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DreamWorks Animation SKG (NASDAQ:DWA)

Q2 2013 Earnings Call

July 31, 2013 4:30 pm ET

Executives

Rich Sullivan - Deputy Chief Financial Officer

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

Ann Daly - Chief Operating Officer

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

Analysts

Ryan Fiftal - Morgan Stanley, Research Division

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

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

Stan Meyers - Piper Jaffray Companies, Research Division

Anthony Wible - Janney Montgomery Scott LLC, Research Division

David W. Miller - B. Riley Caris, Research Division

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Tuna N. Amobi - S&P Capital IQ Equity Research

Brandon Ross - BTIG, LLC, Research Division

Michael Corty - Morningstar Inc., Research Division

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the DreamWorks Animation Second Quarter Earnings Call. [Operator Instructions] And as a reminder, this conference call is being recorded. It is being made available for replay. The replay will begin today, running for 2 weeks until August 14. The dial-in instructions for the replay are to dial 1 (800) 475-6701 and enter the replay access code 296687. International parties may dial (320) 365-3844 and again the access code 296687. [Operator Instructions]

With that being said, I'll turn the meeting over to our host, Mr. Rich Sullivan, please go ahead.

Rich Sullivan

Thank you, and good afternoon, everyone. Welcome to DreamWorks Animation Second Quarter 2013 Earnings Conference Call. With me today is our Chief Executive Officer, Jeffrey Katzenberg; our Chief Operating Officer, Ann Daly; 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'd like to remind everyone that, that press release is available on our website, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company's annual and quarterly reports, as well as in other filings with the SEC. I would encourage you all to review the risk factors listed in these documents and 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 our Chief Executive Officer, Jeffrey Katzenberg. Jeffrey?

Jeffrey Katzenberg

Thanks, Rich, and good afternoon everyone. I'm happy to report that DreamWorks Animation significantly outperformed in the second quarter. Croods is a global blockbuster and was the single largest revenue contributor in the quarter. It is now the #5 film of 2013 on a worldwide basis and has reached $584 million at the box office. It is our best-performing original film since Kung Fu Panda and the newest in our lineup of franchise properties.

Croods marked an outstanding start for our new distribution partnership with Fox and we could not be more thrilled with its performance, particularly in the international markets.

Moving on to our most recent big event, 2 weeks ago, on July 17, we released Turbo in theaters. It has passed the $60 million mark at the domestic box office to date. The film's soft opening is a clear result of an overly saturated marketplace and a difficult release date. This has turned out to be an unprecedented summer, with more family and animated titles than ever, competing for share at the box office. In fact, there were 50% more tentpole releases this summer than last at the domestic box office. We believe that our specific release date, as well as the difficulty of breaking through the clutter with an original title caused us to fall short of our expectations. That said, we are genuinely proud of Turbo with an A-cinema score and an A+ among audiences under 18. Together with more summer playing time ahead and the high multiple that DWA movies have historically achieved off of their opening weekends, I believe there is still upside for Turbo domestically.

As Lew will discuss later, based on the data that we have to date, we do believe that Turbo will be a profitable film for us. Internationally, where we have not faced the same release date challenge as we did domestically, Turbo is off to an excellent start. It has reached $45 million in 29 markets to date. On its opening weekend, Turbo was the #1 film in 20 countries, and we saw very strong launches in Russia, Portugal, Greece, Philippines, Malaysia, Thailand and across nearly every part of Latin America.

There's one more item I'd like to discuss before I turn it over to Ann. On May 1, we announced the acquisition of AwesomenessTV, one of the fastest-growing content channels on the Internet today. The numbers of both subscribers and video views have increased by more than 50% in less than 3 months. Video views are up from 800 million to 1.2 billion, and subscribers have increased from 14 million to 23 million. AwesomenessTV was founded and is run by producer and entrepreneur, Brian Robbins, who has a long career of directing and producing feature films, as well as hit TV series for Nickelodeon and The CW. Just last month, they successfully launched Awesomeness X for boys, and we are now working with Brian to create Awesomeness Kids. I'd like to officially welcome Brian and his team into the DreamWorks family. And with that, I'll hand the call over to Ann.

