DWA 2012 Q4 Earnings Call Transcript

DreamWorks Animation 2012 Q4 Earnings Call Transcript
Executives
Rich Sullivan - Deputy Chief Financial Officer
Jeffrey Katzenberg - Co-Founder, Chief Executive Officer, Director and Chairman of
Nominating & Governance Committee
Lewis W. Coleman - President, Chief Financial Officer and Director
Richard Sherman - Director
Analysts
Barton E. Crockett - Lazard Capital Markets LLC, Research Division
Anthony Wible - Janney Montgomery Scott LLC, Research Division
James M. Marsh - Piper Jaffray Companies, Research Division
Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division
Christopher Merwin - Barclays Capital, Research Division
Richard Greenfield - BTIG, LLC, Research Division
Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division
Tuna N. Amobi - S&P Equity Research
DreamWorks Animation SKG (DWA) Q4 2012 Earnings Call February 26, 2013 4:30 PM ET
Operator
Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the
DreamWorks Animation Quarter 4 2012 Earnings Conference Call. [Operator Instructions]
And as a reminder, this conference is being recorded. You may access the AT&T Executive
replay service at any time after 4:30 this afternoon, and it'll be running through March 13 at
midnight. And you may access the replay service at any time by dialing 1 (800) 475-6701,
and entering the access code of 279175. International participants may dial (320) 3653844.
At this time, I'd like to turn the conference over to our host from DreamWorks Animation,
Mr. Rich Sullivan. Please go ahead.
Thank you, and good afternoon, everyone. Welcome to DreamWorks Animation's Fourth
Quarter and Full Year 2012 Earnings Conference Call. With me today is our Chief Executive
Officer, Jeffrey Katzenberg; and our President and Chief Financial Officer, Lew Coleman.
This call will begin a brief discussion of the quarterly financials disclosed in today's press
release, followed by an opportunity for you to ask questions. I'd like to remind everyone
that the press release is available on our website, that web address,
www.dreamworksanimation.com.
Before we begin, we need to remind you that certain statements made in this call may
constitute forward-looking statements. Forward-looking statements can vary materially from
the 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 other filings with the
SEC. I would 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'd like to now turn the call over to DreamWorks Animation Chief Executive
Officer, Jeffrey Katzenberg. Jeffrey?
Thanks, Rich. Good afternoon, everyone, and thank you for joining our call. DreamWorks
Animation reported a loss of $83 million in the fourth quarter of 2012 and $36 million in the
full year. This is primarily driven by several charges we took in the quarter, including an
impairment of Rise of the Guardians and a number of write-offs associated with changes to
our future release slate. Lew will discuss the details of these changes and charges in a few
minutes.
Rise of the Guardians was released on November 21, 2012. It has grossed over $100 million
at the domestic box office and over $300 million on a worldwide basis. With an
unprecedented number of profitable DreamWorks-branded CG films, to have
Guardians as a financial loss to the company is certainly a disappointment. This is
particularly true because of how proud we are of the movie itself. The audience
response to the film was strong, which is demonstrated by the fact that it
delivered 4.2x multiple off of its opening weekend and also garnered and A cinema
score rating. Still, Guardians did not reach the box office levels required of our
film.
Fortunately, earlier in 2012, we also saw one of the greatest successes for the company, our
summer film, Madagascar 3. It grossed nearly $750 million to become the eighth biggest
movie of the year on a worldwide basis and our best-performing international film ever. We
released it on DVD and Blu-ray on October 16, and it joined Puss in Boots among the
top-10 best performing titles of the year domestically. In an overall home video
market that showed signs of stability in 2012, after 8 consecutive years of decline,
DreamWorks Animation's domestic home video tie ratios improved year-over-year in 2012
even as overall animation ratios fell by 15%.
So clearly, we saw a number of positives in 2012 within our core business. However, one
of the new challenges we face is heightened competition for family audiences, not
from other CG animated films, but actually from broad 4 quadrant movies. This
increased competition makes the need for quality release dates critically important. While
finding optimal windows for our films is not a new strategy for us, today it is more
challenging. Going forward, we're very focused on dating our pictures in a way that gives
each one the best possible opportunity for success at the box office. This is reflected in the
recent changes we made to our slate.
