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Executives

Richard Sullivan – Head, Corporate Finance

Lew Coleman – President and CFO

Jeffrey Katzenberg – CEO

Analysts

Barton Crockett – Lazard Capital Markets

Doug Creutz – Cowen & Company

Benjamin Swinburne – Morgan Stanley

James Marsh – Piper Jaffray

David Miller – Caris & Company

Vasily Karasyov – Susquehanna Financial

Chris Merwin – Barclays

Ben Mogil – Stifel Nicolaus

Richard Greenfield – BTIG

Tony Wible – Janney

Tuna Amobi – S&P Capital IQ

Michael Corty – Morningstar

Dreamworks Animation Skg Inc. (DWA) Q1 2012 Earnings Call May 2, 2012 4:30 PM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the DreamWorks Animation First Quarter Earnings Call. At this time, all lines are in a listen-only mode. Later, there’ll be an opportunity for your questions. (Operator Instructions)

I’d also like to remind you that today’s conference is being recorded and will be available for replay after 7 P.M. tonight through midnight, Tuesday, May 15. You may access the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code 244157. International callers, dial 320-365-3844 using the same code, 244157.

I’ll now turn the conference over to your host, Rich Sullivan, DreamWorks Animation, Corporate Finance. Please go ahead, sir.

Richard Sullivan

Thank you and good afternoon, everyone. Welcome to DreamWorks Animation’s first quarter 2012 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; that web address, www.dreamworksanimation.com.

Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company’s annual and quarterly reports as well as with 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 now like to turn the call over to DreamWorks Animation’s Chief Financial Officer, Lew Coleman. Lew?

Lew Coleman

Thanks, Rich. Good afternoon, everyone. For the first quarter of 2012, the company reported total revenue of approximately $136 million resulting in net income of $9 million or $0.11 per share on a fully diluted basis. Without a theatrical release in the first quarter, results were driven by prior year titles.

Puss in Boots contributed revenue of approximately $74 million to the first quarter, primarily from home video and international box office. By the end of the quarter, it had reached an estimated 3.8 million net home entertainment units sold worldwide.

Kung Fu Panda 2 contributed revenue of approximately $14 million to the quarter, primarily from home entertainment and reached an estimated 5.5 million net home entertainment units sold worldwide by the end of the quarter.

Megamind contributed revenue of $5 million to the quarter, primarily from international Pay TV and home video with an estimated 5.3 million net home entertainment units sold worldwide through the quarter-end.

And Shrek Forever After contributed revenue of approximately $3 million to the quarter, primarily from home video. By the end of the quarter it reached an estimated 10 million net home entertainment units sold worldwide.

Turning to a change in the way we discuss our results, we are now separating revenue from our library category and revenue from other. Library only includes revenue directly related to our featured films and titles are added to our library during the quarter of the second anniversary of their domestic theatrical release.

Our library is still relatively young and recently added titles still have several years of amortization remaining. It is important to remember that the profit margin for each individual film is the same the day after a title enters our library as it was the day before. In the first quarter, library contributed revenue of approximately $27 million. Library revenue will fluctuate from quarter-to-quarter particularly as recently added titles enter their free TV windows. Looking ahead, we do not expect our library revenue to increase until the second half of 2012 when both Shrek Forever After and How to Train Your Dragon enter their free TV windows.

The other category will now include non-feature films specific revenue including television specials, series and live shows. This amounted to approximately $13 million of revenue in the last quarter of which Shrek, the Musical in London was the single biggest contributor. Our non-featured film business currently delivers significantly lower profit margins than our core business.

Moving to the remainder of the income statement, cost of revenues for the quarter equaled $97 million, resulting in a gross profit of approximately $40 million. Selling, general and administrative expenses for the first quarter totaled $27 million, a decline of 8.8% from the first quarter last year.

Turning to taxes, the company’s income tax expense for the first quarter was approximately $5 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 35.5%. We currently expect our full year combined effective tax rate to be in the low 30% range.

Moving to the balance sheet; the company entered the first quarter with cash balance of approximately $89 million. Our diluted share count for the first quarter was 84.8 million and our remaining share repurchase authorization is $125 million.

Looking ahead, the production cost of both Madagascar 3 and Rise of the Guardians will be approximately 15% higher than is typical for our films. We expect second quarter results to be driven by the theatrical release of Madagascar 3 domestically and in selected international territories including France, Russia, Latin American and China.

