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DreamWorks Animation SKG, Inc. (NASDAQ:DWA)

Q4 2008 Earnings Call

February 24, 2009 4:30 pm ET

Executives

Rich Sullivan - Investor Relations

Jeffrey Katzenberg - Chief Executive Officer, Director

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

Ann Daly - Chief Operating Officer

Analysts

Drew Crum - Stifel Nicolaus

Michael Morris - UBS

Richard Greenfield - Pali Capital

Ralph Schackart - William Blair

Ingrid Chung - Goldman Sachs

Jake Hindelong - Monness, Crespi, Hardt & Co.

David Miller - Caris & Company

Doug Creutz - Cowen & Company

Vasily Karasyov - J.P. Morgan

Barton Crockett - Lazard Capital Markets

Tuna Amobi - Standard & Poor’s

Robert Fishman - Banc of America

Brian Shipman - Jefferies & Company

Operator

Ladies and gentlemen, thank you for standing by and welcome to the DreamWorks Animation earnings conference call. (Operator Instructions) I would now like to turn the conference over to our host, Mr. Rich Sullivan with Investor Relations for DreamWorks. Please go ahead, sir.

Rich Sullivan

Thank you. Good afternoon, everyone and welcome to DreamWorks Animation’s fourth quarter 2008 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 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 the 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 may vary 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 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 would like to now turn the call over to DreamWorks Animation President and Chief Financial Officer, Lew Coleman. Lew.

Lewis W. Coleman

Thank you, Rich and good afternoon, everyone. I would like to highlight a few items before handing it over to Jeffrey. In the fourth quarter, the company reported $200 million of total revenue resulting in net income of $52 million, or $0.58 per share on a fully diluted basis. This brings the company’s 2008 revenue to $650 million and net income to $142 million, or $1.57 per share. While the blockbuster success of Shrek the Third in 2007 makes the year-over-year comparison difficult, it’s important to note that 2008 was our most successful non-Shrek year as a public company. In fact, box office receipts from Kung Fu Panda and Madagascar: Escape to Africa together exceeded $1.2 billion, a 12% increase over our 2007 total.

Of the $200 million of revenue in the quarter, Kung Fu Panda contributed $102 million, or about half, primarily from its release in the home video market. Through the end of 2008, we sold approximately 11.2 million units of Panda worldwide, exceeding the guidance we gave on our December analyst day. This number excludes approximately 0.5 million units shipped to two customers that subsequently declared bankruptcy. Several key territories, including Italy, the Nordic region, Australia, Japan and France were not released prior to December and will be reflected in the first quarter of 2009.

Our second theatrical release of 2008, Madagascar 2, has now reached over $580 million of worldwide box office. The revenue effect of approximately $250 million of this box office was recognized in the fourth quarter. As a result, the title was recouped and contributed $24 million of revenue, including consumer products and the normal cost reimbursement from our distributor.

Over The Hedge, the company’s 2006 summer release, contributed approximately $23 million of revenue for the quarter, primarily from domestic network and international free television.

The company’s remaining films contributed $43 million of revenue, largely driven by strong catalog home video performance.

Additionally, Shrek The Musical and Shrek The Halls contributed approximately $8 million of revenue to the quarter. Through the end of 2008, Shrek The Halls sales approximate 1.8 million units on a worldwide basis net of returns.

Costs of revenues for the quarter equaled $117 million and it’s important to note that many of the new business initiatives we discussed are having and will continue to have an impact on our financials. In fact, almost 20% of this quarter’s cost of revenue is unrelated to film amortization and represents costs associated with initiatives like Broadway and India, as well as ongoing film development expenses.

In addition, product development, primarily associated with the start-up of our virtual world, is now impacting our costs, totaling approximately $1 million for the quarter.

Lastly, because of the dramatic change in market conditions due to the economy, we updated our Kung Fu Panda ultimate accordingly. While our ultimates are continuously updated as the normal course of business, the severity of the market changes made this quarter’s change larger than is typical, so while the title performed very well relative to others in the market, the economic conditions of the last few months were not anticipated when we amortized the costs for the film earlier in the year. This resulted in a one-time amortization catch-up of approximately $8 million reflected in this quarter’s cost of revenue.

Moving on to the remainder of the income statement, selling, general and administrative expenses for the quarter totaled $28 million, including approximately $9 million of stock compensation. And interest income was $2 million, bringing the total interest income for the year to $9 million.

Taxes for the quarter included a benefit of approximately $11 million relating to the resolution of a prior year’s FIN-48 tax reserve, and resulted in an EPS benefit of approximately $0.12.

