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DreamWorks Animation SKG (NASDAQ:DWA)

Q3 2013 Earnings Call

October 29, 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

Benjamin Swinburne - Morgan Stanley, Research Division

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

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

Barton E. Crockett - FBR Capital Markets & Co., Research Division

Operator

Ladies and gentlemen, thank you for standing by and welcome to the third quarter 2013 earnings call. [Operator Instructions] As a reminder, this call is being recorded.

And I would now like to turn the conference over to your host, Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you and good afternoon, everyone, welcome to DreamWorks Animation's Third 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 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 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 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, Rick, and good afternoon, everybody. Before we begin our discussion of third quarter earnings, you'll notice that we've made some changes to the way we are now reporting DreamWorks Animation's financial results. These changes reflect the fundamental shift in how we are operating our business today.

As we have now transitioned into a global diversified family entertainment company, with a number of new businesses that have substantial future growth opportunities, we are providing additional financial metrics to you by way of new segment reporting. Following my remarks, I will turn it over to Ann to discuss Home Entertainment, as well as our new television and consumer products businesses. Then, before we take your questions, Lew will provide greater detail behind our new reporting segments, as well as our third quarter results.

I'd like to begin with a few comments about our feature films, which remain at the core of our business and continue to drive new areas of growth for the company. Looking back at our most recent theatrical event, Turbo, which was released on July 17, has now reached $83 million at the domestic box office and $163 million internationally, bringing its worldwide total to $246 million. During the third quarter, it debuted in a majority of its international markets, opening at #1 in 32 territories. It is now among the top dozen animated films of all time in China, Korea and Venezuela, and has recently opened successfully in a number of European markets, where it will continue to play into the fourth quarter.

Based on the information we have today, we believe Turbo is a profitable movie. At home video release -- its home video releases coming up on November 12, and Ann will talk about this shortly.

Looking ahead to our 2014 feature film slate, we have a strong lineup of 3 pictures. And because next year's competitive landscape is far less crowded than 2013, we believe each one is well positioned with a very good release date. First up on March 7th is Mr. Peabody & Sherman, our newest comedy about the super genius dog, Mr. Peabody and his adopted boy, Sherman. It will be the only animated title to be released in the month of March, which historically been a very good release window for us and other CG movies. Mr. Peabody & Sherman is directed by Rob Minkoff, the amazingly talented director of The Lion King and is based on Jay Ward's lovable characters from Rocky & Bullwinkle. Our early previews have been very successful and extremely well received by audiences.

Next up, we will release How to Train Your Dragon 2 on June 13. The overall marketplace next summer is far more advantageous for us than this past summer, with only 8 tentpoles and 2 animated films compared to 17 tentpoles and 6 animated films in 2013. And for the first time in 10 years the summer of 2014 has no animated competition from Pixar, Blue Skies, Sony or Illumination, virtually clearing the way for the second chapter of our epic trilogy. It introduces some great new characters, fantastic new dragons and a number of big surprises, as Hiccup and Toothless unite to protect the future of Dragons and Vikings. The anticipation for Dragons 2 is among the highest we've seen in some time. And we got an early indication of just how excited people are when our first teaser trailer received over 4 million views within its initial 48 hours of being posted online. Ann will talk about the huge amount of retail and consumer products support we have planned for our entire Dragon franchise.

Finally, we will release our third film, Home, on November 26 for the Thanksgiving holiday of 2014. Home is an outrageously funny buddy movie about a hilarious, yet inept, alien race and their equally inept invasion of Earth. Our incredible cast features Rihanna, the #1 recording artists in the world today, alongside with recent Emmy winner, Jim Parsons, legendary comedian Steve Martin, and pop-culture icon Jennifer Lopez. Together with her world-class songwriting creative team, Rihanna has been collaborating with us for over the last 2 years to create an innovative musical movie event that features an entire concept album of brand-new songs and we couldn't be more excited about it. We remain very confident in our 3 pictures and our release schedule for the next year.

