Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Rich Sullivan - Deputy Chief Financial Officer

Jeffrey Katzenberg - Co-Founder, Chief Executive Officer, Director and Chairman of Nominating & Governance Committee

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

Richard Sherman - Director

Analysts

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

James M. Marsh - Piper Jaffray Companies, Research Division

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

Christopher Merwin - Barclays Capital, Research Division

Richard Greenfield - BTIG, LLC, Research Division

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Tuna N. Amobi - S&P Equity Research

DreamWorks Animation SKG (DWA) Q4 2012 Earnings Call February 26, 2013 4:30 PM ET

Operator

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to the DreamWorks Animation Quarter 4 2012 Earnings Conference Call. [Operator Instructions]

And as a reminder, this conference is being recorded. You may access the AT&T Executive replay service at any time after 4:30 this afternoon, and it'll be running through March 13 at midnight. And you may access the replay service at any time by dialing 1 (800) 475-6701, and entering the access code of 279175. International participants may dial (320) 365-3844.

At this time, I'd like to turn the conference over to our host from DreamWorks Animation, Mr. Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you, and good afternoon, everyone. Welcome to DreamWorks Animation's Fourth Quarter and Full Year 2012 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 a brief discussion of the quarterly financials disclosed in today's press release, followed by an opportunity for you to ask questions. I'd like to remind everyone that the press release is available on our website, that web address, www.dreamworksanimation.com.

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

Jeffrey Katzenberg

Thanks, Rich. Good afternoon, everyone, and thank you for joining our call. DreamWorks Animation reported a loss of $83 million in the fourth quarter of 2012 and $36 million in the full year. This is primarily driven by several charges we took in the quarter, including an impairment of Rise of the Guardians and a number of write-offs associated with changes to our future release slate. Lew will discuss the details of these changes and charges in a few minutes.

Rise of the Guardians was released on November 21, 2012. It has grossed over $100 million at the domestic box office and over $300 million on a worldwide basis. With an unprecedented number of profitable DreamWorks-branded CG films, to have Guardians as a financial loss to the company is certainly a disappointment. This is particularly true because of how proud we are of the movie itself. The audience response to the film was strong, which is demonstrated by the fact that it delivered 4.2x multiple off of its opening weekend and also garnered and A cinema score rating. Still, Guardians did not reach the box office levels required of our film.

Fortunately, earlier in 2012, we also saw one of the greatest successes for the company, our summer film, Madagascar 3. It grossed nearly $750 million to become the eighth biggest movie of the year on a worldwide basis and our best-performing international film ever. We released it on DVD and Blu-ray on October 16, and it joined Puss in Boots among the top-10 best performing titles of the year domestically. In an overall home video market that showed signs of stability in 2012, after 8 consecutive years of decline, DreamWorks Animation's domestic home video tie ratios improved year-over-year in 2012 even as overall animation ratios fell by 15%.

So clearly, we saw a number of positives in 2012 within our core business. However, one of the new challenges we face is heightened competition for family audiences, not from other CG animated films, but actually from broad 4 quadrant movies. This increased competition makes the need for quality release dates critically important. While finding optimal windows for our films is not a new strategy for us, today it is more challenging. Going forward, we're very focused on dating our pictures in a way that gives each one the best possible opportunity for success at the box office. This is reflected in the recent changes we made to our slate.

At the strong recommendation of Fox, our distributor, we announced that Mr. Peabody & Sherman has a new release date of March 7, 2014. Our partners at Fox loved what they saw of the film late last year and believe releasing it this November would be a mistake based on the especially crowded release schedule. Fox is particularly high on the early March release date, where they have had huge success with their Ice Age franchise. We are both confident that its new date best positions Mr. Peabody & Sherman for success at the box office.

We also decided to remove Me & My Shadow from our 2014 slate and give it more time in development. This is one of the most exciting and ambitious ideas we've had, and its challenges are reflective of its creative and technical aspirations. Despite having a great creative concept, Me & My Shadow is not where it needs to be at this stage of production. And as you've heard me say in the past, we'll not release a movie before its time. Our 2014 slate is now set for all 3 titles: Mr. Peabody & Sherman on March 7, How to Train Your Dragon on June 20 and Happy Smekday! on November 26. Beyond 2014, we have a lot of great choices for our future film lineup, and we will keep you posted on our slate in the coming months.

