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DreamWorks Animation SKG, Inc. (NASDAQ:DWA)

Q3 2007 Earnings Call

October 30, 2007 5:15 pm ET

Executives

Rich Sullivan - IR

Jeffrey Katzenberg - CEO

Lew Coleman – President, CFO

Analysts

Michael Savner - Banc of AmericaSecurities

Anthony Noto - Goldman Sachs

Eric Handler - Lehman Brothers

Jessica Reif Cohen - Merrill Lynch

Barton Crockett - JP Morgan

Rich Greenfield - Pali Capital

Dave Miller - Sanders Morris Harris

Doug Creutz - Cowen & Co.

Evan Wilson - Pacific Crest Securities

Drew Crum - Stifel Nicolaus

Operator

Welcome to the DreamWorks Animation earnings conferencecall. (Operator Instructions) I now turn the call over to your host, Mr. RichSullivan. Please go ahead.

Rich Sullivan

Thank you and good afternoon, everyone and welcome toDreamWorks Animation's third quarter 2007 earnings conference call. I am joinedon today's call by our Chief Executive Officer Jeffrey Katzenberg, and ourPresident and Chief Financial Officer Lew Coleman.

Today's call will begin with a brief discussion of thequarterly financials disclosed in today's press release followed by anopportunity for you to ask questions. I'd like to remind everyone that today'spress release is available on our website at www.dreamworksanimation.com.

Before we begin, we need to remind you that certainstatements made on this call may constitute forward-looking statements.Forward-looking statements can vary materially from actual results and aresubject to a number of risks and uncertainties, including those contained inthe company's annual and quarterly reports, as well as in other filings withthe SEC. I would encourage all of you to review the risk factors listed inthese documents. The company undertakes no obligation to update any of itsforward-looking statements.

With that, let me now turn the call over to DreamWorksAnimation's CEO Jeffrey Katzenberg.

Jeffrey Katzenberg

Thanks, Rich. This isan important time of the year for the company with two significant eventsoccurring in the coming weeks. First off, we have the theatrical release of Bee Movie at the end of the week whichis followed by the home video release of Shrekthe Third later in the month.

Before I discuss each of these events in more detail, I wantto highlight the continued theatrical success of Shrek the Third this past quarter. The film is now within a hair ofequaling the success of Shrek 2internationally and a total worldwide box office performance of almost $800 million.

In addition to both being the best domestic opening in thehistory of animated film, Shrek the Thirdhas set a number of box office records abroad. It was the biggest animatedopening of all time in many major international territories including the UK,France, Russiaand Mexico.Clearly, the film was a tremendous theatrical success and has made the Shrekfranchise one of the most successful in movie history.

The next big event for Shrek will be the release of Shrek the Third into the home video marketon November 13. We are confident that it will be among the top performers thisholiday season with the support of a very competitive program at retail.

However, once again I want to remind everyone of thedifficult market conditions facing new releases in the fourth quarter thisyear. After a record-breaking summer at the box office, an unprecedented numberof high-quality titles will be released into the home video market thisquarter. With four titles that performed over $300 million in domestic boxoffice and several others reaching over $200 million, we expect a very stronghome video market overall this holiday season.

That said it's difficult to see how this abundance ofproduct will not impact the individual performance of each title. So in additionto the caveats that we would typically place on the home video release of asequel, we remain especially cautious this holiday due to the unprecedentedlevel of competition from new releases.

Beyond the home video release, the continued success ofShrek has allowed us to expand the franchise into a number of new areas. Shrekwill help mark the start of the holiday season this year by making his firstappearance in the annual Macy's Thanksgiving Day Parade as the official 2007ambassador for the event. Then our holiday TV special, Shrek the Halls will debut on ABC on November 28 at 8:00 pm. It's an outstanding product that wehope will become a holiday classic for years to come.

Finally, we continue to make significant progress inpreparing for the launch of Shrek theMusical on Broadway. The talent that we've assembled for this project isfirst rate and we'll keep you updated in its continued progress with hopes of aBroadway debut by the end of 2008.

