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Executives

Rich Sullivan - IR

Jeffrey Katzenberg - CEO

Lew Coleman - President and CFO

Ann Daly - COO

Analysts

Ingrid Chung - Goldman Sachs

Barton Crockett - JPMorgan

Jessica Reif-Cohen - Merrill Lynch

Eric Handler - Lehman Brothers

Rich Greenfield - Pali Capital

David Miller - SMH Capital Markets

Tuna Amobi - Standard and Poor's

Drew Crum - Stifel Nicolaus

Doug Creutz - Cowen and Company

DreamWorks Animation SKG Inc. (DWA) Q4 2007 Earnings Call February 26, 2008 4:30 AM ET

Operator

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

As a reminder, today's conference is being recorded. You can reach the AT&T executive playback service at any time by dialing 1-800-475-6701 and entering the access code of 909084, international participants or direct dial participants will dial 1-320-365-3844 and again please enter the access code of 909084. And at this time is my pleasure to the turn the call over to our host with Investor Relations, Mr. Rich Sullivan. Please go ahead.

Rich Sullivan

Thank you and good afternoon, everyone. Welcome to DreamWorks Animation's fourth quarter 2007 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 the quarterly financial, disclosed in today's press release followed by an opportunity for you to ask questions.

I'd like to remind everyone that today's press release is available on our website at web address again 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 like to encourage all of you to review the risk factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statements.

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

Jeffrey Katzenberg

Thank you, Rich. Good afternoon everyone and thanks for joining us today. I'd like to spend a few minutes highlighting the accomplishments of 2007, followed by a brief overview of what we are looking forward to in 2008. I will then turn it over to Lew for a more detailed overview of the company's results.

2007 was a very successful year for DreamWorks Animation, driven primarily by some of our blockbusters Shrek the Third, and the continued success of the franchise as a whole. At $322 million, Shrek the Third was the second highest grossing in film in the US this past year, and earned nearly $800 million at the worldwide box office, making it the fourth best performing animated movie ever.

Additionally, it set a variety of box office records in a number of territories including the largest animated opening of all time in the US. Including its most recent performance in 2007, the Shrek franchise has now accumulated over $2.1 billion in box office receipts on a worldwide basis.

In addition to its theatrical success, Shrek the Third was released into the home video market during the fourth quarter, where it achieved approximately 15.6 million net units worldwide. As we anticipated, the home video market was extremely competitive this past, as an unprecedented number of successful summer blockbusters were all released into a very crowded market for the holiday season.

It is clear that the clutter, as well as competition in net retail from other sources, such as video games has had an impact on the overall home video market and on the performance of individual titles including Shrek the Third.

While the home entertainment market is maturing, it continues to be strong and I believe that good content can rise above the clutter and continue to perform well. In fact, now more than ever, audiences are looking for new ways to consume entertainment outside of the movie theaters.

It is our job as filmmakers to continue to create compelling content that will remain in high demand as the new platforms gain popularity. Beyond Shrek the Third, the Shrek franchise had a number of notable successes in 2007, and none was greater than the first DreamWorks Animation holiday television special, Shrek the Halls.

The 30-minute program became one of the most watched shows of the year when it debuted on ABC this past holiday season. On the night of its premier, over 21 million viewers tuned in to watch Shrek the Halls, which delivered the best ratings in the 8 p.m. time slot since Fox's American Idol finale last May. We are very proud of its success and look forward to seeing this new holiday classic air on ABC for years to come.

In 2008, we will continue to expand our flagship franchise into new markets with the arrival of Shrek on Broadway. Shrek the Musical, will play an exclusive world premier engagement in Seattle from August 14 to September 21, in preparation for its debut at the Broadway Theater in New York, on December 14.

So overall, it has been a very successful year for Shrek and for the company. In fact the blockbuster success of Shrek the Third coupled with the performance of our second film of the year, Bee Movie, May 2007, our best full year performance since going public, in terms of both box office success and our bottom line.

Released on November 2nd, Bee Movie grossed approximately $126 million at the domestic box office, and $159 million overseas to date. At this level of performance, we currently expect Bee Movie to be profitable for the company with it ultimate profitability dependent upon the film's performance in the home video market, where it's scheduled to be released next month.