One of our primary goals over the coming months will be to meaningfully reduce our overall cost structure so that our business can perform at the best possible margins even when our output level fluctuates as it is doing in 2013. This means that many valuable members of the DreamWorks Animation family will be leaving the company within the year. While the majority of the headcount reductions will occur within our production groups, our support and overhead departments will also be impacted. I believe these changes will make DreamWorks Animation a stronger and more efficient enterprise going forward.

With that, I'll turn it over to Lew for the financial results, and I'll be back with a wrap-up before we take your questions.

Lewis W. Coleman

Thanks, Jeffrey. For the fourth quarter, DreamWorks Animation reported total revenue of $265 million and a net loss of $83 million or $0.98 per share. For the full year, revenue was $750 million with a net loss of $36 million or $0.43 per share.

The company's fourth quarter and full year results included a charge of approximately $165 million, which has 4 components. The first is an $87-million charge related to the write-down of the film cost for Rise of the Guardians. Additionally, Guardians incurred an amortization charge of $13 million in the quarter. The film contributed $6 million of revenue to the quarter and remains in an unrecouped position with our distributor. The second charge totaling $54 million related to our previously announced decision to return Me & My Shadow back to development. Third are development write-offs of $20 million.

The fourth and final component is a restructuring charge of $4.6 million, which represents a portion of the cost for approximately 350 people who will leave DreamWorks Animation over the course of the year. While the majority of these people will come from our production groups, we are also adjusting the size of our support and overhead departments. We expect to incur additional restructuring charges of several million dollars in 2013 as we continue to assess our cost structure.

Turning to the primary drivers of revenue for the fourth quarter. Our summer 2012 release, Madagascar 3, contributed revenue of $95 million to the quarter, primarily from home video and international box office. It had reached an estimated 6 million net home entertainment units sold worldwide through the end of the quarter. Our library, which now includes Megamind, contributed revenue of $63 million to the quarter, including worldwide free TV sales of Shrek Forever After and How to Train Your Dragon. The other category contributed $53 million of revenue to the quarter. The 2 biggest items included here are our holiday TV specials and our live theatrical properties. Classic Media contributed revenue of $32 million to the quarter, primarily from the sale of the Christmas Classic Titles on TV and in home video.

Moving on to the remainder of the income statement. Cost of revenues for the quarter, which include the previous discussed charges, were $354 million, resulting in an operating loss of $126.9 million. Selling, general and administrative expenses totaled $36.5 million, including $3.1 million of stock compensation expense. Approximately $8 million of the fourth quarter SG&A expense is attributable to Classic Media. We expect our SG&A expense over the next several quarters to be in line with our fourth quarter levels as we work to put in place the cost initiatives we discussed today. As a reminder, an overwhelming majority of Classic Media's full year 2012 operating income was contributed in the fourth quarter of this year.

Turning to taxes, the company's income tax benefit in the fourth quarter was approximately $42 million. Our combined effective tax rate, which was a benefit due to our losses, is our actual tax rate coupled with the effect of our tax-sharing agreement with a former stockholder. This rate was 34.3% in the fourth quarter. Moving on to the balance sheet. The company ended the fourth quarter with $59 million of cash and $165 million drawn on our credit line. Our weighted average share count for the year was 84.2 million shares, and our remaining share repurchase authorization is $125 million.

I would like to take a moment to address the production cost of our future films. Our 2013 and 2014 pictures will bear an increased overhead charge due to the dropping of one film during the period. We now expect an average production cost of our 2013 pictures to be approximately $135 million. Additionally, we expect the average production costs of our first 2 films in 2014 to be approximately $145 million as a result of the slate changes we discussed. However, the adjustments we are making to our operating infrastructure today, together with the full deployment of our new animation and lighting technology tool sets, will reduce our production costs to approximately $120 million per film starting with Happy Smekday! and going forward. As a reminder, these production cost targets exclude incentive-based compensation costs, including performance bonuses, residuals, stock compensation, which can run approximately 5% of worldwide box office, as well as our upfront talent cost on sequels.

