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DreamWorks Animation SKG, Inc. (DWA)

Q3 2006 Earnings Call

October 31, 2006 4:30 pm ET

Executives

Rich Sullivan - Investor Relations

Kristina M. Leslie - Chief Financial Officer

Jeffrey Katzenberg - Chief Executive Officer, Director

Lew W. Coleman - President

Analysts

Jeffrey Logsdon - BMO Capital Markets

Michael Savner - Banc of America Securities

Ingrid Chung - Goldman Sachs

Jessica Reif-Cohen - Merrill Lynch

Lowell Singer - Cowen & Company

Barton Crockett - J.P. Morgan

Katherine Styponias - Prudential Equity Group

David Miller - Sanders Morris Harris

Richard Greenfield - Pali Research

Evan Wilson - Pacific Crest Securities

Tuna Amobi - Standard & Poor's Equity Group

Eric Handler - Lehman Brothers

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the DreamWorks Animation earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.

(Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Mr. Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you, and good evening, everyone, and welcome to DreamWorks Animation third quarter 2006 earnings conference call.

I am joined on today’s call by our Chief Executive Office, Jeffrey Katzenberg; our President, Lew Coleman; and our Chief Financial Officer, Kris Leslie.

Today’s call will begin with a brief discussion of the quarterly financials, disclosed in today’s press release, followed by an opportunity for you to ask questions.

I would like to remind everyone that 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 on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of factors and uncertainties, including those contained in the company’s annual and quarterly reports, as well as other filings with the SEC. I would encourage all of you to review the risk factors listed in these documents.

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

With that, I would like to now hand the call over to DreamWorks Animation CFO, Kris Leslie. Kris.

Kristina M. Leslie

Thanks, Rich, and good afternoon, everyone. Happy Halloween. I know many of you probably want to get home for the holiday, so I am going to keep my remarks fairly short today.

As we expected, without a release in either the theatrical or home video market, the third quarter was fairly quiet from a financial perspective. The company reported total revenue of $55.6 million, and net income of approximately $10.5 million, or $0.10 per share on a fully diluted basis. We ended the quarter with a cash balance of approximately $536 million.

Looking at revenue for the quarter, Madagascar generated approximately $24.1 million of revenue, primarily through home video sales. Through the third quarter, Madagascar has reached an estimated 20.4 million units shipped net of actual returns and estimated future returns.

Madagascar continues to perform well in catalog, and results were driven by ongoing sales as well as a benefit from the partial reduction of reserves that were established for returns, and for costs related to the transition of home video to our new distributor.

Wallace and Gromit contributed a total of approximately $17.2 million in revenue, driven by its release into domestic pay television, as well as ongoing home video sales. Since its release in the first quarter, the film has reached an estimated 5.1 million units shipped net of actual returns and estimated future returns through the third quarter.

Shark Tale contributed approximately $5.8 million in revenue, driven primarily by home video, and Over the Hedge, which has not yet fully recouped its distribution and marketing costs, contributed $2.1 million in revenue for the period.

Our remaining films and library titles contributed approximately $6.4 million.

The company’s distributor remained at an un-recouped positioned of approximately $7.1 million on Shrek 2 at the end of the third quarter. While Shrek 2 continues to generate catalog sales, revenue at the distributor was offset by costs, some of which were a result of the transition to our new distributor. As a result, the un-recouped position at Paramount remained unchanged since June 30th. We anticipate that with license fees from domestic network television due in the fourth quarter that Shrek 2 will be re-couped by year-end.

Results in the quarter also included a credit from Paramount, due to a renegotiated third-party contract impacting our distribution costs. This credit resulted in a $6.4 million benefit to net revenue, primarily impacting our 2005 releases, and had an EPS impact of approximately $0.01 per share on a fully diluted basis.

Looking at the remainder of the income statement, SG&A for the quarter was approximately $17 million, which included $4.9 million of stock compensation expense in the third quarter. SG&A was down when compared to the same period last year, primarily due to costs incurred in the third quarter of 2005, including costs for our first year Sarbanes Oxley efforts, as well as past litigation.

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

Looking ahead, we expect that revenue for the fourth quarter will primarily be driven by the home video performance of Over the Hedge, which was released domestically on October 17th. In addition to its domestic release, Over the Hedge has been released in a few international markets, with most of the larger international territories coming at the end of the fourth quarter or early first quarter of 2007. We will continue to monitor its performance closely in the coming weeks, particularly as the competition from new family titles increases as we move closer to the holidays.

Our next film, Flushed Away, will be released theatrically in the U.S. on November 3rd. As is typical for a film in the quarter of release, we do not expect to recognize significant revenue before year-end, as our distributor will likely not have re-couped its up-front marketing and distribution costs.

I would also like to remind everyone that as we said last quarter, Flushed Away is a collaboration with Aardman, and as a result, has a slightly different cost structure than a typical release.

While the total cost of the picture fits within our generic model for an original film, up-front payments made to Aardman will result in a higher-than-typical negative cost. However, depending on performance, we would expect this to be offset by lower contingent compensation on the title, resulting in a total that should be in line with our generic film model guidance.

Lastly, as you are all aware, Paul Allen has delivered a notice to trigger the follow-on secondary offering as described in the Holdco arrangements that were put in place at the time of our IPO.

Our Board will determine the appropriate timing for a filing of a registration statement and the completion of the offering in accordance with the relevant agreement. As you are aware, the completion of any offering will be subject to market conditions and other customary factors. Obviously, because this involves a securities offering, we cannot say much more than that at this time.

With that, let me turn it over to Jeffrey.

Jeffrey Katzenberg

Thanks, Kris, and good afternoon, everyone. I want to thank you all for taking the time to join us today.

As Kris pointed out earlier, we had a somewhat quiet third quarter financially, but we certainly had a lot going on in the creative areas.

Madagascar home video continued to perform well as it moved into catalog. The title has now sold over 20 million video units worldwide, placing it among the top-selling titles released in 2005, and number three domestically behind only Star Wars and The Incredibles.

Our latest theatrical release, Over the Hedge, is wrapping up its international release. To date, this film has delivered over $325 million in worldwide box office, making it the eighth biggest title of 2006. The film was also released on home video in the U.S. and some smaller international territories earlier this month, and so far, we are quite pleased with its results to date. This is our first home video release with Paramount, and the partnership is off to a great start.

This coming weekend, we will release our next CG feature, Flushed Away. However, unlike our past collaboration with Aardman, Flushed Away was produced entirely in CG. By holding true to Aardman’s classic look while still achieving the rich, visual imagery that CG animation allows, I believe the film takes CG in a new direction. I believe we have created a film that is unique it both its story and its visual style, that stands out in what has been a very crowded marketplace for animation this year. We look forward to seeing how Flushed Away performs in the coming weeks.

Before we take some of your questions, I wanted to spend a couple of minutes updating you on a few other developments.

As you know, our strategy from the outset has been about building franchises, and I think we have made some great progress on that front in recent months.

Beyond the theatrical release of Shrek the Third next summer, Shrek the Musical is already in development for a possible debut as early as 2008. We also continue to develop Puss in Boots, and are excited about the progress we have made on the project so far. In fact, because of the strength of the concept and the title, which was originally intended as a direct-to-video property, it is now being developed into a full theatrical release. We believe this is where it has the greatest potential to succeed as part of the growing Shrek franchise.

As a result, it will not be released into the direct-to-video market in 2008. This is an important shift from our previous thinking, but based on our current views on direct-to-video, we believe there is more potential to enhance the brand through other channels.

An example of our new opportunities is our partnership with Nickelodeon, which is allowing us to extend our properties into television. Last week, Nickelodeon and DreamWorks announced plans to develop our first two television series based on feature films. The first will be based on the popular penguins from Madagascar, and the second on our 2008 theatrical release, Kung Fu Panda.

We think interaction with these characters on a weekly basis is invaluable for building consumer awareness, enhancing the value in areas such as consumer products, and building the DreamWorks brand.

Finally, today, we have announced our film slate for 2009. Our summer release, currently titled Monsters versus Alien, is being produced by Lisa Stewart and directed by Conrad Vernon, who previously directed Shrek 2, and Rob Letterman, who had previously directed Shark Tale.

Our 2009 holiday release, How to Train Your Dragon, is based on the popular children’s book by Cressida Cowell. The film is being produced by Bonnie Arnold, the producer of our summer hit, Over the Hedge, as well as the original Toy Story and Tarzan. It will be directed by Lorna Cook, who previously directed Spirit: Stallion of the Cimarron, as well as David Soren, who served as head of story on Shark Tale.

Overall, we have a lot in the works, and I believe we are set up to be firing on all cylinders in 2007. With that, let me turn it back over to Rich so we can take some of your questions.

Rich Sullivan

Thanks, Jeffrey. Operator, could you please start the Q&A session and repeat the instructions for logging their questions?

Question-and-Answer Session

Operator

(Operator Instructions)

We have our first question from the line of Jeffrey Logsdon of BMO Capital. Please go ahead.

Jeffrey Logsdon - BMO Capital Markets

Great. Thank you. Jeffrey, should we assume then that Puss in Boots is a 2008 theatrical release, or a subsequent theatrical release with a date to be determined later?

Jeffrey Katzenberg

Right now, our plans would be for it to follow chapter 4 of Shrek, which is scheduled for 2010, so it would follow that.

Jeffrey Logsdon - BMO Capital Markets

Thank you.

Operator

Thank you. Our next question comes from the line of Michael Savner with Banc of America Securities. Please go ahead.

Michael Savner - Banc of America Securities

Thanks very much. Two quick ones. One, Jeffrey, on the secondary, I do not know if this is public information. To the extent that it is, it would be helpful to know if there is any time limit on the back-end in terms of when you are required to have the offering. I think you said you would commence it some time after Flushed Away, but I did not know if there was a time limit on the other side.

Secondly, Kris, maybe if you could just spend a minute reminding us a little bit on the accounting treatment of Wallace and Gromit. You already did take a write-down on the film. The $17 million during the quarter, I assume that was not all from domestic pay TV, so anymore granularity you could give on that, how the breakdown of that came and the accounting treatment for revenue, once you have already taken a write-down, that would be helpful. Thank you.

Jeffrey Katzenberg

Michael, I am going to let Lew Coleman answer the first.

Lew W. Coleman

As you guys probably know, under the Registration Rights Agreement, the company is obliged to use its reasonable best efforts to file a registration statement as soon as practical, but in any event, no later than 90 days after receiving demand.

Additionally, the Board has some flexibility under certain conditions, mostly to ensure that the timing of the offering makes sense for the company and its shareholders, to have some additional delays.

There are also the normal considerations that we take into account, including the market conditions, advice from the under-writers, and that kind of stuff. The bottom line I think is that the offering has been triggered. We are still assessing the timing, as is our Board, and that we believe that the resolution of Holdco, which will occur with this offering, is quite positive for the company.

Kristina M. Leslie

On your second question, I think it had two parts, so let me take the $17 million first. You are right. It is not all from domestic pay TV. The majority was from domestic pay TV. There is also some contribution from home video and pay-per-view in the quarter.

Then, in terms of the accounting, the write-off does not really impact the revenue, so conceptually the way that it works is we recognize revenue as it comes through from the distributor. At the time of the write-off, we write the inventory down to its net realizable value using a present value calculation. So from that point forward, you would expect the amortization of the capitalized costs to almost exactly offset any revenue you are recording. We actually show a small profit when we record revenue because remember, the write-off occurs on a present-value basis, so over time, you effectively make that back up, but the revenue is not impacted by the write-off.

Rich Sullivan

Thanks, Mike. Next question, please.

Operator

Thank you. Our next question comes from the line of Anthony Noto from Goldman Sachs. Please go ahead.

Ingrid Chung - Goldman Sachs

Good afternoon. This is Ingrid Chung for Anthony. Just a couple of questions. Number one, what are the gating factors for doing a potential share buy-back and, if at that point you got through those gating factors, would you consider doing one?

Number two, this is just a quick one, what is still un-recouped on Over the Hedge?

Lew W. Coleman

Ingrid, I will take the share repurchase. There is nothing we can do about a share repurchase until Holdco is dissolved. In fact, we cannot even sort of announce we are interested in one until Holdco is resolved. Once Holdco is resolved, we would go through a normal process of deciding whether or not that is the most appropriate investment for the company to make, and then get Board authorization. So nothing would happen until we essentially went through the recommendations of the Board and had Board authorization.

Kristina M. Leslie

On Over the Hedge, we do not disclose the amount of un-recouped, but conceptually what is un-recouped at this point are any remaining theatrical distribution and marketing costs which, as you know, can range between $125 million and $175 million for a release of that size.

Rich Sullivan

Thanks, Ingrid. Next question, please.

Operator

Our next question comes from the line of Jessica Reif-Cohen with Merrill Lynch. Please go ahead.

Jessica Reif-Cohen - Merrill Lynch

Hi, a couple of questions. First, why didn’t the un-recouped position for Shrek 2 change? Were there any DVD sales in the quarter?

Kristina M. Leslie

I will take that one. Yes, there were ongoing catalog sales in the quarter, but we also incurred some costs related to the switchover in the video distribution from Universal to Paramount, so those sales were offset by costs.

Jessica Reif-Cohen - Merrill Lynch

Okay, and Madagascar, are the reserves now fully released? Was there any TV revenue in the quarter?

Kristina M. Leslie

On the reserve question, Jessica, you know, every quarter we assess the return reserves on all of our titles, taking into account current activity, actual returns, et cetera. So it is an ongoing process where we look at them and make any adjustments necessary every quarter.

Then, in terms of revenue for Madagascar, yes, there was some TV revenue in the quarter, primarily from pay-per-view.

Jessica Reif-Cohen - Merrill Lynch

Then, this is my last question, on the decision to move away from direct-to-video, it sounds like that is a decision just in general, not just for Puss in Boots. Could you walk through the financial impact of that?

Jeffrey Katzenberg

Let me first, Jessica, say that I do not think it is a decision to walk away from the business. I think it is a decision to look at some other opportunities that exist right now today.

For the higher-end production, original production made for direct-to-video, at the kind of cost that we feel we need to do in terms of the representation of a franchise property, and sort of what is still a bit of a crowded marketplace, we have just hit the pause button on it for the moment.

Frankly, very specifically to Puss in Boots, really it is as much about feeling like it has much greater potential as a theatrical film than a direct-to-video.

Jessica Reif-Cohen - Merrill Lynch

Thank you.

Kristina M. Leslie

In terms of a financial impact, at the time of the IPO, we laid out some economics, and I think as Jeffrey pointed out, we do not believe those economics are the same at this point today. There is no particular impact at the moment. We will obviously look forward to some of these opportunities Jeffrey has talked about and start to assess what contribution they may make, but it is too early for us to tell at this point.

Jeffrey Katzenberg

Clearly, again, just to say, there is opportunity in the Shrek Broadway and in these television series, should they go forward and were they to be successful. They would have impact on our consumer products and other related businesses.

Rich Sullivan

Thanks, Jessica. Next question, please.

Operator

Thank you. Our next question comes from the line of Lowell Singer with Cowen and Company. Please go ahead.

Lowell Singer - Cowen & Company

Thank you. A couple of questions. Jeffrey, could you talk about the status of the Aardman relationship following the release of Flushed Away? Will you still make movies with them moving forward, or not?

Second, could you talk a little bit about the economics of taking these two franchises and moving them into the television realm? How do the economics there -- I mean, I think at one point, you maybe even announced or talked about doing a penguins film as a direct-to-video, and if you are taking them as characters and putting them in television, I am wondering what the comparison would be from an economics point of view. Thank you.

Jeffrey Katzenberg

Lowell, on the first one, it is about? I am sorry.

Lowell Singer - Cowen & Company

Aardman.

Jeffrey Katzenberg

Aardman, okay, sorry. On the Aardman front, our original deal with them was for a five-picture deal. This is the completion of picture number two. Under the terms of the deal, subsequent to the release of this film, we have the opportunity to assess where we are at and, at our option, elect to go forward or not. I think we have had a very good relationship with them. This has been a great collaboration with them, and we will reassess after we see how things have gone on Flushed Away.

In terms of the values of these other enterprises, again, I think it is a little early for us to try and quantify what those values are, other than experience and knowledge of things that are going on in the marketplace, say that it is a place of opportunity, not only in consumer products but if you have a TV series, there is then the video release of that TV series that is going to have value for us.

We think that these are two very, very good opportunities for us to invest in right now today. They both occur in 2008, and as we get closer to that, I think we will be able to have some more clarity as to what the actual values would be.

Lowell Singer - Cowen & Company

But presumably, if your folks are working on these, the economics are in the realm of what you would earn from putting those people to work on a feature film. I mean, they must be reasonably attractive for you to commit the resources to two television series.

Jeffrey Katzenberg

Well, they are attractive. The answer is yes, they are attractive.

Lowell Singer - Cowen & Company

Okay, great, thanks, Jeff.

Rich Sullivan

Next question.

Operator

Thank you. Our next question comes from the line of Barton Crockett with J.P. Morgan. Please go ahead.

Barton Crockett - J.P. Morgan

Thank you for taking my question. I wanted to ask you first a little bit about Over the Hedge. You said that you are pleased with the performance so far of the DVD this quarter. It seems to be in line with your generic model, but I was wondering, could you give us some idea of what percentage of your expected sales for DVD this quarter would have already happened in these first couple of weeks when basically the competing DVDs were not out there, and how much of it is really coming later on, after Cars and some of these other competing DVDs come out there, and whether there is any element of conservatism in your outlook? In other words, do you expect less in the back-half of the quarter than you normally would because of the competition?

That would be one question. Then I have one other follow-up.

Jeffrey Katzenberg

Well, just to the first, every time we release a video, we do assess what its specific opportunities are in the marketplace and try as best we can to anticipate how it might be impacted by other factors that would come along subsequent to its release.

Yes, we have, as part of our business plan, assumed that there will be impact by the fact that there are a number of titles that will be coming in the next four weeks that are competitive with it.

Having said that, to date the title has performed to our plan.

Barton Crockett - J.P. Morgan

Switching gears to Madagascar, the revenue that you guys recognized in the quarter was just well above what we were looking for. I am still kind of struggling with how to exactly back into it, and I was wondering if you might be able to break it down a little bit more finely in terms of how much of it was new home video sales in the quarter, roughly, how much of it was that partial reversal that you cited, and how much of it was TV, which I think came up in an earlier question?

Kristina M. Leslie

Yes. We do not get into that level of detail on any of the titles. I would caution you to keep in mind that looking at the return reserves is something we do every single month on every single title. Our financial results will always reflect the impact of that assessment that we make. This happens on a number of titles. We do not get into that level of detail to talk about actual movement in the returns level.

Rich Sullivan

Thanks, Barton. Next question, please.

Operator

Our next question comes from the line of Katherine Styponias from Prudential. Please go ahead.

Katherine Styponias - Prudential Equity Group

Thank you. I have a couple of questions, too. Lew, one question for you, if you could just clarify with respect to the share buy-back, given that you cannot buy back any shares until Holdco is dissolved, is it also fair to say that you cannot buy back any of the shares that Paul Allen might be selling? That is question number one.

Question number two, just a little bit more clarification on the television programming side. The shows are going to be created and aired in 2008, and if so, what is the financing arrangement? Is it going to be fully financed by DreamWorks Animation and therefore fully owned by DreamWorks Animation? Is it going to be typical of TV program, i.e., it is going to be deficit finance, so that not only will it not be a contributor to the bottom line in 2008, it could actually be a drag? Thank you.

Lew W. Coleman

Kathy, it is an awkward question only because you are asking me to sort of predict the future in a number of different ways. I think it is simpler just to say that as long as Holdco is in effect, we are unable to buy back anybody’s shares, including Paul Allen’s.

Jeffrey Katzenberg

On to the second question, Kathy, the TV programming, the intent is for these TV shows to follow and support the theatrical release of Kung Fu Panda and Madagascar 2. They will be fully financed by Nickelodeon. We will not be an investor in the TV shows.

Rich Sullivan

Thanks, Kathy. Next question, please.

Operator

Thank you. Our next question comes from the line of David Miller with Sanders Morris Harris. Please go ahead.

David Miller - Sanders Morris Harris

A couple of questions. Kris, structurally on the secondary, I just want to make sure I understand this, you guys have 90 days from I assume October 11th to prepare the offering, so let’s just call it by January 11th. What exactly has to be prepared before January 11th? Meaning specifically, what exactly do you have to file with the SEC before January 11th? I just want to make sure I understand.

Also, Jeffrey, what are your thoughts on the differences qualitatively between Flushed Away and Wallace and Gromit? I only ask because you have a lot of analysts out there, not necessarily myself, but other analysts talking down expectations for Flushed Away just because it happens to be associated with Aardman. We think that is probably the wrong call, but that just happens to be my argument. Other than the fact that it is CGI and Wallace and Gromit was stop-motion, what do you think are the core differences qualitatively between the two movies? Thanks very much.

Lew W. Coleman

David, to do a public securities offering, we have to file an S3. The S3, because we are a well-known issuer, can be filed close to the time we would actually do a transaction, certainly very close to the time that we would market a transaction. We would assume, under the regs, that it would not be reviewed by the SEC.

Jeffrey Katzenberg

David, in terms of qualitatively trying to find either similarities or differences in these titles, it is very hard for me to do. I have to be honest, I am just not comfortable speculating on it. Flushed Away is a CG movie. Wallace and Gromit was stop-motion. As you know, we have been out actively screening the film. It seems to be well-received. Critical response has been good to the movie. We are looking forward to the release on Friday.

Rich Sullivan

Thanks, David. Next question, please.

Operator

Thank you. Our next question comes from the line of Greenfield with Pali Research. Please go ahead.

Richard Greenfield - Pali Research

Just a couple of questions. One, Jeffrey, you made a comment that you are not an investor in the Nickelodeon development projects. Could you just discuss then, they basically get the right to license your characters or franchises at no cost, with you only benefiting from ancillary sales of those products or of those creations on television? I just want to understand that comment a little bit more.

Second, a question for Kris, the reserve reversal, is this something we should expect more of in the future? Meaning, kind of post what happened with Shrek 2, have you taken a decidedly more conservative view of the DVD marketplace and do you believe you have over-reserved, and that we should expect more future reversals going forward? Thank you.

Jeffrey Katzenberg

On the first question, we have not gone into the specific financial terms of our deal with Nickelodeon. I am not sure that is something that we would do, but nevertheless, just to the question, which was will we be investing capital into the show, the answer is not under the arrangement that we have with them.

Kristina M. Leslie

On the reserve, I do not think you should read anything into the fact that we have made an adjustment in the Madagascar reserve. This is something that we do every quarter based on the best information that we have available to us at the time. It is really nothing more than that.

Rich Sullivan

Thanks, Rich. Next question, please. Operator, can we have the next question, please?

Operator

Thank you. Our next question comes from the line of Evan Wilson with Pacific Crest Securities. Please go ahead.

Evan Wilson - Pacific Crest Securities

Thanks for taking the question, got a couple. First, could you comment on the window for Shrek the Third? I think everybody knows that we have three third iterations of big movie franchises next May, and just curious what you feel about Shrek the Third relative to your other historical releases. Secondarily, could you also comment just on the DVD market in general, now that you have seen the initial loading quantities of Over the Hedge. What is demand like for retail? Give us some comment of what you think the interest for consumers is into DVD in general this holiday season. Thank you.

Jeffrey Katzenberg

Sure. On Shrek the Third, we will be releasing on May 18th, which is the same date that Shrek 1 and Shrek 2 both were successfully released. There are two other very important titles coming in the same month. We are cautiously optimistic. We never underestimate the quality and the performance of the competition. The movie-going marketplace certainly can accommodate all three of these films. The one good thing that has happened is that everything else has cleared away in front of, during, and for a small window behind these titles. We think it is the best release date for the title.

In terms of the DVD market, again, we continue to see real stability in the marketplace. We have now had our two titles perform to our plans and to our expectations, and that seems to be the case on other product in the marketplace, so it does seem to have stabilized and we are pleased with our performance.

Rich Sullivan

Next question, please.

Operator

Thank you. We have a question from the line of Tuna Amobi with Standard & Poor's Equity Group. Please go ahead.

Tuna Amobi - Standard & Poor's Equity Group

Thank you. Are you seeing any benefits yet from the consolidation of your production facilities? I believe that was let a couple years ago. I was wondering if the films you have coming down the pipeline might begin to actually see the benefits of that.

Jeffrey Katzenberg

Okay. The answer is it has been three-and-a-half years in coming, and with the release, the finished completion and release of Flushed Away, we are now fully unified under one platform and one system, and we will now start to see those benefits as we move forward from here. But on the completion of Flushed Away in the end of September, everybody on both lots now have moved on to one operating system, and we expect to see some value from that.

Rich Sullivan

Thanks, Tuna. Next question, please.

Operator

Thank you. Ladies and gentlemen, we have time for one more question. We have a question from the line of Eric Handler with Lehman Brothers. Please go ahead.

Eric Handler - Lehman Brothers

Thank you. A real surprise by the catalog home video sales, and just want to know, were there any home video specials that you are running with retailers this quarter? Secondly, could you just give a little perspective on what is going on with international home video?

Jeffrey Katzenberg

Nothing out of the normal. We had sort of the usual ongoing program through the summer and the quarter. The product performed very well, but nothing unique or out of the ordinary.

In terms of the international business, again there has been some stability in the marketplace, not to the degree that we had seen it here domestically, and so we continue to be very, very cautious and watch very carefully how our product is performing in there. We are a bit more conservative right now about the international marketplace. However, it has been better in the recent period than it was, say, six or nine months or a year ago.

Rich Sullivan

Thanks, Eric, and that concludes our third quarter earnings conference call for today. I would like to remind everyone that a replay of this afternoon’s call will be available shortly and accessible on our DreamWorks Animation website. That address again, www.dreamworksanimation.com. Also, if you have any further questions, please feel free to contact DreamWorks Animation Investor Relations Department. Thank you for participating today, and have a great afternoon.

Operator

Thank you. Ladies and gentlemen, this conference will be available for replay after 6:45 p.m. today until November 12, 2006 at midnight. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 844347. International participants may dial 1-320-365-3844. Again, those numbers are 1-800-475-6701 and 1-320-365-3844, entering the access code 844347.

That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference Service. You may now disconnect.

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Source: DreamWorks Animation Q3 2006 Earnings Call Transcript
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