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DreamWorks Animation SKG, Inc. (NASDAQ:DWA)

Q2 2006 Earnings Conference Call

August 3, 2006 4:30 pm ET

Executives

Jeffrey Katzenberg - Chief Executive Officer, Director

Lew W. Coleman - President

Kristina M. Leslie - Chief Financial Officer

Rich Sullivan - Investor Relations

Analysts

Eric Handler - Lehman Brothers

Michael Savner - Banc of America Securities

Anthony Noto – Goldman Sachs

Kathy Styponias – Prudential

Rich Greenfield - Pali Capital

Lowell Singer – Cowen & Co.

Tuna Amobi - Standard & Poor's

Jeff Logsdon - BMO Capital Markets

David Miller - Sander Morris Harris

Presentation

Operator

Good afternoon. My name is Henry and I will be your conference facilitator today. At this time, I would like to welcome everyone to the DreamWorks Animation second quarter 2006 conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer period.

(Operator Instructions)

It is now my pleasure to turn the floor over to your host, Mr. Rich Sullivan from DreamWorks Animation Investor Relations. Sir, you may begin your conference.

Rich Sullivan

Good afternoon, and welcome to DreamWorks Animation second quarter earnings conference call. I am joined on today’s call by our Chief Executive Officer, Jeffrey Katzenberg; our President, Lew Coleman; and our Chief Financial Office, Kris Leslie.

Today’s call will begin with a brief discussion of the quarterly financials, as disclosed in today’s press release, followed by an opportunity for you to ask questions. I would like to remind everyone that today’s release is available on the company website, at www.dreamworksanimation.com.

Before we begin, I need to remind you that certain statements made in 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 uncertainty, including those contained in the company’s annual and quarterly reports, and in other filings with the SEC. I would encourage all of you to review these risk factors within these documents.

The company undertakes no obligation to update any of its forward-looking statements.

With that, I would like to now hand the call over to DreamWorks Animation Chief Executive Office, Jeffrey Katzenberg. Jeffrey.

Jeffrey Katzenberg

Thanks, Rich, and good afternoon, everyone. I would like to thank you all for joining us this afternoon. Before I turn things over to Kris Leslie, I would like to spend a few minutes talking about some highlights of the past several months.

The most significant event for the company was the release of our latest film, Over the Hedge. Domestically, the film has reached approximately $153 million, making it the seventh highest domestic grossing film of 2006.

While it appears that its performance was impacted by some tough competition, the film held up well against some widely recognized franchise films released this summer.

Internationally, the film has reached approximately $126 million, with several major territories remaining, including Japan on August 5th and Italy on October 27th.

While it has not achieved the same level of box office as Madagascar or our Shrek franchise, we do have one of the top-performing films of the year, and a strong film for our company.

Over the Hedge is also the first movie released through Paramount, and we have been impressed and pleased with this new partnership, particularly with their ability to promote our films with Nickelodeon. We look forward to an even greater collaboration with them on our future releases.

Over the Hedge home video will be released on October 17th with strong support from our marketing partners, all aimed at making it an important event at retail during the holiday season.

In addition to the release of Over the Hedge this quarter, we also reported stronger-than-expected second quarter results, as referenced in today’s release. The results were mainly driven by home video for our 2005 hit, Madagascar. This film continues to perform well in home video, and has been one of the best-selling titles over the past eight months. Its overall performance has made Madagascar a strong candidate to become the company’s next successful franchise, with its sequel scheduled for release in the fall of 2008.

Looking at some of the top-performing domestic films this year, five of the top-six movies are known properties that are clearly attracting audiences to the theatres, which is why building new franchises like Madagascar will be key to our strategy going forward.

Lastly, I would like to spend a moment discussing our up-and-coming release, Flushed Away. The film is scheduled for domestic release on November 3, 2006. This is the first time that we are using our CG studio here in Glendale to make a film with our creative partner, Aardman. Technically, the film has achieved groundbreaking imagery. We blend Aardman’s trademark style with DreamWorks state-of-the-art computer animation, creating a unique look for CG animation.