At the strong recommendation of Fox, our distributor, we announced that Mr. Peabody &
Sherman has a new release date of March 7, 2014. Our partners at Fox loved what
they saw of the film late last year and believe releasing it this November would be
a mistake based on the especially crowded release schedule. Fox is particularly
high on the early March release date, where they have had huge success with their
Ice Age franchise. We are both confident that its new date best positions Mr.
Peabody & Sherman for success at the box office.
We also decided to remove Me & My Shadow from our 2014 slate and give it more time in
development. This is one of the most exciting and ambitious ideas we've had, and
its challenges are reflective of its creative and technical aspirations. Despite
having a great creative concept, Me & My Shadow is not where it needs to be at
this stage of production. And as you've heard me say in the past, we'll not release
a movie before its time. Our 2014 slate is now set for all 3 titles: Mr. Peabody & Sherman
on March 7, How to Train Your Dragon on June 20 and Happy Smekday! on November 26.
Beyond 2014, we have a lot of great choices for our future film lineup, and we will keep you
posted on our slate in the coming months.
One of our primary goals over the coming months will be to meaningfully reduce
our overall cost structure so that our business can perform at the best possible
margins even when our output level fluctuates as it is doing in 2013. This means
that many valuable members of the DreamWorks Animation family will be leaving
the company within the year. While the majority of the headcount reductions will
occur within our production groups, our support and overhead departments will
also be impacted. I believe these changes will make DreamWorks Animation a stronger
and more efficient enterprise going forward.
With that, I'll turn it over to Lew for the financial results, and I'll be back with a wrap-up
before we take your questions.
Thanks, Jeffrey. For the fourth quarter, DreamWorks Animation reported total revenue of
$265 million and a net loss of $83 million or $0.98 per share. For the full year, revenue was
$750 million with a net loss of $36 million or $0.43 per share.
The company's fourth quarter and full year results included a charge of approximately $165
million, which has 4 components. The first is an $87-million charge related to the
write-down of the film cost for Rise of the Guardians. Additionally, Guardians
incurred an amortization charge of $13 million in the quarter. The film contributed $6
million of revenue to the quarter and remains in an unrecouped position with our distributor.
The second charge totaling $54 million related to our previously announced
decision to return Me & My Shadow back to development. Third are development
write-offs of $20 million.
The fourth and final component is a restructuring charge of $4.6 million, which represents a
portion of the cost for approximately 350 people who will leave DreamWorks
Animation over the course of the year. While the majority of these people will come
from our production groups, we are also adjusting the size of our support and overhead
departments. We expect to incur additional restructuring charges of several million dollars in
2013 as we continue to assess our cost structure.
Turning to the primary drivers of revenue for the fourth quarter. Our summer 2012 release,
Madagascar 3, contributed revenue of $95 million to the quarter, primarily from home video
and international box office. It had reached an estimated 6 million net home
entertainment units sold worldwide through the end of the quarter. Our library,
which now includes Megamind, contributed revenue of $63 million to the quarter,
including worldwide free TV sales of Shrek Forever After and How to Train Your
Dragon. The other category contributed $53 million of revenue to the quarter. The
2 biggest items included here are our holiday TV specials and our live theatrical
properties. Classic Media contributed revenue of $32 million to the quarter,
primarily from the sale of the Christmas Classic Titles on TV and in home video.
Moving on to the remainder of the income statement. Cost of revenues for the quarter,
which include the previous discussed charges, were $354 million, resulting in an operating
loss of $126.9 million. Selling, general and administrative expenses totaled $36.5 million,
including $3.1 million of stock compensation expense. Approximately $8 million of the fourth
quarter SG&A expense is attributable to Classic Media. We expect our SG&A expense over
the next several quarters to be in line with our fourth quarter levels as we work to put in
place the cost initiatives we discussed today. As a reminder, an overwhelming majority of
Classic Media's full year 2012 operating income was contributed in the fourth quarter of this
year.
Turning to taxes, the company's income tax benefit in the fourth quarter was approximately
$42 million. Our combined effective tax rate, which was a benefit due to our losses, is our
actual tax rate coupled with the effect of our tax-sharing agreement with a former
stockholder. This rate was 34.3% in the fourth quarter. Moving on to the balance sheet. The
company ended the fourth quarter with $59 million of cash and $165 million drawn on our
credit line. Our weighted average share count for the year was 84.2 million shares, and our
remaining share repurchase authorization is $125 million.