While we are certainly excited about expanding into thesenew markets, our primary focus remains on creating successful, high-qualitytheatrical releases. We are just a few days away from our next big theatricalevent, the opening of Bee Movie inthe U.S. onFriday. Working with Jerry Seinfeld on this project has been one of the mostthrilling things to happen here at our studio since its inception. He hasreally brought a passion and energy to the film-making process that I think isevident in the finished product. I'm convinced that audiences who have missedJerry's unique style and humor for all these years will not be at alldisappointed.

Consequently, we believe that especially here in the U.S.,Bee Movie has the potential to reachan audience that may not have otherwise gone to see a typical DreamWorksAnimation film. With Jerry's help, we've developed one of our mostcomprehensive marketing programs to support the opening this weekend. From talkshow appearances to TV vignettes to national advertising spots -- includingfantastic support from our promotional partners like McDonald's and HewlettPackard -- Jerry and his Bee Movieare hard to miss. We are all excited to see how it performs this weekend and inthe coming weeks.

Before I turn it over to Lew to discuss the results in moredetail, I want to mention one final item. I'm very happy to announce today thatwe've selected our project for our fall 2010 release. The film, acquired underthe working title of Master Mind is aproject from Red Hour Films, Ben Stiller's production company. Lara Breay andDenise Cascino will produce, and Cameron Hood and Kyle Jefferson will maketheir animated feature film directing debut on the project.

The film tells a story of a Super Villain who, inaccidentally killing his archrival in the opening sequence of the movie, has tofind a way to reclaim what made his life meaningful. With the addition of thisproject completing our lineup through 2010, I believe we now have one of thestrongest film slates that I've ever been associated with. I'm very excitedabout seeing all of these films and great projects come to fruition in theyears ahead.

With that, let me turn it over to Lew.

Lew Coleman

Good afternoon, everyone. Let me briefly highlight a fewitems before we take your questions. Overall, the company reported $160.8million of total revenue resulting in net income of $47 million or $0.47 pershare on a fully diluted basis. As Jeffrey mentioned, the primary driver of theresults was the international box office performance of Shrek the Third. Most of you know that we settled internationalresults with our distributor on a 30-day lag. As a result, approximately $400million or 85% of the total international box office for Shrek the Third impacted the third quarter.

In total, Shrek theThird contributed $92.1 million of revenue to the company in the period.After Shrek the Third, Over The Hedge and Flushed Away were the largest contributors of revenue with $17.8million and $17.3 million respectively, driven mostly by television and homevideo performance.

Looking ahead to the remainder of 2007, we expect thatrevenue for the fourth quarter will be driven primarily by the home videoperformance of Shrek the Third, whichwill be released in the U.S.on November 13. As Jeffrey pointed out, we're confident that Shrek the Third will be a top performerthis year.

Yet, as we've mentioned several times before, we areapproaching this home video release with caution based upon a number offactors, including the competitive environment, with at least five other mega hitreleases targeted at our core audience coming to market during the fourthquarter. The fact is, historically sequels have generally underperformedprevious chapters in the home video relative to box office. Lastly, box officeto home video tie ratios tend to weaken as box office levels increase, due tothe number of repeat movie-going customers who still only buy one copy of theDVD. So, we've set our expectations and maybe more importantly, our initialshipments to retailers with these variables in mind.

As Jeffrey mentioned, BeeMovie will open in the U.S.on Friday. As is typical for our films, we do not expect to recognizesignificant revenue in the quarter of its release as our distributor will notlikely have recouped its upfront marketing and distribution costs. Also in thequarter, ABC will air Shrek the Halls forthe holidays. The majority of the economics will be recognized in both ourrevenue and expenses in the fourth quarter when the project is delivered.Essentially ABC has reimbursed us for our production costs, so the net profitto us on the project will not be material in the quarter. ABC also has theright to share in a portion of the revenues from the DVD sales beginning at theend of next year.