Ann Daly

Thanks, Jeffrey. In the second quarter, Rise of the Guardians continued to exceed expectations in its home video release. It has sold 4.1 million physical units on a worldwide basis. According to our distributor, year-to-date worldwide consumer spending on home entertainment is stable versus last year. And the U.S. market is up slightly in the first half of the year due to the growth of subscription streaming, as well as high margin businesses, including Blu-ray, EST, VOD, which offset the decline in physical DVD. The Rise of the Guardians has the highest box office to DVD conversion ratio among major releases so far this year. Looking ahead, we plan to release both The Croods and Turbo into the home video market during the fourth quarter.

I'd now like to provide an update on a few of our recent efforts outside of DreamWorks Animation's core movie business. First, our top-rated TV series, DreamWorks Dragons: Riders of Berk, continues into its highly anticipated second season on Cartoon Network this fall. Second, last month we signed 2 groundbreaking new television distribution deals with Netflix and SUPER RTL, and we are in the process of forming long-term agreements with dominant telecast partners in other territories around the globe. We are now committed to delivering nearly 1,200 new episodes of DreamWorks branded programming over the next 5 years.

Third, I'm thrilled to announce today that we have recently signed a number of key, very experienced television executives to take on the leadership of our TV efforts. Marjorie Cohn joins us as Head of Television. A 26 year veteran of Nickelodeon, she most recently held the role of President of Content Development in which she managed the development, creation and production of some of the most successful children's programs in television history, including SpongeBob SquarePants, Rugrats, iCarly and Kids Choice Awards.

Mark Taylor is also joining us as Head of Television Production. He previously worked with Marjorie for 15 years at Nickelodeon, where he was responsible for all of the productions at their animation studio.

By reuniting Marjorie and Mark and expanding our leadership in this area, we believe we can accomplish the ambitious goals we've outlined for our television strategy.

Turning to consumer products. Our toy program on Turbo was extremely successful and outperformed expectations at retail in conjunction with the film's theatrical release. With the fourth quarter DVD release and the launch of our new Turbo TV series on Netflix, we believe we can develop continued interest in the property, which will drive sales in this area.

In other CP news, we are announcing today that we have entered into an exclusive new agreement with Hasbro, a leading branded play company, to create Toys & Games inspired by 2 of our key tentpole movies. The first movie is B.O.O.: Bureau of Otherworldly Operations, starring Seth Rogen and Melissa McCarthy, which comes to theaters on June 5, 2015. And the second movie is our 2016 production of Trolls. We couldn't be more thrilled to work with Hasbro as they develop product lines across all of the major toy categories for both of these franchise properties.

I'd like to close with a recap of news and activity coming out of the June licensing show in Las Vegas. In our biggest showcase ever, Michael Francis and his new team presented the DreamWorks Animation and Classic Media properties to retailers, licensees, manufacturers and agents from around the world. They have now solidified relationships with the key global accounts and generated a huge amount of excitement for DreamWorks branded properties. Clearly, the primary focus for this year is Turbo, and looking forward to 2014, they plan to deliver one of the biggest consumer products programs in our history with How to Train Your Dragon 2. We expect to have 100 licensees worldwide on board when Dragons comes to market next June, and the toy line has already received a huge amount of support and enthusiasm from major retailers.

So with Dragons in 2014, B.O.O. in 2015 and Trolls in 2016, we are executing on our strategy to deliver 1 consumer product tentpole property every year.

As you know, we've already begun to successfully expand another important part of our CP business by licensing our properties to cruise ships, theme parks and hotels. During the second quarter, we had a number of significant location-based entertainment milestones, including the opening of the DreamWorks Experience at the Sands Resort in Macao and the expansion of our agreement with Royal Caribbean to include their 2 newest world-class ships.

Additionally, our Madagascar Live Experience opened in another 2 new locations during the quarter, Seaworld in San Diego and Busch Gardens in Tampa, bringing our total to 7 on a worldwide basis.

