter were Home's domestic home entertainment revenues, The Penguins of Madagascar's domestic home entertainment and international television revenues, The Croods' worldwide home entertainment and international television revenues, How to Train Your Dragon 2's worldwide home entertainment revenues, and to a lesser extent, the collection of worldwide television and home entertainment revenues from our other films. In addition, other sources of cash included those related to revenues from licensing of our episodic content. Cash used in operating activities for the three months ended March 31, 2016 included $39.1 million related to incentive compensation payments, which increased $32.3 million when compared to the amount paid during the three months ended March 31, 2015 as these cash payments primarily fluctuate based on our financial results. During the three months ended March 31, 2016, we also made payments to an affiliate of a former stockholder related to tax benefits realized in 2015 in the amount of $16.4 million. Cash used in operating activities also included production spending for our films and television series, as well as participation and residual payments. Including the impact of the 2015 Restructuring Plan, DWA reported operating cash flow of $(52.9) million for the three months ended March 31, 2016, compared to operating cash flow of $1.6 million in the prior-year period.

As of March 31, 2016, DWA had $349.0 million of availability on its revolving credit facility and $91.6 million of cash and cash equivalents on hand, bringing the Company's total available liquidity to approximately $440 million.

Subsequent to the end of the quarter, on April 5, 2016, DWA entered into a Unit Purchase Agreement with ATV, Hearst and Verizon. Pursuant to the Purchase Agreement, upon closing Verizon will acquire from DWA and ATV a 24.5% equity interest in ATV for a purchase price of $159.0 million, and Hearst will acquire from ATV additional equity interests in ATV to maintain a 24.5% equity interest. Following this transaction, DWA's equity interest in ATV will be reduced to 51.0%. DWA will continue to consolidate the results of ATV as it will retain control over its operations. The transaction is subject to a number of customary closing conditions. DWA currently expects that the closing of the transaction will be completed during the second or third quarters of 2016. Upon closing, and before adjusting for direct transaction costs, the Company expects that it will receive $168.0 million of aggregate gross proceeds from Verizon and Hearst, of which approximately $49.0 million will remain at the ATV joint venture.

Items related to the earnings press release for the first quarter of 2016 will be discussed in more detail on the Company's earnings conference call later today.

Source: DreamWorks Animation

Jennifer Wolfe's picture

Formerly Editor-in-Chief of Animation World Network, Jennifer Wolfe has worked in the Media & Entertainment industry as a writer and PR professional since 2003.