In closing, I'd like to provide an update on AwesomenessTV. During the third quarter, the Awesomeness team has continued to build and grow at a rapid pace. Video views have climbed over 75% in just 3 months to 2.1 billion, and our subscriber base has increased more than 25% to over 29 million. We're now reaching a scale and the size is becoming more and more attractive to valuable advertisers, as well as promotional partners.

For example, last month, they entered into a new joint venture with Hearst to launch a Seventeen-branded multichannel network, which is expect to generate revenue through advertising on YouTube, as well as from licensing original content. Awesomeness is an invaluable platform that continues to bring great momentum to our digital strategy at DreamWorks.

With that I'll hand the call over to Ann.

Ann Daly

Thanks, Jeffrey. The most recent big event for the company was The Croods home video release on October 1. In addition to being the most successful original animated movie through the first 10 months of the year, Croods has, in fact, outgrossed any other original film, live action or otherwise, at the box office in 2013. And it is #6 -- is #6 film on a global basis. On the heels of this blockbuster success in theaters, The Croods is now on its way to becoming one of the best-performing titles of the year in the home video market. As a category leader for big-box retailers, Fox has put its world-class distribution platform to work, as we've gone to market with their team for the first time on a DreamWorks film. And we couldn't be more pleased with the outstanding results we're seeing so far. Croods was the best-selling DVD and Blu-ray in its first week of release, and it is converting better than the average of our last 4 franchise titles.

As we did with both Rise of the Guardians and Madagascar 3, we released The Croods digitally 2 weeks prior to its street date. This successful strategy has generated, on average, 15% more EST revenue from The Croods than from our last 2 titles, more than any other DreamWorks film at this point in its release.

As Jeffrey mentioned, up next is Turbo on November 12. Again, we kicked off with an early EST release on October 22. Leveraging Fox's outstanding digital footprint, we are off to a spectacular start. In its first week of release, Turbo's box office to digital unit conversion is our highest ever, outperforming titles such as Madagascar 3, Rise of the Guardians and The Croods. While the majority of Turbo's domestic home video results will contribute to the fourth quarter, its international release will be divided between the next 2 quarters, with major territories like Germany, the U.K., France and Australia, coming in the first quarter of 2014.

In other Turbo news, Turbo: F.A.S.T. will be the very first of our all-new DreamWorks TV series to debut on Netflix this December. This marks an early milestone in our TV production strategy, which will ramp up significantly, as we work to begin delivering episodes of 4 new DreamWorks-branded series to Netflix in the fourth quarter of 2014.

With its upcoming DVD release and the launch of our new series on Netflix, retailers both domestically and abroad continue to sell Mattel's line of Turbo racing toys, with plans to sustain support for the property into next year.

Before I turn it over to Lew, I have a few updates on our Dragon franchise activities within our Television and Consumer Products businesses. The second season of DreamWorks Dragons: Riders of Berk premiered on September 19. New episode premieres continue to rank #1 in their time slot with boys aged 2 to 14 and are consistently the most watched show on Cartoon Network on Thursdays with boys 6 to 11. On the Consumer Products front, our Dragon franchise plan is now shaping up to be one of the biggest fully developed CP programs in DreamWorks history, which we believe can exceed that of the original film. Thanks to the continued success of DreamWorks Dragons TV series, Spin Master, our master toy licensee for the Dragons franchise, recently launched a line of great new toys in time for the 2013 holiday season.

Looking ahead to next summer's theatrical release of How to Train Your Dragon 2, we expect to have over 200 licensees on board and a strong representation across all major categories, including a highly innovative toy line, consisting of 188 SKUs, compared to the 38 from the original Dragon consumer products effort. We are thrilled that retailers across the globe have already designated DreamWorks Dragons as one of the most significant tentpoles CP properties for next summer.

In closing, since our last call, we announced that Dawn Taubin has come on board as DreamWorks' Chief Marketing Officer. Dawn is responsible for heading all of our marketing efforts, including theatrical, television and global brand marketing initiatives, and we're very excited to welcome her to the team.