On a final note, I'm pleased to announce today that we have named Paul Kurzawa to the newly created position of Global Head of Retail Development. Paul is the most recent strategic hire that Michael Francis has made within his world-class team, with 35 new people joining our consumer products organization since the beginning of the year. Paul previously served as Chief Operating Officer for Caruso Affiliated, a leader in high-end retail development that has created a number of world-class destinations in Southern California. We believe that there is a big untapped opportunity to leverage our brand in interactive retail spaces on a global basis. And under Paul's leadership, we are confident that we can attract generations of new consumers to state-of-the-art DreamWorks Experiences, at top retail destinations and developments around the world. Together, we believe that location-based and retail entertainment will be a significant area of growth for the company. We clearly have a great deal of momentum within both our consumer products and television businesses today as DreamWorks Animation continues to diversify and evolve into a branded family entertainment company.

With that, I'll hand the call over to Lew for the financial results.

Lewis W. Coleman

Thanks, Ann. Good afternoon, everyone. For the second quarter of 2013, the company reported revenue of $213 million, net income of $22 million and $0.26 of earnings per share on a fully diluted basis. Compared to the same period in 2012, revenue has increased over 30%, while earnings and EPS were up nearly 75%. Our second quarter results were driven by the continued performance of The Croods at the worldwide box office and Madagascar 3's release into both domestic and international pay television markets. The Croods contributed revenue of $72 million to the quarter. Rise of the Guardians contributed revenue of $17 million to the quarter, primarily from home video. Madagascar 3 contributed revenue of $49 million to the quarter, primarily from worldwide pay television and recent estimated 7.7 million net home entertainment units sold worldwide. Library contributed revenue of approximately $41 million. Kung Fu Panda 2 fell into the Library during the quarter.

The Other category contributed $24 million to the second quarter, including revenue from the license of Madly Madagascar to Netflix. For the first time, the Other category includes revenue from both Oriental DreamWorks and our acquisition of AwesomenessTV. Our agreement to form Oriental DreamWorks closed on April 3. DreamWorks Animation will contribute $50 million of cash to the joint venture over the next several years. We have provided approximately $6 million to date.

Second quarter results include a onetime revenue pickup of $3.4 million related to the licensing of DreamWorks Brand to the joint venture. Also included in the Other category for the second quarter is $3.5 million of revenue related to AwesomenessTV, primarily from content licensing fees. As Jeffrey mentioned, we acquired AwesomenessTV during the quarter. Our initial purchase price was $33 million in cash. The deal includes an earnout of up to $117 million, which is based on adjusted EBITDA targets in 2014 and 2015. We currently estimate the fair value of this payout to be $95.5 million, resulting in a significant amount of goodwill.

Finally, Classic Media contributed $9 million of revenue to the second quarter. As we stated last month, we expect television to contribute $100 million of revenue to the company in 2013, $50 million of which will come from Classic Media. Although the first half of the year we were -- through the first half of the year, we recorded $42 million of television revenue, including $21 million from Classic Media's TV business. And we expect to record the overwhelming majority of our remaining 2013 television revenue in the fourth quarter.

Moving onto the remainder of the income statement. Cost of revenues for the quarter were approximately $133 million, resulting in a gross profit of $80 million. As part of our agreement to form Oriental DreamWorks, we are contributing non-cash assets, including a technology license, to the joint venture. In the second quarter, we recognized approximately $3 million in income from this technology license and our consulting and training services.

Selling, general and administrative expenses for the second quarter totaled $50 million, including $5.6 million of stock compensation expense. Year-over-year increase in SG&A can be attributed to our acquisitions of Classic Media and AwesomenessTV, as well as the expansion of our leadership team as we continue to invest in the growth initiatives that Ann discussed. Additionally, our services related to Oriental DreamWorks contributed to SG&A in the second quarter, partly offsetting the previously mentioned gain. For the second half of 2013, we expect SG&A to be slightly below our total for the first half of the year.

Turning to taxes. The company's income tax expense for the quarter was $10 million. Our combined effective tax rate, including the impact of our tax-sharing agreement with a former stockholder, was approximately 32% in the second quarter. We currently expect our combined effective tax rate for the full year to be approximately 30%.