Madagascar 3 will be released in a significant number of key international territories late in 2012 due to the scheduling decisions relating to this year’s summer Olympics. In particular, it will be released in Australia, Italy, Japan, The Nordic region and Spain in the third quarter and in Germany and the UK in the fourth quarter.

As a result of the film’s release schedule, we expect our distributor will spend only about half of its worldwide prints and advertising expense in the second quarter. Beyond the performance of Madagascar 3, we expect pay TV revenues for Kung Fu Panda 2 and home entertainment revenues for Puss in Boots to contribute to the company’s second quarter results.

With that, I’ll turn the call over to Jeffrey.

Jeffrey Katzenberg

Thanks, Lew, and good afternoon, everyone. As expected it was a relatively quiet first quarter, but I do want to focus on two items before we take your questions. The first is our home video results for Puss in Boots and the second is a look ahead at our future film slate.

As we mentioned last quarter, Puss in Boots got off to an excellent start. It was the number one best selling title for the first two weeks of its home video release. It’s performed well since then, delivering a comparable sell-through ratio domestically as we were seeing last year for animated titles.

Puss in Boots had over 1 million digital transactions in the U.S. during its first four weeks of release, the biggest number of any of our titles to date. Its results make Puss in Boots the 16th profitable DreamWorks only branded CG movie in a row. On average the 10 films we’ve released since 2007 have grossed $200 million at the domestic box office and with the growth of international theatrical markets, our films now have achieved blockbuster performance of $550 million at the worldwide box office on average over the last five years.

The next big event for the company is the release of Madagascar 3, Europe’s Most Wanted on June 8 and I’m very proud to say that I believe it’s the best Madagascar movie yet. At its heart’s the very big idea that takes our zoosters on an exciting world wind journey to a brand-new place.

Our well-known cast featuring Ben Stiller, Chris Rock, David Schwimmer, Jada Pinkett Smith and Sacha Baron Cohen is joined by a great collection of new characters played by Bryan Cranston, Martin Short, Jessica Chastain and our villain is being voiced by Frances McDormand. Madagascar 3 is filled with a ton of comedy and adventure and marks the first time audiences will get to experience this franchise in 3D. We look forward to seeing how it plays around the world throughout the summer and as Lew mentioned, into the second half of the year.

After our Madagascar sequel we will release an original film Rise of the Guardians on November 21. It’s based on a book series by acclaimed author William Joyce and ties together the adventure of the greatest heroes of childhood, Santa Claus, the Tooth Fairy, The Sandman and the Easter Bunny.

Our All-Star Cast features Chris Pine, Alec Baldwin, Hugh Jackman, Isla Fisher and Jude Law. Our first theatrical trailer was met with exceptional feedback from audiences when it debuted earlier last month and our online trailer has been viewed by over 11 million people since its April 5 launch receiving widespread attention from fans and critics.

Rise of the Guardians is the first of five original films that DreamWorks Animation will release over the next two years followed by The Crudes, Turbo, Me & My Shadow, and then finally, Peabody and Sherman. We’re very confident that among these five are a number of new franchise properties for the company.

So, with that, we’ll be happy to take your questions.

Richard Sullivan

Great. Thanks. First question, please.

Question-and-Answer Session

Operator

Thank you. Our first question is from Barton Crockett with Lazard Capital Markets.

Barton Crockett – Lazard Capital Markets

Okay, great. Thank you for taking the question. I was wondering if you could provide us an update of where you wanted the exploration of distribution alternatives. I mean has anything happened or are we still in a holding pattern at this point?

Jeffrey Katzenberg

Barton, no change from last time. As I think we shared with you, it’s our plan to really get on to pursuing this after the release of Madagascar. So, our process will begin in June and we anticipate it being concluded no later than Labor Day.

Barton Crockett – Lazard Capital Markets

Okay. And I was also wondering if you could update us on progress in China, if anything’s happened and I doubt there’s anything to say, but there have been press reports about government investigations there, if there is anything to say about that, I’d be interested in hearing it.

Jeffrey Katzenberg

Well, as you know we don’t comment on that. So, I think we’ll punt on that one.

Barton Crockett – Lazard Capital Markets

Okay. But in terms of your progress in China, has anything happened there yet?