Total diluted shares outstanding for the year were approximately $91 million and there were no additional repurchases in the fourth quarter.

For the full year 2008, we repurchased 6.8 million shares for $185 million and we have approximately $50 million remaining under our current board authorization.

Turning to the balance sheet, the company ended 2008 with $263 million in cash and cash equivalents. In the year, we spent approximately $20 million on our campus expansion and plan to spend between 70% and 80% of the remaining $55 million in 2009.

Looking ahead, the first quarter of 2009 will be driven primarily by Madagascar 2’s international box office and domestic home video. The title was released on home video in the U.S. on February 6th and results for the first three weekends were very strong. In fact, the title sold approximately 5 million units in the domestic market through last weekend, making it the largest release of the year by far.

Because of its box office level and the fact that it’s a sequel, we would expect this title’s initial release to track below that of Kung Fu Panda.

However, its success to date is a clear indication that the home video market for our product remains encouraging. It’s also important to note that due to the title’s home video release schedule, the majority of the international initial release will be recognized in the second quarter. I am happy to say though that the only international territory that falls in the first quarter, Mexico, has performed quite well. The remainder of the year will largely be determined by the performance of Monsters Versus Aliens which opens in the U.S. on March 27th.

As you know, the film is the company’s first 3D theatrical release and we believe there are sufficient screens available worldwide to reach the attendance levels necessary to make a good return on our investment. Moreover, we’re optimistic about the film’s performance in traditional CG as well.

In closing, Madagascar 2’s success has positioned the company well headed into 2009, and coupled with a strong performance from Monsters Versus Aliens, it’s possible for us to achieve year-over-year growth in earnings.

With that, I will turn it over to Jeffrey.

Jeffrey Katzenberg

Thanks, Lew. Good afternoon, everyone. I have a few additional remarks and then we’ll get right to your questions. As Lew pointed out, 2008 was a very successful year for DreamWorks Animation. In fact, it was the second best year in box office performance in the company’s history following very closely behind 2004 when we released Shrek 2, the highest grossing animated movie of all time and the third highest grossing movie of all time.

To me, our greatest accomplishment in 2008 was the consistency in our film performance, a goal we’ve been striving very hard to achieve. Kung Fu Panda and Madagascar 2 finished in the third and seventh best -- as the third and seventh best performing films for the year. Kung Fu Panda, our most successful original film ever, surpassed $630 million, $415 million of which came from overseas.

Critical acclaim was also overwhelming for the title -- it broke records as the animation industry’s Ani Awards all-time highest-nominated film and then won 11 categories, including best picture, best directing, and best lighting.

On November 9th, we released Kung Fu Panda into the home video market, where it became the third best-selling title behind only The Dark Knight and Iron Man, giving it one of the year’s very best box office to DVD conversion ratios. We believe its strong performance is an indication of a few things.

First, consumers uniquely appreciate and highly value our titles and recognize them as must-own purchases. And second, CG product continues to perform well despite cyclical factors that have weighed on the home video market as a whole.

Our second box office blockbuster of 2008 was Madagascar 2, which to date has reached approximately $180 million domestically and over $400 million internationally. Its worldwide gross will continue to grow when it’s released in Japan on March 14th.

On February 6th, we released the title into the domestic home video market and it has been the year’s biggest release so far and we expect it to remain among the top selling titles of 2009.

So despite the weakened economic environment, our product continues to perform well at the box office and in home video. Our performance in 2008 has positioned us nicely for future strength and has also solidified our franchise strategy for years to come. With the addition of the Kung Fu Panda franchise, we are now in a position to release sequels in 2010, ’11, and ’12.

We talked at length about how our franchise building strategy can deliver a great deal of value to the company and we saw examples of this throughout 2008. Most recently, Shrek The Musical opened in December in New York City. We are pleased with its performance to date, particularly over the past few weeks, as ticket sales have continued to grow. We also saw great success in our TV specials business, with the network re-airing of Shrek the Hall and its strong performance in the DVD market. In 2009, we are working to extend the reach of our other franchises on television.

In addition to our Madagascar Penguins series produced for Nickelodeon, which airs next month, we expect to air four TV specials this year -- Secrets of the Furious Five in two days from now; a Monsters Versus Aliens Halloween special; a Madagascar Christmas special; and then the return of Shrek The Halls.

As you can see, we are well on our way with many of the new business initiatives we presented to you at our analyst day this past December. We think that each and every one of these new initiatives have the potential to drive both meaningful revenue and earnings growth.

