Ladies and gentlemen, thank you for standing-by and welcome to the DreamWorks Animation earnings conference call. At this time, all lines are in a listen-only mode. Later, there’ll be an opportunity for your questions. (Operator Instructions)
I would 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, August 14th. You may access the AT&T Executive Playback Service at anytime by dialing 1800-475-6701 and entering the access code 251569. International callers, dial 320-365-3844 using the same access code 251569.
I would now like to turn the conference over to Rich Sullivan, DreamWorks Animation’s Investor Relations. Please go ahead, sir.
Thank you and good afternoon everyone and welcome to DreamWorks Animation’s second 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 the quarterly financials disclosed in today’s press release, followed by an opportunity for you to ask questions. I would like to remind everyone that the press release is available on our website at web address, www.dreamworksanimation.com.
Before we begin, we need to remind you that certain statements made on this call may constitute forward-looking statements. Forward-looking statements can vary materially from actual results and are subject to a number of risks and uncertainties, including those contained in the company’s annual and quarterly reports as well as in other filings with the SEC. I would encourage all of you to review the Risk Factors listed in these documents. The company undertakes no obligation to update any of its forward-looking statements.
And with that, I would now like to hand the call over to DreamWorks Animation’s Chief Executive Officer, Jeffrey Katzenberg. Jeffrey?
Thanks Rich and good afternoon everyone. The big events for the company in the second quarter was Madagascar 3, Europe’s Most Wanted, which was released in the U.S. on June 8th. Today, it's grossed $210 million at the domestic box office and $292 million overseas for a worldwide total of over $500 million, making it the seventh highest grossing movie of the year on a global basis. It is the third and biggest film in our blockbuster Madagascar franchise and yet another incredibly successful sequel for the company.
All DreamWorks Animation sequels have surpassed $600 million at the worldwide box office and Madagascar 3 is on-track to do the same. It was the number one movie in the U.S. during its first two weekends of release and continues to break records in many territories around the globe. To name just a few, in Russia, Madagascar 3 is the number one animated movie of all time as well as the number three film of all time. The top three animated films ever in Russia are now DreamWorks Animation titles.
In the Ukraine, United Arab Emirates and Egypt, it became the biggest grossing animated movie of the year and in Brazil and Argentina it had the biggest opening weekend of all time for an animated film. And in Portugal, this past weekend it had the biggest opening of the year of any movie so far.
As we mentioned on our last earnings call, as a result of the Summer Olympics, a good portion of Madagascar 3’s international release won’t occur until later this year. So already the film has been a massive commercial and critical success and it still has a long way to go. Also, I am happy to report that 50% of Madagascar 3 worldwide box office receipts have come from 3D which continues to be an important and successful investment for us.
Our next release, Rise of the Guardians will be in November. We have debut two trailers so far and audience feedback of the characters, the breadth and the originality of the story and the visuals have been exceptional; we look forward to seeing how it performs on November 21st.
Beyond our core business, we are committed to growth and diversification of DreamWorks Animation more today than ever before. We are focusing on three key areas of investments. The first is you ongoing character driven efforts which include TV series and live entertainment. We are currently producing Dragons, Riders of Berk, DreamWorks Animation’s third TV series and our first that we will air on Cartoon Network.
Jay Baruchel, America Ferrera and Christopher Mintz-Plasse are all praising their lead roles from the film. We premiered 15 minutes of footage earlier this month at Comic-Con and audience reactions were positive. A sneak-peek of two episodes will air a week from today on Cartoon Network. From a brand building standpoint, we believe a TV series will provide family audiences with high quality content between our Dragon feature film events and help sustain a consumer products program around the franchise.
Turning to live entertainment; last month How To Train Your Dragon Live Spectacular! kicked off its nationwide tour to great critical acclaim. It is perhaps the biggest and most ambitious travelling arena show that has ever been produced and we believe it will set a new standard for this type of live family entertainment.
In addition to doing more with our characters, we are equally focused on a second area of investment which is our new technology initiatives. DreamWorks Animation has always been a technology with a specialized and highly advanced skill-set that is directly related to CG film making. We have now applied this technical expertise to launch new strategic initiatives in casual gaming, social networking and the app space. We will have specific news to share with you on this front in the coming months.