We are proud of Bee Movie's creative accomplishments, as a total unique and intelligent story and the voice of one of the most successful comedic talents in the world, Jerry Seinfeld, and visually it raised the bar for CG animation. However, in order to realize the full potential of our business model, we need to improve upon the consistency of our film's box office performances.

This is an area in which we have dedicated significant resources and I believe these efforts will soon begin to pay tangible dividends. In fact, I think we now have a film slate to contain some of the best creative properties we have. On June 6th, we will release Kung Fu Panda, staring Jack Black into US theaters. I believe that it has a lot of the creative elements we strive to include in a DreamWorks Animation film, memorable and endearing characters, great storytelling, lots of emotion and humor.

Then in November the sequel to our second franchise 'Madagascar' comes to theaters. The original Madagascar was a worldwide blockbuster, and we look forward to the arrival of its next chapter with the same old star cast this year.

In 2009, we have a theatrical debut of our first ultimate 3D movie Monsters versus Alien. As you know we previously moved the release date for this film up three months to March 27, 2009.

This means that we plan to release three films over the next 13 months. Therefore, we have a very challenging year ahead of us, but one with a lot of opportunity as well.

As I mentioned earlier, we have been working hard to improve upon consistency of our films' performances. To achieve this goal, we need to make sure that every film on our slate is given the very best chance to succeed.

And to that end, we announced today that we have moved the release date of our 2009 fall film How to Train Your Dragon, into early 2010. Specifically, the film will now assume a March 26, 2010 release slot, four months later than it's release November 2009 date. It will become the first of our three theatrical releases in 2010. Shrek Goes Fourth will follow on May 21 and MasterMind on November 5th.

We believe the new date for How to Train Your Dragon allows the film to be released into a more mature 3D market, giving us the maximum number of screens and a less crowded release window. And obviously our artists and animators are thrilled to have an extra couple of months to work on a film.

So overall we do this as a positive for the picture, our company and our shareholders. With a strong film slate and new business opportunities on Broadway in 2008, we are excited to see the rest of this year unfold.

With that, let me turn things over to Lew before we get into your questions. Lew?

Lew Coleman

Thank you Jeffrey and good afternoon everyone. I'd like to briefly highlight a few items before we take your questions. In the fourth quarter, the company reported $290 million of total revenue, resulting in net income of $94 million or $0.98 per share, on a fully diluted basis. This brings the company's 2007 revenue to $767 million and net income to $218 million or $2.17 a share on a fully diluted basis.

Of the $290 million of revenue in the quarter, Shrek the Third, contributed $179 million primarily from its release into the home video market. The title shipped to the end of 2007 approximately 15.6 million units on a worldwide basis, net of actual and estimated future returns.

Several key territories including France, Italy and the Nordic were not released until December, and will be reflected in the first quarter of 2008 as is customary. We also received a significant revenue contribution of $52.1 million from a library and other titles in the fourth quarter, almost half of which came from the television release of Shrek the Halls.

As I indicated last quarter, the majority of the revenues and expenses for this project were recognized upon delivery of the film and the net profit was not material.

As Jeffrey mentioned our second release of 2007, Bee Movie's worldwide box office has reached $285 million. This title did not contribute any meaningful revenue from our distributor, as total revenues did not exceed their cost of prints, advertisements and the 8% distribution expense. We do not expect to record revenue until after March 11, when Bee Movie is released into the home video market. While we are forecasting an ultimate profit for the film, this will be largely dependent on its upcoming performance domestically and internationally in the home video market.

Our full year 2008 financial performance will be largely determined by the worldwide box office of Kung Fu Panda, which opens in the US on June the 6th. Given this release date, it is likely that the majority of our 2008 financial performance will occur in the second half of the year.

Our second 2008 film, Madagascar, the Great Escape, is scheduled for release on November 7th. Again, because our distributor needs to recover their costs first, we do not expect to see significant revenue from this film until 2009.

While we are certainly excited about our strong slate in 2008, it's important to note that the blockbuster success of Shrek the Third in 2007 will make 2008 a difficult year for a comparison.