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

Lewis W. Coleman

Thanks, Ann, and good afternoon, everyone. For the third quarter of 2013, the company reported revenue of $154.5 million, and net income of $10.1 million or $0.12 of earnings per share on a fully diluted basis. Before I discuss the individual drivers in the quarter, I'd like to comment, and as Jeffrey mentioned, on our new reporting segments.

Our financial reports now include both revenue and gross profit contributions from 4 distinct segments, which align with how we operate our business today. Let me start by describing each of the segments, and then we'll move on to the third quarter results.

The first segment is feature films, which includes the results related to the development, production and exploitation of feature films in the theatrical, television, home entertainment and digital markets. The second segment is television series and specials, which includes the development, production and exploitation of television, direct-to-video and other non-film -- non-feature-film content in the TV, home entertainment and digital markets. As a reminder, we provided revenue guidance for our Television business earlier this year.

The third segment is consumer products, which includes all merchandising and licensing activities related to the exploitation of our intellectual property, including location-based and retail entertainment.

Finally, the segment entitled All Other will incorporate all remaining lines of businesses, including the results from AwesomenessTV, Live Entertainment and our technology initiatives. We believe these segments will serve to provide more detail on our growth and diversification efforts going forward.

Turning now to our third quarter results. The Feature Film segment contributed revenue of $120.7 million, and gross profit of $55.4 million to the quarter. Revenue for this segment is down year-over-year, since the prior period included results from Madagascar 3, our blockbuster sequel from last summer.

The 2 key drivers of this segment in the third quarter are our library, which contributed revenue of $52.2 million, and Rise of the Guardians, which contributed revenue of $42.4 million from worldwide paid television. As expected, Turbo remained in an unrecouped position with Fox at the end of the third quarter. However, it did contribute revenue of approximately $6.4 million, primarily from its theatrical performance in China and South Korea, where it was not distributed by Fox. Based on our current expectations, we believe that Turbo is a profitable film on an alternate basis. However, this assumes successful performance in home video and other markets, including consumer products.

Moving on to Television Series and Specials, this segment contributed revenue of $18.2 million and gross profit of $4.2 million to the third quarter. Television revenue is up over 20% year-over-year, driven primarily by Classic Media content, which accounts for about 1/2 of this quarter's TV revenue amount. The remainder is from our television specials and series, primarily the second season of DreamWorks Dragons on Cartoon Network.

The Consumer Product segment contributed revenue of $12 million and gross profit of $3 million in the third quarter. This revenue amount is down only slightly year-over-year. The third quarter of 2012 included the recognition of the remaining high-margin revenue from our deal with Gaylord Hotels, while the third quarter of this year contained a full quarter of Classic Media consumer products results. The impacting -- impacting this segment's gross margin is a portion of the amortized capital cost and direct marketing expenses associated with Turbo. This film accounted for $4 million of Consumer Product revenue in the quarter.

Finally, All Other revenue in the third quarter totaled $3.6 million, primarily from AwesomenessTV. Revenue from this segment is down year-over-year, as we no longer have Live Entertainment revenue coming from SHREK THE MUSICAL or our Dragon Arena Spectacular. Moving on to the remainder of the income statement, cost of revenues for the quarter were approximately $91.7 million, resulting in a gross profit of $62.9 million or approximately a 41% gross margin.

Selling, general and administrative expenses for the third quarter totaled $47.7 million, including $4.5 million of stock compensation expense. This compares to $49.7 million, including a $5.6 million of stock compensation expense in the second quarter of 2013, and we expect this fourth quarter's SG&A to be in line with second quarter levels.

Turning to taxes. The company's income tax expense for the third quarter was $6.9 million, our combined effective tax rate, including the impact of our tax sharing agreement with a former stockholder, was approximately 42%. Due to a favorable resolution of a California state tax audit, we expect our combined effective tax rate for 2013 to decrease from previous estimates to approximately 27%.