This comedy adventure stars an impressive cast of voice talent, including Tony Award winner Hugh Jackman, and four-time Oscar nominee, Kate Winslet. We are looking forward to seeing how the film performs as it kicks off the holiday season.

In addition, we recently announced our new collaboration with Marc Burnett Productions and AOL to create the Flushed Away Underground Adventure. Beginning in early October, the online game will be available for free on the web, and will offer a series of challenges, each featuring a different character, setting, or storyline from the film. This marks the first opportunity for DreamWorks to expand our digital content into customized animation made specifically for online gaming.

Now, consumers will be able to interact with our characters and their environments like never before. This is one of the many ways we will be looking to leverage our unique content in the new media space going forward.

With that, let me turn things over to Kris to discuss the results of quarter.

Kristina M. Leslie

Thanks, Jeffrey, and good afternoon, everyone. As Jeffrey said, we had a solid quarter, and reported results that were better than we had expected, driven mainly by Madagascar home video as well as lower-than-expected SG&A costs.

For the quarter, the company reported total revenue of $74.9 million, and net income of approximately $13.7 million, or $0.13 per share on a fully diluted basis.

The company finished the quarter with a cash balance of $526.9 million.

Madagascar generated about $37.9 million of revenue in the second quarter, mainly driven by pay television and home video performance. Through the end of the second quarter, Madagascar has reached an estimated 18.9 million units shipped, net of actual returns, and an estimate of future returns on a worldwide basis.

Our second quarter release, Over the Hedge, contributed a total of $10.7 million of revenue in the quarter, $4.6 million of which was associated with the annual cost reimbursement from Paramount.

Over the Hedge has grossed over $278 million in worldwide box office to date, with several major territories yet to be released. As is common for a film, in the quarter of its release, our distributor remains in an un-recouped position for Over the Hedge, as it has not yet recovered its up-front marketing and distribution costs. As a result, we did not recognize any revenue from the theatrical distribution of the film this quarter.

Looking at the other contributors of revenue for the quarter, Shark Tale generated approximately $9.6 million of revenue, the majority of which was from international pay television, and Wallace and Gromit recorded about $3.4 million.

Through the second quarter of 2006 in home video Wallace and Gromit has reached and estimated 4.4 million unit shift net of actual returns and an estimate of future returns on a worldwide basis. Our remaining titles contributed $13.3 million of revenue. By the end of the second quarter, the unrecouped position for Shrek 2 had declined to approximately $7 million.

SG&A for the quarter was approximately $21.3 million, which included $6.4 million of the stock compensation expense. In the quarter we reported lower than anticipated SG&A which contributed to the better than anticipated results we are announcing today. This favorability was driven primarily from the timing of services that we are transitioning over from our distribution partners. We still expect to see an increase at or slightly below 15% over last year in our 2006 total SG&A.

I also want to remind everybody that is part of agreement with Paramount, the Company will receive reimbursements to help offset these additional expenses. On a P&L basis, we are amortizing the total reimbursements during the term of the agreement evenly over the minimum number of films. Accordingly, we’ve reported the previously mentioned $4.6 million of revenue for Over the Hedge as part of this reimbursement process.

Looking at the tax expense for the quarter, the Company recognized a tax benefit related to the tax basis step up of about $4.5 million which lowers the effective tax rate. This was offset by an expense of approximately $3.8 million representing Vulcan’s share of that tax benefit as part of its tax-sharing agreement with the Company. The net impact of that tax benefit for the quarter was approximately $0.01 per share.

Looking forward to the remainder of the year, we still do not expect any significant drivers of revenue in the third quarter of 2006. Over the Hedge will be the primary driver of revenue for the remainder of the year. But as we have previously indicated, it is possible that we will not recognize any significant revenue until the film is released on home video in the fourth quarter.

Flushed Away, as Jeffrey said, is scheduled for release in November 2006. As is typical of a film released under our distribution agreement, we did not expect significant revenue from the film in the quarter of its release.

So in closing, the Company had a solid quarter with better than expected results. Madagascar continues to perform in the home video market and we hope the performance of Over the Hedge in theatres will lead to a strong showing in the home video market made it this year.

Now I would like to turn it over to Lew to begin our Q&A part of the call.