Turning to the balance sheet, the company ended the year with a cash balance of $293 million, which includes the repayment of our $50 million of HBO subordinated debt and the repurchase of 3.5 million shares of common stock for a $107 million in the quarter. For the full year 2007, we repurchased 9.8 million shares for $301 million at an average price of $30.80. On December 14, our Board authorized an additional $150 million for future share repurchases.

During 2008, the company bought 2.1 million shares for $50 million or $23.37 a share, and there now is $100 million remaining under the authorization.

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

Jeffrey Katzenberg

Great. Tom could you please review how to log questions for the call?

Question-and-Answer Session

Operator

(Operator Instructions). Okay. Your first question comes from the line of Ingrid Chung with Goldman Sachs. Please go ahead.

Ingrid Chung - Goldman Sachs

Thank you and congratulations on a nice quarter. My first question is about the 3D opportunity. How does 3D impact your revenue? And how does it impact the cost of each individual film? And then, in terms of How To Train Your Dragon and moving it four months later, how many additional 3D screens are you looking for at that point?

Jeffrey Katzenberg

Okay, so first on the cost side, it’s between $10 million and $15 million incremental cost per picture, and on the revenue side we anticipate a sizable premium to the per ticket pricing on. I think you can look to Hannah Montana as an example of a kind of premium that is certainly possible. And so, we actually think there will be a good return on the incremental investment from the theatrical exhibition of the film. The second part, Ingrid, again just how many screens --

Ingrid Chung - Goldman Sachs

By moving the sale four months later, how many additional screens?

Jeffrey Katzenberg

Sure. Well, let me explain. I think that there is a two part answer to that. The first is that in the current dating that we were in, in November, there is a Disney /Bob Zemeckis motion capture film that was scheduled to open two weeks before us. And then more importantly, the Jim Cameron movie, Avatar, which we seem to be consistently bumping into here, was scheduled to be moved, as you know, from it's Memorial Day weekend, which was where Monsters versus Aliens moved, down to Christmas, for whatever their reasons were. And that would impact significantly the international market.

The international market is going to rollout and mature much slower than the domestic market. And so Avatar basically would be commanding 100% of those 3D screens internationally. So, being, frankly, sandwiched between the two opportunities seem to be taking too much upside off of this for us.

In the spring of 2010, there actually is a much-much more orderly marketplace there, that I think is going to have a very beneficial impact on the whole 3D rollout at exhibition. You will have Toy Story 2 in February, followed by Tim Burton's Alice in Wonderland at the beginning of March, followed by us. And these movies are all spaced now three, four weeks apart from one another, and in, I think, what will be a much more mature 3-D market. So a lot of moving parts here, all of which just point for this being a bigger opportunity for us for the release date.

Rich Sullivan

Great. Thanks, Ingrid. Next question please.

Operator

All right. Next question comes from line of Barton Crockett with JPMorgan. Please go ahead.

Barton Crockett - JPMorgan

Okay, great. Thanks a lot. First, I was wondering if you could talk about the DVD units for Shrek the Third. I think it came better than some of the concerns out there, which is great to see. They were down a lot from Shrek 2. I was wondering if you could talk about why that is, and what if anything that says about any DVD unit [extrications] for future durations of the Shrek franchise?

Jeffrey Katzenberg

Sure, Barton. I think there are a handful of things. First of all, again anticipated for a long time, it was a competitive marketplace. There were 11 films released back-to-back going over $200 million, which just resulted in a lot more clutter than we would like to see. And then I think on top of that, there is something that we are actually very focused on here, which is really taking a hard look in terms of what happens on these sequels in terms of how they perform, when you get further down into the series of these films. And there is no question that there is a downward trend from Shrek 1 to Shrek 2 to Shrek 3, which you can look at in virtually every other franchise enterprise out there, and it's one of the things that we continue to look at and analyze and stay very focused on and to make sure that these sequels do continue to have the kind of value that we're all expecting from them.

And the third thing is, that there was a fair amount of other competition, in terms of the home video gaming market, which came in. But having said all of that, it still was a very, very strong performance for the film. It was one of the top three titles of the year in home video, and really held its head above the competition in a good way. And I think the franchise still has a lot of very strong firepower to it. And the year as a whole, for original releases, was also strong.