Jeffrey Katzenberg

We continue to actually make great progress on multiple fronts there both with regard to the animation studio, our joint venture there, some development opportunities. We’ve had excellent engagement and it continues to expand in terms of the scope of it. Lew and our team are on their way back to China this weekend. We then have a large contingent visiting us here at the end of this month in May and then I’m back over there for a week in June. So, many, many irons in the fire there and we continue to be very excited about what seems to be opportunities there for us.

Barton Crockett – Lazard Capital Markets

Okay, great. I’ll leave it there. Thank you.

Jeffrey Katzenberg

Thanks.

Richard Sullivan

Thanks, Barton. Next question, please.

Operator

Okay, that will be Doug Creutz with Cowen & Company.

Doug Creutz – Cowen & Company

Thanks. Given that the incremental Kung Fu Panda 2 sales only appear to be about $400,000 in the quarter, the revenue number looked sort of high. So I wonder if you could maybe talk about what’s going on there?

Jeffrey Katzenberg

Rich, is there something there?

Richard Sullivan

Yeah. I mean, I think we have a little bit of – obviously, beyond just the units themselves there’s also things like set television, most of the pay-per-view revenues in there as well. So most of it is related to home video.

Doug Creutz – Cowen & Company

But it might not be physical unit home videos, is that what you’re saying?

Richard Sullivan

It may not be unit driven.

Doug Creutz – Cowen & Company

Okay. Thank you. That helps.

Richard Sullivan

Next question, please.

Operator

Thank you. We’ll go to Ben Swinburne with Morgan Stanley.

Benjamin Swinburne – Morgan Stanley

Thanks. Good afternoon. I actually wanted to touch on that digital transaction data point you guys gave, I think on Puss in Boots. I think you said over 1 million. Jeffrey, how are you thinking about digital distribution of your films beyond the stuff you’ve done with Netflix, are you excited about electronic sell-through? Do you think this is largely VOD pay-per-view that we’re seeing, and do you think the cable satellite guys are getting a little better at that platform and can really drive real revenue? And just going back to Rich’s comment about the Panda revenue.

And if I could ask one follow-up on just sort of on the modeling side, was your comment about the P&A being spread through the rest of the year, I guess this is for anybody, suggesting that we won’t see this recouped in the second quarter or are you saying we should look at this as two different P&A buckets for the domestic and then sort of international later in the year? Any help there would be interesting.

Jeffrey Katzenberg

So, first, I’ll just give you a little bit more insight on the first part of your question and I’ll let Lew or Rich do the second one, which is in the Puss in Boots million digital transactions, 75% of those were CVOD, cable, satellite, video-on-demand transactions and 25% of them were IVOD or EST. And I think we continue to see promise in this emerging distribution and consumption by our consumers and I just want to say, emerging. We’re not there yet, but it’s growing and it would seem in the long-term measured in the next several years that it is going to become very, very important and very valuable.

Lew Coleman

I think on the P&A, the easiest way to think about it is probably in two separate buckets. What is likely to happen, when you spread the buckets out, is that likely we will recoup for the film and then it will go unrecouped as you get into some of the international markets and then recoup again later towards the end of the year. So, it’s going to be a little bit of a swing particularly in and out of the quarters on being unrecouped and maybe twice this year.

Richard Sullivan

Obviously that depends upon the domestic performance of the film.

Benjamin Swinburne – Morgan Stanley

Right. That makes sense. Well, thank you very much.

Operator

Your next…

Richard Sullivan

Next question, please.

Operator

That will be James Marsh with Piper Jaffray.

James Marsh – Piper Jaffray

Great, thanks. Thanks very much. Quick question on China here. China films groups in backing a competitor Imax in China and mostly the key to that would be to get the digital master and digitally convert that. Would you guys consider releasing your digital master to a China film group a couple months before release in that market and what criteria would you consider as you look at that option?

Jeffrey Katzenberg

Well, the answer is I don’t know. It’s not something that we have looked at or considered. To be honest with you, given the wide release that we’ve had for our films there and sort of the popularity of them out beyond just the top two or three cities, that would seem like that would maybe not be the smartest release pattern for us. But I would have to – I don’t know enough to answer that question with certainty.

James Marsh – Piper Jaffray

Okay. That’s helpful. And then just a follow-up on that digital sell-through data point. How does that million units compare to films with similar domestic box office? Have you compared it to other films to see how strong it was?