Looking ahead, the next event for the company is the home video release of Rise of the Guardians on March 12. We expect the film to remain unrecouped until the second half of 2013. Even after it has been recouped, its future revenues are expected to be offset by Rise of the Guardians' remaining costs, which means that the film is not expected to have a material impact on earnings going forward. In addition, we do not expect a material contribution from television until Madagascar 3 hits the domestic pay-TV window in the second quarter. As a result, this year's profit will be dependent on the success of our next 2 films, The Croods, which would be released late in the first quarter; and Turbo, which will be released in the third quarter. And as is typical with our original films, the majority of the movie's contribution occurs after it has been released into home video market. This means that a majority of these films' profits will not occur until the second half of the year, specifically in the fourth quarter.

With that, I'll turn the call back over to Jeffrey.

Jeffrey Katzenberg

Thanks, Lew. Looking back at 2012, we saw a number of positive industry-wide developments that give us continued confidence in our business. These include strength in the animation segment at the box office, record-setting attendance levels domestically, continued significant expansion of international markets, increased consumer activity levels in home entertainment and growth in digital. We are entering 2013 as a better-positioned global family entertainment company, and I believe DreamWorks Animation is poised to capitalize on a number of new opportunities that have come with having a recognized quality brand name.

Our growing relationship with Netflix will begin to add value to the company this year. In addition to a new and more lucrative output deal for our future film titles in the pay-TV window, we're also producing their first-ever original kids TV series. Turbo Fast Action Stunt Team will begin streaming on Netflix in December in 40 countries around the globe. Also related to Turbo, we've developed a robust consumer products program in support of the film, and we're particularly excited about Mattel's fantastic line of racing toys. Later this fall, on the consumer products front, Spin Master has a great line of Dragon toys coming out in conjunction with our hit DreamWorks Dragon TV series playing on Cartoon Network.

As you know, we are acquired Classic Media in 2012 and our fourth quarter results demonstrate that this acquisition contributed meaningful value to DreamWorks Animation during the year. We've identified opportunities to leverage their library of titles in even bigger ways starting this year. Two weeks ago, we announced an exciting licensing agreement in Russia to develop Europe's 3 largest indoor theme parks. Together with the progress we're making in China with Oriental DreamWorks, we believe these location-based entertainment deals are strong opportunities to continue to drive value for DreamWorks Animation around the world.

Last year, we announced the addition of Michael Francis to our executive team as Chief Brand Officer, a role that was created specifically for his expertise in growing and monetizing brands on a global scale. He will be responsible for adding value to our consumer products, television and international growth initiatives, among other areas.

Turning to our core business. As Lew mentioned, we look forward to fully deploying our next-generation animation and lighting tools in the coming year. This technology will not only increase the creative possibilities of our artists but also maximize our flexibility, reduce the length of our overall production cycle and meaningfully bring down the cost of film production.

And 2013 marks the beginning of our new distribution agreement with Twentieth Century Fox. Simply said, we couldn't be more thrilled to be in partnership with them. Our collaboration is off to a strong start on The Croods, which stars Nick Cage, Emma Stone and Ryan Reynolds. Together, we premiered the film at the international film festival, Berlin International Film Festival, on February 15, and we're now looking to its domestic release on March 22.

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

Rich Sullivan

The first question, please.

Question-and-Answer Session

Operator

[Operator Instructions] And our first question today comes from Barton Crockett with Lazard Capital Markets.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

I guess, one question is, I was just noticing on the balance sheet that your cash and equivalents at the end of the year were $59.2 million, and I think they were about $130 million in the third quarter. So there was a bit of a decline there, and I was just wondering, obviously, there's a lot of lumpiness in receivables. How should we think about your cash flows over the next couple of quarters as we go through this kind of drier period with earnings and your liquidity?

Lewis W. Coleman

Sure. Barton, you did point out that cash is a bit volatile, and you're very right. You can also, if you look at the balance sheet, see that our receivables were up quite a bit, most of which were our normal receivables from Paramount at the time. In terms of looking at cash other than sort of the underlying lumpiness, we would expect over the next couple of quarters for cash to remain about where it is. If we get over-performance on Croods, that may improve a bit. But I think over the next couple of quarters, it's going to remain about where it is. From a liquidity standpoint, we've only drawn $165 million out of our $400 million line of credit, and I think we feel fairly comfortable here in terms of our liquidity position.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. So that Paramount receivable, now that the distribution deal with them is wrapped up, I mean, over what period of time does that cash actually come to you?