Turning to the balance sheet, the company ended the quarterwith a cash balance of approximately $544 million. As you know, we completedthe repurchase of approximately $150 million or 4.8 million shares in the thirdquarter. In addition, we repurchased approximately 770,000 shares at $31.79 afterthe close of the third quarter directly from a charitable organization that hadpreviously been established by Steven Spielberg. This brings the total of sharerepurchases for the year to approximately 7.1 million shares or $218 million.

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

Rich Sullivan

Operator, can you please announce the instructions forlogging questions?

Question-and-AnswerSession

Operator

(Operator Instructions) Your first question comes from MichaelSavner - Banc of America Securities.

Michael Savner - Banc of America Securities

Jeffrey, do you have a rough screen count you can give usfor the Bee Movie opening?

Jeffrey Katzenberg

Yes. We will open inabout 3,900 theaters and about 7,000 prints.

Michael Savner - Banc of America Securities

Lew, can you go into a little bit more detail about yourexpectations for the balance sheet and the cash use? Obviously the cash balancereally did swell again even after the buyback. Even adjusting for the roughly$24 million-ish that you just told us you repurchased, when might you revisitthe optimal use of that cash? Is there something else that it's being earmarkedfor?

Lew Coleman

I think as most ofyou know by looking at our balance sheet, we have $50 million of subordinateddebt maturing in the next couple of days. While I can't promise you that we'regoing to pay it off, you ought to think that is probably the likely outcomebecause we haven't made any other arrangements. We also are conscious of thefact that our financing next year on our campus matures. While that is a bitfurther off, we do consider that to be a claim on cash.

We've done what we think is a pretty good job, given thenumber of shares we've repurchased this year. We do not really have anyoutstanding board authorizations remaining at this point and probably will notgo back to the board until sometime early next year. At that point we'll have abetter look at what happened to the Shrek DVD and what happened to Bee Movie.

So I know everybody is interested. We still believe that ifwe can't find a better place to use the cash, it needs to be returned to theshareholder in one form or another. So there's no change in that policy. But atthis point, we are probably going to wait until we see how a few of thesebigger revenue sources pan out before we go back to the board.

Michael Savner - Banc of America Securities

Jeffrey, if I could just ask one last strategic one. DavidPorter recently joined you from Wal-Mart and Tom Freston recently joined the board,though I don't know if he was at it, but I believe you had a board meetingrecently. Can you talk about what impact, if any, either of those individualshave had and what David's role might be coming on, on the distribution side?

Jeffrey Katzenberg

Yes. Well, we're veryexcited. As you say, David Porter, one of the senior merchants at Wal-Mart, hadbeen with them for 20 years plus. David'sjust got a lot of experience in many aspects of sales and retail. I think that the places where he is beingfocused right now is working with Ann Daly on our international home videofront in particular, what we're doing at retail internationally. The programsthere really don't have the same sophistication and the same level of supportthat we see here in the U.S.so we see that as a meaningful opportunity internationally.

Secondly, we are continuing to look at digital delivery andwhat the opportunities are there. That's another thing that David is focusingon and working with Ann Daly directly on it. So he's a great addition to us andI think he will have more and more visibility in lots of areas of the company.

Tom Freston, just a world-class executive with tremendousknowledge in the whole entertainment sector. Just adds, I think, yet anotherreally quality point of view to our board. I think down the road as we start tolook at strategically what are opportunities for our company, Tom is going tobe invaluable.

Operator

Your next question comes from Anthony Noto - Goldman Sachs.

Anthony Noto -Goldman Sachs

Flushed Away and Over The Hedge had a much greatercontribution than we would have thought. I was just wondering if there continues to benew legs of opportunity to leverage that content? Obviously those films hadunderperformed a while back and there was a certain amount of writedown; actuallyWallace & Gromit, Over The Hedge, and Flushed Away, all three I'd put them in the same bucket.

Is the revenue you're recognizing there above what you hadpreviously anticipated, is really the question?