The third area of investment we are focused on is expanding our international business. Our China joint venture is a significant first step in this direction. Together, with our partners and the government we are making great progress as we explore a number of exciting development opportunity for Oriental DreamWorks.
So while there are short-term costs associated with our creative technical and international expansion efforts, we believe we are setting the company up for long term growth that will deliver meaningful returns on the investments that we are making today.
Finally, as you know last week, we made a big strategic move by announcing by our agreement to acquire Classic Media for $155 million. This is DreamWorks Animation’s first acquisition since becoming a public company in 2004. What attracted us to Classic Media first and foremost is that they on own one of the largest and most valuable independent collections of characters and branded assets in the world today.
We believe Classic Media will add greater stability to hit driven business model and present us with meaningful new opportunities. These include movies, television, consumer products, live entertainment and digital including our continued interest in establishing a DreamWorks channel with both domestic and international reach.
Before I turn it over to Lew for the financial results a brief word on the status of our distribution agreement. We are currently engaged in discussions about a new distribution agreement with multiple studios, but we do not plan to discuss any of these talks on today’s call. We stated last quarter that our plan was to communicate our decision by Labor Day and this timing has not changed.
With that, let me turn it over to Lew.
Thanks Jeffrey and good afternoon everyone. For the second quarter of 2012, the company reported total revenue of approximately $136 million resulting in net income of $13 million or $0.15 per share on a fully diluted basis.
Taking a closer look at the primary drivers of revenue for the quarter, Madagascar 3 has grossed approximately $415 million in worldwide box office through quarter end. The film contributed revenue of approximately $55 million for the second quarter primarily from worldwide box office and including approximately $4 million from merchandise and licensing.
Our distributor recognized a greater percentage of prints and ads expense in the second quarter than we had expected. Previously, we expected them to recognize approximately 50% of Madagascar 3's worldwide prints and ads expense in the second quarter. Instead they recognized more than 65%. This occurred as a result of system changes by our distributor and Madagascar 3’s international release schedule.
Overall prints and ads expense from Madagascar 3 are expected to fall at the high end of our guidance range of $150 million to $175 million. Additionally, for two very specific reasons Madagascar 3’s international settlement rate for the second quarter was approximately 35%.
First, nearly 30% of its international box office in the second quarter came from Russia and China, which combined have a lower than average settlement rate. And second, at least 10% in Madagascar 3’s international box office in the quarter came from Argentina and Venezuela which we will recognize later on a cash basis when the cash is received.
As Jeffrey mentioned, the film will be released in a number of its major international territories in the second half of 2012. Only two-thirds of Madagascar 3’s territories have opened so far with several important ones, Germany, Austria, the UK, Australia and New Zealand releasing between mid-September and mid-October. So while it would be a very profitable film and a great creative success for DreamWorks Animation, a number of unique timing related issues had an impact of Madagascar 3’s results in the second quarter.
Moving on to our 2011 releases, Puss In Boots contributed revenue of approximately $23 million to the second quarter primarily from home video. By the end of the quarter, it reached an estimated 5.2 million net home entertainment units sold worldwide. Kung Fu Panda 2 contributed revenue of approximately $46 million to the quarter primarily from paid television.
It had reached an estimated 5.7 million net home entertainment units sold worldwide by the end of the quarter. Megamind contributed revenue of $1 million to the quarter primarily from home video with an estimated 5.5 million net home entertainment units sold worldwide through quarter end.
Our library contributed revenue of approximately $27 million in the second quarter. As a reminder Shrek Forever After has reached the second anniversary of its domestic theatrical release and it's now included in our library.
There is a year-over-year decline in library because Madagascar 2 contributed free TV revenue to the library in the second quarter of 2011. Because we did not release the film in the fall of 2009, there was no comparable television to benefit our library in the second quarter of this year. The other category contributed approximately $10 million of revenue in the second quarter of which Shrek, The Musical in London was the single biggest contributor.
Moving on to the remainder of the income statement, cost of revenue for the quarter equaled a $114 million resulting in gross profit of approximately $49 million. As Jeffery mentioned, we are making investments across our business today that we believe will deliver value to the company in the future and the cost of revenue for the second quarter reflect a number of these.