Jeffrey Katzenberg

It’s grown substantially for us. I don’t have a percentage for you and I don’t know how it tracks against competitive product.

James Marsh – Piper Jaffray

Okay. Thanks anyway.

Richard Sullivan

Thanks, James. Next question, please.

Operator

Thank you. We have David Miller with Caris & Co.

David Miller – Caris & Company

Yeah, hi. I have two for Lew. Lew, deferred revenue was unusually high in the quarter, $53.7 million versus $19 million last year. Is that related to the Chinese joint venture or is there something going on there?

And then also the consulting fees you’re paying out to Chuck Viane, I assume you house those in SG&A and the only reason I ask is just because SG&A looked unusually low in the quarter, which is obviously great for your EPS line. But I had thought that some consulting fees were being paid out to Chuck in the March quarter. Let me know if I have that wrong. Thank you.

Lew Coleman

David, on the deferred revenue, the blip is really HBO.

David Miller – Caris & Company

Oh, I see. Okay.

Lew Coleman

And I don’t know what the answer is on the consulting fees for Chuck other than we would expense them, and that’s probably what we did with them.

Richard Sullivan

That’s correct.

David Miller – Caris & Company

Okay. Thank you.

Richard Sullivan

Thanks, David. Next question, please.

Operator

Vasily Karasyov with Susquehanna Financial.

Vasily Karasyov – Susquehanna Financial

Thank you very much. Good afternoon. Jeffery, I was wondering since it’s a quiet quarter, maybe I would ask you about how your view on animation and its relative importance versus other genres in movie making evolved since you started DreamWorks Animation and where it is now given there is so much competition now and everyone seems to be making CGI movies and what do you think that means for you and what this dynamic will be going forward in two, three, five years what you guys expect from the competitive standpoint?

Jeffrey Katzenberg

Okay. Well, I’ll give you the short answer to it because the long answer to that I’m sure will have us banging into other people’s earnings calls. So, you know, as always the animation business has been in which we’ve seen cycles of production. Last year was a significant uptick in the number of films that were released, particularly – not just animation, but combination animation and even family titles last year were almost double what they had been in the previous two or three years before.

If you look at the total revenues for the pie itself, it actually expanded and expanded decently except it was being split by a substantial number of films. And so, I think to some degree last year, at least in the domestic marketplace, the wide releases were divvying up the pot a bit.

In total, the animation business has become the single most mainstream, most successful genre in movies today. And it’s continued to be – if you look at the top 20 titles, it is without a question, the dominating genre of films. I think this year feels like it’s a bit more of a normalized market. There are far fewer animated titles and far fewer family titles.

As an example, by the time Madagascar comes out, there in fact will only have been one CGI animated movie in front of it, one stop motion animated film and very little family product. If you compare it to last year, last year there was three times as many animated releases and family titles that were in the marketplace prior to the release of Kung Fu Panda.

Going forward, I think many people have come into the animated field. They’ve made movies here. I think when you look at the actual bottom line of those films versus maybe what their box office grosses were and then look at their international market and their home video markets afterwards, I think people actually – other than the handful of super high end films, consistently made by the Pixars, and Blue Sky and Illumination and DreamWorks. Outside of that, the rest of the work being done has probably not been very profitable if not just the opposite of that.

So, it looks easier than it is. People come in, they try it. It doesn’t necessarily work for them and they go away. So, right now the market looks pretty attractive for the next two years or so.

Vasily Karasyov – Susquehanna Financial

All right. Thank you very much.

Richard Sullivan

Thanks, Vasily. Next question please.

Operator

Thank you. We have Anthony DiClemente with Barclays.

Richard Sullivan

Hey, Anthony.

Chris Merwin – Barclays

Hi, this is actually Chris Merwin for Anthony. I was wondering if you could give us some color on your strategy for monetizing your catalog content. Obviously, you have the deal with Netflix, although it doesn’t sound like the library is going to be a big part of that near-term. Have you been talking to other S5 providers about potentially licensing some of your content on a non-exclusive basis to sort of augment the revenues there?

Richard Sullivan

It’s a good question. As far as Netflix is concerned, I think most – that’s an exclusive relationship in that window. Just like HBO was in the PayTV window in the deal prior, Netflix is an exclusive relationship. So, selling to other carriers would be – go against the rights both in the HBO and Netflix deal.

