DreamWorks Animation SKG Inc. announced results for the fourth quarter and full year ending Dec. 31, 2005.
Within the release, DreamWorks officially nixed past projects TORTOISE AND THE HARE and TUSKER. Both films were written off for book purposes in 2003. Because DreamWorks Animation plans to abandon the rights to these films in 2006, it receives the associated tax benefit at this time. This has resulted in an increase to net income of approximately $28.0 million, or $0.27 per share, in the fourth quarter.
In the fourth quarter, the company reported net income of $63.2 million, or $0.61 per share on a fully diluted basis, bringing net income for the full year 2005 to $104.6 million or $1.01 per share on a fully diluted basis. These results compare to the fourth quarter of 2004 when the company recorded net income of $192 million, or $1.99 per share on a fully diluted basis and net income of $333 million, or $4.05 per share on a fully diluted basis for the full year 2004. The company noted that its distribution agreement with DreamWorks Studios was in effect for all of fiscal year 2005 as compared to only the last three months of fiscal year 2004.
Incorporated in the results for the quarter were two off-setting items including a $0.27 per share increase associated with a tax benefit on film projects previously written off in 2003 for financial statement purposes, as well as an additional $25.1 million write-off for WALLACE & GROMIT: THE CURSE OF THE WERE-RABBIT that resulted in an approximate $0.15 per share reduction to fourth quarter EPS.
"The fourth quarter was primarily driven by the home video performance of MADAGASCAR, which finished as one of the best selling home video titles of 2005," commented Jeffrey Katzenberg, DreamWorks Animation's ceo. "Together with our early 2005 release of SHARK TALE, which according to industry sources finished in the top four domestic selling home video titles of the year, our CG films remain among the leading products in this highly competitive home video market."
Revenue for the fourth quarter 2005 totaled $172.9 million. MADAGASCAR contributed approximately $152.3 million of revenue primarily driven by home video sales. Additional revenue from SHARK TALE contributed $5.7 million in the quarter. The remaining revenue for the quarter came from library and other films, which contributed approximately $14.9 million.
Cost of revenue for the fourth quarter totaled $109.1 million. Included in the cost of revenue for the quarter is the aforementioned charge of $25.1 million due to the lower-than-expected home video performance for WALLACE & GROMIT: THE CURSE OF THE WERE-RABBIT.
"Despite achieving critical acclaim, commercially WALLACE & GROMIT: THE CURSE OF THE WERE-RABBIT did not perform as well as expected in a highly competitive release period," added Katzenberg. "While we remain cautious with the state of the overall home video market, we believe that this result was primarily a title specific issue for a film that did not achieve the level of consumer awareness that we had hoped."
Although WALLACE & GROMIT: THE CURSE OF THE WERE-RABBIT was released on home video on Feb. 7, 2006, the company is required to re-evaluate its inventory as of Dec. 31, 2005 to the extent it has not yet filed its Annual Report on Form 10-K. As a result, the additional write-down of the film is captured in the company's fourth quarter and full year 2005 results. The charge represents the difference between the film inventory on the company's balance sheet and the discounted cash flows the film is expected to generate in the future. This charge is in addition to the previous write-down of $3.9 million, or $0.04 per share, that the company incurred in the third quarter of 2005.
Selling, general and administrative expenses in the fourth quarter were approximately $15.7 million, which included costs from Sarbanes-Oxley compliance and legal fees related to pending litigation. Stock compensation expense totaled $2.6 million reflecting a downward adjustment to previously granted equity awards that vest upon achievement of performance criteria. The company reported fourth quarter operating income of approximately $48.1 million.
Looking ahead to 2006, the company will not provide EPS guidance going forward but expects this year's results to be primarily driven by its next film, OVER THE HEDGE, set for domestic release on May 19, 2006. The company will not recognize any significant revenue or earnings for this film until costs are recouped by its distributor. Depending on the box office success of the film, it is possible that the majority of the company's earnings for 2006 will occur when the title is released on home video in the fourth quarter of 2006. DreamWorks Animation's second film in 2006, FLUSHED AWAY, is set for release in November. However, as is typical with the company's fall releases, the company does not expect to recognize revenue for the film in 2006.
On Jan. 31, 2006, the company entered into a new distribution deal with Paramount Pictures. The transition of all marketing and distribution for future DreamWorks Animation films is underway with OVER THE HEDGE being the company's first film released under this new agreement. All of the company's current home video releases will continue to be distributed through its previous distribution partner until the end of the second quarter 2006. At that time, Paramount will take responsibility for the marketing and distribution of all DreamWorks Animation titles.
As part of the new agreement, DreamWorks Animation will be taking over several corporate functions that were historically provided by DreamWorks Studios under a Services Agreement. Assuming these activities, as well as the compensation cost associated with new members of the company's senior management team, this will likely increase the Company's SG&A by approximately 15% over the $76.5 million amount reported for 2005. As previously disclosed, Paramount has agreed to annually reimburse DreamWorks Animation in predetermined amounts for the period that DreamWorks Animation delivers new films to Paramount under the new distribution agreement, which is intended to offset incremental expenses on a cash basis related to the change in the Company's distributor.
DreamWorks Animation is principally devoted to developing and producing computer generated, or CG, animated feature films.