Approximately $3 million in operating expenses were incurred by How to Train Your Dragon Live Spectacular in preparation for its US launch on June 27. The show did not have a material revenue contribution in the second quarter.
Shrek, The Musical which has been playing in London’s West end for over a year, posted a second quarter operating loss of approximately $5 million. This amount includes the recognition of Shrek, The Musical's remaining capitalized cost.
Selling, general and administrative expenses for the second quarter totaled $31 million including approximately $5 million of stock based compensation expense. Turning to taxes, the company’s income tax expense for the second quarter was approximately $6 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 30% in the second quarter. We currently expect our full year combined effective tax rate to be in the low to mid-30% range.
Moving on to balance sheet, the company ended the second quarter with a cash balance of approximately $81 million. Our diluted share count for the second quarter was 84.9 million and a remaining share repurchase authorization is a $125 million.
Looking ahead, we expect the company’s third quarter results to be driven by the continued box office performance of Madagascar 3 domestically and its release into a few international territories. We also expect Pay TV revenues for Puss In Boots to contribute to the company’s third quarter results.
Our library revenue in the third quarter is expected to be comparable to the amount we’ve seen in each of the last two quarters. We anticipate that some of the ongoing investments Jeffrey outlined will continue to have an impact on a cost of revenue in the third quarter.
In particular, we expect to expense several million dollars of production cost for How To Train Your Dragon TV series in the third quarter and we believe third quarter SG&A and product development cost will be inline with year-to-date levels.
So as we saw in the second quarter, our new business initiatives will continue to put pressure on our gross margins over the next several quarters.
Before take your questions, I would like to make a few comments regarding Dream Works Animation’s acquisition of Classic Media. The purchase price is a $155 million and the acquisition will be financed with cash-on-hand and the use of our credit facility which is undrawn today. We expect the acquisition of Classis Media to be earnings accretive to DreamWorks Animation in its first full year and we believe that we will deliver long-term value to our shareholders. With that Rich?
Yes. Operator can we have the first question please.
Certainly that will come from Ben Swinburne with Morgan Stanley.
Ben Swinburne - Morgan Stanley
Jeffrey, on Classic may be just could you spend a minute or more on how you plan to monetize the asset I think you made some comments on CNBC too about doing more [IP] acquisitions and thinking about diversifying the company and you called out a TV network domestic and international as part of that, may be just spend a couple of minutes if you could on sort of how you think about that?
Sure. Well I think we actually have a bit of a gold mine here in that the breadth and depth of this library is really quite extraordinary and that it seems as though there are many, many opportunities for us I think first and foremost just to simply continue to operate the business as it has been which has been very effectively by the co CEOs of the business and leveraging what we have here existing today DreamWorks Animation vis-à-vis our film library, our distribution platform will have I think a meaningful impact on their immediate earnings in next 12 to 24 months.
Beyond that there are then as I said almost unlimited number of opportunities that we are just sorting our way through now and they seem to have great assets that can be used to make feature films for television series, I think this will go a long way for helping us realize the idea of a DreamWorks branded channel whether that’s a digital channel or cable or otherwise domestically, internationally.
The value of putting our consumer products business together with there seems to have tremendous opportunity. So we couldn’t be excited about this and we will look to build on what now is a very, very strong platform for us. So I do think we will look to acquire other IP that fits well within what the Classic Media plan has been up for now.
Ben Swinburne - Morgan Stanley
And this is a follow-up, are any of the big characters that you guys have talked about in the press release or otherwise, its restricted in anyway, there has been some focus Lone Ranger in particular and as a follow-up to that, does this business grow sort of own its own when you look over the next years before you think of any sort of operating synergies with DreamWorks?
Well, I think the operating synergies of DreamWorks are a significant accelerator to it. And both Eric [Allenbaugh] and his partner John -- they are very excited about the opportunity of integrating and getting those values. So that's just a stay on the path that they are on.
The other thing is that we think there are some great investment opportunities in terms of both acquisitions to make with them as well as a little bit more resources on the production front in terms of making additional television programming which they have done very, very successfully with very, very limited resources up till now.