Lew W. Coleman

Thanks. I just wanted to make a quick comment before we start taking your questions. As you know our larger shareholders have the right to execute the secondary offering of their shares to the public market. On June 1st of this quarter, the right to trigger such an offering became the full right of Paul Allen and will remain his right until December 1, 2007.

Recently there is been a lot of speculation and questions regarding the follow on offering. The intention of these shareholders and the workings of the partnership. While I can understand your interest in this topic, we will not be taking any questions or making any comments about a follow-on offering on today’s call. As a result, I would request that you please ask your questions with this in mind.

With that, why don’t we get started with your questions. Operator, can we please have the first question?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is coming from Eric Handler - Lehman Brothers.

Eric Handler - Lehman Brothers

Good afternoon. Can you give us sense of what you might think the international box office potential is for Over the Hedge now that you are in all but two key territories?

Secondly can you may be talk about marketing plans for Over the Hedge home video, and what is Nickelodeon doing that may be different from what’s been done in the past?

Kristina M. Leslie

I think you aware that that we have made a decision that we are not going to try to predict box office. So I think what we would say at this point about Over the Hedge is we feel its tracking right as we expected it would given its performance in the US and it is too early to tell, because there are still a couple of major territories to be released.

Eric Handler - Lehman Brothers

Are you doing anything differently with Nickelodeon in terms of marketing Over the Hedge home video, anything new that hasn’t been done in the past with your relationship with Paramount?

Lew W. Coleman

No we did on the theatrical release, but there is no specific plan on the video release.

Operator

Your next question is coming from Michael Savner - Banc of America Securities.

Michael Savner - Banc of America Securities

Kris, if I can ask you a couple of questions on Flushed Away and then maybe just one general strategic question for Jeffrey. On Flushed Away, can you just remind us of what box office levels the contingency comp kicks in? I know you have said 7% to 9% of worldwide box office for an original film, but I am wondering if there is a minimum box office it needs to meet?

Also, you have talked generally about $125 million to $175 million in worldwide P&A and production negative costs about $130 million for just generic, original films. Is Flushed Away, should we assume that there is nothing abnormal about it? If you could tell us whether it is skewing at the high or low end that would be helpful, as well as maybe the breakeven, similar to what you said for Wallace and Gromit in terms of the box office you would expect to avoid a writedown, not that that is what is being discussed. Just if you can give the same kind of guidance again this year.

Kristina M. Leslie

Let me make a couple of comments about Flushed Away. Obviously we don’t comment specifically about any individual film’s performance but, you raised a couple of generic things we’ve said about films in the past. I think the key point is that we would certainly expect on the cost that Flushed Away would fall right within those parameters. So the $125 million to $175 million for theatrical marketing, we would expect it to fall right within that range.

In terms of the production costs and the contingent comp, as you know what we have said in the past is roughly the films are about a $130 million plus 7% to 9% of worldwide box office as a good barometer to use for the contingent comp.

While Flushed Away will be a little bit higher on the upfront production cost, because of some of the fees that we pay to Aardman, it is a little bit lower on the contingent comp so overall it will fall right within that range that we’ve talked about generically in the past.

In terms of the last part of the question about the breakeven we don’t comment on the profitability of any particular film. You are right, we did make a comment last year about Wallace and Gromit, but we had some full year guidance out there and we wanted to make sure people were clear on the assumptions that were underlying that full year guidance.

So given our position now of not providing that sort of guidance, we are not going to make any comment about breakeven.

Michael Savner - Banc of America Securities

Fair enough. Jeffrey, can you just comment generally, given you got over $500 million of cash on hand, its certainly a comfort level for at least a couple of films and very, very little debt on the balance sheet, would you consider looking at buying back, large blocks of stock or a significant amount of stock if there was an opportunity, given where your stock is at this level? Thanks.

Jeffrey Katzenberg

Mike, I am going to let Lew, take that if you would please?

Lew W. Coleman

If what you are really asking me is, do I like the idea of a share buyback? I have talked to you all about that before. I think that to the extent that the Company has excess cash and it is happy with the price of the stock, we think it is one of the best uses of cash.

