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DreamWorks Animation SKG, Inc. (NASDAQ:DWA)

Q3 2008 Earnings Call

October 28, 2008 5:00 pm ET

Executives

Rich Sullivan - Investor Relations

Jeffrey Katzenberg - Chief Executive Officer, Director

Lewis W. Coleman - President, Chief Financial Officer, Director

Analysts

Jessica Reif-Cohen - Merrill Lynch

Barton Crockett - J.P. Morgan

Ingrid Chung - Goldman Sachs

David Miller - Caris & Company

Michael Morris - UBS

Ralph Schackart - William Blair

Drew Crum - Stifel Nicolaus

Tuna Amobi - Standard & Poor’s

Jake Hindelong - Monness, Crespi, Hardt & Co.

James Marsh - Piper Jaffray

Analyst for Richard Greenfield - Pali Research

Doug Creutz - Cowen & Company

Operator

Thank you for standing by and welcome to the DreamWorks Animation earnings call. (Operator Instructions) At this point, I would like to turn the call over to your host, Mr. Richard Sullivan. Please go ahead.

Rich Sullivan

Thank you and good afternoon, everyone. Welcome to DreamWorks Animation’s third quarter 2008 earnings conference call. With me today are our Chief Executive Officer, Jeffrey Katzenberg, and our President and Chief Financial Officer, Lew Coleman. This call will begin with a brief discussion of the quarterly financials disclosed in today’s press release, followed by an opportunity for you to ask questions. I would like to remind everyone that today’s press release is available on our website, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from 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 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 would like to now turn the call over to DreamWorks Animation Chief Executive Officer, Jeffrey Katzenberg. Jeffrey.

Jeffrey Katzenberg

Thanks, Rich and good afternoon, everyone. Thank you for joining us today. I just want to mention if you detect a change in the tone of my voice today, it’s not my happiness over the market’s performance but I am getting over a bad cold. The main news for the quarter was the incredible success of Kung Fu Panda. As we discussed last quarter we had high expectations for the film overseas and did spend a little bit more than usual on advertising support to take advantage of its global appeal. This ended up paying off nicely, as Kung Fu Panda has reached nearly $450 million in international box office to date, breaking records across Europe, Latin America, and Asia during the quarter.

It became one of only four films this year to surpass the $400 million mark in foreign grosses, thanks largely to its impressive runs in the U.K., France, Korea, China, Germany, and Italy. We couldn’t be more pleased with its performance and continue to view the international theatrical market as a growth area for the company.

Kung Fu Panda has now reached over $630 million on a global basis, becoming our most successful original film. The title will be released into the U.S. home video market on November 9th, followed by its international rollout throughout the next two months.

We believe Kung Fu Panda's outstanding theatrical performance and critical acclaim position it well for a successful home entertainment release this holiday season.

Accompanying Kung Fu Panda on DVD and Blu-Ray will be a brand new, 22-minute companion story titled Secrets of the Furious Five. Narrated by Jack Black’s Po, it tells the back story of the characters of the Furious Five in what we believe is among the most extensive bonus content ever created for a home video release. Retailers are pricing the double pack at around $25 and we anticipate that consumers will recognize this as an exceptional added value.

On November 4th, we are also set to release on to DVD last year’s successful holiday special, Shrek the Halls, which marked our foray into the non-theatrical special content business. Over 21 million viewers tuned in for the television premiere of Shrek the Halls, making it one of the most watched shows of 2007. We look forward to its DVD release next week and to seeing it re-air on ABC in prime-time next month.

Beyond home entertainment, we have our second theatrical event of the year, the release of Madagascar: Escape to Africa into U.S. theaters on November 7th. Families across the world are looking forward to the return of their favorite Central Park Zoo characters in the sequel to our 2005 hit. Audience reaction to the film has been strong and we have high expectations for its box office performance.

Also in the next few weeks, Shrek the Musical will begin its preview performances in New York before officially opening at the Broadway Theater on December 14th. The show had a very successful run in Seattle last month and critical response so far has been supportive. While we do not expect Shrek the Musical to have a significant impact on earnings through 2009, its success we believe could be a source of meaningful value and growth in future years.