Jeffrey Katzenberg

Yes, let me startwith Flushed Away, first of all. Asyou know, we took a writedown. Part of taking a writedown is the fact that youhave to present value your anticipated future revenues. So essentially part ofwhat you're seeing is the accretion of the present value writedown. In thatrespect it's sort of built into the accounting system more than anything else.

We had better results in TV than we expected, but also TV islumpy. This was one of those lumpy periods for TV. The DVDs are basicallyperforming better than we had expected, mostly because children's titles seemto remain fairly strong in the DVD market.

Anthony Noto -Goldman Sachs

You had recognized approximately $92 million in revenue for Shrek the Third this quarter and younoted 85% of international box office was recorded. Will all the remaining 15%occur in the fourth quarter or will some of that spill over into 2007?

Rich Sullivan

Anthony, this is Rich. You have about $25 million ofinternational box in the second quarter; about $400 million this quarter. Theremainder will hit in the fourth quarter of 2007.

Anthony Noto -Goldman Sachs

Finally I know that you're not going to give us a lot ofcolor on what the Bee Movie will do.

Jeffrey Katzenberg

You're going to ask anyway.

Anthony Noto -Goldman Sachs

I know that you do a lot of testing and ultimately how itplays out we'll see on Monday, but could you tell us how it actually testedfrom an awareness standpoint? Did it resonate with children in your marketingresearch testing?

Jeffrey Katzenberg

Anthony, I just think that research testing is more of atool for the filmmakers in the process of making their film than it is anindicator of how a movie is ultimately going to do. But the film has playedwell across all quadrants. There are different aspects of the film that I thinkit's one of the interesting things about the movie is that for people that comelooking for Jerry Seinfeld's sophisticated sense of humor, they're going tofind it in a big way. For kids who are used to coming to these movies for a lotof the visual and physical things that are so much a part of them, there's alot there for them.

Operator

Your next question comes from Eric Handler - LehmanBrothers.

Eric Handler - Lehman Brothers

I wonder if you could talk a little bit about the home videomarket, given that there is such a large number of mega hits that's targeted atyour core audiences, what have you seen in terms of requests from retail interms of shelf space? Are you going to be allocated a typical amount of shelfspace? Are they cutting back on the order somewhat?

Secondly, what percentage of that home video do you believewill be contributed from the high-def DVD?

Jeffrey Katzenberg

In terms of theretail, the good news for us is that retail has been on alert for this nowsince the beginning of the year. The new releases and something that we've sortof labeled franchise catalog, which means the accompanying titles, in our case,Shrek and Shrek 2-- but you'll find the same for Spidey 1and 2 and for thePotters and for Pirates, et cetera, in it.

Retail has made a great accommodation to us and given us agood deal of high visibility. So I think you're going to see these titles frontand center in a very big way. I think retail sees them as a very attractivetraffic builder for the holiday season. Clearly the boxes don't get bigger, sothere's going to be pressure I think on catalog in the face of that. But forShrek and the Shrek catalog, which is where our focus is, we have very high visibility.

In terms of HD, there's a big push on for it. As apercentage of our business, it will be very, very small. I think you're goingto see a lot of visibility. You're going to see a lot of marketing effortsbehind HD. I think there's actually some great, great creative work thatToshiba has done that we've worked with them on in terms of our characters. SoI think you'll find a lot of attention being given to the market. But in termsof percentage of sales for us it will be very, very small.

Eric Handler - Lehman Brothers

Will there be anybundling with the Toshiba DVD product at all?

Jeffrey Katzenberg

Not in the fourthquarter.

Operator

Your next question comes from Jessica Reif Cohen - MerrillLynch.

Jessica ReifCohen - Merrill Lynch

Jeffrey, as we sithere on the eve of a potential strike, can you talk about your views and howprotected you are? How have you prepared for the strike?

Jeffrey Katzenberg

Our animation, Jessica, our writers that work for us inanimation are actually governed by the Animation Union, which is IATSE local839, we are not under a WGA agreement. I think that we are probably in asomewhat unique situation in terms of that. But again, having said that, Idon't think anybody escapes this.