Moving on to the balance sheet. The company ended the third quarter with a cash balance of $156.4 million. During the quarter, we issued $300 million of senior notes due in 2020 with an interest rate of 6.875%. We have used these funds to pay down our revolving credit facility and plan to use the remainder for general corporate purposes. Year-to-date, we have spent $25 million to repurchase 1.3 million shares. Our diluted share count for the third quarter was 85.4 million shares, and our remaining share repurchase authorization is $100 million.

Looking ahead, the significant events in the fourth quarter include the home video release of both The Croods and Turbo, the results of which will be incorporated into our Feature Film segment, as well as the distribution of our holiday-themed content within our television series and special segments.

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

Question-and-Answer Session

Operator

And I have a question from the line of Ben Swinburne, with Morgan Stanley.

Benjamin Swinburne - Morgan Stanley, Research Division

I'd love to get your thoughts -- maybe, Jeffrey, for you, on a couple of topics. One, thank you for the additional disclosure on the revenue side. Is there a target you have for the team in terms of gross profit? You really commented on the diversification of the business or the plan for further diversification. Do you have a mix in your mind that you've got the team focused on reaching over time? And then my follow-up is around some of the comments Ann made around Fox's home video performance, particularly as it relates to the digital front, EST and early windowing. Can you give us a little more color on how that's gone, what they've done well? Where you see that going over the next several -- maybe titles or years in terms of mix on the electronic sell-through side? It seems like this early windowing is having a positive impact.

Jeffrey Katzenberg

Thanks, Ben. I think on the gross profit side, I think it's really too early to sort of give what might be a blended target. Many of these opportunities are still very new for us and they really cut across so many different business segments and types of business, and the margins around each one of them are very unique. So I don't think that we would be really in a position to give, really, any clear guidance on that. When you look at everything from the Netflix business, to AwesomenessTV, to location-based entertainment, to consumer products, these are such singular and unique businesses. I guess the only thing I can say, that they all do pretty much share in common with one another is they are very high-margin businesses in general and they don't involve big capital investments from us. So I hope that -- I know that doesn't give you a precise answer, but as we have more insight into the segments, we'll share it. So Ann, you want to talk about Fox?

Ann Daly

Sure. Fox has been aggressive in promoting and developing the electronic sell through portion of their business. We supported their strategy of releasing these titles early and it was a 2-week window before the physical product was available in the stores. And you are right, it is having a positive effect on our overall business. I think it's a combination of that exclusive window, which is giving consumers, particularly families, a focused moment to consider a digital purchase. The promotions that they put in place to support that availability are very strong. And we're seeing that this -- with each release that we've done, the percentage of business that we're doing is slowly creeping up. So we like the trend a lot and we'll continue to pursue this.

Benjamin Swinburne - Morgan Stanley, Research Division

Are you seeing any pushback or are they seeing any pushback from the big-box retailers as a result of the early windowing, obviously, potential lost sales for them?

Ann Daly

A lot of these big-box retailers are participants in developing a digital strategy for their consumer base. And so, to a large extent, I'd say they've been supportive of this move.

Operator

That will be from Ben Mogil, with Stifel, Nicolaus.

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

Wanted to sort of talk to you a bit more about the DVD tail that you're seeing. So when I look at the quarterly numbers that you give on each film, it looks like a lot of these films are having a little bit longer of a tail than I think a lot of people would have realized or even just less than a year ago. Is this digital related? Is this sort of better promotions by the big-box retailers on stuff that sort of 3 to 4 quarters old? I'm just sort of curious what's driving that a little bit better than I would have thought?

Ann Daly

I think in large part, we're seeing a positive result, frankly, in our shift to Fox and their focus on the tail and the catalog. Their multiple promotions that they've put into the marketplace, the way they price them, promote them, we think is having a significant positive effect on our results. Some of them are just leaning into the market opportunity.