Additionally, we continue to look ahead with enthusiasm to March 27th when we release 2009’s first big event film, Monsters Versus Aliens, into theaters in 3D. We remain confident that there will be an adequate number of 3D capable screens in the marketplace for Monsters Versus Aliens to serve as a valuable proof of concept for the industry as a whole. It has been a very successful year so far for DreamWorks Animation and we are hopeful that we will see a continuation of that success in these next two very busy months for the company.

Finally, I would like to discuss an important item as it relates to our board of directors. Today, David Geffen will be stepping down from the board. As one of DreamWorks' original founders, David’s vision for and commitment to the company has been absolutely vital throughout its 14-year history. Without him, there would be no DreamWorks Animation. He leaves his post as a director with the entire company’s deepest gratitude. We look forward to working with David as a trusted advisor going forward, and on a personal note, I would like to thank David, always a mentor and my best friend, for his incredible wisdom, leadership, and guidance. David, you will remain the guardian angel of DreamWorks Animation.

With that, I will turn it over to Lew before we take your questions. Lew.

Lewis W. Coleman

Thank you, Jeffrey and good afternoon, everyone. I would like to highlight a few items before we take your questions. In the third quarter, the company reported total revenues of $152 million resulting in net income of $37 million, or $0.41 per diluted share. Revenue was mainly driven by the company’s latest three releases, Kung Fu Panda, Shrek The Third, and Bee Movie. Kung Fu Panda contributed $63 million of revenue, driven by its international box office performance. Due to the one-month lag in international reporting from our distributor, approximately $385 million, or 93% of the film’s international box office receipts, fell in the third quarter.

Shrek The Third contributed $33 million of revenue, primarily from earlier than expected international pay television. Whereas revenue for this market has historically spread over several quarters, the majority of Shrek the Third’s international pay television fell in the third quarter. In addition, the title reached an estimated 20.5 million home entertainment units net shipped worldwide through the end of the third quarter.

Bee Movie contributed $27 million of revenue, driven by domestic pay television. The film reached an estimated 7.5 million home entertainment units net shipped worldwide through the end of the third quarter.

Cost of revenues for the third quarter equaled approximately $76 million, resulting in a gross profit -- in our 15% gross profit margin.

SG&A was approximately $30 million, including $10 million of stock compensation expense. SG&A for the quarter also included non-cash items of approximately $2 million, resulting from Roger [Enrico’s] transition to non-executive Chairman and the acceleration of depreciation related to the remodeling of the company’s Glendale campus.

The remaining increase is primarily comprised of both new business initiatives and the continued growth in the number of stock compensation grants under the annual grant permit.

As previously referenced, the company has a number of new business initiatives underway, including 3D, Broadway, television, and online opportunity. We look forward to updating you on the progress of these initiatives in the coming months, starting with our analyst day on December 11th.

Results for the quarter also included a tax benefit of $0.03 per share on a fully diluted basis.

Earnings for the fourth quarter will be largely driven by the home entertainment performance of Kung Fu Panda, which will be released this November. While the film has been very successful overseas, several territories contributing to its international box office total have not typically generated significant home video revenue.

Looking at other events in the quarter, our fall film, the sequel to Madagascar, is schedule for release on November 7th. Because our distributor must recoup its up-front marketing and distribution expenses before reporting revenue to us, we do not expect to see significant revenue from the distribution of this film until 2009. Also, Shrek the Musical will be released on Broadway this December, and success live theater can be a very profitable business but we don’t expect Shrek the Musical to have a meaningful impact on the company’s earnings in 2008 or 2009.

Finally, I would like to update everyone on our share repurchase program. Year-to-date, the company has purchased $185 million, or 6.8 million shares, at an average price per share of approximately $27.20. And we have approximately $53 million remaining under our current board authorization.

With that, we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) We will go to the line of Jessica Reif-Cohen, Merrill Lynch. Go ahead.

Jessica Reif-Cohen - Merrill Lynch

Thank you. I have a couple of questions -- the first one is given your balance sheet, would you consider a dividend?

Jeffrey Katzenberg

Are you going to give us all the first?

Jessica Reif-Cohen - Merrill Lynch

Do you want them all? I’ll give them all.

Jeffrey Katzenberg

No, I’ll give you -- there is no -- we have not considered taking such an action right now and I think that like all businesses in the world right now today, having a strong balance sheet we consider a very important and valuable asset of the company and obviously we are going to continue to watch very, very carefully the world economy, the domestic economy, and most of all to keep DreamWorks Animation in a very, very strong position in terms of being well-financed. So we feel very comfortable where we are right now.