The Lone Ranger is actually a very great example. You know we retain a significant financial interest in the property on the consumer product side of it and to have that in the hands of Jerry Bruckheimer, Johnny Depp, Gore Verbinski, the Walt Disney Company hard to have a better pedigree than that and that's exactly the kind of thing that we will look to replicate with other titles that we have in the library but that's a very good thing for us and we think there are many more of those to be done with the titles there.
Just to answer your question which is some things are encumbered in little ways, some things are encumbered in larger ways, some of them are completely free and clear, it's because it's so vast there's actually no sort of really general answer that I can give you to that. I can answer about a specific property, but overall there's a lot of valuable rights that are available to be exploited.
Ben Swinburne - Morgan Stanley
And if I could just sneak one in on the quarter on Mad 3 P&A, I think you said it's going to come in overall at a $175 million and that you've -- Paramount’s already incurred 65% of that. Why is it coming at the high end of the range than that you guys thinks makes sense and any help on how the rest of that flow through the back half of the year would be great.
Well I could just answer the last thing which is you know, its performance has been exceptional. And you know, we've continued to support the movie as it has rolled out around the world and we’ll continue to. We've only opened it in a little bit more than 55% of the international territories. So we're either a 55% or 60% of the international territory. So we've considerable runway left here on the film and you know, when it's all said and done, this is actually going to come out at being one of DreamWorks’s most successful titles on a worldwide basis
So I think that we're hitting the higher ends of our marketing support, frankly because the movie has performed. In terms of the timing and recognition, as Lew said in his remarks, you know, Paramount for whatever reasons has accelerated their payment schedule with us in a way that they’ve not done up until now. So it is not in keeping with the way in which we have conducted business till now. It is within our agreement for them to do it. So you know, the timing of it is what it is, but it doesn't reflect any change in the economics of the title or our expenditure on it. It's timing issue, nothing more.
Then I think as far as what happened going forward, we would expect most, not all obviously but most of the prints and ads remaining to be spent in the third quarter.
We have Ben Mogil with Stifel Nicolaus.
Ben Mogil - Stifel Nicolaus
Just following up on Ben's question about P&A, you know, Lew and Jeffrey, as you sort of look out to Guardians, do you think that you know do you still stay within that sort of guidance range or do you think the experience with Madagascar is looking to move it up on that number?
Again, I don’t want to guess on that to be honest with you. It's a very different release time of the year, circumstances are different. It's an origin title, not a sequel. So I don’t think there is an apples-to-apples comparison to be made about it. I will say the movie itself is a very strong title for. We're excited about it and so it will get the full on support of us. We think it's got a terrific potential.
Ben Mogil - Stifel Nicolaus
Okay, then, just a follow up on Classic. In terms of the revenue, I think it was like 82, 83 million of revenue in the LTM numbers. Can you break it down by sort of how much was packaged media, how much was traditional television, how much was streaming, just so we can get a sense of what the revenue contribution or composition was coming from?
We’ll be providing additional detail on that day at a later date. But for the most part, you can imagine their business is driven off of two main components. It's a home video packaged goods driven by several large titles and with Christmas classics as well as a pretty strong television licensing business, both domestically and internationally. Those are the predominantly the main drivers there and I would also they have a fairly substantial CP business as well. So at a later date, we will try to get to more detail, but that's the best we are going to do inaudible) on this call today.
Ben Mogil - Stifel Nicolaus
And you will also give us that later times and geographic kind of contribution as well?
Next we have Barton Crockett with Lazard Capital Markets.
Barton Crockett - Lazard Capital Markets
Wanted to learn a little bit on the talks with multiple studios on the distribution agreement and I understand there is not much you can say, but the fact that you said you are in talks with multiple studios, so should we read that to suggest that you are leaning towards using a studio partner as opposed to self distributing, so that will be one question.
Barton Crockett - Lazard Capital Markets
Okay. And then following up on the Classic Media acquisition, with the cash that you have on your balance sheet at the end of the quarter and your revolver capacity, you are kind of at your target liquidity by two movies worth of production budgets right now and a lot of that will be going out to buy Classic Media. Could you comment on how you kind of see the liquidity trending from here looking at Classic and China and all the other kind of puts and takes with the movie timing.
