Dreamworks Animation: Diversification Puts Company On The Right Track To Long-Term Success

| About: Dreamworks Animation (DWA)
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On Wednesday night, Dreamworks Animation (NASDAQ:DWA) reported stellar revenue and earnings for the fiscal second quarter. The results, led by the success of "The Croods" in theaters, sent shares up in the after- hours trading. On Thursday, shares hit a new fifty two week high of $27.00 and are up close to double digits. Investors should stay bullish on this movie company as it turns its attention to television and consumer products in an attempt to diversify.

As Wednesday's results show, Dreamworks Animation shares are heavily influenced by the results of movies released in theaters. The animation company, which releases two to four movies a year, has lived and died by this theme for quite some time. That practice is about to change, as new business segments are strengthened.

Movie Business

The success of "The Croods" led the way in the fiscal second quarter. Of the reported $213 million in second quarter revenue, "The Croods" contributed $72 million. "Rise of the Guardians" contributed $17 million, and "Madagascar 3" contributed $49 million. Library titles, which represents DVD sales and television deals of older movies, made up another $41 million. The company's other segment brought in only $24 million in second quarter revenue.

As you can see, the company's recently released movies have a significant impact on the company's financials. Less than 15% of the company's revenue came from other business ventures. In the quarter, revenue from "Merry Madagascar" on Netflix, Oriental Dreamworks, and AwesomenessTV contributed to the other category.


My last article on Dreamworks centered around the company's new partnership with Netflix (NASDAQ:NFLX). The two companies signed an agreement which will bring shows based on existing characters and new original shows to Netflix. Through the first half of the year, television revenue has only made up $42 million of Dreamworks revenue. That amount puts the company on track for its yearly goal of $100 million. However, going forward, the Netflix deal and others should yield significantly higher segment results.

The acquisition of Classic Media, which I discussed here, should power new original television shows. The company acquired a vast library of old comic and television characters. In the second quarter, Classic Media turned in $9 million in revenue for the other category. Through the first half of the year, Classic Media has generated $21 million revenue. In 2013, Dreamworks Animation expects half of its revenue ($50 million) in the television segment to come from Classic Media.

AwesomenessTV was acquired by Dreamworks Animation for $33 million. Since the announcement of the acquisition in May, video views have increased by over 50% as users have also increased by over 50%. The important announcement of this new business unit centered around new concepts. AwesomenessX, aimed at younger boys, was launched this past month. Awesomenesskids is in the process of being created. These distinct brands will help power the online video segment.

Dreamworks Animation announced it hired Marjorie Cohn as its newly created "Head of Television". Cohn brings a vast amount of experience in creating animated television shows. Cohn, who spent 26 years with Nickelodeon, was part of a team that created and produced hit kids shows like: "Spongebob Squarepants", "Rugrats", "iCarly", and the "Kids' Choice Awards". Cohn will now oversee the completion of the Netflix deal. In total, Cohn and her team will need to create 1200 new original episodes in the next five years. Cohn's experience and oversight should transform the television segment for Dreamworks.

Consumer Products

With a vast catalog of movie characters, I have long said Dreamworks' consumer products division was lacking. The company has strong characters who can be licensed out in a variety of categories.

One of the reasons "Turbo" wasn't a complete failure for the company was its strong licensing power. The original movie, which underperformed due to "overly saturated marketplace and a difficult release date", was produced for less and had better consumer partnerships.

A new partnership with Hasbro (NASDAQ:HAS) was announced on Wednesday. The new deal calls for toys and games to be created based on two upcoming movies from Dreamworks Animation: "B.O.O.: Bureau of Otherwordly Operations" and "Trolls". The two movies, which will be released in 2015 and 2016 should have very strong licensing revenue and will be the focus of those respective years.

In 2014, "How to Train Your Dragon 2" will be the featured consumer product showcase movie. In Dreamworks Animation's new strategy, they will market the licensing power of one movie heavily. "How to Train Your Dragon 2" follows the successful first movie and has already signed on additional partners.

Dreamworks Animation also made another hiring announcement concerning its consumer products and retail presence. The company hired Paul Kurzawa as the new "Head of Retail Development and Entertainment". Kurzawa was previously the chief operating officer of Caruso Affiliated. Caruso operated real estate properties including heavily trafficked malls like The Grove. Based in Los Angeles, The Grove is one of the top 10 shopping centers in the world, based on sales.

Theme Parks

Anyone who has followed my articles on Dreamworks Animation will be no stranger to the company's recent theme park deals.

I highlighted Dreamworks deal with Triple Five to bring Dreamworks' characters to the American Dream Mall in New Jersey. I also highlighted a partnership announced in February that will bring Dreamworks' characters to three planned indoor theme parks in Russia. Those three parks are expected to open in 2015 and will provide the company with licensing and royalty fees. Dreamworks has already seen its box office results improve in Russia and they have significant upwards momentum with these parks in the works.

In the second quarter, Dreamworks Animation opened "Dreamworks Experience" at the Sands Resort in Macau. This is a licensed property and will net licensing revenue to Dreamworks Animation going forward. The company also expanded its partnership with Royal Caribbean to be included on two new cruise ships. "Madagascar Live Experience" opened at two additional SeaWorld properties in San Diego and Tampa. The event is now held at seven resorts worldwide.


Dreamworks reported strong second quarter revenue and earnings. Total revenue of $213 million was an increase of 30% from the prior year. Earnings per share of $0.26 represented an increase of 75% from the prior year. For fiscal 2013, analysts expect Dreamworks Animation to earn $0.78 per share on $744.6 million in revenue.

Looking at current trends, Dreamworks Animation should beat full year earnings estimates. In the first quarter, Dreamworks beat analysts with reported $0.07. That amount, along with the $0.26 just reported equals $0.32. Estimates for the third ($0.06) and fourth ($0.43) quarters would results in $0.81 for the fiscal year. With new growth streams, the company could also provide earnings beats in the next two quarters as well.


Shares of Dreamworks Animation hit new fifty two week highs of $27.00 Thursday. However, looking back at the last five years, shares still trade significantly down. Shares are down 21% in the last five years. Back in 2010, shares actually traded for over $40. The company has strengthened its library and diversified its business since that time.

Going forward, revenue is expected to climb 12% in fiscal 2014 to $835.4 million. I think this number undervalues the Netflix deal and the positive release schedule. In 2014, Dreamworks Animation will release "Mr. Peabody and Sherman", "How to Train Your Dragon 2", and "Home". The company will also see significant revenue from other business segments. Dreamworks Animation is a mini-Disney and is finally starting to act like one. It's time to get behind this all-in-one entertainment growth machine.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DWA, HAS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.