In terms of the immediate production and delivery of ourslate for 2008, we will not be impacted by a WGA strike if there is to be one.But I think that if there is to be one it's going to have a negative impact oneverybody.

Jessica ReifCohen - Merrill Lynch

When does your union contract expire?

Jeffrey Katzenberg

Ours goes until July2009.

Jessica ReifCohen - Merrill Lynch

On the promotion for the BeeMovie, where does it fall in the range of the P&A that you've providedto us on your various movies?

Jeffrey Katzenberg

It's right online.There are a lot of bells and whistles of some kind of innovative things thatwe've done with Jerry. Obviously there's a lot of work that we did with NBC.But I think the thing is that he has personally been out there in support ofthe film in a way that I'm not sure anybody has ever done before. He loves itand is very proud of it and loves to talk about it. So he has been invaluablein getting out domestically and goes on the road for five weeks to do the sameinternationally. He's literally going to every major territory in the world tosupport it.

Rich Sullivan

The question on P&A was right. It is right in themiddle. I think what you may have been referring to is the production costs of thefilm is more like a sequel production cost. I think we've said that a fewtimes.

Jessica ReifCohen - Merrill Lynch

Right. But I wasasking about promotion, but thank you.

Operator

Your next question comes from Barton Crockett – JP Morgan.

Barton Crockett - JP Morgan

I wanted to ask you about your cash flows in the quarter.You've generated a lot of cash from it looks like working capital benefits,distribution services agreement, unearned revenues, accounts payable. To whatextent should we expect some of that stuff to reverse here in the fourthquarter?

Lew Coleman

I would not expect a lot of reverses in the fourth quarter.You're dealing with slightly different revenue sources coming in in the fourthquarter, particularly on the DVD side. But I would not expect anything to bethat much unusual in terms of how we're consuming cash or the kind of cashwe're going to generate.

Barton Crockett - JP Morgan

You did generate cash from operating activities of $235million in the quarter and the net income was $124 million. So it suggests therewas something unusual in terms of the cash generation in excess of net incomehere. I understand there is lumpiness on the investment and the amortization onthe films, but I guess you're suggesting that there really wasn't anythingunusual in this quarter?

Lew Coleman

I think what you saw in this quarter as much as from a cashstandpoint is that Paramount wasfully recouped by the end of the second quarter in Shrek. So we essentiallycovered the prints and the ads. We're now down into a reasonable share of therevenues.

In the fourth quarter, it's unlikely Bee Movie will be recouped and that's why we say you're not goingto see a lot of Bee Movie.Conversely, in all likelihood we'll recoup pretty quickly on the Shrek DVDrelease.

Lew Coleman

I think you have to remember and this is where I think theworking capital gets a little bit difficult to measure we'll have a big eventin the fourth quarter, the Shrek theThird DVD. What normally ends up happening is we end the quarter with areceivable for the cash for that amount which comes into the following quarter.So you'll see that that fluctuation as we typically see with the DVD.

Barton Crockett - JP Morgan

Maybe we can follow-up a little bit more offline on that.And then switching gears here a little bit just in terms of the Over The Hedge DVD sales here in thethird quarter, should we assume that that's kind of the units that you shipwill dip a lot here in the fourth quarter? You’ve already sold a lot of thedemand and it's going to be very competitive, can you give us a sense of a the hitby the competition?

Jeffrey Katzenberg

Some, but we'veworked pretty hard to get our niche. The one thing that's kind of nice is thatour catalog is strong and not so deep. So we actually are able to get it somevisibility. Having one of the strongest titles for the fourth quarter isallowing us to put programs in place to get us some visibility. So I don'tthink anything exceptional is going to happen but I also don't think that we'regoing to disappear.

Barton Crockett - JP Morgan

Finally here just with that big chunk of cash sitting onyour balance sheet, just to be clear, I mean outside of just having cash tofinance your movies, is there any other strategic reason to sit on that? Acquisitions?Strategic alternatives? Dry powder for whatever may come down the pike in termsof strategic changes? Is there any other reason to sit on that?