Jessica Reif-Cohen - Merrill Lynch

Okay, sounds like no dividend. I have three more questions, just so you know -- the next one is could you discuss what the foreign exchange impact was on the third quarter and any comment on what a strengthening dollar will mean for you guys?

Jeffrey Katzenberg

In the third quarter, I don’t know, Lew, is there any specific impact for the third quarter?

Lewis W. Coleman

You know, I don’t think there’s a big significant impact in the third quarter. The foreign exchange rates weakened obviously in September but were fairly -- remained fairly strong in June and July, so off the top of my head I don’t think there was a big effect.

Jeffrey Katzenberg

And I think the variable will come more now in the fourth quarter here with the release of Madagascar into worldwide theatrical as well as the Kung Fu Panda DVD on a worldwide basis. And we are seeing two impacts on it -- one, our costs, we are seeing some savings coming through on the cost side of it and also seeing impact on the revenue side of it.

I would think that in looking at Madagascar, we would still suggest that the way to look at the international theatrical business, certainly in this next six months, is to look at it pretty much on the same basis that we have over the last two to three years, which is if you use about a 1.5 multiple on our domestic number, we still feel like that’s going to very much fall within the range for us.

Jessica Reif-Cohen - Merrill Lynch

All right, and then I was wondering if you would let us know how many shares does David Geffen and his charities control?

Jeffrey Katzenberg

Somebody will scramble to get that information for you, Jessica, because it’s not something --

Jessica Reif-Cohen - Merrill Lynch

Okay, so while you are looking, the last question I have is about Bee Movie -- the [inaudible] was surprisingly high and I was just wondering, did you lock into that before the movie was released?

Jeffrey Katzenberg

Yes.

Jessica Reif-Cohen - Merrill Lynch

Okay.

Jeffrey Katzenberg

Yes, there was both pay TV and a network TV sale that were made in advance of release of the film that were affected by the performance.

Lewis W. Coleman

Jessica, back on your question about David’s share holding, at the end of the quarter, David held about 5.75% of the stock, which had about 22.16% of the voting rights because of the B shares.

Jessica Reif-Cohen - Merrill Lynch

So should we expect you guys to buy this or come on to market?

Lewis W. Coleman

No, I don’t think you should -- I mean, obviously David can do what he wants. David is bound by a shareholder agreement between he and Jeffrey which we have filed in the past, which specifies that neither of them will reduce their shares beyond a point where combined, there is less than 50% of the voting stock. And that shareholder agreement is still in effect.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Operator

Next in the queue is Barton Crockett from J.P. Morgan.

Barton Crockett - J.P. Morgan

Okay, great, thanks for taking the question. I was wondering if you could comment on the economic environment in DVD sales -- did you see anything in the DVD sales in this past quarter that suggests any impact from the economy or not? And then as you look at Panda, how do you think about the economic impact there and also the competitive situation? You know, it doesn’t look terribly competitive except for WALL•E the next week but if you could comment on that, that would be great. Thanks.

Jeffrey Katzenberg

I think we start with the DVD sales so far to date in this quarter I think have held up very well and we have seen good performance by the big titles. And as -- so far, the DVD market has performed well. In terms of Kung Fu Panda, we think it’s well-placed, got a great date, it’s a strong property, seems to have a very good appeal in terms of our market research and we are cautiously optimistic.

Barton Crockett - J.P. Morgan

Okay, that’s great. And then I was intrigued by your comment about 3D, that you are confident that you will have I think essentially enough screens to have a valuable proof of concept for the industry as a whole for Monsters Versus Aliens. Could you elaborate on what you mean by that? Is that a way of saying that you think the 1,000 screens that we have now is enough to give you proof of concept, or do you expect there to be more screens?

Jeffrey Katzenberg

I guess what I would say is that yes, there will be more screens. There’s some good continued progress that is being made, particularly on the DCIP front but obviously financing in today’s market is very different than anybody anticipated three or six months ago. So I do expect that there will continue to be installations made and I guess all I was saying in terms of proof of concept is this is a long-term commitment and a long-term strategy for DreamWorks Animation. As you know, our investment on a per property basis is about $15 million or so. We feel that the upside opportunity on Monsters Versus Aliens will more than cover that opportunity [as they are two more than cover that] incremental investment we’ve made.