Lewis W. Coleman

And another thing that was a little bit unique for this quarter is that we're seeing more than expected television revenue, partly coming out of Paramount. And in particular, this quarter, coming out of older titles, which is slightly higher-margin kind of revenue than we normally see. So it's getting -- the tail is getting spread across a number of revenue categories.

Operator

[Operator Instructions] And we'll go to the line of Tony Wible, with Janney.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

I was hoping you can comment on the P&A with Turbo. Was that roughly in line with what you guys spent on the Guardians? And then, I was hoping you can go through some of the mechanics on the new consumer products. Historically, I think, when you guys did a film, you would recognize the licensing associated with that film in the film side of the business, will that continue to be the case? Or will that, for instance, on Turbo, now fall in to CP and if so, does that fall into the ultimate calculations that you're running on the film?

Rich Sullivan

Tony, it's Rich. There's 2 questions. The first one on the P&A side, I think we're comfortable that Turbo falls within our previous guidance range for prints and ad, which is anywhere between $150 million and $175 million. We've seen that pretty consistently and I think Turbo fits within that range. As far as the way we calculate our ultimate, Consumer Products is considered part of the revenue stream in which we calculate our amortization rate and ultimate profit for a film. As far as the segments are concerned, however, we do separate out what's driven by TP from a revenue side and what's driven by the feature film in non-TP markets. In other words, theatrical, home video, television, et cetera. We will allocate out the amortization associated with that film based on that same revenue calculation, but we have split it out for you, so you can get an understanding where it's coming from.

Lewis W. Coleman

And Tony, a little more color there. As we begin to move our CP operation from sort of an episodic release with each film to continual sale, 365 days a year with TV boosting it, and movies boosting it, and sequels boosting it, we will have to come up with probably some slightly different revenue recognition algorithms to understand exactly how this full time consumer product operation is going to work. And we'll keep you posted on that.

Anthony Wible - Janney Montgomery Scott LLC, Research Division

Got it, thanks. And in electronic sell-through, it sounds like it's a growing component, when will you guys start to include that in the unit numbers? And just roughly, is it becoming material at this point as far as looking at EST units versus historical DVD, Blu-ray units?

Rich Sullivan

Well, it certainly is an area of growth, Tony. I think we've seen, with at least the last 3 titles, and some of the strategies we've taken with the EST and the early digital release, that it is becoming more and more significant part of our business. So, as that continues to grow, we're going to have to think a little bit more closely about how to disclose that business. But both of those, from a revenue perspective, are included in the feature film line, for the film.

Operator

And that is from David Miller, with B. Riley & Co.

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

A couple of questions. Lew, on the recategorization of your business units, where will the Classic business fall? I'm going to assume feature films for now, but it looks like it would've been sort of proper to put it in All Other, but I didn't hear you say that. So if you can just clarify that, that would be great. And then Ann, on the DVD sell-through business, I remember back in, like, late '08, early '09, when there started to be a number of secular problems in the business and just unit sell-through started to fall. And so, studios blocked and tackled against that by first of all, like instead of 2 disks, there would be 1. So everyone opted out of that kind of second disk, or SKU. And then the game to play was kind of replication and try to lower replication costs. What are you, or Fox, doing now on the cost side, within DVD sell-through, to kind of maintain margin integrity? Because it seems like you guys are doing a really good job of retaining margin integrity.

Lewis W. Coleman

David, the Classic Media unit has now been split up, mostly between Television and Consumer Products. So it's no longer reported through as its own unit.

Jeffrey Katzenberg

Ann?

Ann Daly

And then on the DVD side of it, we are continuing to take a title-by-title assessment of what the consumer kind of benefit would be to owning and purchasing a title. We have continued to find success in creating a suite of premium SKUs, some of which have to do with the format in Blu-ray, some have value-added. In the case of Croods, there was a toy that was part of the main SKU and that seemed to have a great sell-through. And then we've also, with some retailers, just hit a lower price point, so an opening price point, so they -- people who are not as inclined to buy the premium price, actually have something to buy. And so, that kind of multipronged approach on the last several releases has really -- we think, has been successful on our titles. And it's something we're going to continue.