Barton Crockett - JPMorgan

Okay, all right. If I could ask a separate question, just switching gears here. Could you comment on your outlook now for Blu-ray and HD DVD, and based on reports of the deal with Toshiba, money paid, which I guess you guys don't comment on? But what do you see yourselves doing at this point?

Jeffrey Katzenberg

Well, I think that we're watching as Toshiba, who we have a partnership with, and have an obligation to see this through. It really is in their court, at this point, to really declare what the next steps will be. We are poised either way to jump into the marketplace, when the conditions are right to do so. In the meantime, as you know we have been well compensated for our support.

Barton Crockett - JPMorgan

Okay. But you can't really, because they said basically they are discontinuing future kind of manufacturing of the HD DVD boxes. But you are not ready to say at this point, that your partnership with them would be terminating or ramping up?

Jeffrey Katzenberg

Well, again I think we still are looking for some more clarity from them, in terms of very specifically what their expectations and needs are from us. We expect that to get resolved in the next few weeks.

Barton Crockett - JPMorgan

Okay, fair enough, thank you.

Rich Sullivan

Thanks Barton. Next question please.

Operator

Thank you. Next question comes from the line of Jessica Reif-Cohen of Merrill Lynch. Please go ahead.

Jessica Reif-Cohen - Merrill Lynch

Hi. I guess, following along those lines, can you be a little bit more specific about the payment from Toshiba? Just how much was it for Bee Movie, and is it that there wasn't a write down, and well I guess, let's sort it out?

Jeffrey Katzenberg

Okay. Well again, Jessica, as Barton said, we don't comment on specific terms of the deal. I will say that in terms of Bee Movie, and why it is turning a profit for us, I think is affected by several things to look at. One, the international box office performance on the film, I think, was reasonably strong for us. Number two, is that Jerry is very, very strong on network TV, has had a positive impact, in terms of that aspect of the value of the movie, and again, in terms of using the title itself to help market the HD platform. That has given us additional financial benefit to it. So, all of those are factors in ultimately why performance of this film stood up.

I guess the last thing, which is to keep in and to factor into this is that, as I think everyone knows, there are participations in these movies, and we ask you to look at the Bee Movie in terms of how you would look at a sequel in terms of that.

However, those participations are success based. So, there are portions of it that actually kick in at very specific performance levels, and higher performance levels than we attained on the movie. So, that changes the profile of that in a positive way.

Jessica Reif-Cohen - Merrill Lynch

And just to clarify one thing, when you said that, Jerry's success on network TV, are you implying that the network television rates were higher than you'd normally expect, or just that it was promotional?

Jeffrey Katzenberg

I had a positive impact on us financially.

Jessica Reif-Cohen - Merrill Lynch

Okay. That was ambiguous. Thank you. Changing gears slightly then --

Jeffrey Katzenberg

I don't mean it be ambiguous, Jessica, I wasn't trying to be ambiguous on it. There was a network stalemate on the movie.

Jessica Reif-Cohen - Merrill Lynch

Okay.

Jeffrey Katzenberg

And they stay on a favorable basis. I think that we were given a premium for the title because of his unique appeal.

Jessica Reif-Cohen - Merrill Lynch

That's okay. I didn't know if it's promotional or not, that's fine. And then just a separate subject; on home video, could you just talk a little bit more though what's going on in the international markets right now, and what's going on both domestically and internationally from a wholesale pricing level?

Jeffrey Katzenberg

I am going to let Ann Daly, who is here with us and a resident expert, I think I'll let her talk to both of those.

Ann Daly

Hi, Jessica.

Jessica Reif Cohen - Merrill Lynch

Hi, Ann.

Ann Daly

In the international marketplace, we saw that the ratios on our title, particularly Shrek 3, pulled up year-over-year, a little bit different than what we saw in the US. So the performance of Shrek 3, in comparison to Shrek 2 and other titles from a box office admissions basis, versus unit, seem to be fairly strong. So again, also internationally, the release of our titles didn't face the same type of competition, just because of the way that the title fell in the quarter. So I think we also benefited from that scheduling.