Barton, I think a couple of things. I think that we have additional debt capacity that we will probably begin to avail ourselves up. Also the markets right now as you know are pretty generous particularly with some term financing for our rate and credit.
So we don’t feel that we have any real problems either drawing down the line and then terming it out or terming it out early. So we think there is debt capacity there. We are happy to have a little bit of debt back on our balance sheet. We think this is a good way to increase the leverage with a good operating asset, a slight change in how we sort of run the balance sheet in the past.
And one which is accretive in the first year and you know that's with what we think is some pretty nice upside for it. So I think if there are investments for us to make like this and the other ones that we are in right now, you know we think that strategically is very smart for our company right now.
We have James Marsh with Piper Jaffray.
James Marsh - Piper Jaffray
Two questions here. First I was wondering if you could help me understand the difference between your 3D share of box relative to Pixar. I think you guys do consistently better and is it a marketing effort, is it that you pay more attention to 3D, I mean help me reconcile that 600-700 point difference in domestic share of box for 3D?
Then secondly I just had a question regarding the performance in Russia. Just seems like the numbers are, Monsters are coming out of that market, a billion dollar market, but you are doing this huge numbers out of there and is it as simple as getting a Russian accent to the tiger and just help me understand what's going on in that market? It seems like you had tremendous success there?
Okay well first on the 3D front, I think it is a couple of things. We have been extremely ambitious about embracing 3D as a creative tool here first and foremost. We have made more 3D product and have more 3D expertise working at the studio today than any other company by a factor. And I think that that has our filmmakers have embraced 3D as an artistic tool and as an opportunity and have used it very, very effectively.
One of the things that's actually interesting is that if you look at the critical response to our last three movies which have all outperformed significantly our competitors in terms of the 3D ratio, it has been driven a lot by the critical acclaim, I mean it is 75% to 80% of the critics of the last three movies, so Panda, Puss in Boots and now Madagascar actually call out how the 3D experience for these specific movies is exceptional and worth the premium to our viewers.
So I think it is, our filmmakers have used it exceptionally well and our audience has responded well to it and I think they have now come to expect it from us and the critics have called it out and people have really enjoyed it.
So the issue of Russia I think is actually been true in Russia, Brazil, Korea, China, now a number of places, interestingly almost all in the emerging markets or maybe the newer markets, it’s hard to refer to these as emerging markets anymore, our brand has been received exceptionally well and we have built a very, very strong following.
And so it’s the reverse of where we may be in other parts in the world and all of those countries I ravel off to you DreamWorks Animation has more like in Russia I think we are seven of the top 10 animated movies of all time. We are seven of the top 10 animated movies of all time in Korea. I think we are six of the top in Brazil and Argentina and so I guess we've built a very, very strong following and our movies play exceptionally well there and Russia is certainly at the top. Our distributor there has done an outstanding job, so they are entitled to credit and building a following and a popularity for our films there.
David Miller with Caris & Co.
David Miller - Caris & Co.
A question for either Lew or Rich, a lot of us on this call were sort of under the impression that the only way you would ever tap your credit facility would be if you in fact decided to self distribute. So related to Barton’s question should we assume that that's just generally off the table, I know Jeffery you just sort of answered it, but I mean Lew or Rich could you just expound on that a little bit, should we definitely assume that this is completely off the table by virtue of the fact that you have capped your credit facility for Classic Media. And Lew if you could just kind of go into what optionality there is for expansion of that credit facility; that would be helpful? Thanks very much.
Okay, I am going to hijack the answer on that, because I think I gave you a straight answer which is that you know right now today our expectation is that our distribution will be handled by a major; we will not be handling that independently.
Having said that, the issue of our ability to handle P&A if that’s something that we choose to do even in an arrangement with the distributor, that's an option for us; we clearly have the capacity to do; we have been highly underleveraged and we are going to look at these things, I think strategically in terms of investment opportunities for us. That’s the way we see it. So we have the capacity of -- Classic Media did not take that option off the table for us, but as for self distribution, that is not something that we’re pursuing right now.
We have Chris Merwin with Barclays.