I would like to take a moment to address the production cost of our future films. Our 2013
and 2014 pictures will bear an increased overhead charge due to the dropping of
one film during the period. We now expect an average production cost of our 2013
pictures to be approximately $135 million. Additionally, we expect the average
production costs of our first 2 films in 2014 to be approximately $145 million as a
result of the slate changes we discussed. However, the adjustments we are making to
our operating infrastructure today, together with the full deployment of our new animation
and lighting technology tool sets, will reduce our production costs to approximately $120
million per film starting with Happy Smekday! and going forward. As a reminder, these
production cost targets exclude incentive-based compensation costs, including performance
bonuses, residuals, stock compensation, which can run approximately 5% of worldwide box
office, as well as our upfront talent cost on sequels.
Looking ahead, the next event for the company is the home video release of Rise of the
Guardians on March 12. We expect the film to remain unrecouped until the second half of
2013. Even after it has been recouped, its future revenues are expected to be offset by Rise
of the Guardians' remaining costs, which means that the film is not expected to have a
material impact on earnings going forward. In addition, we do not expect a material
contribution from television until Madagascar 3 hits the domestic pay-TV window
in the second quarter. As a result, this year's profit will be dependent on the success of
our next 2 films, The Croods, which would be released late in the first quarter; and Turbo,
which will be released in the third quarter. And as is typical with our original films, the
majority of the movie's contribution occurs after it has been released into home
video market. This means that a majority of these films' profits will not occur until
the second half of the year, specifically in the fourth quarter.
With that, I'll turn the call back over to Jeffrey.
Thanks, Lew. Looking back at 2012, we saw a number of positive industry-wide
developments that give us continued confidence in our business. These include strength in
the animation segment at the box office, record-setting attendance levels domestically,
continued significant expansion of international markets, increased consumer activity levels
in home entertainment and growth in digital. We are entering 2013 as a better-positioned
global family entertainment company, and I believe DreamWorks Animation is poised to
capitalize on a number of new opportunities that have come with having a recognized
quality brand name.
Our growing relationship with Netflix will begin to add value to the company this year. In
addition to a new and more lucrative output deal for our future film titles in the
pay-TV window, we're also producing their first-ever original kids TV series. Turbo
Fast Action Stunt Team will begin streaming on Netflix in December in 40
countries around the globe. Also related to Turbo, we've developed a robust consumer
products program in support of the film, and we're particularly excited about Mattel's
fantastic line of racing toys. Later this fall, on the consumer products front, Spin Master
has a great line of Dragon toys coming out in conjunction with our hit DreamWorks Dragon
TV series playing on Cartoon Network.
As you know, we are acquired Classic Media in 2012 and our fourth quarter results
demonstrate that this acquisition contributed meaningful value to DreamWorks Animation
during the year. We've identified opportunities to leverage their library of titles in even
bigger ways starting this year. Two weeks ago, we announced an exciting licensing
agreement in Russia to develop Europe's 3 largest indoor theme parks. Together
with the progress we're making in China with Oriental DreamWorks, we believe these
location-based entertainment deals are strong opportunities to continue to drive value for
DreamWorks Animation around the world.
Last year, we announced the addition of Michael Francis to our executive team as
Chief Brand Officer, a role that was created specifically for his expertise in
growing and monetizing brands on a global scale. He will be responsible for adding
value to our consumer products, television and international growth initiatives,
among other areas.
Turning to our core business. As Lew mentioned, we look forward to fully
deploying our next-generation animation and lighting tools in the coming year.
This technology will not only increase the creative possibilities of our artists but
also maximize our flexibility, reduce the length of our overall production cycle and
meaningfully bring down the cost of film production.
And 2013 marks the beginning of our new distribution agreement with Twentieth Century
Fox. Simply said, we couldn't be more thrilled to be in partnership with them. Our
collaboration is off to a strong start on The Croods, which stars Nick Cage, Emma Stone and
Ryan Reynolds. Together, we premiered the film at the international film festival, Berlin
International Film Festival, on February 15, and we're now looking to its domestic release on
March 22.
With that, we'd be happy to take your questions.
The first question, please.
Question-and-Answer Session
Operator
[Operator Instructions] And our first question today comes from Barton Crockett with Lazard
Capital Markets.