But the real home run for this is as there is deeper penetration and we get up into the place where I expect by the time Shrek comes out, Shrek 4 comes out 15 months later, where 70%, 80% plus of our admissions can and will be in 3D. It will be a very different environment a year or two later.

So it’s not ideal. We wish there would -- we would have reached much, much higher deployment by the time of the release of MVA but as I said, it’s still I think an offer very, very good opportunity to launch this whole new generation of movie-going.

Barton Crockett - J.P. Morgan

Okay, that’s great. That’s helpful. I’ll leave it there. Thanks a lot.

Operator

Ingrid Chung, Goldman Sachs.

Ingrid Chung - Goldman Sachs

Thank you. Good afternoon. I have a few questions, the first one is following up on your comments on Bee Movie, it sounds like there’s no change to your view on ultimate profit for the film and I just wanted to check if that is the correct assumption.

And then the second question I had was I was wondering if you could talk about Shrek the Musical advanced ticket sales and how those are trending, and if Shrek the Musical is successful, what would be the next property that you think would fit naturally to adapt for Broadway?

And then lastly, I was going to ask about merchandising for Panda and Mad 1 in terms of home video -- do you see big box retailers like Walmart using it as a major traffic driver for Christmas?

Lewis W. Coleman

On Bee Movie, most of the big revenue windows have been hit now and so we have a pretty clear picture of where the profitability is, and I did say profitability. So we are comfortable even though it’s low margin that there is no write-off on Bee Movie.

The other thing going on with Bee Movie is that when we have to look at a write-off, we have to discount the cash flows. When we don’t write it off, we don’t discount the cash flows and so there’s been enough room in Bee Movie to produce a low margin but a reasonable amount of profit. So I don’t expect to see anything other than what you have seen to date.

Jeffrey Katzenberg

On to the Shrek musical, the pre sales to date are what I would think is sort of characterize as on track and what I mean by that is that we are just getting into the holiday sales season and it’s really too soon to be really predictive of what that is going to mean in the long run, but they are solid. And you know, we are excited about the show and we are looking forward to getting it on its feet and our preview is in about 10 days or so.

You know, I think this world is no different than any other these days, which is the proof is in the pudding. When the show is up and running, if people like it, the word of mouth is really going to determine ultimately the level of success that it enjoys.

And as to a next property to be honest, we want to get one up and successful and before we charge on to the next one, and it’s a very, very big and demanding enterprise. It’s been a very significant effort by the whole company, particularly Bill [Dinaski], who runs creative for DreamWorks Animation, has really devoted a tremendous amount of his time on the show and I think the results are going to be more than worth that investment. But as I say, we really want to get a hit under the belt before we worry about the next one.

In terms of your question about Madagascar 1, it will be marketed, the DVD will be marketed at retail as part of our Madagascar 2 and Kung Fu Panda push into the home video marketplace in the fourth quarter. That’s one of the great things about these sequels, is that there’s a halo effect that is created and we certainly expect to see a real up-tick on our Mad 1 DVD sales.

Ingrid Chung - Goldman Sachs

Okay, great. Thank you.

Operator

David Miller, Caris & Company.

David Miller - Caris & Company

Good afternoon. Lew, two questions for you and then a follow-up for Jeffrey, if I may -- the $64 million in revenues that you recognized primarily from international box office receipts of Panda, are you pretty much done there? Should we expect any more flow-through into the current quarter or are you pretty much done? And then also, were there any [inaudible] fees rather recognized in the quarter? And then I have a follow-up, thanks.

Lewis W. Coleman

David, there were no [tap-wear] fees recognized in the third quarter, and I think I indicated that we had recognized approximately $385 million of international receipts on Panda, which represented 93% of the total receipts to date, so you’ve got about 7% additional, plus there’s some dribs and drabs filling out there. So --

David Miller - Caris & Company

Okay, wonderful.

Lewis W. Coleman

-- been recognized, there’s little pieces coming in the fourth quarter.

David Miller - Caris & Company

Okay, great and then also Jeffrey, I think it might have been two quarters ago, maybe it was last quarter, where you were at least rhetorically prognosticating a $5 up-charge for Monsters Versus Aliens. Just given the current environment, given the overall murkiness surrounding DCIP, do you still think that’s realistic? Are you still lobbying for $5? Do you see smoothing that down to perhaps $3 or $4? Just curious as to your thoughts there. Thanks.