Jeffrey Katzenberg

Barton, that receivable is essentially representing the Mad 3 home video release, and that should come to us over the next 30 to 60 days. If you remember, they're going to continue to perform with -- own Mad 3 as a title for an extended period of time. Although we're switching distributors for our new release, Paramount will still be involved in all the films that they released historically ending in 2012.

Barton E. Crockett - Lazard Capital Markets LLC, Research Division

Okay. And then on the call, you said that Netflix would be driving incremental value for you this year. Now I know that they get rights, the pay-TV rights to your movies that are released this year. And I would assume that they'd go to Netflix closer to next year, given the release schedule and the normal delays on kind of the pay-TV window. So is the value that you're getting here really just the payment for the Turbo series? Or is there something else that you're delivering to Netflix that we'll notice on the P&L income statement?

Richard Sherman

Yes. I think, Barton, you're right. The titles that are released this year will be the primary driver for Netflix, which we actually don't receive payment until it's delivered to Netflix, which will be in 2014. We also have, as Jeffrey announced, a Turbo TV series that will be going on there, and we've also announced TV specials that are currently on Netflix that we derive value this year and some next year. So all of those combined, I think what we were referring to on that call. But you are right, the majority of the value is on the new feature film deal that we have with Netflix, which kicks in for '13 films, delivering value in 2014.

Operator

Our next question comes from the line of Tony Wible with Janney.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Yes, I was hoping you can comment on China a little bit. Will you be reducing any of the negative cost through using of China and Oriental DreamWorks? And is that part of the negative cost guidance you guys are currently providing?

Jeffrey Katzenberg

No, it's not. China is a separate production pipe that is for original films being produced in China. None of the work for our Western releases is being done there, with the exception that Kung Fu Panda 3 may be done as a coproduction there, in which case some parts of that film will be done there. But it does -- it's not part of our ongoing production enterprise here.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Great. And any update on your TV network ambition?

Jeffrey Katzenberg

We still have it. So good conversations, a number of parties interested. And the one thing we continue to see is the growing value of the DreamWorks brand. In a marketplace in which there is more and more platforms and more and more channel opportunities, having a worldwide recognized brand has tremendous value. And we're seeing it in our conversations with potential partners on the channel side, but nothing to announce yet. But certainly, there's a lot of very promising activity on many fronts, both domestically and internationally.

Operator

Our next question goes to the line of James Marsh, representing Piper Jaffray.

James M. Marsh - Piper Jaffray Companies, Research Division

Great. Couple quick questions here. First on the Turbo television show on Netflix, how is that structured? Is that like a standard kind of deficit financing television show and you guys retain the rights afterwards? Or are they just buying it kind of outright and will have control over it? And then secondly, just related to your workforce reduction initiatives. Can you just remind us what percentage of the workforce is unionized and maybe just discuss how that plays into trying to reduce labor costs?

Jeffrey Katzenberg

Okay. So on the first one, the Turbo TV series is being sold around the world where we are -- DreamWorks is producing the show. We are making 56 11-minute -- yes, 56 11-minute episodes of it and it's not being produced at a deficit. So I think that's on the Turbo front. On the -- again, I wasn't quite sure, James. I think you asked something about China?

James M. Marsh - Piper Jaffray Companies, Research Division

No, that was related to the workforce reductions and just complications related to the unionized workforce.

Jeffrey Katzenberg

So China has no impact on our workforce here in the...

Lewis W. Coleman

I think generally here. I think the question was whether or not our union workforce complicated our staff reductions.

Jeffrey Katzenberg

No. No, complication from that.

Operator

Our next question comes from the line of Vasily Karasyov with Susquehanna Financial Group.

Vasily Karasyov - Susquehanna Financial Group, LLLP, Research Division

After the restructuring is completed, can you give us an idea what would an original film look like in terms of production cost, G&A spend and maybe box office ranges where it will be profitable? What kind of ultimate you are shooting for through this process?