Chris Merwin - Barclays
I think Classic Media has something like 450 titles in its library and is it fair to say that the library is already big enough to grow revenues meaningfully through incremental licensing deals or how important on a relatively basis is right to acquisition in growing that business? I am just trying to get a sense I guess is what margins might look like going forward relative to where they are now?
Well, I guess it's hard to answer the last part of your thing which is to be predictive of margins going forward. I don't think we’re in a position to do that. We think we’ve actually struck a gold mine here and are looking at this very, very entrepreneurially. I am on my way to New York tomorrow. We're going to spend most of Thursday sitting down with management, really now looking at where are the best investment opportunities.
I do want to say that to take the existing business they have today without any further acquisitions on their behalf, we think they have some significant growth opportunity in the next 24 months. Much of that value will come out of our ability to leverage what we have and what they have together.
So that’s just sort of the base line of where we start today which is to let these guys to continue to do exactly with what they’re doing with our platform is going the increase the profitability of their company in a meaningful way, which is why we’re so excited about the acquisition. Beyond that, there, as I said I don’t want to keep repeating myself, we just think there is lots and lots and lots of things for us to do with them.
We will go to Richard Greenfield with BTIG.
Richard Greenfield - BTIG
Hi thanks for taking the question. We are seeing what seems like a DVD marketplace where it’s getting more challenging to get sales of more than 6 million or 7 million units; I am just wondering as you look at a title that’s like a third in a franchise how you think the ageing of a franchise is impacting DVD sales?
And then related to that, just your international DVD strategy; you really spaced out to take advantage or to deal as best you can with the impact of the Olympics; you have spaced out the theatrical release. When you look at where the lower axis now dated, how are you thinking about dating the film internationally as you will be just releasing theatrically in mid-October in some of these European markets? Thanks.
So again Rich, I guess one in terms of the DVD market right now today we have seen pretty strong stabilization, if that makes sense. The market has really kind of settled into a plateau and seems to be hanging there now for the better part of the year; certainly that is the trend that we have continued to see now.
All I can say is that on a title like Madagascar 3 as an investment and a return on investment, it’s a very, very, very strong title for us and will be very profitable for us. I like you wish it were the way it was in 2003 or ‘04 or ’05; it was wildly profitable then, but this is a very strong performer for the company and I think a very, very good investment.
So you can look at in terms of DVD unit sold and certainly we do but ultimately the title will have performed very well for the company and been very, very profitable. In terms of the roll out of the film, our dates are very carefully selected not based on only its theatrical window but also what would then be the home video window that would follow from that. It’s a very specifically and lets take Germany and the UK, two very big territories coming in October.
We have in place for them very good release windows that will come the other side of the holiday, and that has been taken into consideration from day one.
Richard Greenfield - BTIG
So how many titles, or how many regions do you think you'll release in 2012 versus '13 in terms of major DVD territories.
You know I don’t want to wing it but it would certainly be the October, it will be most of the September, October territories will come after the first of the year just by virtue of the typical release windows that we have.
Those territories specifically the UK, Germany and Australia all of which are open either end of September or beginning of October.
Our next question is from Tony Wible with Janney. Go ahead please.
Tony Wible - Janney
You know, Panda Had a big Pay TV number, do you expect more Pay TV contribution coming from international, does that number already in corporate international and on a quick housekeeping question, did you say Madagascar only had $4 million of merchandise, I think that's what the transcript was picking up, I assume it was higher than that.
To answer your first question the number reported for (inaudible) include both domestic and international pay and there's probably a few small territories that are international but the majority of that Pay TV revenue was recognized in the quarter. As far as your second question you heard that correctly there's a CT program for Madagascar 3 recorded $4 million of CP this quarter. So that was, you were correct in hearing that.
Tony Wible - Janney
Okay, how much more merchandise could you expect out of that and then could you also speak the merchandise on Guardian, just a potential roughly?
At this stage we are not going to give you any forward-looking guidance on CP. We do recognize a lot of these things on a minimum guarantee basis when the film is released and that's what you are reflecting in the quarter depending on how the merchandise performed over the coming weeks will determine how much ultimately it records because it's too early to tell.
