The stock closed down 12.2%, to $17.26, after analysts piled on the production company for its soft year-end results, a warning that costs in 2012 will be higher than expected, and broad concerns about the market for animated films. ”Although the studio can control the quality and genre of its movies, it cannot prevent competition in the crowded animation space, or combat 3D fatigue and lofty ticket prices,” says Wedbush Securities analyst Michael Pachter. Janney Capital Markets’ Tony Wible says that DreamWorks Animation’s prospects “look more challenging” in 2012 because it will release just two films instead of three and it’s ”seeing weaker performance on the 2011 carry-over films” — Puss In Boots and Kung Fu Panda 2. Wible lowered his 2012 earnings per share forecast 11.2% to 95 cents, and says the stock is only worth about $13. Susquehanna Financial Group’s Vasily Karasyov is more optimistic — he has a target stock price of $18. But he was jarred by the company’s spending plans to upgrade its production infrastructure, and the talent costs for the upcoming Madagascar 3, which the company says will be $20M higher than they were for the original film. “These largely offset potential benefits of a proven property,” he says. What about DWA’s new joint venture to release films in China? Since the first picture in that deal isn’t due to be released until 2016, “we believe the JV is unlikely to have a material impact on DreamWorks’ earnings near term,” says Barclays Capital’s Anthony DiClemente.
CEO Jeffrey Katzenberg will have to deliver a world class sales pitch soon if he wants to overcome investors’ growing sense that 2012 will be an ogre of a year for the producers of Shrek. The animation studio’s stock hit an all time low in late December when it fell to $16.50. Even so, 22.9% of the shares were controlled by short sellers — people who were betting that the price would continue to drop — according to SNL Kagan. That hasn’t happened yet; DreamWorks Animation closed today at $17.58, which is still -39% over the last 12 months. But analysts don’t see a buying opportunity: This week Goldman Sachs analyst Drew Borst downgraded DreamWorks to “sell.” He’s disappointed by the estimated $150M domestic box office for last year’s Puss In Boots – which he figures attracted 30% fewer ticket buyers than the average for the previous 13 DreamWorks releases. That probably wasn’t a fluke, he says: The company faces “increased competition at the box office in the kid/family genre” as well as from home entertainment options on cable and online streaming services such as Netflix. Barclays Capital’s Anthony DiClemente also cited weakening trends for home video sales last week when he lowered his 2012 profit estimate by 24.3% to $1.03 a share. He figures Kung Fu Panda 2 sold about 43% fewer DVD and Blu-ray discs than he had forecast. The growing amount of time that kids spend with video games and tablets, “may be impacting demand for DVDs more acutely than previously thought.”
The maker of popular Facebook games including FarmVille and Mafia Wars says this morning in an SEC filing that it hopes to end up with nearly $890M from a public offering of 100M shares at an expected price of about $9.25 a share. The stock will trade at NASDAQ under the symbol ZNGA. The cash will be used for “general corporate purposes” which could include acquisitions. The company says it also plans to contribute a some of the net proceeds to charitable causes through its philanthropic initiative, Zynga.org. Today’s announcement follows its disclosure this past summer that it planned to go public — seizing on Wall Street’s infatuation with tech companies. Investors have become a little more skeptical about the category, though: For example, Pandora Media is down about 40% since it went public in June. LinkedIn is down 28% since May. And Groupon lost 27% of its market value after it hit the market early last month. Zynga investors also will have no power over the company.
Big Media 3Q Corporate Earnings Roundup: Are CEOs Really Worried About Recession? Or Just Looking For Convenient Excuse?
Three months ago, when Big Media CEOs wrapped up their 2Q earnings, they were still relentlessly upbeat about the business. Any worries about the economy? Not then. But the messages they delivered over the past few weeks, as they discussed 3Q, were different. Although they’re still optimistic — remember, they’re paid to be salesmen — now and then you could hear expressions of concern about where things are headed. It stood out when Viacom CEO Philippe Dauman noted that “ad sales growth will face some headwinds.” Other CEOs who are known for speaking bluntly warned that other shocks may bedevil the business. For example, Dish Network Chairman Charlie Ergen said that his satellite company — and others in pay TV — have to fight harder against rising programming costs because “there’s a limit to the price increases that could be passed on to consumers.” Time Warner Cable CEO Glenn Britt warned that premium channels such as HBO, Showtime and Starz “are clearly impacted by the economy as consumers try to cut back.” Either they’re genuinely worried, or they want a scapegoat to blame for things that are going bad, or may soon do so. Whatever the case, we can expect to hear a lot more about the economy when it’s time for the post-mortem on the all-important 4Q earnings.