Moving on to the balance sheet. The company ended the second quarter with a cash balance of $29 million. Year-to-date, we have spent $25 million to repurchase 1.3 million shares. Our diluted share count for the second quarter was 84.5 million and our remaining share repurchase authorization is $100 million.

Looking ahead, we anticipate that our third quarter results will be driven primarily by Rise of the Guardians and its domestic pay-TV window, as well as Kung Fu Panda 2's release in the international free television markets. We expect Turbo to remain in an unrecouped position with our distributor in the third quarter. As Jeffrey mentioned, we believe at this time that Turbo is a profitable film on an ultimate basis. This assessment is based on a number of factors. First, it's production cost is nearly 20% lower than that of Rise of the Guardians. Second, its continued performance at the international box office, which will be well into the fourth quarter. In fact, we expect approximately 60% of Turbo's international box office and 80% to 90% of its worldwide P&A spending to occur by the end of the third quarter. Lastly, as Ann mentioned, Turbo's consumer products program is bigger than that of a typical DreamWorks original film. As we do with all of our films, we will continue to monitor the ultimate estimates for Turbo on a regular basis.

With that, we would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from the line of Benjamin Swinburne with Morgan Stanley.

Ryan Fiftal - Morgan Stanley, Research Division

This is Ryan Fiftal on for Ben. A lot of announcements today. I guess on consumer products, can you help us think about how you structure some of those deals with your partners? Should we think about those in terms of just purely variable with retail gross sales or are you guys able to get significant minimum guarantees on those? And then any help quantifying what kind of upside we should be thinking about for CP over the next few years compared to say, on a per film basis for the last year? Anything there would be helpful.

Ann Daly

Ryan, I think the best way to think about these is these typically have a minimum guarantee as part of the deal structure with an opportunity to, in some cases, earn above the guarantee. And so, that's the way that I would characterize that.

Jeffrey Katzenberg

And Ryan, in terms of consumer products guidance, I know that we've given you some guidance around the TV business. I think we are still doing work to formulate some of these plans, including signing up some of these licensees for Dragons as well as getting some of these earlier deals set for the '15 and '16 tentpole. So at this time, we're not ready to talk about any real guidance there. It's probably something we have to get back to you on.

Ryan Fiftal - Morgan Stanley, Research Division

Okay. And then one quick one for Lew. I was just wondering your thoughts on your working cap needs over the next couple of years. I see you threw some on the revolver and then I would also guess that you have a significant ramp in TV production ahead of you. I would guess that's a drag on working cap for probably the next year or 2. So thoughts there would be helpful.

Lewis W. Coleman

Thanks, Ryan. I think at this point, we think we have adequate liquidity for operating the company into the future. We clearly have an obligation to AwesomenessTV, which we are mindful of. The Netflix production issue is a little bit different than some of the other capital needs because we essentially get paid when we deliver, so we're funding production. So there's a gap in the time we fund to the time we receive funds, but that's pretty short term and we think that it's pretty easy to get short-term credit for that. So at this point, we're mindful of our cash position, we're mindful of our available lines of credit, and we're mindful of what's going on in the markets, generally.

Operator

And we have a question -- yes, we'll go to Bart Crockett with Lazard Capital.

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

I was wondering about the flexibility on scheduling a movie. I mean, Turbo dropped into probably the most competitive couple of weeks of the year for a kids movie and you look out into the fourth quarter, and things seem to be a lot less competitive for kids movies, which is very different from last year when it was very competitive at different times. So at what point can you make a decision that you want to change a date and why didn't you do that here with Turbo?

Jeffrey Katzenberg

Well, I think, Barton, this is -- we hit a perfect storm here and I think this is a hopefully, once-in-a-lifetime opportunity that we've had. I guess the more -- I think the more important thing for us right now is that what we are able to do is we have very clear path as to what 2014 looks like and pretty much so on '15. I mean, the good news is that these kind of big event movies don't fall in, in the last minute. We do have some flexibility in terms of moving our dates. But I think a number of factors here, not the least of which was a change in distributor, the issue of a May date and Fast and the Furious and it just was a -- it was just a bad date. It's a bad date and when we look at Peabody, Dragons and Home, which are our 3 titles for 2014, each finds themselves right now in a very well-positioned, not overcrowded, I think we've seen more animation in this summer by maybe 100% than we have ever seen before. And again, it's a -- we certainly -- we don't see this again for several years, if it happens at all, but it's certainly not on the horizon of the next 24 months.