So that's where we are with Madagascar 3 and as far as Guardian as we've been saying from the beginning these original films are, the CP program especially with the deterioration in the video game business are harder and harder to get robust CP program, it’s really an individual basis we do have a few in the pipeline. But for the most part these original films tend to be in the high single digits unless we think it’s a big CP property like a turbo that we've talked about in the future. So that should help you at least get the size of that red box.
We have Tuna Amobi with S&P Capital. Go ahead please.
Tuna Amobi - S&P Capital
So a quick clarification Lewis, so given your expectation Classic Media to be accretive in year one, I was wondering if you can share with us some historical financials on that would be helpful and Jeffrey on the same theme, I guess one could say that this deal potentially opens up a whole lot of avenues beyond the ones you've already identified whether its live action or TV production or even kind of original TV series for different streaming platforms like Netflix.
So the question is as you begin to dream up all these possibilities out there, any of these that you would perhaps kind of rule out at this point or it's pretty much everything on the table. I know that some of these ideas may sound a little bit radical based on your current business model but I want to just get a sense of what you think it is?
Let me try and answer that question first and I'll turn it back to Lew which is that, here is the way we've come to feel about this library particularly in these last few weeks as we really got into a very good, productive and exciting due diligence on this. I actually think that if you go back and you look and I don't think whether 10 or 15 years ago at Marble and you see the depth and breadth of the library that they had and you look at what some very, very talented, very smart people have done in terms of taking that library and frankly mining it and reinventing for the 21st century.
You know, they’ve done it just an exemplary job of taking great Classic IP and making it relevant for today. By the way as we’re expecting the Disney Company is doing right now with the Lone Ranger I have a lot of confidence that they’ll take that title and reinvent it and make it relevant and exciting and exceptional for people today and for our audience today.
I think that is what the level of opportunity is that exist for us with this. Obviously much more in the family brand that Marvel’s done it with the action hero genre. It's a wonderful path that they’ve laid out there and that’s the one we intend on pursuing. This library, frankly is, has much greater breadth and depth to it than theirs and you know, this will happen over many years but we do think there is unlimited potential through what we have with this library and we think its going to have a significant impact on DreamWorks as a business going forward. Lew you want to?
Yes, just for a couple of data points, Classic Media's fiscal year end was 229 in '12 and at that year end they had revenue of $82.2 million and operating profit of $19.2 million.
Tuna Amobi - S&P Capital
Just a quick follow-up separately on the How To Train Your Dragon Tour, so I’m just trying to understand Jeffrey, the philosophy behind these live tours. So given your experience with Shrek, is it fair to say you know, kind of that these tours are mostly promotional and some kind of help or understand of your business plan or financial model. Is it kind of a breakeven type of a situation or are you actively looking to be profitable on these kinds of tours? Any help there would be appreciated. I know it's relatively small but just trying to get a sense of how you think about that? Thank you.
We look at this as a strong investment opportunity for us. That’s the basis certainly that we went into it. It really isn’t I think too analogous as a business model to the Shrek Musical, but in the same way that our interests and our ambition in doing the Shrek Musical was to do something that in success would have a meaningful return on investment and be a potentially great earner for the company.
We are proud of the show, it's done okay. It didn’t -- we didn’t hit the bulls eye with it, but I think it was a good opportunity for us and obviously I am glad we took it and we have learned a lot from it and I think it will help us when the next opportunity comes along. The arena business and this show in particular -- it’s a spectacular show; it’s been brilliantly reviewed and received everywhere that it’s been. We are hoping to catch its fire. I am actually going back to New York open to the Nassau Coliseum on Thursday and we have high hopes for it.
We have Vasily Karasyov with Susquehanna Financial Group.
Vasily Karasyov - Susquehanna Financial Group
I have one modeling question probably for lower rates and then I have a follow up for Jeffrey. You mentioned that there was a timing issue with theatrical revenue out of Argentina; does that mean that it reduced the retention rate this quarter, but then it will go up back up in the Q3?
Argentina at the moment has decided not to pay for their films and not to pay for lots of other things, they've essentially -- are (inaudible) their foreign currencies and they are paying anywhere from about 9 months to 18 months late. As such we evaluate each film on whether or not to send it down there and then we figure out pretty much when we are going to get the cash and we don’t book it until we receive it.