As Lew pointed out, we have already begun spending on a number of these new areas which has had an impact on cost in the fourth quarter. And while these additional costs will continue for the next several quarters, we expect that as early as the fourth quarter of this year, 2009, we will begin to see incremental revenue and profit from several of these investments. We are confident that the future upside and growth opportunities from these initiatives will result in a significant return on the investments we are making today.

Looking ahead to our next big event, Monsters Versus Aliens opens domestically on March 27th in both 3D and traditional CG, delivers the cutting edge animation, subversive comedy and all-star voice talent that DreamWorks Animation audiences have come to know and love. It offers moviegoers a brand new, very exciting in-theater experience which we believe will reset the bar for what to expect from a CG animated film.

Monsters Versus Aliens is the very first feature film we are releasing in 3D and the first film that has been entirely authored in 3D from its inception. Of the more than 7,000 screens on which it will play. We anticipate in excess of 2,000 3D screens to be available by March 27th, including 147 in Imax. We believe this number will be more than enough to allow our film to serve as a proof of concept and to propel the new format forward.

So far, 2009 is off to a great start for DreamWorks Animation -- we are firing on all cylinders and looking forward to a busy and productive rest of the year.

With that, we will open this up for questions. Rich.

Rich Sullivan

Great. Operator, please provide the instructions for allowing a question and we will take our first question.

Question-and-Answer Session

Operator

(Operator Instructions) First we go to the line of Drew Crum with Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Thanks. Good afternoon, everyone. Just a question on Monsters Versus Aliens -- Jeffrey, any update on presumed ticket premiums for the film, and just give us a sense as to your expectations for P&A spend -- is it going to be consistent with the notional model?

Second question, I just want to get a sense as to the catalog sales on Madagascar, given the sequel release in the fourth quarter. And then finally, just a housekeeping item -- expectations for D&A in 2009? Thanks.

Jeffrey Katzenberg

Okay, so let me see here -- P&A spend in line with previous releases, so no change on that. In terms of pricing on 3D, we still anticipate that in most of the market, not just domestically but also internationally, there will be a meaningful up-charge. We expect it to be in the $5 for the domestic market.

And then Ann, do you want to talk about the Mad catalog sales?

Ann Daly

Madagascar 1 catalog sales were very strong for us, primarily in the fourth quarter around the theatrical release. There were programs that were in place in the first quarter but most of the volume came last year with the theatrical release.

Drew Crum - Stifel Nicolaus

Have you seen any pick-up since you released the sequel?

Ann Daly

On the catalog?

Drew Crum - Stifel Nicolaus

Yes.

Ann Daly

Yes, we have.

Jeffrey Katzenberg

Good, and then the last one here -- somebody was scrambling.

Rich Sullivan

Drew, you asked a question about --

Drew Crum - Stifel Nicolaus

Depreciation and amortization for 2009.

Rich Sullivan

Yeah, I assume that when you asked that question, you’re not talking about film amortization, you’re talking about non-film amortization?

Drew Crum - Stifel Nicolaus

Correct.

Rich Sullivan

Mostly it’s just the building and the capital expenditures. Though while we are doing some campus expansion, which will start to hit, it should be fairly consistent year over year.

Drew Crum - Stifel Nicolaus

Okay. Thanks, guys.

Operator

Next we turn to the line of Michael Morris with UBS. Please go ahead.

Michael Morris - UBS

Thank you. You referenced the DVD sales of Madagascar 2 at about 5 million units through last weekend. Can you share how that compares with another film, say Kung Fu Panda, through the same period?

And then also with the $8 million amortization catch-up you referenced, what kind of impact does that have on the margin for Kung Fu Panda and how should we be thinking about margins going forward kind of relative to historical titles? Is it -- should we be taking several hundred basis points out of our assumed margins for these films in the future? Thanks.

Jeffrey Katzenberg

Okay, so Michael, what I think we’ll do is have Ann Daly first talk to the Madagascar 2 DVD release and then Lew will talk about the margins, so --

Ann Daly

The Madagascar 2 release initial sales through the first 10 days of release were almost on part with what happened with Kung Fu Panda. The sales that we are seeing now, the 5 million, probably will represent maybe anywhere from 65% to 75% of the total volume that we’ll see, primarily because it is a sequel, which is -- Kung Fu Panda was not, and also because Kung Fu Panda had the advantage of being in the holiday selling period. But all in all, we feel very, very strong out of the gate.

Jeffrey Katzenberg

I mean, Michael, again just to put it in perspective, the fact that in its first three weeks of sales would be on par with Kung Fu Panda, given that it’s a sequel, which are traditionally a step down, in a more difficult selling period in a more difficult market we though was very, very strong.