Jeffrey Katzenberg

That's interesting. Both in the theatrical release, where Shrek didn't have the same product clutter internationally, it performed extremely well, very, very near Shrek 2 levels, and then once again in the video market in a less cluttered market, it performed very strongly. So I do think there is a lot to be paid to the clutter that we are seeing in the domestic marketplace, which fortunately is actually starting to work its way through.

Jessica Reif Cohen - Merrill Lynch

And pricing?

Ann Daly

And pricing year-over-year internationally, we did not see any big differences. So just in terms of where we saw the product priced in the marketplace to consumers, and what we took away on a per unit basis, remained relatively stable.

Jeffrey Katzenberg

And domestically, also. In fact our pricing held very, very strong, and one of the places where we outperformed the competition and our margin.

Rich Sullivan

Okay. Thanks Jessica. Next question please.

Operator

Our next question comes from the line of Eric Handler, representing Lehman Brothers. Please go ahead.

Eric Handler - Lehman Brothers

Thanks for taking my call. Couple of questions. First, it seems that the DCIP agreement with the exhibitors is taking a little bit longer than expected. Are you surprised by this, and as a result do you think a deal will be done in enough time, where you can see 3,000 3D screens for Monsters versus Aliens in March of '08?

And then secondly, looks like no matter when you look into '09 and '10, you are going to start to see more and more 3D films. So as we get into '10, do you think we will need to see 10,000 3D screens, where do you think this ultimately goes?

Jeffrey Katzenberg

So first of all, on the DCIP deal, it's very complex. It involves nine different parties, putting aside the financing side of the equation, and it's just simply on the distribution and the exhibitor side of it. There are nine parties to it. And unfortunately, any time you need to bring consensus on that basis, it's going to take time to get it done. It is literally front burner, everybody is working very, very hard to move this along, Travis Reid and his group are here in town this week, meeting with the studios, and I think there is momentum here. Clearly the performance of Hannah Montana, I think, really opened the eyes of exhibition in a way that has had tremendous amount of benefit, and has put a lot of momentum behind us.

To answer more specifically, if the DCIP deal can get done in the next 30 to 45 days, which I think is more than realistic, the ability to roll out 3,000 plus screens before 2009 is practical and doable. In the meantime, there has been some real progress and movement, that we started to see in the international marketplace. There are over 500 screens ordered in the UK, 100 screens ordered in France, and more orders coming in fairly regularly now.

So, we are starting to see things get off the dime here. I think going into 2010, right now there seems to be a lot of 3D product. And it’s coming in, in a very orderly way, in which over the course of the spring, now the summer and going into the holiday season, there is probably between 12 and 14 significant titles in 3D, most of which seem to be spaced from three to five weeks apart from one another, which is fantastic for exhibition. And I think that will be the point in time at which you will really see an explosion of theaters taking on 3D capability.

Rich Sullivan

Thanks Eric. Next question please.

Operator

Our next question comes from the line of Rich Greenfield with Pali Capital. Please go ahead.

Rich Greenfield - Pali Capital

Yeah, hi. Couple questions. One, Jeffrey, could you just give us an update on the progress on cable TV for your planning? I believe you have two projects in development with Nickelodeon. Two, you mentioned that the reason for moving out How To Train Your Dragon was to have more screens available. Given that Monsters Versus Aliens is going to be 3D too, why not further push that film out later in the year as well, to kind of allow for more 3D screens. And then lastly, to some extent, I know you are currently negotiating with Toshiba, but is it possible that whatever type of financial benefit you have got on Bee Movie, that you would not get that on the following two films, given the format change that currently Toshiba is underway with?

Jeffrey Katzenberg

Okay. So Rich, let me answer the last question first. We are not in any negotiations with Toshiba. They've honored the deal, we have honored the deal. And we are waiting for them to give us full clarification of what they want to do in the immediate next couple of weeks. As you know we have the release of Bee Movie coming up in a handful of weeks. So that's the only thing that we are looking for clarity on at this point. Okay.

