DreamWorks Animation Profits Down

Despite having one of the best-selling home video titles of 2005 with Madagascar and winning the Oscar with Wallace & Gromit: The Curse of the Were-Rabbit, DreamWorks Animation SKG reports that net income for the fourth quarter is only a third of what it earned for the same quarter last year. This company netted $63.2 million this round, compared to $192 million for the fourth quarter of 2004. Yearly income was also way down from $333 million in 2004 to $104 million in 2005.

DreamWorks Animation’s fourth quarter profits came mostly from home video sales of Madagascar, its latest CG-animated comic adventure movie, which accounted for approximately $152.3 million of the company’s $172.9 million gross.

“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,” comments DreamWorks Animation CEO Jeffrey Katzenberg.

Clay didn’t quite pay off as well as pixels as DreamWorks took a $25 million write-off for Wallace & Gromit: The Curse of the Were-Rabbit, which was a big hit overseas but failed to make a splash at U.S. theaters and retail outlets.

“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,” says 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.”

The studio was also able to write off the abandoned productions Tortoise and the Hare and Tusker. Both films were written off for book purposes in 2003, but since DreamWorks Animation plans to abandon the rights to these films in 2006, it receives the tax benefit or this past quarter. This has resulted in a net income increase of approximately $28 million.

DreamWorks Animation expects revenues in 2006 to be driven by its next film, Over the Hedge, which will roll out in North America on May 19. While the company s hoping for a strong box-office performance, execs are looking at the possibility that the majority of the toon studio’s earnings for 2006 will come from the film’s home video sales. DreamWorks will also release the CG Aardman pic, Flushed Away, in November of 266, but doesn’t expect to see and revenue from the film until 2007.

Costs for 2006 will be negatively affected by the start of DreamWorks Animation’s new distribution pact with Paramount Pictures, which kicks off with Over the Hedge. DreamWorks Animation will be taking over several corporate functions previously provided by DreamWorks Studios, and will have to compensate new members of its senior management team. This will likely increase the company’s selling, general and administrative expenses by approximately 15% over the $76.5 million reported for 2005. These incremental expenses, however, will in part be offset by predetermined reimbursements from Paramount during periods when DreamWorks Animation is delivering new films.