As far as other things we’re doing in the digital space with our catalog, we recently announced that we were part of the Wal-Mart Voodoo transaction, so bringing our catalog into the digital world. We’ve launched that. We’re also looking for additional TV type deals internationally that would mirror the Netflix deal in the U.S. So, we are looking at a number of different areas in the U.S. in particular, however, it is restricted by what we’ve already committed to both HBO and Netflix.

Lew Coleman

To answer your question, we are seeing, you know, some meaningful new opportunities internationally with the use of our library and digital delivery of it, particularly in the emerging markets.

Chris Merwin – Barclays

Okay, great. Thanks. And then would you also mind breaking out roughly how much Shrek musical contributed to the non-film revenue of about $13.5 million I think it was.

Richard Sullivan

It’s about 6 million.

Chris Merwin – Barclays

Okay. Great. Thank you.

Richard Sullivan

Yeah. Next question, please.

Operator

Thank you. And next is Ben Mogil with Stifel Nicholas.

Ben Mogil – Stifel Nicolaus

Hi, good afternoon. Thanks for taking the quick question. So, just a couple of questions, Lew, I just want to make sure I heard you currently, is the budget commentary that you gave on Madagascar 3 and Guardians, is it still $145 million on the actual budget SP&A?

Lew Coleman

Yeah, it’s right in the range. Its $145 million, not just in SP&A, but including talent as well. It’s direct and indirect production costs.

Ben Mogil – Stifel Nicolaus

Okay.

Lew Coleman

With the sequel, you’ll have additional talent related costs associated with the film.

Ben Mogil – Stifel Nicolaus

So, just confirming it’s the exact same as what you gave last quarter, right?

Lew Coleman

Correct.

Ben Mogil – Stifel Nicolaus

Okay. And then in terms of the digital transaction, so let’s call it 250,000 of them were sell-through, is that in addition to 3.8 million DVD units or is that embedded in that number effectively.

Lew Coleman

It’s included in that number.

Ben Mogil – Stifel Nicolaus

It’s included, okay. And then lastly, Lew, just from a timing perspective, and it was interesting you talked about the chance the film could go recoup unrecouped on Madagascar because of the timing, do you anticipate that you could possibly actually not show revenue until maybe even early next year only because Paramount may hold back on everything or is that unlikely?

Lew Coleman

I think that’s very unlikely. We’ve actually had films that have gone from recouped to unrecouped again in the past, it’s not unusual. So the way to think about this is, think about the domestic release probably being recouped in a standard fashion. Then think about at least the first half of the international release probably not being recouped, and the last half of it being recouped.

So, what you may wind up seeing is a pattern where the middle stages of the release have – are not recouped and the early part of the release is recouped and the later part of the release is recouped for this year.

Richard Sullivan

Just to make sure, Ben, we’re clear; this isn’t a reflection of our expectation of performance of the picture. It’s solely related to the release dates associated with the film. Because of the Olympics, we’ve moved a few of these release dates later into 2012 including releases for big territories like the United Kingdom in the fourth quarter. That not only affects the box office that we’re going to be receiving, but also the release of the DVD which has also used historically to recoup in the fourth quarter that film. So, just the timing of revenue for that film is spread because of release dates. I didn’t want you think we’re giving any kind of indication of performance on our end.

Ben Mogil – Stifel Nicolaus

Sure. I understood. You have a sense of the territories and the timing. Maybe let me ask it a little differently and I’m not trying to get to guidance perspective. But is it kind of fair to say that half of the international box office you think will be – half international markets from box office perspective will be released in 2Q and then the other half in 4Q or is it more half 3Q, half 4Q outside of the U.S.?

Lew Coleman

No. don’t – I’m watching heads shaking here. Nobody guess at that, please. If you want to follow-up on that, we can actually sit down and look at the territories and give you a more accurate – not a wild guess.

Richard Sullivan

Ben, the release schedule is available on the website. And so the best thing to do is let’s you and I walk through each of the territories. Clearly, it depends on the success of each of those territories to really do that equation. But we can certainly give you an idea.

Jeffrey Katzenberg

But even just in terms of market share, what percentage of the market is being released in the second part, you know, we can give you that information accurately. I just don’t want people guessing at it.