And Lew, do you want to talk about --

Lewis W. Coleman

Michael, the $8 million adjustment in the fourth quarter was essentially a catch-up of the second and third quarter over amortization, so if you look at it in the fourth quarter, the amortization resulted in a sort of catch-up margin. If you look at it for the whole year, you can sort of get an idea about what the margin was going to be. We don’t disclose margins but clearly the reduction in DVD volume has resulted in a decline in margins in our film ultimates.

Michael Morris - UBS

Okay, so that’s -- on a go forward basis --

Lewis W. Coleman

So what I’m saying is don’t take a run-rate off the fourth quarter because that would be incorrect, because a good chunk of it was catch-up in the second and third quarter. And to the overall question, should you be assuming slightly lower margins in this DVD market for our films in general, the answer is yes.

Michael Morris - UBS

Can you tell me approximately, say how much the margin came down on a normalized basis -- not the fourth quarter, but just as you look back to the second and third quarters?

Lewis W. Coleman

You know, we really don’t disclose margins and part of it is that we don’t necessarily allocate expenses among individual products, so it’s sometimes misleading to disclose the margins. I think it’s safe to say that margins are coming down, mostly due to the home video business and also a bit overall because as we swing into more international sales of settlement rates for the box office are a bit lower there, so as the mix changes in our business as we described in December, you’re beginning to see some decline in margins.

Michael Morris - UBS

Okay. Thank you.

Operator

Next we turn to the line of Richard Greenfield with Pali Capital.

Richard Greenfield - Pali Capital

One housekeeping point -- just on the $8 million, how do we think about what the proper effective tax rate is, just to think about what that one-time non-cash charge meant to your numbers? And then two, just a more fundamental question -- your stock has obviously been under quite a bit of pressure. You stopped buying back, or you did not buy back stock, I believe, Lew said in the quarter. What’s your thought process on share buy-back. I know you’ve been concerned about the float historically. Was it purely the environment that held you back from buying back the stock? What would make you think about it given where the stock is going, and then a larger structural question of as investors do not seem to be terribly excited about film businesses in the current environment for the DVD world, what are your options or what are you thinking about in terms of addressing the kind of valuation of your stock?

Jeffrey Katzenberg

Okay, so Lew, I’ll let you do the tax one and --

Lewis W. Coleman

Okay. Rich, the tax issue is a little bit difficult to characterize because on the one hand, we have clearly sort of had a fairly conservative tax position with reserves because you’ve seen some tax reserve changes for the last three or four quarters. This one I think I would think of as bigger than most, and in that respect, in terms of its size, it’s probably not quite as repeatable.

In terms of the share repurchase stuff, it turns out, particularly given the way we scheduled the investor conference, that we really didn’t have a clean time where we felt comfortable based upon what we knew and what we had disclosed to really get a bunch of share repurchasing done in the fourth quarter. Our attitude toward share repurchases remains unchanged. We think it’s still a good way to return money to the shareholders and we do think the price of the stock is particularly attractive today.

Jeffrey Katzenberg

So on my side, Rich, and just in terms of the overall issue of valuation, as you well know, we spent a fair amount of time out with the buy side the end of last year and again the beginning of this year. I think that there has been a tremendous amount of hesitation until there is greater clarity as to trends in our business.

What we have seen now in the past eight to 10 weeks since we met with on our analyst day, have been sort of two things. First I’ll take the theatrical window and say -- and just characterize the business from Christmas time to date as something around spectacular. The industry as a whole is up over 25% over these last eight weeks. Business could not be stronger, and it’s not up just in gross but it’s also up in admissions, something that I don’t think the movie business has seen for some time. And I believe that is a reflection of the marketplace and is the movie business behaving counter-cyclically, which it has done historically. So the box office is very, very strong and I think is going to end up being very opportune for the release of Monsters Versus Aliens and for the 3D platform.

Moving to the DVD market, where the greatest stress and the greatest anxiety has been expressed, we have now had two test points that have occurred, one of which we are disclosing for the first time today -- or actually, both of which we are disclosing for the first time today, which is that when we were with the both sell and buy side in December, we projected 10 million units, over 10 million units for Kung Fu Panda and in fact have come in over 11 million units, which again in this marketplace, we thought showed a very, very good strength for our product. And now secondly, here we are today with another test place for us, very specifically for the Madagascar 2 DVD, and -- which has to be characterized as very strong. And so these are the two kind of key components I think that the buy side have been looking for. I am hoping that they will have the same confidence out of this that we do and we certainly look at our stock today and think that it’s under-valued.