Two, back on to the Dragons and Monsters Versus Aliens, the reason for the move on the Dragon film, as you know, was because we were into overlapping release schedule with Avatar, domestically here in the marketplace. We had been dated on the Memorial weekend, they moved Avatar on to it. We felt that it was really bad for the marketplace, and most importantly for ourselves, to be splitting screens. We do think there will be very significant capacity to be able to handle the release of a title at a time, when these films have three, four, five weeks apart from one another. We made the decision to move the release date up to spring 2009, in which we will be two things. One, we will have pretty much, it looks like today and I am pretty confident this will hold up, we will actually have a 100% of the 3D capacity in the marketplace. There is no other film in 3D going to be out at that time.

Number two is, spring is a very strong release date, and we have been supported in that move by all our promotional partners, and so we feel very, very comfortable and confident about that release date and having a 3D capability. And then finally, the move on Dragons, out of November, is because we don't have the space in the marketplace. We have zero space in the international marketplace at Christmas time with Avatar, and the international marketplace is rolling out slower, and it's just not going to have the ability to have any overlap of multiple releases in 2009.

Once again, moving into 2010, on the date that we have, it's too early to know, but it would seem as though right now, again we are going to have pretty much clear selling there for a solid five or six week period of time. So it's actually lined up in a very strong way for us. Is that clear? I just want to make sure I'm answering the question.

Rich Greenfield - Pali Capital

Yeah, it was more of just, obviously, screens are really referencing to prior questions, screens are still in development, it's not clear how many screens. You mentioned in the press release that you do expect to have more screens in total built out in 2010. I just was thinking, I know why you moved originally back to March, but to the extent that the screens are going to be increasing over the course of '09, why not push out the '09 release a little bit too, again the other way, rather than you moved it forward, back now to give yourself --?

Jeffrey Katzenberg

Because I think there will be 3000 plus screens. Actually on a worldwide basis, I think it's going to be between 3000 and 5000 screens, which is a fantastic launchpad for us. Again, we don't have to look any further back than a few weeks ago, that Hannah Montana doing $45,000 of screen in three days and 650 screens, I mean it's a big, big opportunity. And remember, we will be releasing a 2D version of our film, day and date. We are not going to exclusively in 3D in those markets that are not able to accommodate a 3D release of the film. We have great confidence in this movie in its 2D version. We have very good business being in the 2D CG business today. And we think this is incremental business for us, as opposed to closing that opportunity for us.

Rich Greenfield - Pali Capital

And then, just lastly on the cable TV shows?

Jeffrey Katzenberg

Yeah. Nickelodeon is moving forward. I think, as we've announced, they gave us a 52-episode order for the Madagascar Penguin Show, which will air in the first quarter of next year. It's the largest original order ever placed by Nickelodeon, and it's well into production, and going very, very well. They are doing a great job. And Kung Fu Panda is on a fast track, no timeframe set for when it might air, but they are anxious to have that come as soon on the heels of the release of the movie as possible.

Rich Greenfield - Pali Capital

Thanks.

Rich Sullivan

Thanks, Rich. Next question please.

Operator

Our next question is from the line of David Miller with SMH Capital Markets. Your line is open.

David Miller - SMH Capital Markets

Yeah. Hey guys. Just a couple questions, Lew for you, and Ann, if you are still on. In terms of the international home video release of Shrek 3, where would say we are in the tail on that one? Are we sort of 40% through, just excluding domestic, just are we 40% through, 50% through, where would say we are in the tail there? And then also Lew, on the negative cost for Kung Fu Panda, should we assume the sequel? In other words, should we model a negative cost platform there, around the $170 million market, very similar to Bee Movie, or should we assume it's a non-sequel on to your old model, that would get us to somewhere around a $140 million negative cost? Thanks very much.

Ann Daly

With regard to the Shrek 3 release internationally, there are a couple of territories that are not reflected in the 2007 results, and that includes some major contributors like Italy, France and Nordic, so I would say that we have about 40% or so to come.

David Miller - SMH Capital Markets

Great.

Jeffrey Katzenberg

And, David, just consider this a normal original movie, as far as negative costs are concerned.

David Miller - SMH Capital Markets

Wonderful, thank you.