Jeffrey Katzenberg

Well, David, I think everything is different today than it was six months ago for all of us and we are not ignoring things that are going on in the marketplace. Having said that, there are several other things that we look to to give us some indication as to whether that $5 premium is going to hold up. There’s a very big Disney release in Bolt coming in 3D later in November and there’s some -- you know, we continue to watch closely what is happening with IMAX, which has been playing very, very strongly in the last couple of months. As you know, that’s a much more significant up-charge than $5.

And so there are places and things and events for us to closely monitor that I think will be good indicators to us. My hope is that we are offering the consumer an experience that is exceptional, significantly beyond anything they have experienced in a movie theater before and I am hoping they will see that value and value it as we do, as a $5 premium.

David Miller - Caris & Company

Thank you.

Operator

Michael Morris, UBS.

Michael Morris - UBS

Thank you. On the international distribution, I believe that your take is less in terms of the total box office receipts in percentage terms relative to what you take in the U.S. Is that accurate and if so, can you maybe give us some details on how that breaks down and whether that is something that you think could change over time in your favor or if it is something pretty static?

And then second of all, I think you mentioned Shrek the Halls in your prepared remarks. I think it contributed about $25 million in revenue last year. What’s your expectation for this year? Thanks.

Jeffrey Katzenberg

So on the first one, Michael, international tends to settle in the low 40% area, in the 40, 41, 42% film rental, which is 10 points lower than what we tend to see out of the domestic market. That’s not changed. That’s held fairly consistent now the last 24, 36 months. We don’t see any big change in that looking forward for the next 12 months.

In terms of Shrek the Halls, I don’t know --

Rich Sullivan

Mike, I think when we -- we actually haven’t disclosed a specific number for Shrek the Halls but I think in the quarter that was reported, it made up roughly about half of the other income and that quarter was around $50 million, so it would put it in the low 20s, if that’s what you are looking for. But we haven’t specifically disclosed that relationship.

Jeffrey Katzenberg

And just in terms of how it is going to, what to look for in the fourth quarter this year, the answer is we don’t know. This is new territory for us. It’s a very unique property and we are in a pretty strong push behind it but we really don’t yet have any real insight as to what its performance is going to be.

Rich Sullivan

Mike, just one other point there -- obviously it’s going to be driven by whatever that title does in home video. It’s important to remember that with ABC, we split those home video units with ABC, so --

Jeffrey Katzenberg

The revenue from it.

Rich Sullivan

The revenue from it.

Michael Morris - UBS

Is there a certain threshold before you start taking revenue on that?

Jeffrey Katzenberg

No.

Michael Morris - UBS

Okay.

Operator

Ralph Schackart at William Blair.

Ralph Schackart - William Blair

Good afternoon. Two questions, one for Jeffrey, one for Lew; Jeffrey, there seems to be some debate on how meaningful the Blu-Ray cycle is going to be in the eyes of digital distribution. Just curious since player price points are coming down and the PS3 is rolling out more so on a worldwide basis, any early reads on the cycle, how it’s progressing from your vantage point?

And then for Lew, I’m just looking at D&A of $10 million plus in the quarter. For modeling purposes, will this be a good estimate to use going forward until the campus remodeling project is completed?

Jeffrey Katzenberg

On the Blu-Ray front, the good news is it is growing, certainly bringing down the cost of these units into the fourth quarter I think is going to be a big boost for the platform. We have what we think is going to be an outstanding offer on Kung Fu Panda in Blu-Ray, so we are very supportive of it. We’ve seen some meaningful sales of Blu-Ray on Iron Man and so again, it’s -- can’t quite see yet where it all leads but certainly the indications to date have been very positive for it.

Lewis W. Coleman

Ralph, I’m not sure I understood your question exactly because I’m not sure where the 10% came from. Could you repeat it?

Ralph Schackart - William Blair

$10 million in absolute dollars.

Lewis W. Coleman

For SG&A?

Ralph Schackart - William Blair

For depreciation and amortization.

Lewis W. Coleman

Yeah, it’s going to be a little lumpy here. Part of what happened is that as we have remodeled some of our older buildings, we’ve had to write off the unamortized portion of depreciation. Conversely, as we build new buildings, we will eventually sort of increase our depreciation so I think the way to think about it as sort of a gentle u-curve here over the next five or six quarters.