As for industry performance matters, parents of movie studios had their usual mixed results to brag about or explain away: Time Warner benefitted from Harry Potter And The Deathly Hallows Part 2. Viacom was up on Transformers: Dark Of The Moon. And News Corp beat its chest about Rise Of The Planet Of The Apes and X-Men: First Class. But Disney’s Cars 2 was no match for last year’s Toy Story 3. Comcast’s Universal Pictures had nothing to compare to last year’s Despicable Me. Lionsgate suffered from Conan The Barbarian and Warrior. And DreamWorks Animation’s Kung Fu Panda 2 didn’t contribute as much in the quarter as Shrek Forever After did in the same period last year.
Over at the TV networks, Comcast’s NBC underperformed the Street’s already modest expectations. Execs at almost all the companies were eager to talk about the cash they expect to collect soon from political ads — as well as their favorite new ATM machines: retransmission consent deals and digital streamers including Amazon, Hulu, and Netflix. Speaking of Netflix, CEO Reed Hastings once again tried to reassure investors that he’s focused on “building back our reputation and brand strength” after his decision in July to slap a 60% price increase on customers who wanted to continue to rent DVDs and stream videos. In 3Q Netflix lost 57.7% of its market value and 800,000 subscribers. And since that customer loss was bigger than projected, Netflix shares continued to fall — they’re now down 67.3% since July 1.
Here are some other themes from the latest earnings reports:
Ad sales: They’s good, but for how long? Most television networks report that scatter prices are comfortably above the upfront market from this past summer. CBS chief Les Moonves says prices in 4Q are up by “mid-teens” on a percentage basis, while Discovery says it sees least high single digit percentages. But Disney’s Bob Iger noted that scatter prices have “slowed slightly these last few weeks.” Kurt Hall of National CineMedia — the leading seller of ads in movie theaters — was far more direct when he spoke to analysts after ratcheting down his company’s financial forecasts. “I’m sure that the broadcast and cable guys are sitting there now counting their lucky stars they got their upfront done before August,” he told analysts. “There’s a lot of uncertainty.”
UPDATE, 2:25 PM: DreamWorks Animation CEO Jeffrey Katzenberg has put away his pom-poms for 3D — and the higher ticket prices he has urged exhibitors to charge for it. He says that DreamWorks Animation will offer 2D versions of its films in addition to 3D because “we remain sensitive to the fact that we’re in a stressed economy bordering on a recession.” He admits that he’s “probably somewhat to blame” for the market’s overly optimistic expectations for 3D. Prospects for the technology are “in flux,” he says. But investors have become too pessimistic. His company’s commitment to 3D represents ”one of the best returns on investment of anything that DreamWorks Animation has done.”
Katzenberg won’t discuss his plan to offer online streaming rights to his films exclusively to Netflix: “We’re going to take a pass and punt on this one today. Lots of gossip and rumors and things going on. I’d prefer to take a no comment on this.” As for Kung Fu Panda 2, the CEO says it was “a terrible, terrible calamity” that the film came out in the U.S. the same week as The Hangover Part II. ”This is the first time we met a buzzsaw,” he said. The competition sliced about $20M from the expected box office sales for the animated film, he says. “It’s heartbreaking because there’s no recovering from it.” But he adds that “nowhere else in the world did this happen to us.” Indeed, while KFP2 “didn’t meet our expectations” domestically, it remains “a solid, profitable film” and “a valuable franchise.”
Nothing to report on DreamWorks’ talks to renew the distribution agreement with Paramount that expires at the end of 2012. Katzenberg says he won’t “answer a question that doesn’t have to be answered yet.” He adds that he’s unfazed by Paramount’s decision to ramp up its animation following its recent release of Rango. That film “had zero impact on us and our relationship with them.” Paramount’s plan “reaffirms the value and appeal of animation.”