Richard Greenfield - Pali Capital

Is there any point where if you don’t get the return from shareholders that you would more actively think about strategic alternatives?

Jeffrey Katzenberg

I don’t think that’s a -- that’s too wide open a conversation, Rich, and I’ve got too many people waving at me in the room “don’t answer that!”.

Rich Sullivan

On that note, thanks, Rich. Next question.

Operator

Next we turn to the line of Ralph Schackart with William Blair. Please go ahead.

Ralph Schackart - William Blair

Good afternoon. A couple of questions, if I could; first, Jeffrey, just sort of from a big picture macro standpoint, how is sort of the industry looking at 3D ticket pricing, balancing sort of the recession and the unfortunate events that are going on with some huge blockbusters that are coming out, largely starting with MVA in March?

Jeffrey Katzenberg

Well you know, I think, Ralph, that again just look at the marketplace today -- the performance of Coraline this past weekend, 80% of its $11 million gross came from its 3D screens, which represented less than half of its screen. Its gross to date I think was -- was it 60% of its total gross was out of its 3D screens? You look at the performance of IMAX -- people within this bargain, which going to the movies is the single greatest bargain that exists for a diversion for recreational purposes kind of in the world right now today within that choice, offering people a premium experience, you know, is something that they have responded very aggressively too. We believe that with these releases of next round of blockbuster movies, led by Monsters Versus Aliens, which we think raises the bar for what it means to see a 3D film, that there will be a wide demand at a $5 premium for our product throughout the country and the rest of the world.

Ralph Schackart - William Blair

Great, that’s helpful. And then just in terms of the DVD end market, more on a macro picture, obviously your titles, both new release and catalog, are holding up pretty well in a tough market, but can you give a little more granularity on what has happened in the market since the analyst day, if it’s fair to look at holiday versus Q1 and both toward new releases as well as catalog? I’m just trying to get…

Jeffrey Katzenberg

Again, if I just think -- we don’t want to opine on the rest of the industry. I think you’ve heard from other companies in terms of their business there. They’ve been pretty down on it, talking about it both secularly and cyclically and that has not been our experience. We are not finding the same resistance or deterioration in the marketplace that you have heard from other companies that are dealing with much larger volumes, more diversity of product, different types of catalog. We’ve had very good performance of our catalog in the fourth quarter. We continue to see good performance from our catalog so far this year, and our two titles, our two primary titles, Panda and Madagascar, they’ve just performed very, very well.

Ralph Schackart - William Blair

Great, and then one last one and I’ll turn it over -- of the 11 million plus of the Kung Fu Panda DVDs, how many were Blu-Ray and is Blu-Ray at this point meaningful to sort of the premium pricing to help offset sort of the standard definition decline?

Jeffrey Katzenberg

It’s a very small part of our business to date. Remember, our movies are primarily a mom/family purchase and we like the Blu-Ray platform in it but it’s not a meaningful percentage of our business. The place where we see much, much more impact on our business are with the two packs that we’ve had to offer, so whether it’s the two-pack of Kung Fu Panda with the Secrets of the Furious Five, or the Madagascar two-pack with the extra Madagascar Penguins offer in it, these products which we did have premium offers have sold extremely well and they have been a very meaningful part of our volume.

Ralph Schackart - William Blair

Great. Thanks, Jeffrey.

Operator

Next we turn to the line of Ingrid Chung with Goldman Sachs.

Ingrid Chung - Goldman Sachs

Sure, thanks. Good afternoon. So my first question is on Kung Fu Panda revenue -- I was wondering if there was significant consumer products revenue in the KFP number. And also I know it’s calculate on gross revenue but I was wondering if you could give us some color in terms of DVD ASPs.

And then my second question is around the Penguins TV show -- we know it debuts after the Kids Choice Awards on March 28th and it looks like the sneak peek brought in blockbuster numbers over Thanksgiving. We were just wondering if there was some way that you can monetize the debut of the show. We know Nick gets the ad revenue but what kind of merchandising are you going to have around that?

Jeffrey Katzenberg

First one, Rich.

Rich Sullivan

Ingrid, the $100 million plus of Kung Fu Panda revenue this quarter was predominantly driven by home video. However, there was some residual IBO revenue in there as well, so I mean -- we’ve given you the units of 11.2. I think roughly about 85% of the total revenue was home video, so you should be able to figure out what the ASP is from there.

Jeffrey Katzenberg

And on the Penguins TV show, the merchandising opportunities of that will follow and will probably be in the -- they will start to ramp up in the fourth quarter and then we’ll roll out over a 18-month period of time, so there will not be any immediate impact or benefit to us in the second quarter.