Lew Coleman

I think we've indicated that we're comfortable having acouple of movies worth of production costs sitting in cash at all times just sowe don't have to go out and finance a film slate or add risk to our balancesheet because we believe that the risk in the operating model is sufficientwithout adding financial risk to the company.

Beyond that, we continually evaluate a variety of optionswhich we try to do obviously on a disciplined basis. We are continually lookingfor the kinds of acquisitions which would be closely related either to our IPor our customer base. At the moment we haven't found anything. But it doesn'tmean we're not looking and it also doesn't mean that the money is burning ahole in our pocket. We are being fairly disciplined and careful. If we can'tfind a better use for the cash other than financing a couple of movieproductions, it will in all likelihood get returned in some way to theshareholders.

Jeffrey Katzenberg

Barton, I mean, you're literally coming off a quarter wherewe just invested $220 million in our stock. So it's not like we're sittingstill.

Barton Crockett - JP Morgan

Clearly there's no complaints and you guys have done a lot.I just wanted to understand from here. That helps and I appreciate it.

Jeffrey Katzenberg

I think Lew haspositioned it in absolutely the perfect way. You're coming into a fourth quarter,we have two very, very big events coming. What we would like to do is see wherewe are on the other side of those events, which is going into the first quarternext year and then we'll reassess it. So we'll keep our eye on it. Promise.

Operator

Your next question comes from Rich Greenfield - PaliCapital.

Rich Greenfield - Pali Capital

First is a follow-up on the last question in terms ofallocation of capital. Just given what is a pretty significant increase in yourcash balance, does it make you think especially with the share shrink thatyou've had this year, do you start to think about how long you want to be apublic company or what the benefits are of being a public company? That wouldbe helpful to address.

Jeffrey, Transformers did extremely well on DVD. It was oneof the first big films out of the box, and it did more than 4.5 million plusunits in the first week. I just wanted to get your sense of does that set abetter tone relative to the caution that you urged earlier in the conferencecall, is that a good first indicator? Is that a unique title because it's anoriginal movie, et cetera? Thanks.

Lew Coleman

This issue of whether or not we want to be a public companyor not is not on the agenda. We are a public company. We like the currency thatwe have available. As you all know, we've gone through a certain amount of painand anguish being a public company. We don't have any intent to buy it back inprivately, slowly through share repurchases. Period.

Rich Sullivan

What was the secondpart of that question?

Rich Greenfield - Pali Capital

Transformers and does that have any impact on your viewaround the DVD marketplace in Q4 or is that a unique title?

Jeffrey Katzenberg

It was good news foreverybody. To have the market get off to a great start that way is good newsfor everyone.

Operator

Your next question comes from Dave Miller - SMH Capital.

Dave Miller - Sanders Morris Harris

I'm assuming you guys feel comfortable with the scale thatwill exist by March of '09 interms of overall digital projectors and therefore 3D screens by the time Monsters vs. Aliens is released in Marchof '09. So given that, should we assume as analysts that around sort of thatmid-'09 timeframe would be the time at which you may switch to self distributorship,perhaps in the United States -- maybe not in Europe, but definitely in theUnited States? If that's the case, would you consider funding your ownadvertising expenses? Thank you.

Lew Coleman

A lot of different things there, Dave. Let me say that Ithink it's a little bit early for us to have that kind of insight as to what'09 theatrical digital delivery is going to look like. In any event, we have adistribution agreement with Paramountwhich goes to 2012 and we're in a very happy and good relationship with them. Self-distributionis not something that's on the table for us and not something that we areconsidering.

Operator

Your next question comes from Doug Creutz - Cowen & Co.

Doug Creutz - Cowen & Co.

I was wondering ifyou could tell me with respect to your decision to go HD DVD support exclusive,should we expect to see any impact to the P&L, any direct impact to theP&L from that? Thanks.

Lew Coleman

As you know, we have not disclosed or confirmed whatevereconomic incentives there are. But from an accounting standpoint, the economicincentives would be attached to the ultimates of individual films and thereforewould be amortized as we would amortize the profit on any film.

