Battered DreamWorks Animation Still Has Wall Street’s Confidence… For Now

Despite a bad week for DWA, “the future is much brighter than it was a few months ago,” one analyst tells TheWrap

DreamWorks Animation, Jeffrey Katzenberg
Getty Images, DreamWorks logo

DreamWorks Animation suffered a big loss at the Academy Awards on Sunday, reported a fourth-quarter net loss of $247 million on Tuesday and subsequently announced plans to sell and lease back its lavish Glendale studio lot.

But despite a very bad few days for Jeffrey Katzenberg‘s company, experts aren’t all doom and gloom on the company’s outlook.

Bullish analysts believe that things took a turn for the better when the company announced a major restructuring of the company in January. The restructuring is designed to save $30 million in 2015 and $60 million by 2017, and includes laying off 500 workers and scaling back its film slate from three movies a year to two. The $210 million cost of implementing the plan in in the fourth quarter was actually lower than the $290 million that some analysts had estimated.

“They needed to get things back on the right path,” B. Riley analyst Eric Wold told TheWrap. “Major layoffs. Switch out of creative staff. The future is still unknown but much brighter than it was a few months ago. We upgraded the stock from neutral to buy the Monday after the restructuring.”

The change in creative staff included the promotions of Bonnie Arnold and Mireille Soria, the producers behind the studio’s two lucrative franchises, “How to Train Your Dragon” and “Madagascar,” respectively. The two were named Co-Presidents of Features several weeks before the major restructuring was announced. They replace Bill Damaschke, who is stepping down as chief creative officer.

On Tuesday, DWA reported sales of $234.2 million, up 14.7 percent over the same Oct. 1 – Dec. 31 period in 2013. The adjusted operating loss came in at $37.6 million, while its net loss was $64.1 million. Investors lost $3.08 per share, greater than the $3.01 analysts had projected, and way off the 20 cents per share gain for the same period a year ago.

Wold thinks the studio’s new model of releasing two films a year — down from three — is a sustainable business model, and uses rival studio Pixar as an example. Other analysts aren’t so bullish.

“No company can bet consistently on the brilliance of creativity and win,” said Seth Willenson, a valuation analyst specializing in media and entertainment properties.. “You have to have a business plan that allows for the peaks and valleys of creativity.”

To that end, Dreamworks suffered another blow when its “How to Train Your Dragon 2” lost the Best Animated Feature Film Oscar to Disney’s “Big Hero 6,” after spending heavily on a campaign for their film. “Dragon” had won the animation Golden Globe and swept the Annie Awards, and was seen as a frontrunner after Warner Bros’ “The Lego Movie” failed to be nominated in the category.

However, the company has also started to diffuse the financial pressure on its feature films year by diversifying into TV and online media.

The studio acquired the Youtube network AwesomenessTV in 2013 to help promote “Shrek” and its other animated characters across the web. The channel, which already had 500,000 subscribers at the time of the sale, has been described as “Nickelodeon for teens.”

“Their television arm is ramping up considerably — that revenue is going to more than double this year,” said Wold. “Consumer products is ramping up big. The new venture with AwesomenessTV was a great acquisition. They’re diversifying and taking some of the risk and focus away from the theatrical side.

“That said, the success of theatrical drives everything else, so they still need those movies to be successful. But it’s relieving the burden a little bit.”

Of concern to some analysts is that it could make all the right moves and still not get back to the position of prominence it once held because it is being outstripped creatively  its rivals. Disney has hit unprecedented heights with “Frozen” and “Big Hero 6,” and has sealed its ownership of the Princess market and the millions of dollars in box office, licensing and merchandise sales that go with it. And it still has Pixar in its fold.

At the same time, Warner Bros. (“The Lego Movie”), Universal (“The Minion Movie”) Paramount (“Sponge Bob”) and Fox (Blue’ Sky’s “Peanuts” movie) are all growing their in-house animated units.

Many believe a sale is the endgame for Katzenberg, who last year was in talks to sell the company to the Jaanese conglomerate SoftBank. But Wold doesn’t think that will happen anytime soon, or that it’s still the only answer.  

“It’s less that it needs to be sold, and more that it needs to complete the restructuring out of the public eye,” said Wold. “They’ve got ‘Home’ coming out this year, which I personally don’t think will do that well, but then it’s another year until ‘Kung Fu Panda 3.’

“Is it best to sit there publicly and be scrutinized and wonder what’s happening, or is it best to go private, complete the transaction out of the public eye, maybe secure capital with an Asian buyer that can help you get more relationships in China? That’s a possibility. Then they can come back stronger publicly in a couple of years, like what AMC Entertainment did with Wanda. But I don’t think it’s a necessity anymore.”

FBR Capital analyst Barton Crockett called DWA’s Q4 earnings “ugly,” and has serious doubts it can compete with the increasing animation arms of other established studios, according to The Street.

There is also a prevailing attitude is that DWA was caught out of step and didn’t evolve quickly enough to keep pace with the digital revolution.

In general, the value of animated films, which years ago could be re-released every few years, has also declined.

“Once a film is out there digitally, it may not be officially in the public domain, but for practical purposes, it is,” said Willenson. That has cut the value of DWA’s film library, which includes “Shrek,” “Kung Fu Panda” and “Madagascar,” and was a real strength for the company just a few years ago. And it also reduces the potential returns on ancillaries like DVDs and downloads.

While shareholders hoping for dividends from a sale or merger may be disappointed, a new approach will go a long way toward making them happy too, Willenson said.

“It boils down to creating a business model that fits their creative output to today’s new digital environment,” he said.