Ingrid Chung - Goldman Sachs

Okay, great. Thank you.

Operator

Next we turn to the line of Jake Hindelong with Monness, Crespi, Hardt.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Great. Good afternoon. Just to follow-up first on the last question with the ASPs can you address just the promotional activity in the fourth quarter, and then pricing on Madagascar 2 DVD versus the Kung Fu Panda?

Ann Daly

In the fourth quarter, we saw some lower retail pricing, which was the result of the competitive environment that you normally see in the fourth quarter between retailers, so I believe the average selling price at retail in the fourth quarter was around -- probably in the high $16 range for the product. In the first quarter, we are seeing a higher price point on our Madagascar product. We’re seeing the single being priced around $18 and as Jeffrey mentioned earlier, we saw our premium product, which was doing very, very well, being priced over $20, and that represented a higher percentage of sales than we have ever seen on any release up until this time, so very happy with that.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Okay, thank you. And then separately, just on the upcoming release of Monsters Versus Aliens, when do you think the first opportunity is going to be for the public to see more of the film, see the entire film and for investors to get a full review?

Rich Sullivan

We’re going to be doing an investor screening, as is typical for our films, most likely the March 21st weekend for you guys in New York and a similar one in L.A., so you’ll be able to see the full film then.

Jake Hindelong - Monness, Crespi, Hardt & Co.

Thank you.

Operator

Next we turn to the line of David Miller with Caris & Company.

David Miller - Caris & Company

Lew, a question for you -- in terms of the revenue recognition schedule for Madagascar 2 theatrically, not on DVD but theatrically, is most of that juice from the international territories going to in fact fall in the current quarter, or do you see sort of a longer tail happening, maybe a little bit of that revenue bleeding into the second quarter because the Japanese opening occurs much later in the quarter? Thanks very much.

Lewis W. Coleman

David, I think the bulk of it is going to be in this quarter. Even though Japan is in the next quarter, it’s the last territory I think that will open in the next quarter and as you know, our expectations in Japan have not been huge.

David Miller - Caris & Company

Thank you.

Operator

Next we turn to the line of Doug Creutz from Cowen & Company.

Doug Creutz - Cowen & Company

Thanks. I think you mentioned in your prepared remarks that roughly 20% of your COGS in the quarter were due to non-theatrical release sources -- could you give a little more color on what the composition of the COGS were and were there associated revenues with those COGS? Thanks.

Lewis W. Coleman

I tried in my remarks to be fairly careful about giving you an outline of what a good chunk of those numbers were and I’m a little bit -- it’s a little bit difficult to characterize them without characterizing them with non-GAAP numbers. So I think what you ought to do is take a look at those numbers. I can tell you historically they are running at least double what they have in the past, the non-cost of goods amortized numbers, so it was a fairly big pick-up. They are at a point where the bulk of those are not associated with revenue now and probably won’t be for the next two quarters, but probably will be in the fourth quarter. I think that sort of combines partly what I said and partly what Jeffrey said. I hope that’s a bit of a help to you.

Doug Creutz - Cowen & Company

Yeah, thanks.

Rich Sullivan

Next question, please.

Operator

Next we turn to the line of Vasily Karasyov with J.P. Morgan.

Vasily Karasyov - J.P. Morgan

Thank you. I have a question about margins again, if you don’t mind. P&A, would you ever consider re-evaluating the P&A budgets if the challenges in the home entertainment markets persist? And not only domestically but also internationally? And if so, how much more do you think you can cut out of it without hurting the opening weekend and title performance? Thank you.

Jeffrey Katzenberg

Okay, so I would -- I think there are -- in terms of our P&A spend, we are I think seeing different fluctuations that are occurring in different ways here, and it literally is month-to-month. So we can have a currency conversation and things are fluctuating one way. We can look at our ability to make better buys and get more for our money. We are aggressive about that and about managing these costs, and I think what we don’t want to say yet today is there a specific target number that we have in mind, other than to say it is top of mind and we are looking to take every single advantage we can as a major buyer of media, both to support the theatrical and the home video window.

But again, I have to say you characterized the conversation at the beginning by saying with the difficulties in the home video market, and I just have to say again, we are an offensive player in this arena right now, not a defensive one, and we are seeing good results from being an offensive player.

Vasily Karasyov - J.P. Morgan

Okay, thank you. So you are buying more audience for the same dollar value?

Jeffrey Katzenberg

Yes.

Vasily Karasyov - J.P. Morgan

Okay. Thank you.

