Dreamworks Animation SKG Inc. has released its results for the fourth quarter of the full year ending Dec. 31, 2005.
In the process Dreamworks officially got rid of two projects that they had written off for the books in 2003 Tortoise and the Hare and Tusker. They have dropped all rights to both of these films this year and as a result receive the connected tax benefits. The importance of this strategy is seen in the results which added $28 million, or 0.27 per share in the fourth quarter alone.
The company reported an income then in the fourth quarter of $63.2 million, or $0.61 per share. Consequently the net income for the whole year was $104.6 million of $1.01 per share on a fully diluted basis.
Animation World reported that Dreamworks Animation CEO Jeffrey Katzenberg said "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, 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."
The low performance of Wallace & Gromit: The Curse of the Were-Rabbit added to the cost of revenue which was $109.1 million for the fourth quarter.
"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."
Animation world also adds that 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.
While anticipating how the 2006 year will be, the company is not giving guidance going forward. It is saying that its entire year will be determined by its next release called "Over the Hedge" which is expected to be released May 19, 2006. Of course with distributors being paid first, they won't receive income probably until the video release in the fourth quarter.
I can't help but wondering about the wisdom of those running Dreamworks. To rely upon one stream of revenue for a whole year is rolling the dice; there is no other way to put it. Sure they might hit a big one, but that will only be luck if they do. You can't run a company this way and survive. Dreamworks is on some shaky ground here. Big names can't save you from poor judgment.
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