Rich Sullivan

Thank David. Next question please?

Operator

Our next question come from the line of Tuna Amobi with Standard and Poor's. please go ahead.

Tuna Amobi - Standard and Poor's

Thank you very much. I guess one possible fallout of this shift in the release date, is that why you are going to go to next 13 months with three movies? It seems like the next 12 months is, literally, not going to have any new release after that. So, I guess it's the first time you are going a whole year without a new release between March 2009 and March 2010, and that includes a critical holiday period. Given that Q4 has been traditionally your biggest quarter, what plans are you making for the 2009 holiday period, at least to have some product out there in the market?

Jeffrey Katzenberg

Again, I think if you look at our year and this past year as a perfect example of it, our biggest financial event occurs from the spring release in the fourth quarter, and you aren't really seeing any of the benefits of fourth quarter release in that year, anyway. And so, I don't know that this is going to really have any significant impact on that.

Tuna Amobi - Standard and Poor's

No, I was actually, Jeffery, referring to the DVD releases as oppose to theatricals, so I guess...?

Jeffery Katzenberg

That’s what I am saying. You'll have a theatrical release of Monsters Versus Aliens in spring of '09, and its home video release will come in the fourth quarter of '09. So, the major financial event that you see annually from us will occur. 2010, it seems as though it will have many financial events than this, but again you are looking at '07, it was impacted by Shrek, not impacted by Bee Movie. The same thing Lew is alerting you to, in terms of this year, you will be impacted primarily by Kung Fu Panda. Madagascar will fall into 2009. So, that is your second event that is going to occur in fiscal 2009 for us, we will have two major home video releases.

Tuna Amobi - Standard and Poor's

Okay. That's helpful. Just one more question, and I guess this is for Lew. Lew, it seems to me that, given that that average share buyback price for last year is obviously much higher than where the shares are trading now, and you are getting another change to buyback at significantly lower price than last year, my question is, does this change your philosophy at all, in terms of how you might allocate your capital? And how would you consider a special dividend here, given the fact that obviously last year it didn’t turn out as well in terms of the buyback as one might have hope?

Lew Coleman

I think you have a couple of questions there. Our philosophy of buybacks really hasn't changed. If we have cash above our knees, we are going to return it to the shareholders in the most efficient way we can. Obviously, over a lengthy period of time of share repurchases, the stock is going to average out. The issue on paying dividends is one that the Board has not yet taken up. We are mindful of the amount of float we have out there. And we will consider alternate ways to return cash to shareholders, other than repurchases when it's appropriate, but there has been no decision on that at this point.

Tuna Amobi - Standard and Poor's

So you are going to stay aggressive on this new authorization, is that fair to say?

Lew Coleman

Well, we are authorized for $150 million in December. As you know, the first quarter has always been an awkward period of time to repurchase stock, given all the filings and everything else that go on. And we were able to go through a third of that, so you can decide whether or not that was aggressive or not.

Tuna Amobi - Standard and Poor's

Thank you.

Rich Sullivan

Thanks Tuna. Next question please.

Operator

Next question will come from line of Drew Crum with Stifel Nicolaus. Please go ahead.

Drew Crum - Stifel Nicolaus

Good afternoon everyone. Jeffrey, I wondered if you could comment on the competitive slate, the spacing for June release, and just your strategy for the international rollout of Kung Fu Panda. That's my first question. Second question pertains to the cash flow statement. Looks like there was a sequential decline in your cash flow from ops, and there are several items there, but the one I wanted to ask about was the receivable from the payable to distributor, what that represents? And how we should think about working capital and free cash flow in the early part of '08, as you begin to collect on Shrek 3 DVD? Thanks.

Lew Coleman

Okay. So I'll go first, Drew. Summer is competitive. There is very strong line-up of product in the May, June timeframe. We like our release date, but we've got an Adam Sandler movie opening on the same date. Something that occurred to us on Madagascar a couple of years ago, literally, an Adam Sandler movie. He seems to like to release his movies at the same time we do. And obviously Madagascar went on to be great success, even in the face of that competition.