So I guess the direct answer to your direct question isthere's no direct relationship but there is an indirect relationship throughthe ultimate process.

Doug Creutz - Cowen & Co.

So your gross marginswould essentially be higher?

Lew Coleman

Yes.

Operator

Your next question comes from Evan Wilson - Pacific Crest.

Evan Wilson - Pacific Crest Securities

After Shrek TheThird’s international performance, I understand Shrek is Shrek. Could youtalk about the international, helping us recalibrate our expectations for a ratiobetween domestic and international going forward for all your future releases? Justa little bit more about the market dynamics there.

Jeffrey Katzenberg

Again, I think it isa title-by-title situation. There are certain titles that would seem to havestronger pulls. The Seinfeld factor would seem to probably add incrementalboost to the U.S.,Australia, UKand be less impactful in other parts of the world. So whatever the halo is ofthat, we would not expect to and I think we've actually said to you in previouscalls that we expect the boost here and therefore the tie ratio betweendomestic and international we think is going to be closer to 1:1.

You have a movie like Madagascar which I think as you know, playedextremely strongly internationally. Shrek obviously had a great summer in it.So, the good news is when our titles perform internationally, they are super,super strong. I would expect Kung FuPanda is going to play extremely well internationally.

Operator

Your next question comes from Drew Crum - Stifel Nicolaus.

Drew Crum - Stifel Nicolaus

Jeffrey, I wonder if you could comment on a couple ofscheduling items. First for Bee Movieit appears the schedule is staggered. I just wonder if you could explain therationale there versus going with more of a day and date scenario? And thenmaybe talk about the rationale behind moving the release date up for Monsters vs. Aliens?

Jeffrey Katzenberg

Sure. So depending onthe time of year when a movie is coming out really is what determines thereleasing windows. We have historically followed the family audience and so ourrelease dates are very, very much reflective of in individual countries,holidays, school breaks and the like. There are some places, instances in whichpiracy is a very, very big issue for us. Sometimes that will impact us decidingto go on a day and date rather than delaying because of what can happen in anindividual country under those circumstances. So we are always looking at that.

But the November film release tends to be more compactedthan the summer one. The holidays traditionally are closer. Obviously,Thanksgiving is unique here in this country. But the Christmas holiday ispretty much around the world. We tend to follow those holidays.

In terms of Monstersvs. Aliens, that decision was really based on what we think are going to bethe constraints of 3D digital theaters and the rollout of them. We were notconcerned with competing creatively with Avatar,Jim Cameron's movie. I think they're very, very different films. Just like thisweekend with Bee Movie and American Gangsters. These films appealto very, very different audiences and both can do well.

For us it was really about wanting to be able to grab themaximum number of 3D screens. Given the release window that we've chosen, Ithink you'll see us with very near, if not at, 100% of the 3D screens,certainly in North America, made available to us. They'llbe available to us over a good six to eight week period of time. We feel theadvantage of that versus that summer window really made the difference.

Drew Crum - Stifel Nicolaus

I think the last call or maybe the two quarters ago youmentioned piracy being an issue in the home entertainment market and foreignmarkets. Is that something that's still persistent or is that something that'ssubsided?

Jeffrey Katzenberg

There's no question it is persistent. And it is, again,different approaches in different countries for us to deal with it. But thereare certain countries in which it has flared up and the impact is very visible.

Drew Crum - Stifel Nicolaus

Lastly, could I get a current share count for what you hadat the end of the quarter?

Lew Coleman

About 99 million shares.

Operator

That was the last question, sir. I turn the call over toyou.

Rich Sullivan

Well that concludes the third quarter earnings conferencecall. I'd like to remind everyone that a replay of this call will be availableshortly and accessible on our website. That address again,www.dreamworksanimation.com.

Also if you have any further questions, please feel free tocontact the DreamWorks Animation Investor Relations department. Thank you verymuch and have a great afternoon.

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