So a little bit higher because of some demolition expenses this time, and then it will take a little while before the campus construction sort of catches up with higher depreciation in maybe three or four quarters. So that’s how I would think about it.

Ralph Schackart - William Blair

Great, that’s helpful. Thanks, guys.

Operator

Drew Crum, Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Thanks. Good afternoon, everyone. Jeffrey, I wonder if you could comment on the expected screen count for Madagascar 2 in the domestic market and just your overall strategy in terms of the international release schedule?

Jeffrey Katzenberg

Sure. I would say right around 7,500 prints will be playing in about 4,000 locations, which is really sort of the pattern for a super high release this time of year. And internationally, we have -- it will roll out between actually this weekend, in which we start in Russia, and we will roll out throughout the year. And with many of the big international territories falling in the late November, December period.

You know, one of the things that did happen to us I think people noted is that Harry Potter moving out of the marketplace, which is obviously had very -- a big impact for us here domestically, that the bigger impact actually is internationally where the Potter franchise remains really the top of the top and their moving out of the Christmas holiday period has left a very big void there, and one that we have done our very best to fill for them.

Drew Crum - Stifel Nicolaus

Okay, thanks. And on the SG&A line item, it was near $30 million in the quarter. Is that a fair run-rate going forward? I know there’s a lot of moving parts in that number this quarter but just kind of a normalized run-rate on a quarterly basis, your expectations there?

Lewis W. Coleman

Drew, you know, the line has been growing but you saw a bit of a jump this quarter. Part of that jump was a couple of the unusual items that I called out for about $2 million. But I do expect, given our investment in some of the new businesses and ultimately given our investment in some of the new buildings, I expect that to sort of continue to increase more like it did in the first, second quarters than necessarily what you saw in the third quarter.

So a little bit higher growth rate in the third quarter than I would build in going forward but I would build in a growth rate.

Jeffrey Katzenberg

And Drew, what I would add is that we have, as I think you know, an investor meeting in December in New York and I think one of the priorities for us at that meeting will be to really give everybody a sense of these new business initiatives that we have ongoing here in this and I think that will help give people a better sense of where our SG&A is, because for our primary production of our movies and the running of our business, you know, we remain -- our SG&A is actually remaining pretty stable and the places where there is growth are really more reflective of some of these new business opportunities, which as I say we’ll give some detail on when we see you in December.

Drew Crum - Stifel Nicolaus

Okay, thanks.

Operator

Tuna Amobi, Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

Thank you very much. I have three questions as well. I guess I should take them one at a time or I can go at all of them at the same time.

Rich Sullivan

Fire away.

Tuna Amobi - Standard & Poor’s

All right. So the first one is on Panda -- given the international box office ratio, it seems like it has the highest international ratio to date of all of your films. So I’m just kind of wondering, any lessons that you learned? What would you attribute to that success and what lessons do you think it can replicate here for some of your other titles?

The second question would be on 3D -- I was wondering if we can get an update on where you stand currently with the $85 million you talked about, and if you foresee that your investments in 3D, given the efficiencies that might accrue, do you foresee that could lead to ramping up the number of films that you produce on a yearly basis?

And lastly, perhaps for Jeffrey, I was wondering if perhaps you can comment on the Paramount relationship, given what has happened with DreamWorks and signing with Universal. I realize that you have a few more years with Paramount so I’m just kind of wondering if you can update us on how you think about that relationship and any possible other considerations you might be considering at this time.

Jeffrey Katzenberg

Great. Okay, so let me start with the last question first, which is the Paramount relationship for DreamWorks Animation -- remains very strong. They have done an outstanding job in servicing the distribution of our product, as I think seen by the results. You know, they have a very, very strong marketing and distribution organization there and they have supported DreamWorks Animation in a first-class manner. And we expect them to continue to do so going forward and we do not anticipate any change in the relationship with Paramount. Again, I just have to say they have done an excellent job for us and they have treated us well.

On to Panda, I think that if you actually go in there and sort of dissect it a bit, what we have seen is something unique about this particular title, which is that it has played outstandingly throughout Asia, stronger than any of our other films have and that does to a very large degree represent the unique performance of this movie at a higher multiple. You know, this is at about 1.8 or 1.9 times our domestic performance, where our other movies have played more typically in the 1.5 to 1.6 or 1.7. As I say, primarily this came from Asia, in particular China, which typically on our movies we would take in $3 million, $4 million, maybe $5 million range in terms of gross in China. This one was -- it’s the third biggest non-Chinese title in the history of China, so it was exceptional, in the high $20 million, so I guess maybe we should make more Asian themed movies.