In terms of other family product and animated product, the marketplace, again, is kind of set up very nicely. Narnia falls three weeks before us. And the Disney Pixar Movie falls three weeks after us. So, once again, we think it's a very good line up in terms of that opportunity. The international release of Panda will very, very much follow the pattern of the international release on Shrek this past year. And so it will rollout everywhere internationally. In the June, July period we will be out of the marketplace. In terms of any releasing around the Olympics, we have a few territories that will come on the other side of that in late August and early September, as we've done in the past.

Jeffrey Katzenberg

Drew, on the cash flow question, there was a little bit more than usual noise in the numbers, and I'm going to give you two numbers that we didn't really break out for you that readily. We settled a bunch of claims with our distributor Paramount that went back to the days even before Paramount was a distributor, that related to the fact they had to go back and get a bunch of invoices, and as a result, we paid them approximately $90 million.

Drew Crum - Stifel Nicolaus

$90 million, okay.

Jeffrey Katzenberg

In December. Conversely, we settled up the other way early in January, and they paid us about $33 million. And those items get buried in the noise here. And they should probably be considered unusual more than anything else.

Drew Crum - Stifel Nicolaus

Okay. And as far as working capital and free cash flow in the early part of '08 just given the cash collections coming from Shrek 3, any comment there?

Jeffrey Katzenberg

Yeah, first off the working capital here is, for all practical purposes, cash, because you really can't think of us as running a working capital statement. And as we've told you, we'd like to keep a couple of movies worth of production cost in cash, or in an unused bank line. And we are still an excess of that, even if you were to substrate the use of the remaining share repurchase authorization. So, at this point we are within our guidelines that we previously announced, and are comfortable with our cash position.

Drew Crum - Stifel Nicolaus

Okay. I guess the question should we expect to inflow of cash in the first quarter from Shrek 3?

Rich Sullivan

This is Rich. Usually the way this works is in the fourth quarter we have a receivable Paramount for the home video release, and that using lags by a quarter for cash, and it happens every year. Our big fourth quarter event being home video gets paid out in cash the following quarter.

Drew Crum - Stifel Nicolaus

Got it, okay, thanks great.

Operator

And we'll go to like of Doug Creutz with Cowen and Company, please go ahead.

Doug Creutz - Cowen and Company

Thanks could you confirm whether or not you received an HD DVD payment on Shrek 3 in the quarter, and if you did, was that booked in the Shrek 3 revenue bucket, or would it have been booked in the library other bucket? Thanks.

Lew Coleman

We've basically been fairly careful not to tell, not to comment on what our deal is with HD. I will say this. From an accounting standpoint, we would consider any payments we got that are directly related to the film, as part of the film ultimate, and therefore amortized in accordance with the revenue we received. In the case of Shrek, we have used up about 60% of the ultimate. We have amortized in the revenue about 60% of the ultimate, so, that gives you some idea what the effect is, but I can't tell you what the amount is.

Doug Creutz - Cowen and Company

I am not so much asking for the amount, I just asked to just confirm was anything in the quarter from that?

Lew Coleman

I don't think we've ever confirmed that.

Doug Creutz - Cowen and Company

Okay.

Jeffrey Katzenberg

If there was a (inaudible).

Lew Coleman

If there was, it would be the Ultimate.

Doug Creutz - Cowen and Company

All right. Thanks.

Rich Sullivan

Great. Next question please?

Operator

No other questions queuing up at this time.

Jeffrey Katzenberg

Okay. I guess, that concludes today's fourth quarter earnings conference call. I would like to remind everyone that a replay of this call will be available shortly and accessible on our website. The address, again, is www.dreamworksanimation.com. If you have any additional questions, please feel free to contact DreamWorks Animation Investor Relations department. And thank you again for participating and have a great evening.

Operator

Ladies and gentlemen once again this replay will be available after 7 p.m. this evening until March night at midnight. You may access the AT& T executive playback service at any time by dialing 1800-475-6701 and entering the access code of 909084. International participants will direct dial, please dial 1320-365-3844. Again please enter the access code of 909084. That does conclude our conference for today. Thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.

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Source: DreamWorks Animation SKG Inc. Q4 2007 Earnings Call Transcript
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