Ben Mogil – Stifel Nicolaus

Yeah, absolutely. I was looking for guidance – general market share. That’s exactly what I was referring to.

Jeffrey Katzenberg

Okay.

Ben Mogil – Stifel Nicolaus

Okay. Thanks. That’s it for me.

Richard Sullivan

Great. Thanks, Ben.

Operator

And we’ll go to Richard Greenfield with BTIG.

Richard Greenfield – BTIG

Hi. A couple of questions. One, just getting back to this question of the international release, delaying it in major European territories to the length that you are makes a lot of sense because of the Olympics. Just curious given the kind of state of piracy and kind of where we’re now in terms of when you can put out kind of a U.S. home video for a movie like this. How do you think about containing the relative risk related to piracy with that type of delay in markets like the UK and Germany?

And then second question, just in terms of the distribution deal, should we assume at this point that you might end up paying a higher fee for distribution or just give us some sense – it doesn’t sound like you’re moving down the path of doing self distribution. So just curious how to think about the distribution fee that you may end up paying going forward after the Paramount deal end. Thanks.

Jeffrey Katzenberg

Great. So on the first issue, this is not the first time we’ve released in – our movies rolled out over a period of time in the same – in a similar set of circumstance four years ago, two years ago with soccer, European soccer. This is something that we’ve done historically and with some regularity to it.

The countries where piracy for our product, and I emphasize our product which we don’t necessarily follow the typical patterns of everybody else in this, are not in the delayed windows. So, we do not expect that we will be materially adversely affected by these delays from a piracy standpoint and in fact believe we have competitively outstanding release windows and particularly in the UK and Germany are excellent examples of that. A place like Russia we’re day to day just for those reasons. So I think we’re in good shape with the rollout here, vis-à-vis the piracy issue.

In terms of the distribution side of it, all options are on the table. I think it would be premature for you or anyone else to assume or presume that self distribution is still not a serious and real and viable option for us, that in fact is what Chuck Leon has devoted a pretty good part of his time here with us making sure that that option is something that we are fully exploring and taking a look at.

In terms of speculating the terms of what the deal will be, Rich, I just don’t – I don’t think we can or we should. I don’t know that we’re going to know until we get into the marketplace and we see who’s interested and on what basis and what the other opportunities that go along with it.

I think I said this once before, but I want to reaffirm again. The value of the deal cannot and should not be measured solely in what the distribution fee is because depending on who the partner is, there are opportunities to create meaningful incremental value to DreamWorks shareholders that are separate and aside from the fee itself.

A perfect example of that is the deal that we had with Paramount, have had, continue to have with Paramount has a very large component that involves Nickelodeon and we have obviously created some very significant assets in partnership with Nickelodeon as well as promotional opportunities and so lots of factors to put into this. The fee itself doesn’t get you to the bottom line.

Richard Greenfield – BTIG

Thank you very much, Jeffrey.

Richard Sullivan

Thanks, Richard. Next question, please.

Operator

Thank you. That will be Tony Wible with Janney.

Tony Wible – Janney

I was hoping you could touch on the delayed international release. Will that throw off some of the post theatrical windows too or do you anticipate kind of compressing DVD a little bit closer in some of those markets? And second question is, on the carve-out of the nonfilm product, is there a signal in there that you plan to grow that business or what was kind of the logic in kind of carving out catalog from nonfilm activity?

Lew Coleman

Tony, why don’t take the second one first. The reason we carved it out was that we felt that the nature of the other revenue was significantly different than the nature of the library revenue. And we thought it would be better to start giving just a clean library number for solely that reason.

Jeffrey Katzenberg

Margin, margin’s different than that and so we’re just...

Lew Coleman

So, we continue to emphasize library and we continue to emphasize other. So, it doesn’t represent a change in strategy, it just represents sort of cleaning up one reporting item that was becoming increasingly difficult to explain when it was lumped together.

Richard Sullivan

More transparency. And then on the DVD windows, pretty much in most territories follow a pattern of usually in the neighborhood of about 16 weeks. So, and in many, many countries that’s by regulation or by pattern of distribution agreement with exhibition. So, it’s a – we will not be breaking any of those windows, if that’s your question.

Tony Wible – Janney

Okay, great, that helps. Thank you.

Richard Sullivan

Next question, please.

Operator

Thank you. We have Tuna Amobi with S&P Capital IQ.