Jeffrey Katzenberg

And seeing good impact on it.

Operator

Next we turn to the line of Barton Crockett from Lazard Capital Markets.

Barton Crockett - Lazard Capital Markets

Okay, great. Thanks for taking the question -- I was wondering if you could talk a little bit about Shrek The Musical in terms of you described that you are pleased with the performance at this point, I think particularly into this year. But I think some of the trade presses described it at as maybe a little bit softer than at least the trade press would have expected for a production of this magnitude.

What kind of weekly box tally -- can you give us any sense of what needs to happen to the weekly box tally over the next couple of quarters to put this thing on a track to really spawn a couple of the touring shows, which is I think where you really have the opportunity to make money if it works.

Jeffrey Katzenberg

Well, thank you. Again, I think it’s hard for us to want to be predictive of the too-far-out on the horizon. What we have seen is increasing performance week over week over week here now for four weeks in a row. This past week ending on the 22nd is actually the third biggest week that we’ve had on the show since we opened, including the two holiday weeks of Christmas. And so we have seen very good trends on the box office to the show.

You know, I think there was fair amount of concern on everybody’s part. We had a very weak week the last week of January, which is traditionally the worst week -- you know, for 40 years it’s the worst week of the year for the entire industry and most of our competitors were doing heavy, heavy discounting and two-for-one offers and a number of things that propped their box office gross up. We did not think that was the right strategy for us and so we saw a pretty steep dip in our number that week and I think it made everybody anxious, us included, by the way. But we have literally seen us go from 500,000 to 636,000 to 765,000 and 850,000 this past week for us. Obviously this is a strong trend. We now head into -- you know, when we get to mid-March and the Easter breaks begin, it starts the better season for all of the Broadway theater business. So we think the worst is behind us. Love the trend that we are seeing and as we said to you at our analyst conference, we’ll be comfortable rolling out what our future plans are when we’ve got a good six months under our belt, which will be mid-summer.

Barton Crockett - Lazard Capital Markets

Okay, well, if it is -- if the weekly box stays in this range, is that on a trend where you would feel comfortable doing the road shows, or does it need to grow a bit from here?

Jeffrey Katzenberg

These are really good numbers. We hope they will go up from here but to answer your question, these are solid numbers for a show.

Barton Crockett - Lazard Capital Markets

Okay, great. Thank you.

Operator

Next we turn to the line of Tuna Amobi with Standard & Poor’s.

Tuna Amobi - Standard & Poor’s

Thank you very much. So just a philosophical question, Jeffrey, on the premium cable window, particularly with the [inaudible] launch coming up later this year. So as you think about that window, do you see -- what thoughts do you have on the capacity of the marketplace to handle another premium cable channel and does that factor at all into your strategy, release strategy into premium cable, particularly with Paramount being one of the launchers of [inaudible]?

Jeffrey Katzenberg

Tuna, again, I am not 100% sure of what the question is. We have a very strong output deal with HBO in which our product is given a very strong premium. If you are talking about day-and-date VOD, that is, in terms of our customers and our primary buyers who use these for multiple, multiple plays in it, it’s a very small part of our business. It’s not -- you know, I think this is more of an issue for people who are in the rental business primarily, or at least that is a very big part of their business. So I hope I’ve answered your question.

Tuna Amobi - Standard & Poor’s

Yeah, that’s helpful. Separately on the -- just maybe a question for Lew, on the ultimate revisions for Panda, were there also any revisions for Madagascar or is that still a little bit early? Have you revised your ultimates for Madagascar thus far based on the comment that you made about Panda?

Lewis W. Coleman

You know, Tuna, we look at our ultimates obviously every month and we sort of look at them very carefully every quarter as a part of the way we close our financial books. And we probably make adjustments in 60% or 70% of our films every quarter. Some of it has to do with when TV windows open, some of it has to do with sort of what we see but there’s always adjustments. Very seldomly do we adjust more than $1 million or so in a quarter, so the adjustment we called out for you was unusual and doesn’t happen very often. The rest of them are very small and they are as likely to be up as they are down.

Tuna Amobi - Standard & Poor’s

Okay, that’s helpful and just lastly, a housekeeping question -- a clarification, actually, on the percentage of the non-theatrical COGS. So the $1 million per quarter product development, was that factored into the 20% that you mentioned or is that additional?

Lewis W. Coleman

That’s additional. I mean, essentially on the $1 million, clearly some people would capitalize that against a product and then amortize it when it’s released. At this point, we’re expensing that.

Tuna Amobi - Standard & Poor’s

Thank you. Thank you very much.

Rich Sullivan

Next question, please.