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

Okay, that's helpful. And then just to follow-up a little bit on the Consumer Products licensing. With the deals you've lined up for 2014, '15 and '16, how would the size of those deals, in terms of the minimum guarantees, at least compared to what you have for Turbo. Could you give us some color there?

Jeffrey Katzenberg

Well, Dragons is greater...

Ann Daly

Dragons is going to be greater compared to Turbo just because it's starting on a basis of -- as a sequel. And so, we're already stepping up in terms of the guarantees that are coming in. As Rich said, those aren't complete yet so we're going to have a much fuller view of the size in aggregate of all of these properties in the next coming months. The things that we're talking about right now, in particular, are based on a sizable toy guarantee, particularly as you look at Hasbro. And those are some of the biggest that we had to date. So I would say that they could be in advance of what -- higher than what we've had with Turbo as the baseline.

Jeffrey Katzenberg

I think the important thing to look at in terms of just our whole CP enterprise, is we are laying the foundation right now today, really are not at a point where we can give you enough hard numbers, I think, have you model this out, because it's just -- it's too soon. But the way we are approaching this is that every year now for the next 3 or 4 years, we will have what is an A-feature release, A meaning the merchandise potential of that property. This is not something that we have done in the past. I think we talked about this 2 or 3 years ago, that we were now going to see that at least 1 of our 2 or 3 movies in a given year was going to have a very strong CP component to it. So that's now in place, and you're seeing that sort of lineup in the release schedule over the next 3 or 4 years. So we have at least 1, in some years we actually now look like we may have 2 of those properties. In addition to that, there are a series of other big opportunities that are coming out of the television business, and that 3 of the 4 first TV shows that we are delivering to Netflix have attached to them meaningful opportunities for CP. And then separate and aside from that, there are properties that have come out of Classic Media that have CP potential to them irrespective of whether we're making new content. An example of that is Lassie. And so what Michael Francis is doing, is he's put a team in place here now, and they are building from the ground floor up each one of these properties, calendaring them out and starting to build what will be really an ongoing business as opposed to one that is simply event-driven. So that's the larger approach that we're taking right now and the business we're building on CP.

Operator

We'll go to Ben Mogil with Stifel Nicolaus.

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

Much better gross margins, I think than a lot of us were expecting the quarter, much better gross margins than you've had for a while now. On the sort of everything other than the future films, so Classic, the Library, Other, are you seeing sort of structurally that margins are getting better, maybe if you want to talk sequentially, quarters or year-over-year? I'm just kind of curious on what drove the gross margins to the extent that they were at?

Rich Sullivan

Ben, I think it's a couple of things. I mean obviously, some of the performance in the cost structure of future films are really driving that, obviously, Turbo -- I mean, Croods is a big contributor of the quarter. The cost structure of that film was better than our films in '12 and the performance in the box office is fairly strong. So that was one of the main drivers there. In addition to that, our Library continues to get bigger and as you know, the Library values have fairly substantial margins to them. And then lastly, Classic Media, which has continued to contribute, comes in at a fairly hefty or sizable margin for us. So those are kind of the 3 main drivers. I think Consumer Products, as Ann was alluding to, is also a very high margin business, especially in the location base. So as we diversify our revenue stream, we're finding pockets of high margin businesses that are more ongoing revenue streams and less dependent on the performance of the new releases. I think you've seen that diversification play out in the gross margins.

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

Did you disclose -- I apologize for not catching it, did you disclose the consumer products revenue in the quarter across sort of everything?

Rich Sullivan

No. We haven't actually disclosed CP as a separate line item like we gave some outside guys on television. As that business continues to grow, it's something we're thinking about.