And then your second question? I’m sorry.

Tuna Amobi - Standard & Poor’s

The second question was on 3D -- well actually still on the answer you just gave, so it seems like China was a big part of that story, right? Is there anything to do with the release of [inaudible] beside --

Jeffrey Katzenberg

No, I think it’s the subject matter here. This was a movie that our filmmakers and artists actually made as a love letter to China and fortunately it was received just that way, and I am sure Kung Fu Panda 2, they are very much looking forward to. In fact, we just came back from a trip to China with the creative team. They were there last week and received as heroes.

Tuna Amobi - Standard & Poor’s

Okay.

Jeffrey Katzenberg

So I just think it’s the uniqueness of that title.

Tuna Amobi - Standard & Poor’s

All right, and the last question was on the 3D ramp-up and the number of films.

Jeffrey Katzenberg

Well, we continue on track. All of our titles, starting with Monsters Versus Aliens, are being authored in 3D and as I say, we continue to believe very, very strongly in the long-term value in this new platform and think that it is going to have meaningful benefit and value to us, both to our margin as well as to our gross profit.

Tuna Amobi - Standard & Poor’s

Sorry, Jeffrey, the question was more like do you think that the number, that your 3D investment -- first of all, I would like to get a sense of where you are with the spending and also, do you see the efficiencies that will help you to ramp up more than two films a year in the future?

Jeffrey Katzenberg

No, I don’t see that yet, so --

Rich Sullivan

And Tuna, if you are talking about where we are in the spending, I am assuming you are referring to the $85 million we talked about for the --

Tuna Amobi - Standard & Poor’s

Correct.

Rich Sullivan

Yeah, I’ll turn that question over to Lew but I think roughly, I believe we are about $12 million through the 85 by the end of the quarter.

Tuna Amobi - Standard & Poor’s

All right, great. That’s very helpful. Thanks a lot.

Operator

Jake Hindelong, Monness, Crespi, Hardt.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Good afternoon. Just a couple of quick questions -- first, could you comment on the timing of the Kung Fu Panda home video release internationally? And if you look at the first two quarters of the release, about how much of the revenue do you think would be split between the fourth quarter and the first quarter?

Jeffrey Katzenberg

So the release internationally starts in November and pretty much in the major territories is November, December and a few important territories come in January. Mexico, November; Netherlands, November; U.K., mid-November; Brazil, mid-November; Germany, mid-November; Spain, end of November; Denmark, Italy, Finland, Norway, Sweden, Australia, Japan are all in December and France is in January.

Lewis W. Coleman

Don’t forget the December --

Jake Hindelong - Monness, Crespi, Hardt & Co.

It’s on a one-month lag, correct?

Lewis W. Coleman

Yeah, we’ll still on a one-month lag, so the December won’t come in in this year.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Got it. Okay, and then just separately, as far as the Blu-Ray discussion is concerned, haven’t heard much about Shrek 1 and 2 on Blu-Ray. What are your expectations there?

Jeffrey Katzenberg

No plans yet.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Very good. Thank you.

Operator

James Marsh, Piper Jaffray.

James Marsh - Piper Jaffray

Two quick questions here -- first on Kung Fu Panda home release, any sense of what you think the mix in units might be between Blu-Ray and DVD? And then if you could just comment on where the Blu-Ray pricing for Kung Fu Panda will be. I think you mentioned 23 for the DVD.

And Lew, just quickly on the tax rate, it looks pretty low there. I was just wondering if you could address what that might look like going forward.

Lewis W. Coleman

Let me do the tax rate -- the $0.03 really came about because we re-filed a prior year’s return based upon the fact that we had done a study on R&D credits, found out that we had more R&D credits to take than we took. So in some respects, you can consider that a catch-up, assuming we don’t change our rate of R&D. And I guess on a little basis, we will continue R&D, so we’ll continue to get some of that tax credit.

You’ve got to remember that we have to pass our taxes through the Vulcan sharing agreement so partly what you see in the tax line and partly what you see in Vulcan needs to be added together to see what the real tax rate is, quote unquote.