Jeffrey Katzenberg

Yes. So Vasily, I think we said to you that beginning with our November release next year, the production cost of our film will be $120 million. So if you look at that historically, we were in the $145 million to $150 million cost about 18 months or so ago, and we will have brought that down to $120 million. And that will be the go-forward cost. In terms of marketing and P&A, as you know, we're just beginning our new relationship with our distributor at Fox. We are optimistic that there are some meaningful savings that will come there, but we're not ready to really put a figure around that until we've had a chance to get through at least a release or 2 with them. But we do expect to see those costs diminish also.

Operator

Our next question will be from the line of Chris Merwin with Barclays.

Christopher Merwin - Barclays Capital, Research Division

So you mentioned the production deal with Netflix and that was sort of the first its kind in many regards. And I know it's early, but could you talk about the longer-term opportunity for licensing shorter form content to SVOD platforms? Do you see your overall business mix shifting more towards shorter form content going forward, given the lower cost structure there?

Jeffrey Katzenberg

No, Chris, I don't -- I mean, I think there are opportunities in short form content. That's not what this is about. I think that the big opportunity for us that we are actively pursuing right now is that with the acquisition of Classic Media and the combination of their titles and their library and what is now a growing library from DWA, we actually have enough content and enough IP to actually have a pretty strong ongoing television presence in the kid marketplace. And we have found a good deal of opportunity internationally and domestically to put together what would be a potentially sizable ongoing television business for us, bigger the one that we're in today. So remember today, we have 4 TV series, 3 that are on the air, the fourth about to come on the air. Turbo will be our fifth. And now with the Classic Media, we see a chance to significantly increase that.

Christopher Merwin - Barclays Capital, Research Division

Great. And if I could sneak another one in. Would you mind just giving a bit more color on the $20 million write-off for other development projects? Is there anything in particular you'd call out there?

Jeffrey Katzenberg

No, it's a handful of projects in different stages of development. No, we don't really break those out individually in it. But this just seemed like a very good important time for us to really get focused on our best stuff going forward here and clear the decks.

Operator

Next we'll go to the line of Richard Greenfield, representing BTIG.

Richard Greenfield - BTIG, LLC, Research Division

The question kind of looks at Jeffery's comments about the importance of release date. Clearly, the release dates are getting more important and it's getting more crowded, and you made the decision a while ago to partner rather than to create your own distribution company to control your release dates yourself. And I'm just wondering how you think about the balance. Fox obviously has an animation studio and has a lot of very important films of their own, where they have full economics versus partial economics on your films. And how do you think about the ability to get the best release dates, given the interplay with Fox?

Jeffrey Katzenberg

So Rich, good question. Actually, the Fox part of this is going extremely well and the -- just to give the full color here on Peabody & Sherman, we knew when we were making a change from one distributor to another, we were actually going to have sort of to get ourselves aligned going forward. Suddenly, they were having these titles fall into place there and having to make accommodations. Going in, originally, Peabody & Sherman was dated to be in the Christmas release window. And one of the things Fox was just right upfront with us about going in is, is that they already had 2 films that they were committed to in that release window. There's no distributor that can get off 3 movies in that 10-day period of time on a fully distributed, wide theatrical release. No distributor can get 3 full tracks in that window. So we actually made the decision to move the release date up into November last fall when we made our new distribution deal with Fox, picking what seemed like the best date at the time in what was a very crowded November. We then showed Fox Peabody & Sherman. They were frankly blown away by it and said, "This is too good a movie. It's too big an opportunity. This is not a good release window for this film, there are too many movies jammed up in there, and we really urge you guys to move this to a more opportunistic place." So that's sort of the full story on how we got to it. The thing that I'm referencing here is, is that right now, and I think these are cyclical things, we've gone through this before, there's just a lot of more sort of big event 4 quadrant films. In the past, the only thing we actually ever had to really sort of duck and weave and find really good release dates were other CG animated movies, and that actually is something that we've always very successfully done. We've never competed head-on against another CG animated film. Well, today, it's not as simple as that. We are looking at things like Hobbit and Avengers and Oz and movies that are out there also competing for the entire audience. And so there is in this next 18-month, 2-year, 2.5-year period of time, seems to be a bit of a jam up there. And we just have to be much more flexible and more strategic in making sure that we're finding great release dates.