Tuna Amobi – S&P Capital IQ

Hi, good evening, good afternoon. And so my question’s on Madagascar 3, right. So, it seems to me that given the minimal competition as Jeffrey alluded to domestically, as well as the fact that it’s coming out in 3D. You know, it seems to me that domestically it seems like the stars are aligned to significantly outperform. And as I look at the international release schedule, China in particular, I was wondering how that film, you know, the strategy might kind of be different than what you did in the prior installment, what, if any, role your JV partners might play. I suspect there’s none but I was wondering if, perhaps, this could present some opportunities that you didn’t have before.

So, internationally, any perspective on that film in China would be helpful as well, granted that the Olympics would, you know, might be a factor that, as you alluded to. I’m not sure if the Olympics net-net is a positive or negative. So I’m just trying to get a sense of what factors that you see may play into the overall box office expectations of that film?

Lew Coleman

Okay. So first, Tuna, just in terms of the domestic marketplace, I wish I shared your optimism for us having basically a free pass to blockbuster happiness. We have two weeks before us Men in Black II – Men in Black III. The week before us Snow White, Huntsmen. On the same date as us Prometheus. The following week Rock of Ages. I mean, we’re just surrounded by happiness.

And obviously we’re the only family film in there. We are – although what defines a family film any more, I’m just – I’m not sure, you’ll remember last memorial weekend it seems like it was hundreds of years ago, Hangover II became a family film somehow or another. So, we don’t take anything for granted. We think the competition is significant. And we remain, you know, very focused on the fact that it is a very competitive marketplace and we don’t believe we’ve been given free sailing here and that we’re just in open waters, we’re not.

In terms of the international side of it, specifically China, we’re awaiting a release date from China Film. We are well through the process and, you know, we don’t have final confirmation on it but we are hopeful that we will – are being given a very timely slot for the release of the film. So, I really don’t want to say anymore than that because we’re in the middle of the process here and other factors that we may not know about may change that in some regard.

The Madagascar series has been successful in China, but obviously the marketplace today versus three years ago, three and half years ago has significantly grown. But we do think we’ll have a good opportunity there.

Tuna Amobi – S&P Capital IQ

Can you perhaps remind me what Madagascar 2 did in China. That would be helpful.

Lew Coleman

Somebody...

Jeffrey Katzenberg

I’ll get you that answer.

Tuna Amobi – S&P Capital IQ

Thank you so much.

Lew Coleman

We’ll give you that in a second. Let’s go on to the next while somebody’s sorting to get through that.

Richard Sullivan

Can I have the next question, please?

Operator

Our final question will come from Michael Corty with Morningstar.

Michael Corty – Morningstar

Good afternoon. Thanks for taking the question. I just want to get back to the $1 million digital sales. I just wanted to get your thoughts now that you’re at that higher level in terms of how you will balance over the next few years obviously maintaining your DVD sales versus building the customer or consumer awareness through your digital partners. And then secondly, the trickier question obviously would be the price differentiation in terms of buying a digital copy versus renting especially given that your movies have a much higher value in terms of purchasing given the repeat viewing that often happens with animated films. So any thoughts on that would be helpful, thanks.

Jeffrey Katzenberg

I think to answer the digital part of that question; I mean digital offers an increased number of SKUs and better segments for our customers. So between a digital ownership or digital rental, standard or hi-def and even three 3D, we can offer the content to consumers at a bunch of different price points now. And that’s a lot better than what we were able to do in just the physical market.

So I think digital does provide us avenues in which to price to two different segments of the consumer base at different times and at different price points. As far as pricing in general, I think Blu-Ray has been successful in helping us increase the wholesale price and helping us maintain margins. So that’s kind of what’s going on in the space in general.

Tuna, to answer your question regarding China, I think Madagascar 2 did $6 million in box office in China.

Lew Coleman

3.5 years ago, which is actually a pretty decent number.

Richard Sullivan

Okay. Next question, please.

Jeffrey Katzenberg

I think that was it.

Operator

There are no further questions.

Jeffrey Katzenberg

Okay. Well, I’ll get back to – our first quarter conference call, I’d like to remind everyone that a replay of this call will be available shortly on the DreamWorks Animation website. If you have any additional questions, please feel free to contact DreamWorks Animation Investor Relations Department. Thanks again for participating and 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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