DreamWorks shares initially soared more than 7% in after-hours trading. By the end of the analyst call they were up 4.3% over Tuesday’s $21.57 closing price.
PREVIOUS, 1:17 PM: DreamWorks Animation reported 2Q net income of $34.1M, up 42.1% vs the same period last year, on revenues of $218.3M, up 38%. Profits at 40 cents a share matched analysts’ consensus forecast. But the revenue number was higher; the Street expected $197.1M.
The New York-based mutual fund founded in 1996 describes itself as an “independently owned and operated investment boutique that adheres to a long-term, contrarian, fundamental value investment philosophy.” DreamWorks Animation seems to fit the bill for contrarians: The stock is down about 30% over the last 12 months even though …
UPDATE, 3:30 PM: Things were fine for RealD, until executives started talking. The company’s stock price initially jumped in after-hours trading following a surprisingly strong earnings report. That would be a welcome change for the company whose stock value has dropped more than 29% since mid-May. But investor sentiment quickly changed about mid-way through CEO Michael Lewis’ briefing where he scoffed at the notion that consumers are fed up with paying higher ticket prices for 3D. The stock price fell to 7.4% below Thursday’s $24.07 closing price. “I don’t think that two films a trend makes,” Lewis said referring specifically to the disappointing 3D sales for Disney’s Pirates Of The Caribbean: On Stranger Tides and DreamWorks Animation’s Kung Fu Panda 2. “I don’t see a trend. It’s a trend until the trend changes to something else.” He added that results for 3D films this year “will be all over the place, but the end result will be a good one.” RealD is especially optimistic about the performance of its screens outside the U.S. The international venues account for 49% of RealD’s locations, but 55% of its gross revenues. Lewis didn’t directly answer a question about whether weakening 3D sales in the U.S. might be an early warning of what will happen overseas.
Just as I hit the ground at the Nice airport today I ran smack into Jude Law, one of the main competition jury members of the 64th edition of the Cannes Film Festival (under President Robert De Niro), and he looked rarin’ to go as he arrived for all the hoopla and non-stop filmgoing over the next 11 days. We’ll see what he feels like after plowing through the 20 competition films as well as those out of competition such as Wednesday night’s opener, Woody Allen’s Midnight In Paris, and the closer, on May 22, Christophe Honore’s 2-hour and 25-minute Les Bien-Aimes (Beloved), the longest of any film in the official competition — competing or not.
Workers were busily attaching huge billboards up on the big Croisette hotels when I cruised the tony neighborhood earlier today, but the world’s second-most-famous red carpet won’t be laid out until midday tomorrow just before Woody, Marion Cotillard, Owen Wilson and the cast of the director’s first French-set film make their way up those famous Palais steps for his love letter to Paree. It was hoped that co-star Carla Bruni, aka Mrs. Nicolas Sarkozy, First Lady of France, would be coming too, but I heard she’s not making the trip after all and neither is her husband. C’est La Vie.
Up and down the Croisette you are bombarded as usual by Hollywood product being hyped on any available space. The new Transformers film from that auteur (NOT) Michael Bay got the hot spot at the Carlton entrance right next to a display for Disney/Pixar’s Cars 2 on one side and Cowboys and Aliens on the other. Lording over them, though, are The Smurfs and all of those Pirates of the Caribbean, which plans to make a huge splash here Saturday as the prime-time film on one of the key nights of the fest. Star power will be in force, of course, with Johnny Depp and Penelope Cruz driving the paparazzi wild, which is just what Disney wants for its global launch of the film that premiered last week at Disneyland and makes another stop in Moscow before hitting the Cote d’Azur. Cannes, though a serious-minded haven for cineastes, doesn’t mind the attention either.
Jack Black, just seen in trailer form as the star of 20th Century Fox’s Gulliver’s Travels, lends his voice once again to Kung Fu Panda 2: The Kaboom of Doom, which DreamWorks Animation releases through Paramount Pictures May 26, 2011.