Operator

Next we turn to the line of Robert Fishman with Banc of America.

Robert Fishman - Banc of America

Thank you. I’m calling on behalf of Jessica -- one question, just to clarify an earlier comment -- on the 5 million units representing the 65% to 70% of the total Mad 2 units to date, was that just for domestic units or was that on a worldwide basis? And then, if I may, can you just discuss if you are seeing any different trends on the wholesale DVD pricing in the international markets versus the domestic market, and if you can quantify the breakdown in sales of the double pack for Kung Fu and the up-lift in pricing? Thanks.

Ann Daly

On the -- just to clarify, the 5 million units was domestic and the range was really 65% to 75% of the initial release period. Your second question had to do with the wholesale price in international and we are seeing that, at least in our business, to be relatively stable. We didn’t see a material change in the fourth quarter from the previous quarter, so we are happy with that result. And then I think you were asking about the two-packs. For Kung Fu Panda, I think in our analyst presentation in December, we mentioned that we were seeing the initial sales just under 30% of the mix and in Madagascar, that percentage has increased. In the initial release days, we were seeing nearly 50% of the volume done in those premium packs. And again, those premium packs were selling for -- in the $22 to sometimes $25 range, even in this market. We thought that was very, very strong.

Jeffrey Katzenberg

So again, this really goes back to Rich Greenfield’s earlier question here, in terms of what we are seeing in our business and how this sort of differentiates us from what’s going on in the sector as a whole. I just have to say again, not only are we seeing strong performance from the title but our customers in an unexpected way are trading up for the premium product. The fact that close to 50% of our volume on the Mad 2 were the premium two-pack is something that is -- you know, you would think is counter to what might be going on in a very difficult economic environment. But our consumers are seeing this as a great added value and worth the extra charge, so it’s actually been very rewarding for us.

Rich Sullivan

Thanks, Robert. Next question, please.

Operator

Next we turn to the line of Brian Shipman with Jefferies.

Brian Shipman - Jefferies & Company

Thanks. Good evening. A couple of questions; first, can you talk about what your assumptions are on Monsters Versus Aliens in terms of the up-sell to 3D in the 2,000 plus theaters it will be available? And then second, you talked at the analyst day in December about expecting 7,000 to 7,500 3D screens in the market by the time Shrek 4 hits theaters in May of 2010. Are you still at that same expectation level or has that changed at all? Thanks.

Jeffrey Katzenberg

So I think that to the first question, I think what I’m comfortable saying is that at 15% penetration at a $5 premium, we begin to see a return on our investment for the 3D rollout of MVA and I’m more than confident that we will see a performance that is significantly higher than that.

At this point, all of these things are new and we are the first, and so I think today to sit here and try and speculate or calculate whether our admissions are going to be at 20% or 30% or 40%, we just don’t know. We have very solid capacity out there -- you know, 2,000 screens have got a lot of seats in them and what we are seeing right now is the consumers are very much making that extra effort to get to a 3D screen.

The other thing that’s happened, which is -- and then the third thing, which is do I think we’ll get the rollout to the 7,000 screens by the time Shrek is released, the answer is yes. There’s been a tremendous progress that has been made on the DCIP front, as well as other financing opportunities that are now starting to present themselves for exhibition and for the distributors, and I think you will see beginning in the second quarter a very, very strong pick-up to the pace of 3D rolling out.

The last thing that has happened in this, which is actually another real pleasant surprise for us, is the fact that internationally, the pace has picked up very dramatically. And right now today, our distributor is projecting that there will be close to 1,600 3D screens in the international market and we would expect to be able to play on somewhere between 70% and 80% of those screens as the movie rolls out internationally. That’s twice what we had thought when we met with you in December.

Brian Shipman - Jefferies & Company

Okay. Thank you.

Rich Sullivan

Thanks, Brian. Next question, please.

Operator

(Operator Instructions) We do have a question from the line of Lauren Schuker with The Wall Street Journal. Please go ahead.

Rich Sullivan

Lauren, I think we’re going to take that -- I think we have a meeting with you afterwards to take that offline, so this call is for analysts and investors. We’ll handle the media calls right after this.

Operator

And with that, we have no further questions in queue.

Rich Sullivan

Well, thank you, then. That concludes today’s fourth quarter earnings conference call. I would like to remind everyone that a replay of this call will be available shortly on our DreamWorks Animation website -- that address again, www.dreamworksanimation.com. If you have any additional questions, please contact DreamWorks Animation Investor Relations department. Thanks 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 for using AT&T executive teleconference service. You may now disconnect.

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