Obviously a buyback requires board approval, it is not up to me. So there is clearly a process that needs to occur if management was to get to the point where they wanted to recommend a buyback.

Michael Savner - Banc of America Securities

Thank you very much.

Operator

Your next question is coming from Anthony Noto - Goldman Sachs.

Anthony Noto - Goldman Sachs

Thank you very much, Jeffrey you had mentioned the initiative that you have with Flushed Away as it relates to new media. I was wondering if you can comment on any other initiatives for product films that may be a priority over the next year, in terms of leveraging that content across the Internet or other forms of new media, such as a mobile devices?

Obviously this year has had a significant number of increased releases of CG films. As you go into Flushed Away, how may you market that film differently than, maybe that you’ve done in the past? Obviously you’ve mentioned the relationship that you have with AOL and the online game, so I was wondering if you could comment on that a little bit.

Finally, the last couple of calls we talked a lot about home video and the changing dynamics in the marketplace. Could you give us any additional insights there? Thanks.

Jeffrey Katzenberg

First, we are looking at a number of different opportunities for us to move our product. Again, given that it is digital it is actually well suited to move out into the mobile marketplace. I think that there are a number of opportunities. I think it is a little early for us to be able to predict what those values are going to be, but I think there is promise there. We are exploring many, many opportunities both on the promotional side but also on the licensing income side of it. I think that we will start to see a much, much more robust market specifically for us when Shrek comes next year.

In terms of Flushed Away and the marketplace, I guess there are a couple of things that I would say which is I think we have a pretty good opportunity. We come the very first weekend of what is the beginning of the holiday movie-going season, which is that first weekend of November which has always been a very strong release period for these movies, historically.

Also I think we are well positioned in that there isn’t a single family title being released, certainly not a major one, but I am not sure there are any actually being released in the entire month that precedes us. There is no significant release scheduled of family titles in the month of October. I am hoping there will be a nice build in demand at that point, going into it.

The other thing about it is as I mentioned in the opening remarks, this really looks special. It has got a great, great look and style to it that is really unlike anything anybody has seen in the market today, and I just think having something different and differentiated from what else has been out there is an opportunity for us.

On the home video front, I will give one comment which is that I think that what we have noticed is a marketplace that is actually starting to stabilize. I think it would be premature today to again be predictive of it, but certainly what has gone on in the last couple of months is a marketplace that is actually starting to settle in in a way that is just comforting for us.

Kristina M. Leslie

I think that is right, we do see that it is stabilized and I think as we have talked about before, our titles when they are initially release have continued to perform well. We saw that with Madagascar. It has now moved into the catalog phase and we continue to be pleased with how it is performing, but it is something that we are really continuing to watch very carefully, particularly in that catalog phase.

Anthony Noto - Goldman Sachs

Thank you very much.

Jeffrey Katzenberg

Thanks, Anthony.

Operator

Our next question comes from Kathy Styponias – Prudential.

Kathy Styponias – Prudential

Thank you. I just wanted to follow up on the Anthony’s question regarding your online gaming efforts. Is there any investment from your aspect in terms of what it’s costing you to actually create the game? So, from a cost perspective what are you investing? How does the revenue work, or is this merely a promotional vehicle?

Also with respect to new media type opportunities, downloads, and what not, I am just wondering, if Jeff or Lew, if you can comment about whether or not you are seeing any change in behavior or tone from traditional retailers that historically have had a lot of leverage with you given the fact that they have used the DVD to drive traffic. To the extent that there is now other places you can distribute or soon will be other places that you can distribute through, whether you are seeing a change in tone from the traditional retailers? Thanks.

Lew W. Coleman

I think on the Flushed Away game there is not any real cost nor revenue on this first outing for us, this is really I think an opportunity for both AOL and Mark Burnett and DreamWorks, for that matter, to really see what the possibilities are out there. It is a very creative game, it is a lot of fun, innovative elements to it. On the cost side there isn’t any on the income side of it, it won’t be meaningful. Kathy, what was the second part of your question?

Kathy Styponias – Prudential

With the advent of different ways to be able to get movies through downloads whether or not you are seeing a change in tone or stance from the traditional retailers, given you had a lot of leverage before, but now you have more places through which you can distribute?