Operator

And that is from Vasily Karasyov, with Sterne Agee.

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

Lew, I have a question for you on SG&A. If I'm doing the math right, for the full year, it will be up year-on-year around $60 million. So I was wondering, a, if you could just give us an idea how it will be in outer years; is this year, in any way unusual? And then this increase year-on-year, what percent of it, what portion of it was because of Classic Media integration? And what percentage of it is other cost increases associated with your other initiatives?

Lewis W. Coleman

Vasily, the biggest single item is Classic Media. But in addition, during this year in particular, we've added senior staff, particularly in Television, particularly in Consumer Products. And you'll get a full year's run rate next year of that amount. So I would expect, if I were looking at next year that growth rate that we saw this year will not quite be duplicated next year, but it will go up next year, as we pay for a full year of some of these new additions to staff.

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

Would it be fair to say that probably second, third and fourth quarters of this year, are more indicative of the run rate than the first quarter -- quarterly run rate?

Jeffrey Katzenberg

That's the second half of the year.

Lewis W. Coleman

No, I think I would take the second half. Or I might even weigh the fourth quarter a little bit higher, because then we would have fully included most of the new hires.

Operator

And that is from Tuna Amobi with S&P Capital.

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

So my first question, on the Dragon sequel. So, Jeffrey, you pretty much outlined a very remarkable disparity in scheduling for the summer box office, which kind of obviously raises the expectations for that movie, as you pointed out, in terms of the trailer views. So I guess the logical question is, how does this kind of change your thinking in terms of how this whole movie would kind of play out in terms of marketing, any kind of changes? And I recall that you did north of $200 million in the box office for the first film. I mean, is it kind of prudent to kind of expect or extrapolate that this film is going to do significantly better than that, which sounds like -- I was actually thinking closer to $300 million in domestic. Is that a reasonable ballpark? And related to that as well, I guess this is for Ann, on the same Dragon, I think the plan that you outlined for Consumer Product is -- it's pretty ambitious and very, very remarkable as well. So, I guess, the question there is, you talked about 200 licensees, you mentioned toys, I'm wondering if there's other verticals where you see kind of growth. And if this is going to be the blueprint that you intend to roll out, similar CP initiatives for other franchises, as you alluded to, any color on that strategy would be helpful.

Jeffrey Katzenberg

So to the first part of your conversation, your question here, which is that we're just not in a position to speculate on what the performance of the films would be, nor is there any corollary that exists that I think one can sort of make those kind of judgments going in. What we do know is it is a radically different marketplace next summer from this past summer and we know that we have a very good release window. And beyond that, I just don't believe that anybody, certainly for us, we don't know how to know -- interpret those into a prediction of what the box office might be. We have a great opportunity -- we have a great opportunity for all 3 of the films. And as I said, we think they're strong and they're in a great position. And beyond that, I think we just -- we're not going to get ahead of ourselves on this. So -- but thank you for your enthusiasm.

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

So just a quick clarification. Do you have a similar metric stats on what the first film did in the first 48 hours of the trailer release? Just to get a sense.

Jeffrey Katzenberg

Well it's not -- you'll be comparing apples to submarines because the first movie was an original title, had no pre-awareness about it. And so you just cannot -- that's why I say, when you look for these -- trying to find algorithms or analytics that are going to give you this -- that kind of insight. You actually have to drill down and just ask yourself the most -- just really, the most basic fundamental thing. There's -- the first was an original movie nobody had ever heard of. This was the first trailer out on one of the most beloved titles that we've had for the last few years. So I don't think you can...

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

Sure that's understood. Okay.

Jeffrey Katzenberg

Ann?

Ann Daly

And then to your question about the Dragon CP, program network putting in place, I think there are 2 significant factors that are resulting in the size and the scale of what is being built right now. And the first is just building on what Jeffrey said, is that the Dragons property has a huge existing fan base and there's a tremendous amount of enthusiasm and anticipation for the -- not only upcoming film for next summer, but also for the television show that's on Cartoon Network and in its second season. And so, we're seeing a lot of participation on the part of retailers and licensees that want to be a part of this program. The other piece is that we have spent the majority, first part of this year, rebuilding the consumer products organization. We brought in Michael Francis, who's heading up that organization; Michael Connolly, who oversees the Consumer Products organization; Shawn Dennis, who's developing the franchise strategy for these properties. And these are very experienced executives who came in and hit the ground running. And you're seeing, I believe, the immediate impact of this team and the people that work for them in building up the Dragon program for next year. And that approach is going to be used on every film but also every franchise that we have going forward. and I think that's why you'll see some great results in this area compared to what we've been able to achieve in the past.

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

That's very helpful. Rick, if you can allow me to ask one follow-up question for Jeffrey. Just kind of a big picture philosophical question on Gravity, in terms of the impact of that film, I think the 3D index in which by all accounts, I think, set a pretty high bar for the industry. So as I look at that title, Jeffrey, I'm wondering if there's any kind of takeaways that you have in terms of why that film might have indexed so high in the 3D screens, and what do you see the impact that might have on 3D moviemaking for the industry?

Jeffrey Katzenberg

Well, again, I mean, ultimately, what you have is world-class filmmaker taking and doing what I think those of us who started very early on in this field, really said was the actual promise, which is to create a much, much more immersive experience for an audience by using 3D as a real author in creative storytelling tool, not as a after-the-fact, add-on gimmick that gave an excuse for an up charge. And so whether it's this or Life of Pi, there are -- Martin Scorcese did it on Hugo. The audience, when they have some certainty that they are going to get a premium experience, they are more than happy to pay for that premium. And here's a movie that did it, the critics really, I think, helped audiences understand that this was a unique way to experience the movie. And all I can say is, we continue to do that on each and every film that we make. And I do think that you go back and you look very consistently, one thing that the critics have been very, very generous to DreamWorks on its movies, is the use of 3D in a very creative and immersive and premium way. So that when people do spend their hard-earned money, they feel like they've been given a good premium product. I want to make sure I thank you again for your enthusiasm for How to Train Your Dragon.

Operator

And that comes from the line of Marla Backer, with Ascendiant Capital.

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

It's Marla Backer. I just had a follow-up question on the CP front. First, just so that we understand, on Dragon, so you're signing up licensees for the next installment of the theatrical movie, but if the licensing platform is as successful as we're all assuming it will be, will that licensing platform continue even after the movie? Will it continue for the series and will it evolve a little bit for the series?

Ann Daly

Yes. The answer is yes. In fact, the licensing has already started because of the television series on Cartoon Network. It will expand dramatically next summer and then continue because of the ongoing activities in the marketplace with Dragons beyond just the feature film release.

Marla S. Backer - Ascendiant Capital Markets LLC, Research Division

And then last question on the CP front also is, is there an opportunity with some other properties, particularly properties that have, as Jeffrey just said, some pre-awareness in the market, and I'm thinking specifically of, let's say, Trolls and Peabody & Sherman perhaps, is there an opportunity with some of those properties to build awareness in advance, through a CP licensing program?

Ann Daly

Yes, there is an opportunity to do that. And, in fact, that is one of the things that the franchise team is assessing property by property, where there is an opportunity, either in advance of the film or in advance of the television show to bring product into the marketplace. Again, I would say it's going to be on a property by property basis that, that decision would be made. But those -- that evaluation is happening as we speak, and there will be multiple opportunities to make that happen, depending on the property.