Operator

And our next question from the line of James Marsh with Piper Jaffray.

Stan Meyers - Piper Jaffray Companies, Research Division

It's Stan in for James. So I'm wondering if you guys can discuss the current cinema environment in China given some recent turbulence there. Obviously, Croods grossed $63 million, the reasons are clearly important, for you guys. And then I have a follow-up.

Jeffrey Katzenberg

I mean, I think that China continues to be a place of opportunity for us. The Croods actually grossed almost $70 million there, happy to say, and we have not had any operational issues. We have been given all the appropriate notifications that we are due by the China Film Group, our distributor, Oriental DreamWorks and so we don't -- we have not had an issue.

Stan Meyers - Piper Jaffray Companies, Research Division

And if you guys can just give us some guidance on Classic Media? I know it's more of a holiday season story, but if you can just give us year-over-year performance for the business in the quarter just to see where it's trending?

Rich Sullivan

We haven't actually given specific guidance on Classic Media. The closest I can get for you, Stan is we do talk about Classic Media being about half of that business coming from the television business. We included Classic Media in our overall television guidance for 2013, being roughly about half of that $100 million target for us in '13. To date, it's about $21 million and the majority of that will sit in the fourth quarter as we release our holiday special both in the television market and the DVD market, and that's where the majority of that will sit. Depending among the performance of those DVD titles, there'll be a swing factor there, but that's essentially our expectations and the best I can do probably, for guidance for Classic today.

Operator

We'll go next to Tony Wible with Janney Capital Markets.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I have some questions around P&A. What are we looking at for total Turbo P&A? And then I believe you said 80% will fall into 3Q, which implies obviously 20% in 4Q given those other countries. And then lastly, your thoughts on DVD P&A. DVD seems to be stabilizing or doing even better. Do you expect the level of P&A around DVD to stay the same now or is there opportunity to actually take that number down?

Rich Sullivan

I'll take the first part which is the theatrical P&A, and we haven't given, as you're aware, a specific P&A guidance on a per picture basis. But I would say that Turbo, like Croods, fell into the range of that 150 to 175 number. And obviously, there's still ways to go with Turbo, but that's kind of where our expectations are. What we try to give you is a little sense of how much of that P&A is front loaded and 80% of that P&A will occur in the third quarter while only 60% of your box office internationally will have been released. So what that essentially means is that you're likely unrecouped for that film, in other words, will not be contributing to the third quarter results until a lot of those fourth quarter territories are released for Turbo. So that was the intent of that extra information for you. On the home video side, I guess I'll turn it over to Ann.

Ann Daly

I'll just some jump in and say that in the home video side, the cost to release a DVD has certainly stabilized and in many cases, we're seeing it decline. Some of the cost is really going to be based on the timing and the competitive environment. And if you're in the fourth quarter, for example, they're going to be a slightly higher media cost that you might incur than if you released it in the spring, but I would say on trend, that those costs are declining.

Operator

Our next question is from the line of David Miller with B. Riley and Company.

David W. Miller - B. Riley Caris, Research Division

Jeffrey or Lew, just a question on just what you guys plan to do if anything, in just tweaking the marketing message, if at all, on some of these foreign territories that are opening the film like, I'm looking at the schedule here, I mean, some of these are major territories opening up Turbo, say in late September, early October, even mid-October. So when you have a situation like this where you have such a large spread in time between the domestic theatrical release and some of these other major European and Asian territories that are opening the film 2, 2.5, 3 months later, and you have an opening on the domestic side that you're not necessarily thrilled with, Jeffrey, I mean, do you have the time to tweak the marketing message at all or do you feel you need to, just given the way it's trended out so far in some of these other international territories?