Lew W. Coleman

Well, I think the thing that we are seeing most of all out of them is an interest in pursuing that marketplace themselves. I think our feeling is that it is more of an offensive interest than a defensive one. So all of the major retailers have various strategies that they are pursuing about augmenting digital delivery alongside their hard goods.

Kathy Styponias – Prudential

Thank you.

Operator

Your next question is coming from Rich Greenfield - Pali Capital.

Rich Greenfield - Pali Capital

Hi, just two questions. One on the relationship between domestic and international box office, given what you have experienced so far with Over the Hedge and what Disney seems to be experiencing with Cars this summer, do you think that there is any weakening of the relationship when you look at how well you did last year with Madagascar? Do you think that we should be thinking about international as being less of an increase relative to domestic box office going forward?

Could you give a comment, Jeffrey, on the spacing next summer? Obviously a lot of big films close together around the Shrek 3 release, and just how you think about that time period for Shrek 3? Thanks.

Jeffrey Katzenberg

I guess I’d have to say, internationally Madagascar clearly performed better than historical averages would have indicated. Looking at these things is really more the outlier. All I can do is talk about what has occurred to date on Over the Hedge, I don’t want to try and be predictable of what ultimately go on.

But if we take the date backwards in it, it is actually tracking right at a typical level. Its performance so far has been solid to us. I think that we’ve seen films perform on either side of the typical side of it and I think that is not a reflection of anything changing in the marketplace itself.

You can look at, specifically Ice Age 2, which like Madagascar, had an outstanding performance in terms of the historical averages on it. There are others that have underperformed. We right now are at, to date, a typical level for it.

In terms of next summer in the spacing, this is something that we have spent a tremendous amount of time on obviously there is nothing that would be, I think of more value and importance to us. We feel having looked at the marketplace and all of the opportunities there, the date that we are on is really first rate for Shrek.

Always we would prefer to have as much spacing between these movies as possible. There are some very unique dynamics that have gone on because you do have these three titles coming out within four weeks of one and another. Virtually the rest of the movie marketplace has moved away. When you look at what box office potentials are on these weekends and what the performances are that you can anticipate at the highest end of these three films, the marketplace very much can accommodate all of them and we think that our date on Shrek is the very best date that we can have for that film next summer.

Rich Greenfield - Pali Capital

Thanks.

Operator

Your next question is coming from Lowell Singer – Cowen & Co.

Lowell Singer – Cowen & Co.

A couple of questions. Kris, can you speak to, in some specificity, the scope of the television revenue you took in on the Madagascar and Shark Tale in the quarter? Even if you don’t want to give specific numbers, how much it is a percentage of what you think your ultimate TV revenues will be on those films?

Second, can you talk a little bit about the international release schedule on Flushed Away? What percent of the international market do you think it will be released in the before the end of the year, and what percent slips into next year?

Jeffery, can you just talk a little bit about your sense of the overall CG marketplace? Clearly this is the first year of this bigger step up in output and I am wondering if you think that has had any impact on some of the film performances we’ve seen or if you the market is still big enough to accommodate all these films? Thanks.

Jeffrey Katzenberg

Let me go on your question two and three first. The foreign release on Flushed Away will be I think with the -- I know Japan doesn’t come until the spring, but I think almost all other major territories will follow on the release here in the U.S. So, again I don’t think there is anything other than Japan, there may be a few little outliers. But certainly I don’t think there are any major territories.

In terms of the animation marketplace, as I think we will anticipated when we talked last year, this has been a year in which there have been a lot of product into the marketplace, I think you will see step down in the volume of product released next year, a significant step down as a percentage.

I think more importantly, the marketplace clearly distinguishes product; it is not, all product is created equal. I think that we have seen event status for Pixar’s product, Blue Skies, a sequel of Ice Age and our own, and these seem to exist in their own category and I think the consumer knows the difference between these very high end CG-animated product and a lot of other product that’s out there.

I really don’t want to comment, one way or another on how successful or unsuccessful those movies are, I am not all that familiar with the budgets of every one of them in it. I think there is a clear distinction that is going on in the marketplace both in terms of the product coming in and more importantly about how the consumer see it.

Once again, when you look at next year, and particularly for our two releases, for Shrek we have a very, very clear marketplace for ourselves both product coming before us and after us in terms of competitive CG film. For the Seinfeld movie, D Movie in November, again that’s a bit far out. But right now, today we’ve got an excellent release date and a clear date.

Kristina M. Leslie

Lowell, on the TV question, I don’t want to get into a lot of specifics. As you know, we don’t talk specifically about the TV revenue. There are some competitive issues there and we really don’t disclose it. What I can remind you about is we have given some overall revenue estimates at different box office levels in the past, and what I can add to that is typically about 15% of that overall revenue stream comes from television. We’ve also laid out for you the timing of each of the different pieces of the TV window, I think in the past. So hopefully with those pieces it will be able to give you a little more insight.

I would just say in terms of Shark Tale, the majority of that revenue came from the international paid television and a significant portion of the Madagascar revenue as well.

Lowell Singer – Cowen & Co.

Thank you.

Operator

Thank you. Your next question comes from Tuna Amobi of Standard & Poor's. Please go ahead.

Tuna Amobi - Standard & Poor's

Thank you. First, can you remind us what was the un-recouped amount on Shrek 2 at the end of the first quarter?

Kristina M. Leslie

Just give me a minute on that one. If you have a second question, go ahead.

Tuna Amobi - Standard & Poor's

Sure. My second question is on the Hedge revenue. Of the $10.7 million, $4.6 million related to department reimbursement, and I am presuming the $6.1 million is the licensing revenue. Is that correct?

Kristina M. Leslie

Yes, that is primarily from licensing and merchandising, because we did not recognize any revenue this quarter from the theatrical distribution, since it is still un-recouped.

Rich Sullivan

I believe the number, and do not hold me to this, is around $13 million for the un-recouped on Shrek 2. I will have to go back and verify that with you, so we can talk after the call.

Kristina M. Leslie

It is in the 10-Q from last…

Rich Sullivan

Yes.

Tuna Amobi - Standard & Poor's

So assuming it is $13 million, you go from $13 million to $7 million, right? Does that then raise the prospects, Kris, that there could in fact be some revenue recognition on this title for the rest of this year? I think you said there is no possibility of that happening, but it just seems like the progress you have made raises the possibility that you could have some revenue on that title?

Kristina M. Leslie

I do not think we ever said that there was no possibility we would report any revenue, just that we still had an un-recouped position which, as you point out, is declining, because while we have not been recognizing revenue, the distributor has continued to generate revenue on the title, so I think we would expect that trend to continue. It is not possible for me at this point to predict when it will become fully re-couped.

Tuna Amobi - Standard & Poor's

Finally, Jeffrey, I was kind of struck by your comment that international tracking on Hedge was pretty typical, given the fact that most of your, that your [release] in Europe was right in the middle of the World Cup, so I wanted to get some comment from you. Did you see any impact of the World Cup on that title in Europe? Have there been any subsequent bump-up in the tracking since the World Cup ended?

Jeffrey Katzenberg

I think that our release of the film actually anticipated, in almost every territory, World Cup and for the most part, we moved around it. I would say no, that for movie-going in general, not Over the Hedge specifically, clearly it did have an impact in the marketplace, in the international marketplace. As I said, we had actually anticipated that it would do so and for the most part, released around it.

Business overall has picked up nicely following the World Cup, and in particular right now, the weather, which was very sunny and very hot for some time, has now broken and we have actually seen business pick up pretty nicely in the last couple of days since the weather has changed.

Tuna Amobi - Standard & Poor's

Thank you very much.

Rich Sullivan

Thanks, Tuna. Next question, please.

Operator

Thank you. Your next question is coming from Jeff Logsdon of BMO Capital Markets. Please go ahead.

Jeff Logsdon - BMO Capital Markets

Thank you. First question, the bulk in tax sharing benefits, do those simply relate to films released or revenues recaptured, tax settlements, et cetera, from historical activities? Would that change at all if his equity stayed [inaudible] were it some point it in the future to change?