Richard Greenfield - BTIG, LLC, Research Division

And then if I could just follow up, Jeffrey. When you look at the announcement about the restructuring of the company and reducing work staff, was that purely precipitated by the failure of Rise and the shift out of the film back into development? Or would you have actually gone through and reduce cost anyway, just looking at the overall environment? Just trying to understand like what drove the significant decision in terms of reducing overall workforce.

Jeffrey Katzenberg

Well, I think it's a combination of things. So I think Rahm Emanuel had that really great expression of, "You need to take full advantage of every crisis that you face." And Guardians was the first movie of ours in 17 in a row that didn't work. And when that happens, it really makes you rethink everything. And so we have actually taken this as an opportunity to significantly rightsize the whole enterprise here and to put it on what we believe is a much more profitable, better margin and what will be a long-term successful path going forward. So are these things that would have happened without the failure of Guardians? I don't know. I can say, with it, it certainly made us take a look at everything that we were doing. And at the same time that was going on, we've invested now for 4 years in a revolutionary technology here that we've done in partnership with Intel, invested very significantly in it. And now at that same moment in time, it delivered -- it is delivering to us a chance to make our films in a way that creatively gives greater and better tools to our artists and, at the same time, is able to make the movies faster and cheaper. And so again, taking all these things kind of converging together at one time is really -- we've done a reset, and we've done it across the board, top to bottom, including our development and everything else here. So I feel like we have, going forward here, a leaner and much more profitable business.

Operator

Our next question will come from Ben Mogil with Stifel, Nicolaus.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Lew, do you know, and I'm sure you do, what the film investment and film amortization was in the quarter? I don't think the K was out yet. Can you disclose that for us?

Lewis W. Coleman

The amort for the quarter?

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

And the investment, sure.

Lewis W. Coleman

Yes, hang on for one second.

Jeffrey Katzenberg

We can get it for you.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Sure. Why don't I ask my next question while we look? Jeffrey, when I look at Kung Fu Panda 2 and Puss in Boots, which were already in like the third and fourth quarters of DVD distribution, they actually showed pretty good numbers in the fourth quarter even when you sort of factor in that Christmas was playing in the quarter. So sort of talking about your comment that DVD seems to be stabilizing, can you talk about that and particularly for some of the titles that are already in their third and fourth quarter, are you seeing the tail being a little bit longer than we've seen lately?

Jeffrey Katzenberg

Well, I think that what you see in that particular release window, which is why we like it so much is, is that we get a strong date there in October, November and then sort of get a whole another go round on Black Friday, which then sort of propels you into the holiday window. And so it is why the fourth quarter has always been a strong release window for us, and we saw a very good performance from our films there.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

I guess I meant more even for titles that were already like in their third and fourth quarters of DVD distribution. They sort of almost accelerated again. Are you -- is there something...

Jeffrey Katzenberg

Yes. Well, there is. Because as part of that, we end up putting out a program of library product around our new release. So we take advantage of the fixturing that we're able to get into stores to push our current library, as well as our catalog.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

And what do you think is driving the better tie ratios at your films and sort of your overall comments to how you're seeing the home vid market, both physical and electronic, kind of steering right now?

Jeffrey Katzenberg

I think more than anything else is our brand and the fact that the quality of the films themselves are high. When people love the movies instead of like the movie, your tie ratios go up. That really is -- that's the math. And so I think in terms of these last few titles, our audiences really appreciated them a lot, and they've performed exceptionally well. So I think people have been scrambling to pull some numbers for you here. Does anybody have anything yet?

Rich Sullivan

Yes. Ben, I think your first part of the question was what the amortization in the quarter? Obviously, amortization flows through cost of goods. The total cost of goods for the quarter is $365 million, and included in that number was the charges that Lew identified, which is about $165 million in total. In terms of what did we invest, obviously showing up in terms -- from a cash perspective, is that what you were asking?

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Yes, just trying get at what would show up almost on the increase to the film number on the balance sheet, if you will? Yes, from a cash perspective, sure.