I guess, one question is, I was just noticing on the balance sheet that your cash and
equivalents at the end of the year were $59.2 million, and I think they were about $130
million in the third quarter. So there was a bit of a decline there, and I was just wondering,
obviously, there's a lot of lumpiness in receivables. How should we think about your cash
flows over the next couple of quarters as we go through this kind of drier period with
earnings and your liquidity?
Sure. Barton, you did point out that cash is a bit volatile, and you're very right. You can
also, if you look at the balance sheet, see that our receivables were up quite a bit, most of
which were our normal receivables from Paramount at the time. In terms of looking at cash
other than sort of the underlying lumpiness, we would expect over the next couple of
quarters for cash to remain about where it is. If we get over-performance on Croods, that
may improve a bit. But I think over the next couple of quarters, it's going to remain about
where it is. From a liquidity standpoint, we've only drawn $165 million out of our
$400 million line of credit, and I think we feel fairly comfortable here in terms of
our liquidity position.
Okay. So that Paramount receivable, now that the distribution deal with them is wrapped up,
I mean, over what period of time does that cash actually come to you?
Barton, that receivable is essentially representing the Mad 3 home video release,
and that should come to us over the next 30 to 60 days. If you remember, they're
going to continue to perform with -- own Mad 3 as a title for an extended period of time.
Although we're switching distributors for our new release, Paramount will still be involved in
all the films that they released historically ending in 2012.
Okay. And then on the call, you said that Netflix would be driving incremental value for you
this year. Now I know that they get rights, the pay-TV rights to your movies that are
released this year. And I would assume that they'd go to Netflix closer to next year, given
the release schedule and the normal delays on kind of the pay-TV window. So is the value
that you're getting here really just the payment for the Turbo series? Or is there something
else that you're delivering to Netflix that we'll notice on the P&L income statement?
Richard Sherman - Director
Yes. I think, Barton, you're right. The titles that are released this year will be the
primary driver for Netflix, which we actually don't receive payment until it's
delivered to Netflix, which will be in 2014. We also have, as Jeffrey announced, a Turbo
TV series that will be going on there, and we've also announced TV specials that are
currently on Netflix that we derive value this year and some next year. So all of those
combined, I think what we were referring to on that call. But you are right, the majority of
the value is on the new feature film deal that we have with Netflix, which kicks in for '13
films, delivering value in 2014.
Operator
Our next question comes from the line of Tony Wible with Janney.
Yes, I was hoping you can comment on China a little bit. Will you be reducing any of the
negative cost through using of China and Oriental DreamWorks? And is that part of the
negative cost guidance you guys are currently providing?
No, it's not. China is a separate production pipe that is for original films being
produced in China. None of the work for our Western releases is being done there,
with the exception that Kung Fu Panda 3 may be done as a coproduction there, in
which case some parts of that film will be done there. But it does -- it's not part of our
ongoing production enterprise here.
Great. And any update on your TV network ambition?
We still have it. So good conversations, a number of parties interested. And the one thing
we continue to see is the growing value of the DreamWorks brand. In a marketplace in
which there is more and more platforms and more and more channel opportunities, having a
worldwide recognized brand has tremendous value. And we're seeing it in our conversations
with potential partners on the channel side, but nothing to announce yet. But certainly,
there's a lot of very promising activity on many fronts, both domestically and
internationally.
Operator
Our next question goes to the line of James Marsh, representing Piper Jaffray.
Great. Couple quick questions here. First on the Turbo television show on Netflix, how is
that structured? Is that like a standard kind of deficit financing television show and you guys
retain the rights afterwards? Or are they just buying it kind of outright and will have control
over it? And then secondly, just related to your workforce reduction initiatives. Can you just
remind us what percentage of the workforce is unionized and maybe just discuss how that
plays into trying to reduce labor costs?
Okay. So on the first one, the Turbo TV series is being sold around the world where we are
-- DreamWorks is producing the show. We are making 56 11-minute -- yes, 56 11minute episodes of it and it's not being produced at a deficit. So I think that's on the
Turbo front. On the -- again, I wasn't quite sure, James. I think you asked something about
China?
No, that was related to the workforce reductions and just complications related to the
unionized workforce.
So China has no impact on our workforce here in the...
I think generally here. I think the question was whether or not our union workforce
complicated our staff reductions.

No. No, complication from that.
Operator
Our next question comes from the line of Vasily Karasyov with Susquehanna Financial
Group.
Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division
After the restructuring is completed, can you give us an idea what would an original film
look like in terms of production cost, G&A spend and maybe box office ranges where it will
be profitable? What kind of ultimate you are shooting for through this process?
Yes. So Vasily, I think we said to you that beginning with our November release next year,
the production cost of our film will be $120 million. So if you look at that historically, we
were in the $145 million to $150 million cost about 18 months or so ago, and we will have
brought that down to $120 million. And that will be the go-forward cost. In terms of
marketing and P&A, as you know, we're just beginning our new relationship with our
distributor at Fox. We are optimistic that there are some meaningful savings that will come
there, but we're not ready to really put a figure around that until we've had a chance to get
through at least a release or 2 with them. But we do expect to see those costs diminish
also.
Operator
Our next question will be from the line of Chris Merwin with Barclays.
So you mentioned the production deal with Netflix and that was sort of the first its kind in
many regards. And I know it's early, but could you talk about the longer-term opportunity
for licensing shorter form content to SVOD platforms? Do you see your overall business mix
shifting more towards shorter form content going forward, given the lower cost structure
there?
No, Chris, I don't -- I mean, I think there are opportunities in short form content. That's not
what this is about. I think that the big opportunity for us that we are actively pursuing right
now is that with the acquisition of Classic Media and the combination of their titles
and their library and what is now a growing library from DWA, we actually have
enough content and enough IP to actually have a pretty strong ongoing television
presence in the kid marketplace. And we have found a good deal of opportunity
internationally and domestically to put together what would be a potentially
sizable ongoing television business for us, bigger the one that we're in today. So
remember today, we have 4 TV series, 3 that are on the air, the fourth about to come on the
air. Turbo will be our fifth. And now with the Classic Media, we see a chance to significantly
increase that.
Great. And if I could sneak another one in. Would you mind just giving a bit more color on
the $20 million write-off for other development projects? Is there anything in particular
you'd call out there?
No, it's a handful of projects in different stages of development. No, we don't
really break those out individually in it. But this just seemed like a very good
important time for us to really get focused on our best stuff going forward here
and clear the decks.
Operator
Next we'll go to the line of Richard Greenfield, representing BTIG.
The question kind of looks at Jeffery's comments about the importance of release date.
Clearly, the release dates are getting more important and it's getting more crowded, and
you made the decision a while ago to partner rather than to create your own distribution
company to control your release dates yourself. And I'm just wondering how you think about
the balance. Fox obviously has an animation studio and has a lot of very important films of
their own, where they have full economics versus partial economics on your films. And how
do you think about the ability to get the best release dates, given the interplay with Fox?
So Rich, good question. Actually, the Fox part of this is going extremely well and the -- just
to give the full color here on Peabody & Sherman, we knew when we were making a change
from one distributor to another, we were actually going to have sort of to get ourselves
aligned going forward. Suddenly, they were having these titles fall into place there and
having to make accommodations. Going in, originally, Peabody & Sherman was dated to be
in the Christmas release window. And one of the things Fox was just right upfront
with us about going in is, is that they already had 2 films that they were
committed to in that release window. There's no distributor that can get off 3
movies in that 10-day period of time on a fully distributed, wide theatrical release.
No distributor can get 3 full tracks in that window. So we actually made the decision
to move the release date up into November last fall when we made our new distribution deal
with Fox, picking what seemed like the best date at the time in what was a very crowded
November. We then showed Fox Peabody & Sherman. They were frankly blown away by it
and said, "This is too good a movie. It's too big an opportunity. This is not a good
release window for this film, there are too many movies jammed up in there, and
we really urge you guys to move this to a more opportunistic place." So that's sort
of the full story on how we got to it. The thing that I'm referencing here is, is that right now,
and I think these are cyclical things, we've gone through this before, there's just a
lot of more sort of big event 4 quadrant films. In the past, the only thing we actually
ever had to really sort of duck and weave and find really good release dates were other CG
animated movies, and that actually is something that we've always very successfully done.
We've never competed head-on against another CG animated film. Well, today, it's
not as simple as that. We are looking at things like Hobbit and Avengers and Oz
and movies that are out there also competing for the entire audience. And so there
is in this next 18-month, 2-year, 2.5-year period of time, seems to be a bit of a jam up
there. And we just have to be much more flexible and more strategic in making sure that
we're finding great release dates.
And then if I could just follow up, Jeffrey. When you look at the announcement about the
restructuring of the company and reducing work staff, was that purely precipitated by
the failure of Rise and the shift out of the film back into development? Or would
you have actually gone through and reduce cost anyway, just looking at the
overall environment? Just trying to understand like what drove the significant decision in
terms of reducing overall workforce.
Well, I think it's a combination of things. So I think Rahm Emanuel had that really great
expression of, "You need to take full advantage of every crisis that you face." And
Guardians was the first movie of ours in 17 in a row that didn't work. And when
that happens, it really makes you rethink everything. And so we have actually taken
this as an opportunity to significantly rightsize the whole enterprise here and to put it on
what we believe is a much more profitable, better margin and what will be a long-term
successful path going forward. So are these things that would have happened without
the failure of Guardians? I don't know. I can say, with it, it certainly made us take
a look at everything that we were doing. And at the same time that was going on,
we've invested now for 4 years in a revolutionary technology here that we've done in
partnership with Intel, invested very significantly in it. And now at that same moment in
time, it delivered -- it is delivering to us a chance to make our films in a way that creatively
gives greater and better tools to our artists and, at the same time, is able to make the
movies faster and cheaper. And so again, taking all these things kind of converging together
at one time is really -- we've done a reset, and we've done it across the board, top to
bottom, including our development and everything else here. So I feel like we have, going
forward here, a leaner and much more profitable business.
Operator
Our next question will come from Ben Mogil with Stifel, Nicolaus.
Lew, do you know, and I'm sure you do, what the film investment and film amortization was
in the quarter? I don't think the K was out yet. Can you disclose that for us?
The amort for the quarter?
And the investment, sure.
Yes, hang on for one second.
We can get it for you.
Sure. Why don't I ask my next question while we look? Jeffrey, when I look at Kung Fu
Panda 2 and Puss in Boots, which were already in like the third and fourth quarters of DVD
distribution, they actually showed pretty good numbers in the fourth quarter even when you
sort of factor in that Christmas was playing in the quarter. So sort of talking about your
comment that DVD seems to be stabilizing, can you talk about that and particularly for
some of the titles that are already in their third and fourth quarter, are you seeing the tail
being a little bit longer than we've seen lately?
Well, I think that what you see in that particular release window, which is why we like it so
much is, is that we get a strong date there in October, November and then sort of
get a whole another go round on Black Friday, which then sort of propels you into
the holiday window. And so it is why the fourth quarter has always been a strong release
window for us, and we saw a very good performance from our films there.
I guess I meant more even for titles that were already like in their third and fourth quarters
of DVD distribution. They sort of almost accelerated again. Are you -- is there something...
Yes. Well, there is. Because as part of that, we end up putting out a program of library
product around our new release. So we take advantage of the fixturing that we're able to
get into stores to push our current library, as well as our catalog.
And what do you think is driving the better tie ratios at your films and sort of your overall
comments to how you're seeing the home vid market, both physical and electronic, kind of
steering right now?

I think more than anything else is our brand and the fact that the quality of the films
themselves are high. When people love the movies instead of like the movie, your tie
ratios go up. That really is -- that's the math. And so I think in terms of these last few
titles, our audiences really appreciated them a lot, and they've performed exceptionally well.
So I think people have been scrambling to pull some numbers for you here. Does anybody
have anything yet?
Yes. Ben, I think your first part of the question was what the amortization in the quarter?
Obviously, amortization flows through cost of goods. The total cost of goods for the quarter
is $365 million, and included in that number was the charges that Lew identified, which is
about $165 million in total. In terms of what did we invest, obviously showing up in terms -from a cash perspective, is that what you were asking?
Yes, just trying get at what would show up almost on the increase to the film number on the
balance sheet, if you will? Yes, from a cash perspective, sure.
Yes I think -- so what you're going to see is a change in that asset classes on inventory,
which is a combination of what we invested netted against the charges that we wrote off.
What you're probably going to see is about a film inventory number close to about
$830 million in total at the end of the year. And so there's a bunch of moving pieces in
there, so you'll see the net effect of the investments plus the write-offs getting to about
$820 million, $830 million.