Kristina M. Leslie

No. As you recall at the time of the separation and IPO, there was a tax base step-up, and our ability to get the benefit from that step-up will be a function over time of the income that is generated by the company. So what you see is pieces of that original benefit now being taken into income, or effectively reducing the tax liability, and he shares in that 85%.

Jeff Logsdon - BMO Capital Markets

And would in perpetuity until that has gone to zero?

Kristina M. Leslie

Yes, it is sort of over a 15-year time horizon.

Jeff Logsdon - BMO Capital Markets

Second question, as we model out Wallace and Gromit, given that the film had write-downs historically, X coming in higher than your ultimate projections, we should really expect no margin on those revenues -- is that correct?

Kristina M. Leslie

Yes, little or no margin. Remember that the write-off is calculated on a present value basis, so in nominal dollars, there will be very small margins -- yes, effectively little or nothing.

Jeff Logsdon - BMO Capital Markets

Thank you. Great quarter.

Rich Sullivan

Next question, please.

Operator

Thank you. Your next question is coming from David Miller of Sanders Morris Harris. Please go ahead.

David Miller - Sander Morris Harris

Good afternoon. Kris, a couple of questions for you. The $13.3 million worth of residual library activity for other films, can you talk about what those other films were? Was that a bundling situation by chance? Were you guys just fairly aggressive there, on the QT in just kind of bundling some of the older films with residual sales of Madagascar in the sell-through frame?

Also, can you just talk about where you guys are on Over the Hedge with key international territories that have not opened yet for the film? Thank you.

Kristina M. Leslie

Let me take the first part of your question. You will see when we release the Q, there is a table in there that shows revenue by film. Of that $13 million, there is a little less than $2 million from Shrek 2, a little less than $6 million from Sinbad, and then the balance is really spread across all the library titles. It is really coming from all different markets -- licensing and merchandising, video and television, so there was no sort of big thing in the quarter, as you are suggesting, that drove that $13 million of revenue.

Jeffrey Katzenberg

David, if you want to write really fast, here is what left to come: Japan, Turkey, Bulgaria, Egypt, Macedonia, Serbia, Slovenia, Finland, Norway, Sweden, Denmark, Greece, and Italy.

Rich Sullivan

David, to save you from a hand cramp, we actually post that to the website, so I can actually show you that link when we get off the call.

Jeffrey Katzenberg

But basically what you are looking at is three fairly meaningful things to happen yet, Japan, Italy, Scandinavia.

David Miller - Sander Morris Harris

I would assume that with all of those, Japan is probably 80% to 90% of that potential pie, would that be fair?

Jeffrey Katzenberg

I wouldn’t want to comment on that. Again, the combination of the Scandinavia countries and Italy, those are good territories for us.

Operator

Your next question is a follow-up from Rich Greenfield of Pali Capital.

Rich Greenfield - Pali Capital

Just one question, because a lot of questions are circulating around. Could you just comment on whether or not Paul Allen has triggered, and if he did choose to trigger, how soon after he triggered would you have to file a document to announce that?

Lew W. Coleman

Rich, we don’t believe that Paul’s request to trigger requires disclosure. We do, if you read the agreements carefully, you will see that we need to respond to that trigger within 90 days.

Rich Greenfield - Pali Capital

So would you comment on whether he has triggered and therefore you are in that 90-day phase?

Lew W. Coleman

No.

Rich Greenfield - Pali Capital

No he hasn’t, or no you can’t comment?

Lew W. Coleman

I cannot comment.

Rich Greenfield - Pali Capital

Thank you.

Lew W. Coleman

You’re welcome.

Operator

There appear to be no further questions at this time.

Rich Sullivan

Great. Well that concludes our second quarter conference call today. I would like to remind everyone that a replay of this afternoon’s call is available shortly on our website. That address again, www.dreamworksanimation.com. If you have any further questions, please feel free to contact DreamWorks Animation investor relations department. Thanks again, and have a great day.

Operator

This concludes today’s conference call. You may now disconnect.

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Source: DreamWorks Animation Q2 2006 Earnings Conference Call Transcript (DWA)
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