Rich Sullivan

Yes I think -- so what you're going to see is a change in that asset classes on inventory, which is a combination of what we invested netted against the charges that we wrote off. What you're probably going to see is about a film inventory number close to about $830 million in total at the end of the year. And so there's a bunch of moving pieces in there, so you'll see the net effect of the investments plus the write-offs getting to about $820 million, $830 million.

Lewis W. Coleman

That was $882 million a year ago.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then just to make sure I heard Lew correctly, the fourth quarter run rate for SG&A you think is a reasonable run rate for the first half of the year. Is that correct?

Lewis W. Coleman

I think it's a reasonable run rate for the first and second quarter.

Benjamin E. Mogil - Stifel, Nicolaus & Co., Inc., Research Division

Sure. And then in the second half, some of the benefits of the cost restructuring will be more evident. Is that a fair analysis?

Lewis W. Coleman

Yes. I think it's a fair analysis. I think what you'll see is the beginning of the cost program appearing in the third quarter and much more obvious in the fourth quarter.

Operator

We'll go to the line of Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Equity Research

So Jeffrey, I was wondering if you can update us on the 3D, how much of a runway that you see on a 3D front. We haven't heard that for a while. I know that domestic exhibitors are getting closer to full rollout. And in international, I know there's some trends in some international markets that are starting to, I don't know if peak is the right word. So I'm just kind of trying to get a sense of how you see 3D trends unfolding, both on the screen side, as well as any potential comments on the premium ticketing kind of gap relative to 2D. And for Lew or Rich, with regard to the charge on Me & My Shadow, I don't remember the last time that you've taken such a major charge to kind of put a film back in development. If you can kind of enlighten us a little bit on the thinking there and why you decided to take the hit now as opposed to the future as part of, perhaps, the film amortization expense. That would be helpful.

Jeffrey Katzenberg

Okay. So on the first one, our domestic 3D has been now very stable over the last 3, 4 of our releases. It ranges between 35% and 40% and same on the international, 60%, even as the box office has grown. Certainly, last year, domestically grew and international continues to grow. And so I -- that percentage has stayed consistent even as the box office has grown. So 3D has stayed as a very, very solid business for us. It's still an extremely strong return on investment, particularly because of the incremental cost for us in producing in 3D is negligible. And so we continue to produce in 3D and we continue to see, particularly in the international markets, greater opportunity for it. And just the second part is, is that there is a growing premium of movie-going marketplace. Every major exhibitor pretty much around the world is pursuing this. And so to be able to deliver a premium 3D experience for those exhibitors is an opportunity and is a growth opportunity for us. In terms of on Me & My Shadow, this is unusual. We have not done this before. Once again, a really convergence of a number of different things happening at the same time. The most important thing is to know that this is one of our better, if not best ideas. It is an enormously complex movie to do. I would sort of say, it is analogous to a film that I was involved in 25 years ago, Roger Rabbit, in which we are putting together a 3D CG world and a 2D hand-drawn world, the result of which is really dazzling. It's a unique and extraordinary film experience. It's a challenge to do it. It has difficulties. We've been set back on some of those. Feel like we've come through now and really do have a good path forward. We did have a change up on the director of the movie this past year. And so it really is a time in which we really need to reset the film, put it back onto a development path that will allow it to be the very best version of itself, which we are confident that we will have. So remains a very ambitious and high priority for us.

Tuna N. Amobi - S&P Equity Research

Okay, that's very helpful. Any comment, Lew, on the accounting sense [ph] of that charge as to now versus the future?

Lewis W. Coleman

Not really. Tuna, we really only had 1 of 2 choices. We could have completed the film and put it in completed but not released, or we could have gone in and decide that it really needed a little more change. And we obviously decided the latter. But we really only have 1 of 2 choices, either going into development or going ahead and completing it but not releasing it. And we thought this was a much better way to handle the film.

Operator

I will now turn the conference back over to you for closing remarks.

Rich Sullivan

Great, thanks. That concludes today's Fourth Quarter Earnings Conference Call. I'd like to remind everyone that a replay of this call will be available shortly on our website. That web address again, www.dreamworksanimation.com. If you have any additional questions, please feel free to contract DreamWorks Animation Investor Relations. Thank you 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 using the AT&T Executive Teleconference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: DreamWorks Animation SKG Management Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts