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DreamWorks Animation SKG, Inc. (NASDAQ:DWA)

Q4 2011 Earnings Conference Call

February 28, 2012 4:30 PM ET

Executives

Richard Sullivan – Head, Corporate Finance

Jeffrey Katzenberg – CEO

Lew Coleman – President and CFO

Ann Daly – COO

Analysts

Barton Crockett – Lazard Capital Markets

Doug Creutz – Cowen & Company

David Miller – Caris & Company

Vasily Karasyov – Susquehanna Financial

Chris Marvin – Barclays Capital

Benjamin Mogil – Stifel Nicolaus

Richard Greenfield – BTIG

James Marsh – Piper Jaffray & Co.

Tony Wible – Janney Montgomery Scott

Tuna Amobi – Standard & Poor's Equity

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DreamWorks Animation Earnings Call. At this time, all lines are in a listen-only mode. (Operator instructions) I would also like to remind you that today’s conference is being recorded, and will be available for replay after 7 PM tonight through midnight Tuesday, March 13. You know may access the AT&T executive playback service at anytime by dialing 1800-475-6701 and entering the access code 234-240. International callers dial 320-365-3844 using the same code 234-240.

I will now turn the conference over to Rich Sullivan, Head of Corporate Finance. Please go ahead, sir.

Richard Sullivan

Thank you and good afternoon everybody. Welcome to DreamWorks Animation’s Fourth Quarter and Year-End 2011 Earnings Conference Call. With me today is our Chief Executive Officer, Jeffrey Katzenberg; and our President and Chief Financial Officer, Lew Coleman.

This call will begin with a brief discussion of our 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 at 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.

With that, I would like to now hand the call over to DreamWorks Animation’s Chief Executive Officer, Jeffrey Katzenberg. Jeffrey?

Jeffrey Katzenberg

Thanks, Rich and good afternoon everyone. Although 2011 is a very successful year for DreamWorks Animation at the box office, it did reveal some challenges for the industry as a whole. Our 2011 films, Kung Fu Panda 2 and Puss In Boots, together reached $1.2 billion at the worldwide box office, and both are among the top dozen highest grossing movies of the year.

More than half of our total box office dollars in 2011 came from 3D, which we continue to view as an outstanding investment. Following on the heels of the Kung Fu Panda 2’s more than $665 million at the box office, Puss In Boots has reached approximately $535 million with nearly $385 million coming from international markets. Puss’ worldwide gross will continue to grow when it is released in Japan on March 17.

In addition to their success at the box office, Kung Fu Panda 2 and Puss In Boots were among the very best reviewed films of 2011, and I could not be more proud that both movies received Academy award nominations for best animated feature films. Puss In Boots was released into the home video market four days ago, and included blue ray and DVD double packs, featuring new premium bonus content, while Puss In Boots the 3D [ph]. The title is off to an excellent start, and we have very good news to share today.

Puss In Boots exceeded our expectations in its initial release weekend, and became the number one best selling title for the week ended February 26th. So, clearly its first couple of days of sales performance were strong and we are thrilled to be out of the gate with such great results. That said this is only one weekend of results from the US, so we will carefully monitor Puss In Boots performance during the rest of its domestic release, and in the majority of its international territories through April. Setting aside the opening weekend of Puss In Boots, Kung Fu Panda 2 was released into the home entertainment market on December 13, and while we believe its performance was primarily title-specific, it also proves that the overall home video environment remains challenging.

While animation titles remain at the top of the charts, domestic box office to DVD conversion ratios across the industry do continue to decline. And internationally, box office success has not translated as well into home video sales since many emerging territories still lack mature post-theatrical markets. Moving on to the next big event for the company, the release of Madagascar 3 on June 8, it is the first time we will present the world of roosters [ph] in 3D, and once again we are confident that we will raise the bar in terms of what audiences will see and experience in movie theaters.

In addition to our core business, we continue to look for ways to extend our IT to our non-film initiatives. Our fourth quarter results were impacted by our TV specials and demonstrate that there is a digital market for this type of short-form content. By example, Netflix has purchased the streaming rights to 4 of our 6 TV specials. Our Holiday Specials have also served as a breeding ground for our creative leadership team, helps us to build our franchises and establish the pipeline in India, where the quality of work has far exceeded our expectations.

So, while they may not deliver margins at the same level as our core business, we do believe our TV specials are a sound investment. Turning to our other television content, with the Penguins of Madagascar and Kung Fu Panda; Legends of Awesomeness, DreamWorks Animation and Nickelodeon have two of the top four animated programs on TV in the fourth quarter with kids aged 2 to 11. We look forward to launching our How to Train Your Dragon series on Cartoon Network in the second half of this year.

Turning to our latest announcement, earlier this month we agreed to form a joint venture with three key partners in China, to establish the leading Chinese branded family entertainment company. This is a historic deal for DreamWorks Animation and for the industry as a whole. Together with China Media Capital, Shanghai Media Group and Shanghai Alliance Investment Limited, we will develop and produce high quality original Chinese animated and live action content for distribution within China and hopefully to export to other territories around the world. Oriental DreamWorks will also pursue business opportunities in live entertainment, theme parks, mobile, online, interactive games and consumer products.

We believe this is a compelling strategic initiative and a long-term growth opportunity that reaffirms the value of DreamWorks Animation brand in the global marketplace. Finally, a few words about our distribution agreement, as we've said in the past this is an important and valuable strategic opportunity for the company, which we will begin to actively pursue in the late spring or early summer. We plan to make a final decision on distribution no later than this fall.

With that, I'll turn it over to Lew for the financial results.

Lew Coleman

Thanks, Jeffrey, and good afternoon, everyone. For the fourth quarter, the company reported total revenue of approximately $219 million, resulting in net income of $24 million or $0.29 per share on a fully diluted basis. For the full year, revenue was $706 million, and net income was $87 million or $1.02 per share on a fully diluted basis.

Turning to our fourth quarter results, Puss In Boots contributed revenue of approximately $24 million to the quarter, two-thirds of which was driven by worldwide box office and the other third from consumer products. Puss In Boots contribution from consumer products was lower than we have seen historically, primarily due to lower videogame licensing revenues. The decline in console videogame industry should impact our 2012 films as well. To-date, Puss In Boots has grossed approximately $535 million at the worldwide box office, three fourths of which was earned in the fourth quarter.

It is important to note that Puss In Boots costs were higher than our typical films for two primary reasons. First, its prints and advertising spend is at the top of our guidance range of $150 million to $175 million. Second, Puss In Boots included talent payments not usually associated with an original film, and its production cost was slightly above the $130 million that is typical for our pictures.

Our summer 2011 release, Kung Fu Panda 2 contributed revenue of approximately $50 million to the quarter primarily from home video. By the end of the quarter it had reached an estimated 5.1 million net home entertainment units sold worldwide. Moving to our 2010 films, Megamind contributed approximately $19 million of revenue to the quarter primarily from international pay TV, which represents the majority of its remaining pay television revenues. Through the end of the quarter Megamind has reached an estimated 5 million net home entertainment unit sold worldwide.

Shrek Forever After and How to Train Your Dragon contributed approximately $9 million and $8 million of revenue to the quarter, respectively primarily from home video and international TV. By the end of the fourth quarter, Shrek Forever After and How to Train Your Dragon had each reached an estimated 9.7 net home entertainment units sold worldwide. Library and other items contributed approximately $110 million of revenue to the quarter.

Of this amount our non-film businesses contributed approximately $73 million primarily from the release of our TV specials into the home entertainment and digital markets. Of our non-film business revenue, approximately $9 million is attributed to Shrek the Musical and (inaudible). As a reminder our non-film businesses delivered lower profit margins than our core business. Our remaining film catalog and other items contributed approximately $37 million to the fourth quarter.

Moving on to the remainder of the income statement, cost of revenues for the quarter equaled $159 million, resulting in gross profit of approximately $59 million. Selling, general and administrative expenses totaled $26 million, including approximately $6 million of stock compensation expense. This compares to $31 million including approximately $7.5 million of stock comp expense in the same period in 2010.

Turning to taxes, the company's net income tax expense for the fourth quarter was approximately $10 million. Our combined effective tax rate, which is our actual tax rate coupled with the effect of our tax sharing agreement with a former stockholder was approximately 28% for the quarter. Assuming no change in statutory tax rates, we expect the company's 2012 combined effective tax rate to continue to be approximately 30%.

Moving to the balance sheet, the company ended the fourth quarter with approximately $116 million of cash and we do not expect our cash balance to increase until after the release of Madagascar 3. In 2011, the company repurchased approximately 900,000 shares for $25 million. The company has $125 million remaining under its current share repurchases authorization. Looking ahead, the coming year will be driven by Puss In Boots continued performance in the international box office, its home video release and our 2012 feature films, Madagascar 3 and the Rise Of The Guardians.

We expect the company's library and other revenue to be down year-over-year in 2012 for two primary reasons. First, there's no significant TV event for our feature films in the first quarter of 2012; and second, we had a one-time revenue event for the TV specials during the fourth quarter of 2011.

Now, I'd like to take a moment to make a few comments regarding the cost of our 2012 films, both of which are impacted by changes to our release schedule among other factors. First, the change from three films to two films in 2012 led to a higher allocation of cost for both Madagascar 3 and Rise Of The Guardians. Second, because we moved back the release date of Guardians it will be in production longer than a typical DreamWorks Animation film, resulting in higher costs.

Lastly, both films have been in production during a period in which we have been investing in the company's production infrastructure. These together with other factors will lead to the combined, direct and indirect production cost of approximately $145 million of both Madagascar 3 and Rise of the Guardians. We do expect our direct and indirect production cost per picture to return to more normalized levels after 2012, and we expect the P&A spend on both Madagascar 3 and Rise of the Guardians to be within our range of $150 million to $175 million.

Before we take your questions, I'd like to make one final note regarding our joint venture to form a family entertainment company in China. DreamWorks Animation will own approximately 45% of the JV. The enterprise will initially be capitalized with cash and intellectual property valued at $330 million.

Of this amount, DreamWorks Animation will contribute a limited amount of cash in addition to a certain intangible assets, including the use of our brand. We do not expect that there will be material financial impact to the company in the short term.

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

Richard Sullivan

Thank, Lew. Operator, can we have the first question please?

Question-and-Answer Session

Jeffrey Katzenberg

Moderator, can we have the first question please?

Operator

Yes. That will come from Barton Crockett with Lazard Capital Markets.

Jeffrey Katzenberg

Thank you.

Barton Crockett - Lazard Capital Markets

Okay, great. Thanks for taking the question. I guess a couple if I could. First, on the DVD side, I think, you know, the launch of future here is really to replace DVD sell-through, physical sell-through with some electronic sell- through perhaps cloud-based, which frankly is starting to become available in places like Amazon.com, iTunes, do you see anything, any electronic sell-through at a meaningful level in your DVD unit volumes today, and how do you expect that to kind of ramp over time?

Jeffrey Katzenberg

Hi, Barton. Thanks. No, actually conversion to digital so far has been very, very modest. It's a very small part of our business, and again I think all of us are very excited about the potential of digital delivery and for sure it is coming. But if you're asking right now, boots on the ground what are we seeing on a month to month basis right now, it's pretty miniscule.

Barton Crockett - Lazard Capital Markets

Okay, and then if I could ask one about that China joint venture, is there anything in the structure there that gives you an exclusive, or is the structure such that other companies, like Disney or anyone else who wanted to pursue family entertainment could strike similar partnerships and have similar presence?

Jeffrey Katzenberg

You know, I don't think we should be speculating on what's going to happen with others. This is the first time that a western media company has been invited into a venture like this. All of us have been pursuing this now for the better part of 10 or 15 years. It is very unique and is a first, whether there would be more to follow, we don't know.

Barton Crockett - Lazard Capital Markets

Okay. I will leave it there. Thank you.

Richard Sullivan

Thanks Barton. Next question please.

Operator

That will come from Doug Creutz with Cowen & Company.

Doug Creutz - Cowen & Company

Yes. Thank you. You mentioned that you're pleased with the start that Puss In Boots that's gotten off to home video its first weekend, I was just wondering, if you could, maybe quantify how Puss In Boots first weekend compares to Megamind's first weekend last year?

Jeffrey Katzenberg

Yes, actually I think we tell you exactly Megamind…

Lew Coleman

Megamind last year on the three day [ph] was about a million units, and I believe that this day on the three day core Puss were about 1.2 million units …

Jeffrey Katzenberg

We're about 20% ahead of Megamind.

Doug Creutz - Cowen & Company

But how about on an ASP basis?

Jeffrey Katzenberg

From a price perspective?

Doug Creutz - Cowen & Company

Yes.

Ann Daly

Yes, I think that we're seeing just off of a handful of accounts that are sharing that information with us directly that the selling price is a bit higher in the marketplace than it was with Megamind, but again it's very fluid because what happens over time as you will see pricing on initial release, and then it will change and it will change the actual average price over the course of the release. But right now, I would say on balance, it sounds like it was a little bit higher price point marketplace compared to Megamind.

Jeffrey Katzenberg

Right and we had very high conversion of the premium.

Doug Creutz - Cowen & Company

Okay. Thank you. That is very helpful.

Jeffrey Katzenberg

We have very high percentage of premiums sold on this.

Richard Sullivan

Next question please.

Operator

That will come from David Miller with Caris & Company.

David Miller - Caris & Company

Yes, hi guys. Lew, just a couple of questions on the China joint venture, when will the first film be released under the joint venture as it stands right now, and then just given that you're probably going to be capitalizing some film costs, I would think just immediately, correct me if I'm wrong on that, Lew, when would you feel comfortable creating a below the line entry accounting for minority interest? Thanks very much.

Lew Coleman

David, I think you had about three questions tucked in there. At this point, we do not think that we will be consolidating the joint venture. So it will come in as a minority line. You should see it relatively soon only because there will be some expenses and some revenue associated. The first film to be produced in its entirety or almost its entirety in China will be released in 2016, but there is some possibility that the joint venture will help us distribute the films coming in from the US that would show up earlier on the P&L statement.

David Miller - Caris & Company

Okay, great. And then my understanding is that there are some contingencies in the JV whereby certain things would have to happen for you guys to contribute cash on your own, and certain things would have to happen for them to contribute IP on their own. Could you go into any detail surrounding that or are you just not prepared to talk about that at this point?

Lew Coleman

David, you know, we filed the summary terms of the agreement and because it has lots of different sort of complex terms for all sorts of different conditions, you're probably better off grabbing the agreement that we filed. I think generally speaking we have, excuse me. It's going to be filed later today, so you will get a much better look at that.

There are some conditions that are required to be met for us to fully fund it. Some of these have to do with various kinds of licenses over a period of time. There are some conditions on the other side to, but I think generally as you'll see in the agreement we're putting in more IP than cash, they are putting in more cash than IP, and we expect the amount of capitalization to last through the first two or three years.

David Miller - Caris & Company

Okay, wonderful. Thank you.

Richard Sullivan

Thanks David. Next question please.

Operator

That will be Vasily Karasyov with Susquehanna Financial.

Vasily Karasyov - Susquehanna Financial

Thank you. Good afternoon. First a quick one for Lew, can you please quantify the one-time benefit from non-film revenue in the quarter, I am sorry if you did and I missed it, and the second one for Jeffrey, Jeffrey, as you think about the new distribution deal in hypothetical terms, can you walk us through the possible, the universe of options out there for you outside of just full on distribution deal with one of the major studios bringing it in-house, bring in-house domestic, but not international, doing it on a film-by-film basis, and what kind of benefits and costs are involved? Thank you.

Lew Coleman

Let me take the first one Vasily, if you go through some of the numbers I gave you, you will conclude that the number you are looking for is about $65 million.

Jeffrey Katzenberg

And Vasily, on the distribution side of it, you know, I think we are excited by the fact that there are many different options for us right now, we're considering all of them. And we have brought on board Chuck Viane as consultant for us. He is deep into exploration of this with a strategic team here at the company, and we are looking at all of the variables and opportunities domestic, international, the major companies. So I think it's just a little early for us to try and dive into the specifics other than to say we seem to have a number of very good options.

Vasily Karasyov - Susquehanna Financial

All right. Thank you very much.

Richard Sullivan

Thanks Vasily. Next question please.

Operator

That is Anthony DiClemente with Barclays Capital.

Chris Marvin - Barclays Capital

This is actually Chris Marvin for Anthony. So, Puss In Boots has been performing very well internationally and appears to be headed for an international gross of close to $400 million I think with the Japan release, and with Kung Fu Panda 2 it is a similar theme. But you mentioned on the last call that the out performance of international relative to domestic was really because of competition from Hangover II on the domestic side. But for Puss In Boots what drove the upside for international relative to domestic and is this a trend we should expect to continue going forward?

Jeffrey Katzenberg

Well, you know, again, it's interesting because the domestic marketplace we had six movies released within a four week period of time, family pictures. So, I don't know how much that did or did not impact or I will say that I think Puss In Boots traveled exceedingly well to many parts of the world that performed outstandingly well across much of Southern Europe over into blockbuster number, and Russia performed extremely well throughout all of South America.

So, it traveled well and I think that Antonio Banderas and Salma Hayek went out on road for an extended tour on this, and they seem to have been extremely well received, got a lot of notoriety [ph] throughout the world. I don’t know that there is – I think the good news is that the international marketplace is continuing to grow pretty significantly, and then in terms of the domestic marketplace we are a bit more optimistic about it this year. We've gone from well over 25 or 28 big family releases in 2011 down to closer to about 15 this year, with considerably less animated movies. Just by example, by the time Madagascar comes out, we will actually only be the third animated release in the year when we come out by June 8. So, lot of moving parts there.

Chris Marvin - Barclays Capital

Okay, thanks. And just one on the aftermarket, if I could, UltraViolet is being mentioned as a platform that can ultimately shift consumer behavior back towards owning right and then renting on for content. As you try to offset some of the secular pressures relating to DVD sales, do you see UltraViolet as a longer term solution, and I guess just more generally what is your current strategy for growing aftermarket revenues?

Jeffrey Katzenberg

Ann, you want to take this?

Ann Daly

Sure. I would say that UltraViolet has a version of a solution for consumers who can now buy a digital copy of a movie and have confidence that it can be stored in an environment that allows them access from variety of different avenues is a one important step for consumers to actually gain confidence of moving from a physical world to the digital world.

We are supportive of that and other life technologies so that consumers can actually begin to create a new purchasing pattern and move from that digital space. And we are going to pursue and support all of those in order to help make that happen.

Chris Marvin - Barclays Capital

Thank you.

Richard Sullivan

Thanks Chris. Next question.

Operator

We have Ben Mogil with Stifel Nicolaus.

Benjamin Mogil - Stifel Nicolaus

Hi, good afternoon. Thanks for taking the question. So, two questions, one is more a clarification. Lew, on that $119 million revenue number, should we be looking at it that 65 was television specials, 9 was the Shrek The Musical, and 45 was the core film library in library is that the right numbers?

Richard Sullivan

Ben. It is Richard. I think it was $109 million, I think, is the number you are actually referring to and I believe 9 was for Shrek The Musical, about 36 million was for our catalog library for feature films, and everything else was TV. In that bucket includes both the TV specials, which have both physical good and digital as well as the TV series revenue.

Benjamin Mogil - Stifel Nicolaus

Okay. That's great.

Richard Sullivan

That 65 was in reference specifically to the revenue generated on TV specials.

Benjamin Mogil - Stifel Nicolaus

Okay, 65 was the TV specials alone. Okay. In terms of, and as far as shifting over to digital and I am not sure if you – if you have them, I'm not sure you can give it to us. Can you give us a sense of what Kung Fu Panda 2 and what the library numbers were on digital just to get a sense of sort of how the migration is coming along?

Jeffrey Katzenberg

I think that for the most we don't disclose that to answer your immediate question, and I think what we've said historically still holds that it's fairly small in a single digit in terms of percentage of the total, and for the most part this is still for our business a physical good sell-through business.

Benjamin Mogil - Stifel Nicolaus

Okay. That is it from me. Thank you very much.

Jeffrey Katzenberg

Thanks Ben.

Operator

And next we have Richard Greenfield with BTIG.

Richard Greenfield - BTIG

Hi, thanks for taking the question. When you look at the non-film revenue, I think, you mentioned before that I think Lew called attention to the fact that was lower margin revenue, but I would think that the NetFlix library payments essentially get booked once on catalog. I would assume it is very high business. So, could you just help kind of clarify how to think about the margin between film and non-film in this particular quarter because of that one-off event and then just when you look at marketing at retails for something like Puss In Boots, when I look at, kind of, circulars over the weekend, there didn't seem to be a lot of promotion, normally like the TV screens that are marketed or filled with ads for the next upcoming movie. Is that something that you and I think other distributors are just pulling back on or was it just something specific to this film and how you thought about marketing it? Thanks.

Lew Coleman

Let me take a crack at the first one. Rich, on the non-film revenue margin issue, the Netflix deal included a bunch of TV specials. The TV specials are accounted for just like a film, so that they wind up having capitalized cost, because they haven't been released in the theatres, you don't have the cases you do with DVDs, which are generally sort of almost all revenue. So, in this particular case the way the margins worked out against the cost in the ultimate produced a very low gross profit percentage.

I don't know if that makes sense.

Richard Greenfield - BTIG

So it was basically accelerated amortization because you booked all the revenue at one time versus being let out over time?

Lew Coleman

Yes, and at that point we took care of most of all the capitalized cost.

Ann Daly

And then in regards to the second question about the marketing on Puss In Boots, every release has a different campaign and in general, the circular activity that we saw on Puss In Boots, we were very happy with. We thought we got very sizeable ad cuts in the circular with very visible pricing, so we were happy with that. I would also say that the accounts in very specifically set up – stepped up with big in-store presence in campaigns including placement in store at the front of the store, and we think that is one of the reasons why we're off to such a great start clearly with the Puss In Boots.

Richard Greenfield - BTIG

And could you just follow-up on Redbox, it's been talked about at the conferences a lot in the last couple of days, basically being seen as one of the major problems for the film industry, and especially for DVD sell-through or like overall sell-through of content. Just curious kind of where you stand. I know Puss In Boots is obviously available today in Redbox and curious what you think of that?

Ann Daly

Because our films are primarily family films and purchases, you know, we tend to look at Redbox as incremental business to us, and in fact we found that the rental of the family title can often be an incentive to purchase. So, that may be different from a live action title, but for the family business, we think that, that is incremental to what we are doing in sell-through.

Richard Greenfield - BTIG

Thank you.

Richard Sullivan

Thanks Rich. Next question please.

Operator

We have James Marsh with Piper Jaffray.

James Marsh - Piper Jaffray & Co

Yes, two quick questions on the China JV. First, do you have an expected range for your average production budget in that market, obviously you've got a more limited home entertainment market there, so you're going to be more reliant on theatrical? So just kind of wondering where that might be to generate appropriate returns? And then secondly, could you discuss specifically who you expect to use to handle the distribution in China?

Jeffrey Katzenberg

Well, on the cost side, I think that – I don't think we are ready to sort of lay a marker down on exactly what the cost side will look like. On the revenue side again, you have a market that is enjoying explosive growth, and we believe that will continue, that trend is going to continue if not accelerate over the next four to five years, but we obviously we'll take into consideration both the cost side and the revenue side here and evaluating what we feel we can invest in our titles that are being made there.

And on the distribution side of it, this is something that is being done in conjunction with our partners, Shanghai Media Group, as you probably know, this is second largest media company in China today. They have fair amount of expertise in pretty much every aspect of film and TV business, and they are taking a lead on this.

James Marsh - Piper Jaffray & Co

Thank you.

Richard Sullivan

Next question please.

Operator

(Operator instructions) And we will go next to Tony Wible with Janney Montgomery Scott.

Tony Wible - Janney Montgomery Scott

Hi, with the China deal, I guess, what can we start to expect as far as grant revenue you would receive and the timing of that and then also how should we start to think about international rents on theatrical, now that you have the China deal. I guess, if you can just kind of bring us up to date on where those rents are going, and then I have one follow-up.

Lew Coleman

At this point, we're not disclosing revenue. I think, generally there is a couple of things going on on sort of the rental issue in China, one is you've seen recently there has been a broader base plan to raise the amount of rents received by film producers. Additionally, if we produce in China for the Chinese audience, we will not be part of the 20 or now 30 or so films that are going to be let in with controlled revenue splits. We will be in the local market and able to negotiate what we can negotiate with our distributors who will also be our joint venture.

Tony Wible - Janney Montgomery Scott

Okay. Can you just confirm that there is grant revenue with the China deal?

Lew Coleman

There is. What kind of revenue?

Tony Wible - Janney Montgomery Scott

Grants revenue. Are you receiving grant…

Lew Coleman

Yes, I know what you're talking about. What you got to remember is that our three major partners are a part of the government. So, these are sovereign funds and a government-owned media company. So within that context, you would not expect to receive grant revenues beyond what is available to local producers.

Tony Wible - Janney Montgomery Scott

Okay, and on the Netflix Catalog, is that exclusive and if not, I guess, should we assume that if there is incremental deal since you accelerated the amortization that that would have a high incremental margin?

Lew Coleman

You're referring, excuse me, to Netflix Catalog or to Netflix TV Special?

Tony Wible - Janney Montgomery Scott

The catalog sales that fell into this quarter and last?

Lew Coleman

Without getting too specific of what's available when with Netflix, so there is really not a lot of catalog titles available to Netflix at this time, as far as feature films is concerned. In general, the Netflix deal gives us certain rights to sell our titles that would be not just exclusive to Netflix. So, I think, there are certain things, some of them are past Pay-TV deals that is exclusive to Netflix, but we do have certain rights including the ability to sell digital copies of the product while it's in the Netflix window.

Tony Wible - Janney Montgomery Scott

Got you. Thank you.

Richard Sullivan

Next question please.

Operator

It is from Tuna Amobi with Standard & Poor's Equity.

Tuna Amobi - Standard & Poor's Equity

Thank you so much. I have a few questions as well. So on the JV, Jeff, I think you quoted [ph] a same value could actually experience some revenues as early as this year, particularly on the merge and the life side. So, I'm just kind of wondering if you can confirm that and maybe help us to understand where those opportunities might come from and how large they might be?

Jeffrey Katzenberg

Right. Well, so the last thing is no, we can't tell you how large they may be, but we do expect to be in revenue producing mode in the joint venture this year, both in terms of some consumer products, opportunities that we're pursuing, and some other media opportunities, some of which involve existing IP that we have that we would contribute to the joint venture, but we're not ready to quantify that, yes, it's just too soon.

Tuna Amobi - Standard & Poor's Equity

Okay. Fair enough. On the distribution deal, I know, you've made your point that you want to get all the information before making a decision. But in the investment community, the issue seems to be one of uncertainty out there, and it just seems like the goal post has moved again, I think you've said that you expect that decision by summer, and now it seems like it's getting pushed back to the fall, which is really looking down the wire as you look ahead to your film next spring. So I guess the question is other than the fact that you're taking more time to get all the information you need, are there any issues potentially that maybe standing in the way or any unexpected issue that could be delaying the decision it would be helpful?

Lew Coleman

No, there is no issue. We're looking at this as a major strategic opportunity for us, and we think there are a number of different options, and we want to explore each and every one of them. We don't feel any of the time pressure that you're feeling. So, we are sorry if we're giving you anxiety. We don't mean to do that. We're not having any about it because we do feel like there are a number of viable options for us.

We could make a deal tomorrow in 24 hours, and will be done with it, but we don't think that's the best that we would necessarily have made, the best deal if you do it in that timeframe. And we don't think that doing it under the day-to-day microscope of people trying to guess us or second guess us is necessarily good for the company or for our shareholders. So we expect to do it in the timeframe that we discussed, which is early summer. If it takes a little longer than that, that's okay. We feel – as long as we have it in place by the fall, it would be great. We'll keep you posted.

Tuna Amobi - Standard & Poor's Equity

Lastly – thanks very much for that clarification. And lastly on the – you guys had two films on the Academy Award Nominations for Best Picture, Best Animated Film, which I think by most accounts could have virtually guaranteed a lot that you would come out with the price. I'm wondering, if like some people you were disappointed with that – with Rango coming out on top and what lessons perhaps could have – how this might affect your perception in terms of future marketing strategy for your films?

Jeffrey Katzenberg

Well, I guess I have to start with saying that, if somebody who still thinks that Academy Award is the ultimate gold standard, kind of the Tiffany [ph] recognition of excellence, I'm hard pressed to feel badly that we made two movies this last year, both of which the members of the academy lead were among the five best produced movies of the year. So that's a pretty exceptional thing and extraordinary thing.

I think it's only the second time in the history of the Academy or in the history of this awards certainly 10 or 11 years that it's been around that that's happened. And you know, as the issue of well might we have been served better if we had one movie instead of two, next time, I'm in that situation too, and I will call you up and you talk to the producers, directors and the 400 people that worked on the film that – in our infinite wisdom we will choose to not submit for an Academy Award.

Tuna Amobi - Standard & Poor's Equity

Got it. Thank you.

Jeffrey Katzenberg

I have twins, a boy and a girl. I just have to tell you I love them both equally.

Tuna Amobi - Standard & Poor's Equity

Got it. Thank you.

Jeffrey Katzenberg

We got to play that equally.

Tuna Amobi - Standard & Poor's Equity

Thank you so much.

Richard Sullivan

Thanks Tuna. Next question please.

Operator

We have no one else in queue. Please go ahead with any...

Richard Sullivan

Well, that concludes our fourth quarter call and year-end earnings for today. I'd like to remind everyone that a replay of this call will be available shortly on DreamWorks Animation website that address again, www.dreamworksanimation.com. If you have any additional questions, please feel free to contact DreamWorks Animation Investor Relations department. Thanks again for participating. Have a great evening.

Operator

Thank you. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.

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