That was $882 million a year ago.
Okay. And then just to make sure I heard Lew correctly, the fourth quarter run rate for
SG&A you think is a reasonable run rate for the first half of the year. Is that correct?
I think it's a reasonable run rate for the first and second quarter.
Sure. And then in the second half, some of the benefits of the cost restructuring will be
more evident. Is that a fair analysis?
Yes. I think it's a fair analysis. I think what you'll see is the beginning of the cost program
appearing in the third quarter and much more obvious in the fourth quarter.
Operator
We'll go to the line of Tuna Amobi with S&P Capital.

So Jeffrey, I was wondering if you can update us on the 3D, how much of a runway that you
see on a 3D front. We haven't heard that for a while. I know that domestic exhibitors are
getting closer to full rollout. And in international, I know there's some trends in some
international markets that are starting to, I don't know if peak is the right word. So I'm just
kind of trying to get a sense of how you see 3D trends unfolding, both on the screen side,
as well as any potential comments on the premium ticketing kind of gap relative to 2D. And
for Lew or Rich, with regard to the charge on Me & My Shadow, I don't remember the last
time that you've taken such a major charge to kind of put a film back in development. If
you can kind of enlighten us a little bit on the thinking there and why you decided to take
the hit now as opposed to the future as part of, perhaps, the film amortization expense.
That would be helpful.
Okay. So on the first one, our domestic 3D has been now very stable over the last 3, 4 of
our releases. It ranges between 35% and 40% and same on the international, 60%,
even as the box office has grown. Certainly, last year, domestically grew and
international continues to grow. And so I -- that percentage has stayed consistent even as
the box office has grown. So 3D has stayed as a very, very solid business for us. It's still an
extremely strong return on investment, particularly because of the incremental cost for us
in producing in 3D is negligible. And so we continue to produce in 3D and we continue to
see, particularly in the international markets, greater opportunity for it. And just the second
part is, is that there is a growing premium of movie-going marketplace. Every major
exhibitor pretty much around the world is pursuing this. And so to be able to deliver a
premium 3D experience for those exhibitors is an opportunity and is a growth opportunity
for us. In terms of on Me & My Shadow, this is unusual. We have not done this before. Once
again, a really convergence of a number of different things happening at the same time. The
most important thing is to know that this is one of our better, if not best ideas. It is an
enormously complex movie to do. I would sort of say, it is analogous to a film that I was
involved in 25 years ago, Roger Rabbit, in which we are putting together a 3D CG world and
a 2D hand-drawn world, the result of which is really dazzling. It's a unique and
extraordinary film experience. It's a challenge to do it. It has difficulties. We've
been set back on some of those. Feel like we've come through now and really do
have a good path forward. We did have a change up on the director of the movie
this past year. And so it really is a time in which we really need to reset the film,
put it back onto a development path that will allow it to be the very best version of
itself, which we are confident that we will have. So remains a very ambitious and high
priority for us.
Okay, that's very helpful. Any comment, Lew, on the accounting sense [ph] of that charge
as to now versus the future?
Not really. Tuna, we really only had 1 of 2 choices. We could have completed the film and
put it in completed but not released, or we could have gone in and decide that it really
needed a little more change. And we obviously decided the latter. But we really only have 1
of 2 choices, either going into development or going ahead and completing it but
not releasing it. And we thought this was a much better way to handle the film.
Operator
I will now turn the conference back over to you for closing remarks.
Great, thanks. That concludes today's Fourth Quarter Earnings Conference Call. I'd like to
remind everyone that a replay of this call will be available shortly on our website. That web
address again, www.dreamworksanimation.com. If you have any additional questions,
please feel free to contract DreamWorks Animation Investor Relations. Thank you again for
participating, and have a great evening.
Operator
Ladies and gentlemen, that does conclude our conference for today. Thank you for your
participation and using the AT&T Executive Teleconference. You may now disconnect.

DWA 2012 Q4 Earnings Call Transcript

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DreamWorks Animation 2012 Q4 Earnings Call Transcript

Jeffrey Katzenberg - Co-Founder, Chief Executive Officer, Director and Chairman of

Jeffrey Katzenberg - Co-Founder, Chief Executive Officer, Director and Chairman of

We'll go to the line of Tuna Amobi with S&P Capital.

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