So it is sort of like a non-accrual loan from the banking business. Venezuela, it is relatively new for Argentina. Venezuela has been doing this for a number of years now and also has an allocation system that comes out. In Venezuela's case, I think we get paid a couple of years after the film is released.
Vasily Karasyov - Susquehanna Financial Group
Jeffrey, I have a question about the TV Network you mentioned. I am sorry if I missed the details, but if you could elaborate a little bit more on the concept, what the timeline is, whether it is international, domestic, the size of spending that you think will be required and why now, why do you feel that now is a good time to do that?
So I would say too early to answer those questions. We are in aggressive exploration I would say is the best way to characterize it. So today to be able to frame the size of it, the size of the investment, the size of the opportunity is kind of premature. What has happened is that with the consistency of success of our films particularly in a number of international markets that we talked about today.
The brand is really begun to come into its own and it has real value. It has a set of values around it; it has strong identification in the consumer market place. It is unique and differentiated and so that creates the opportunity for us to build a branded family channel. And to say whether it's going to be cable or digital, what parts of the world they will come first in, we are looking at a whole number of -- a whole different set of opportunities there and I don't think we are ready to sort of declare what the exact path forward is. So other than that, there does seem to be a lot of interest and a lot of opportunity.
Vasily Karasyov - Susquehanna Financial Group
One quick follow-up if I may, would it ever be possible for this channel to come to fruition as part of the distribution, theatrical distribution deal and maybe you’ll find a partner who already has presence in multiple foreign territories that has connections on the ground with the platforms?
Well, that's a little bit premature, but what I am comfortable saying is that this has been a part of conversations that we've been having with potential distributors of ours, is the exploration of a branded channel. So it is something that we are actively talking about with those possible partners.
We have Michael Corty with Morningstar.
Michael Corty - Morningstar
Just a few questions related to the Classic Media. First could this eventually be a catalyst for making more films per year, maybe five years down the road and then secondly just kind of implying from all your answers to the questions and comments. It seems like you like the assets even more, once you've had more time to learn more about them after the deal was announced, is that a function of only having so much information before you made the bids and now you have more information. And then kind of secondarily, it's great, that you are very excited about the deal, just the analyst part of me just wonders, did everyone else miss something or how did you get such a great price for a good deal, so you can kind of comment on that, that would be great.
Well, I can't comment on what other people did or didn't do other than to say I couldn’t be happier with the investment and I don't think we could have made a better investment. And so what others were thinking or doing or the way they approach it or maybe very specifically where our company is right now today, this is just such a perfect fit for us and I feel like we have, we just put some booster jets on the company.
So for us it really was great. I think this is the first time that you had an opportunity to actually hear me talk firsthand about the acquisition since we made it. So to say that I got happier about it, in fact as opposed to where we were as we got down to closing. I don't know, like anybody I was a little bit concerned that somebody was going to swoop in and take it away from us. So we were fairly quiet about it, I mean more than fairly quiet. We were as quiet as we could be about it because honestly I don't know how other people missed it. So I don't know, I hope that answers your question.
Michael Corty - Morningstar
Congratulations on that and then I guess the first part of the question was whether that could be a catalyst at some point with all this new IP for you to make an additional film per year, how do you think about that maybe like five years out?
I don't think so. I think that we are very focused on getting to that three picture a year goal. Certainly there's some very, very exciting IP here, but we think that, it's going to have applications outside of our feature film slate. There are two or three titles. As you know we are making Peabody & Sherman and Rocky & Bullwinkle.
We do think there are two or three more that are great candidates for us in the CG, high-end CG field. The thing that is most exciting to us about it is that its greatest opportunities are outside of that core pipeline of ours and so it's a chance for us to diversify the company in a significant way to create a very strong revenue stream alongside of our feature film CG business.
We have no one else in queue. Please go ahead with your closing remarks.
Great that concludes today's second quarter earnings conference call. I would like to remind everyone that a replay of this call will be available shortly on DreamWorks Animation's website. That web address again www.dreamworksanimation.com. And please feel free to call DreamWorks Animation investor relations department if you have any additional questions. Thanks again for participating and have a great evening.
Thank you and 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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