Troubled movie studio issues profit warning
Less than a year after going public on the strength of hit films such as Shrek, DreamWorks Animation SKG is battling a DVD market slump that forced it to warn of a loss in the second quarter and to lower its full-year outlook.
The US company, which badly missed first-quarter profit estimates due to disappointing revenue from home video sales of Shrek 2, also disclosed yesterday that it was the target of a securities probe into the trading of its stock and release of first-quarter results.
The company said it was co-operating with the Securities and Exchange Commission inquiry, adding that the investigation “should not be construed as an indication that any violations of law have occurred”.
The firm also said its main shareholders decided to postpone indefinitely a planned $500m offering of common stock.
The series of disclosures sent DreamWorks shares tumbling $3.47, or 13.2%, to close at $22.79 on the New York Stock Exchange.
The stock had climbed as much as 52% after its trading debut last October, but it now is about 17% below its initial public offering price of $27.32.
The company blamed the weakened earnings forecast on waning demand for home videos. It cited a review of current sales and inventory that prompted an increase in reserves for returned products.
“What appears to be the case is that over the past several months, retail inventory for titles in catalogue is lower than what we have traditionally experienced, both domestically and internationally,” chief financial officer Kris Leslie told analysts during a conference call.
“This is contributing to a higher level of both actual and expected returns.”
DreamWorks’ home video woes are not unique to the company.
Earlier this month, rival Pixar Animation Studios lowered its earnings projections for the current quarter after sales of home videos of The Incredibles were weaker than expected.
But the litany of announcements yesterday from DreamWorks was sobering, given the fanfare and expectation that greeted its IPO in October and the Hollywood heavyweights behind the company that spun it off – Steven Spielberg, David Geffen and Jeffrey Katzenberg.
DreamWorks SKG, which the three entertainment moguls formed in 1994, set out to produce content for music, television, animation and film, generating hits like Saving Private Ryan and Gladiator. But there were also box-office disappointments such as last year’s Surviving Christmas.
“All of these things were highly ambitious, but the cost of making films shot up tremendously,” said Harold Vogel, head of Vogel Capital Management in New York. “They had to scale back.”
In 2003, DreamWorks sold off its record label to Universal Music Group. Its first animated television series, Father Of The Pride, was cancelled after lukewarm ratings on NBC.
And while its animation unit had its share of flops, including Sinbad: Legend Of The Seven Seas, it proved to be the most consistent moneymaker, with hits like Shrek and its sequel, Shrek 2, and last year’s Shark Tale.
“They’ve had tremendous ups and downs,” Vogel said. “Shrek did them a world of good, gave them the cash.”
Even powerhouse animated franchises like Shrek have not been impervious to the cooling of the once white-hot DVD market, which has been the main source of profitability for movie studios and for animated films in particular.
Still, Vogel suggests DreamWorks Animation appears to be suffering from the growing pains of transitioning into a public company and presenting performance targets to the investment community.
The company is also beset by a series of shareholder lawsuits alleging DreamWorks misrepresented potential DVD sales.
“They’re still new to the game,” Vogel said. “I don’t think they fully understood how that affects their credibility with investors or weakens the confidence in the management.”