Jeffrey Katzenberg

But, Marla, in a sort of more macro answer to your question, we have -- we made the decision 2 years ago here that, it is our goal that each year, one of our feature releases will have a big CP component to it and that's a change. And so, very specifically, we have it this year with Dragons, we have it again next summer with B.O.O., which is a ghost movie, which we have a tremendous program being built in partnership with Hasbro. Following summer, we're back again with Dragons and Troll. So it's possible that in that year, and I say possible, and if our schedule is still flexible, we may end up with 2 CP feature properties in the year. In addition, we think there will be a much, much higher engagement rate on CP out of our ongoing television business, particularly on the Netflix series when they kick in. So when you look at this category, for us, and the category meaning Consumer Products, it is a growing and going to be a much, much more important ongoing part of DreamWorks as a segment for us.

Operator

And that will be from the line of with Barton Crockett, with FBR Capital Markets.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

I wanted to ask just a simple kind of question on Turbo. I was going in to the ultimate profit calculation. In particular, are you including, like, the Turbo: F.A.S.T. series delivery on Netflix, is that part of it? And then also, when we look at the ultimate profits here, given that we're at pretty far into the international release, is it safe to assume that you are I think the former view was that, that third quarter international would be about 60% of the total international, is that still kind of a good way to look at it?

Rich Sullivan

Bart, it's Rich. I think, without getting into any guidance on the international about those points, we talked in a number of territories that are yet to fulfill its complete run. So the U.K., France, Germany, Spain are still pretty early, so we're still waiting to see how those perform. So it's a little bit early for us to give you a definitive answer on where that's going to end up on the international box office front. As far as the ultimate, in general, that has all the components that you'd expect, it has its box office run including, as well as a home video release that Ann referred to earlier. We're going to have a continued Consumer Products program, because it is part of a larger franchise, but there's an intent to have a TV series, there will be some benefit from that TV series in that ultimate on a go forward basis for the use of that IP for the franchise in general. So overall, the ultimate is as you'd expect, and it really will depend upon how it performs in the feature markets, including home video.

Jeffrey Katzenberg

And, Barton, again, because I think this is a way to step back and look holistically a little bit about where our business is today and where it is heading. You have Turbo's production cost, which is down significantly, about $127 million. You have a CP program built around it. You have now our Netflix deal kicking in on this title. We have a strong holiday release window going in to DVD, which is stronger than our winter titles do. So the conversion ratio is likely to be stronger. Certainly, we see that in the early digital release. So, as our business is shifting and we're building out into a broader entertainment company, our ability to monetize these movies is growing. The opportunities are greater for it. And I just think it is how our business is changing, as well as, obviously, the cost themselves coming down meaningfully.

Barton E. Crockett - FBR Capital Markets & Co., Research Division

And if I could just ask one other question on Peabody & Sherman. How would you describe the brand awareness there? And I ask that in this context, and that, I remember watching this series when I was a kid and I love it. And I'm excited to see the movie. I think that a lot of people with young kids though, that would be kind of the target audience, don't seem to remember this series. At least that's kind of my sense of just asking people. So, how would you kind of rate the brand awareness for this going into it?

Jeffrey Katzenberg

Well, I don't think we actually think there's a huge amount of awareness. You're in that category of 80 years and older, so that's fairly limited, Bart.

Lewis W. Coleman

It's okay, Bart, I'm there, too.

Jeffrey Katzenberg

But we're assuming that there's very little pre-awareness for it. We've got a very, very ambitious, I think, very creative marketing campaign on it. You'll see it rollout literally this week and into Thanksgiving. Just very excited. We think the Fox people have got a tremendous campaign for it. We've screened a chunk of the movie this past week for 150 people from the press. And great reaction from them. So we're treating this as though it's just -- it's an original title for us. It does have some brand awareness. We are getting us some traction on the CP side of it. But we're looking at it as more of an original title.

Operator

And I have no further questions in queue. Please continue.

Rich Sullivan

Okay. Well, that concludes today's third 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 contact our Investor Relations Department. Thanks again for participating. Have a great evening.

Operator

And ladies and gentlemen, that does conclude your conference for today. Thank you for your participation and for using AT&T Executive TeleConference service. You may now disconnect.

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