Jeffrey Katzenberg

I mean I think you answered your question there by the end of that, David, which is we've opened this movie in all of South America, major territories in Asia and a couple of very big territories over in Mediterranean, particularly Russia. And all of them have been successful, literally. We have 1 minor disappointment out of 20-some odd territories that we've opened. And so, it's actually been a tremendous success and a great hit in all of those places and so, there is no negative message that needs to be overcome. It's a hit, pretty much everywhere in the world and the thing that's just hard about this, David, is that you have a movie here in the United States that is a disappointment to us, because we're -- our expectations and people's expectations of us is that our movies are $150 million, $200 million grossing movies. In the real world, a movie that is in the vicinity of $100 million is actually still considered a hit. So I think beauty is in the eye of the holder. I think Turbo will be looked at internationally as a strong title going into very, very good playing time. That is, it does not have any competition or very little.

Operator

We'll go next to Vasily Karasyov with Stern Agee.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Lew, I wanted to follow-up on your comments on Turbo. Would you mind giving some additional detail on what you are assuming currently for domestic box office, international box office and P&A maybe?

Jeffrey Katzenberg

I'll answer that for Lew and say no, thank you. We're not going to speculate on the performance of it other than to say, based on the information we have on hand today, Turbo will be a profitable movie for us. And I think there are things that are worth noting here that are important for this movie and they are important trends in terms of where DreamWorks is headed. So you have a production cost that went from $157 million down to $127 million. We have the value of having moved from HBO to Netflix. We have the value of a CP program on the movie. All of these things and a few other factors in it create an opportunity where we can have a film perform like this and be profitable for the company. And the next 2 movies that we have, Peabody and Dragons, are closer to the more expensive end of our movies, but beginning, and we said this in our last call, beginning with Home, which comes out in Q4 of next year, we are looking at $120 million negative cost as the kind of go forward ballpark for us on our movies. So that's a meaningful change in the cost structure of our business, and we're seeing the impact and the value of it even today on Turbo.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

And do you mind framing for us how Turbo is doing internationally in those territories, maybe compared to your recent release? For example, at this point in its release frame, how is it doing compared to what The Croods was doing at the same time?

Jeffrey Katzenberg

Rich, I don't know if they have the week-by-week on...

Rich Sullivan

I think it does vary territory by territory. I would say that if you look at our last previous 2 releases, both being Guardians and Croods, I think Turbo is doing a little bit less than Croods and better than Guardians, is kind of where I would put it if I had to give a big generalization. Obviously, varying by territory.

Vasily Karasyov - Sterne Agee & Leach Inc., Research Division

Okay. And can I ask one last question on the balance sheet and cash. Lew, you were talking about some upcoming needs for working capital and so on. Can you just tell us how important it is for your cash planning for the films to perform over the next say, Turbo and the next one?

Lewis W. Coleman

Yes. Our cash planning is always done on a conservative basis. And so, we don't assume that we are going to over-perform to sort of keep cash in the system. We assume fairly low levels of performance. You have to remember that in almost -- in virtually, all cases in a film other than the effects of the P&A, which we don't pay for, the film has already spent the cash. The cash balance you see is balance of what we've already spent. So the real question is how much cash do we get back? And sure, it's nicer to have an over-performing film, but clearly we don't base our liquidity on the fact that all films have to over-perform.

Operator

We'll go next to Tuna Amobi with S&P Capital.

Tuna N. Amobi - S&P Capital IQ Equity Research

I guess my first question, Ann, on your comments about Rise of the Guardians home video, is there anything in particular that you can point to, that jumps at you, as to why those ratios came in the way they did? Is there anything that you guys did in terms of marketing, positioning, et cetera? I would be very curious to know as well if you think that might be -- is it to do with the title or if that can be perhaps replicated. And then for Lew, I think you said you'd funded about $6 million out of the safety on Oriental DreamWorks. Can you kind of clarify how -- over what period the remaining balance kind of accrues? And also on Oriental DreamWorks, I think you -- can you maybe help me understand the mechanics for the revenue and profit recognition, which you kind of called out this quarter? So how's that going to kind of work out in the future? And then final housekeeping question, Lew, it sounds from your comments that you expect to come in for AwesomenessTV at the high-end of the contingent compensation and I'm wondering, what are the funding implications for that? Is that all structured in cash or is there any equity component in there? It would be helpful to know.