Jeffrey Katzenberg

And on the Kung Fu Panda home video, I don’t think that Blu-Ray will be a meaningful percentage of our sales. Again, it’s a growing platform and we are pricing it aggressively to support the platform. And in terms of -- I think you were asking about the standard release pricing, is that what you are asking?

James Marsh - Piper Jaffray

Right. I think you mentioned that the DVD was going to be priced at $23 and I kind of assumed that it would be $30-ish, but I just wanted to double-check.

Jeffrey Katzenberg

That’s the two-pack, the double pack with the Furious Five. We expect the price to be somewhere in the $20, $25 range, mid-$20 range in that. So for the single disc, it will be under $20.

James Marsh - Piper Jaffray

Okay, and then just one last follow-up -- Jeff, you mentioned IMAX pricing, and I was just wondering, you are going to be releasing these movies in IMAX, I presume, and then assuming you do, how do you see that theatrical food chain kind of evolving as digital 3D gets rolled out in more scale?

Jeffrey Katzenberg

Well, I think it’s going to continue to be the IMAX has actually started to grow in value and importance, particularly as they have digital. Because the real gating issue for IMAX to date has been the cost of a film print. It costs $45,000 to make a print for the theater, so there was just a huge investment that you had to make on the distribution side, and so it made the profitability, the return on investment of IMAX in the past has been a little sketchy. And now that they are converting to and rolling out their new screens digitally, it becomes a much, much more powerful and valuable platform.

People like seeing these movies in these special presentations and to date, the reaction that we’ve been getting to the 3D work that we are doing here is exceptional. People are really blown away by this. It is unlike anything that they have seen and it is more than they are expecting.

So I think this is actually a very hopeful sign in terms of the potential for the theatrical experience and the theatrical exhibition business as a whole.

James Marsh - Piper Jaffray

Great. Thanks very much.

Operator

Richard Greenfield, Pali Research.

Analyst for Richard Greenfield - Pali Research

This is [Ari Danes] for Rich. Thanks for taking the question. So back on 3D again, and I apologize if you actually gave an updated number, but in the past you have talked about 2,500 to 3,000 3D screens up and running by the time Monsters Versus Aliens opens. Given what’s going on today, can you give us an updated number on where you think you might be by the time the movie opens?

And then I have one more. Do you want me to --

Jeffrey Katzenberg

Well let me just tell you, we don’t have any update on that. Our distributor continues to feel that that is an achievable number. At the same time, there are things that are going on with DCIP and the financing of that that have lagged in terms of hitting some scheduled dates. So far, not in a way that would jeopardize the 2,500 screens but it’s not a done deal and so we are cautious about it.

Analyst for Richard Greenfield - Pali Research

And then --

Jeffrey Katzenberg

I mean, having said that, there are right now in the marketplace today over 2,000 3D screens on a worldwide basis. There are about 1,400 or so domestically right now.

Analyst for Richard Greenfield - Pali Research

Great. And then secondly, can you just give us a quick progress report on the Penguins Nickelodeon series and when you expect the show to debut?

Jeffrey Katzenberg

The show is well into production. We’ve seen finished episodes of it. It looks spectacular. I know that Nickelodeon is very pleased and very excited about it and I think their expectations are to launch it towards the end of the first quarter of next year.

Operator

Doug Creutz, Cowen & Company.

Doug Creutz - Cowen & Company

Thanks. Could you comment on whether Activision has the videogame rights to Kung Fu Panda 2? And also more generally, when do you need to have a videogame partner secured for your 2011 films so they have enough lead time for development? Thanks.

Jeffrey Katzenberg

Activision does -- we do have a deal with Activision for Kung Fu Panda 2, and so that takes care of our 2011 release. We’re right on schedule. And I believe all of our titles through Kung Fu Panda 2 have a videogame deal done -- announced. Done and announced, right? I think so. I know so.

Doug Creutz - Cowen & Company

All right. Thank you.

Operator

(Operator Instructions)

Rich Sullivan

Well I guess we have no more questions, so that concludes today’s third quarter earnings conference call. I would like to remind everyone that a replay of this call will be available shortly and accessible on DreamWorks Animation website -- that address again, www.dreamworksanimation.com. If you have any additional questions, please feel free to contact DreamWorks Animation investor relations department. And with that, I thank you again for participating and have a great evening.

Operator

That does conclude the call for today. Thank you for using the AT&T executive teleconference service. Please disconnect at this time.

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