Ann Daly

So regarding the Guardians home video results, I think there are 2 key factors: 1, is that the movie actually was a very good movie and so, it had good word-of-mouth and we saw the legs on that movie really reveal themselves in the DVD release. And the second is the manner in which it was brought to market, it had very good timing and it had extraordinarily strong retail programs. It was released right before Easter. It had a different marketing campaign from the holiday release that tapped into the Easter timeframe, and you just saw all those things come together and you're seeing the legs on the sell through even today. So I think that some of them is unique to Guardians, but I would say those 2 components combine to actually can be replicated on future movies, making sure the movie's great and making sure it has a great release date and strong marketing program around that release.

Lewis W. Coleman

Tuna, on your first question on the ODW funding, the way the agreement works, we sort of have a back-end funding obligation. Our Chinese partners are funding $150 million worth of cash and we're funding $50 million, of which we funded $6 million. Their $150 million goes in much more quickly than our cash does, so we're sort of in the back end. That's partly because we're developing 2 pictures for them, and we argued that, that was a use of cash internally and we shouldn't have to double up on it. On the second issue around the accounting for the revenue and profit for the contributions we are making ODW and to pay for our capital stock position in the company, the accounting is a bit confusing, but the way to think a little bit about it is the following: contributions tend to create revenue and if they cost us expenses to generate, they tend to cause us to have SG&A. The major contributions will go out probably over the next 2 years and a lot of them, other than the 2 feature films, are technology to bring up their pipeline. So you should see a little bit of this dribbling through our P&L statements as we go. As far as AwesomenessTV is concerned, as you are aware, we have to calculate a fair value. The fair value is essentially -- the earn-out, the fair value is essentially an option calculation. We could have actually done it on Black-Scholes. We chose a slightly different methodology. So that is the accounting definition of fair value. Surprisingly, that does not necessarily reflect our expectations.

Operator

We'll go to Rich Greenfield with BTIG.

Brandon Ross - BTIG, LLC, Research Division

It's Brandon Ross for Rich. Just following up on the Guardians home entertainment results. With the results so strong, did you guys over write-down that title? You did $17 million in revenue in the quarter on Guardians. Wondering what the operating income impact of that was?

Lewis W. Coleman

Brandon, when we made an estimate of the write-down, we obviously had to deal with the information that was at hand at the time. What was really at hand at the time was purchase intent from our major retailers. And from that, we produced a forecast of what home video was. It just turned out that the actual results exceeded that purchase intent.

Brandon Ross - BTIG, LLC, Research Division

Right. By how much?

Lewis W. Coleman

Can't tell you.

Operator

And our next question is from the line of Michael Corty with Morningstar.

Michael Corty - Morningstar Inc., Research Division

I had a question about AwesomenessTV. The metrics you cited are clearly very impressive, you use up 50% just quarter-over-quarter. Just wondering if you could talk more about your plans for that as part of your overall TV effort? And then, obviously, you have Brian Robbins there with a lot of experience and you've brought on 2 experienced TV executives, how those folks might work together even though they're essentially working on I guess, different units or different projects?

Jeffrey Katzenberg

Yes. So on Awesomeness, as we said, Brian is continuing to build out both Awesomeness, AwesomenessX and is now turning his attention to Awesomeness Kids. So we are looking to build out over these next 6 months or 9 months or so, 3 distinctive platforms there. And yes, Brian is very much integrated into the leadership and management of the company. He and Marjorie have worked together many, many, many times over the years, are great friends and fans of one another, and we expect to use the creative resources of Brian across all of our TV efforts.

Operator

I'll turn it back to our speakers for any closing remarks.

Rich Sullivan

Great, I think that concludes today's second quarter earnings conference call. I'd like to remind everyone that the replay is available shortly on our website. That web address again, www.dreamworksanimation.com. If you have any additional questions, please feel free to contact the DreamWorks Investor Relations Department. Thanks again for participating. Have a great evening.

Operator

Thank you. Ladies and gentlemen, this concludes our conference call for today. Thank you for your participation and for using AT&T's Executive teleconference service. You may disconnect.

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Source: DreamWorks Animation SKG Management Discusses Q2 2013 Results - Earnings Call Transcript

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