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David Poland

By David Poland

Shouldn’t An Average Of A $500m Gross Per Movie Be Enough For Wall Street?

I continue to be astonished by the Wall Street analysts becoming Twittiots.

Today, the issue is DreamWorks Animation, one of the few public companies that is solely dependent on the revenues of their movies (including licensing) to remain in business and attractive to stock speculators.

I have zero problem with analysts or anyone else questioning whether DWA is a growth business or if it will be stagnant at best and sliding at worst. There are all kinds of opinions and my opinion of them is not the point of this entry.

The Hollywood Reporter did this story.

When you have the Peter Travers of Stock Analysts, Rich Greenfield, pushing his Agenda Of The Week and you get, ““The key drivers of DWA’s troubles are that its movies have not lived up to expectations and the global DVD market is in free fall as consumers continue to shift from buying to renting,” in response to the biggest Memorial Day opening of an animated film in history, you have to wonder why this one movie changed any of that. (To be as fair as possible to Greenfield, who seems to be perpetually auditioning for a CNBC or Fox Business daily show, he was a “sell” on DWA before the release of the film.)

When you have Janney Montgomery Scott analyst Tony Wible talking about how KFP2 didn’t meet HIS expectations of opening because its PROJECTED domestic gross is $20 million than his guess, which translates to about $9 million in net revenue to DWA (after exhibitors and Paramount take their cuts), you scratch your head an wonder… really? Less than $10 million off of his GUESS and so the company needs a kick in the balls?

Doug Creutz, analyst at Cowen & Co. seems to be the only non-jackass in the game, keeping his DWA position at “neutral,” taking international grosses seriously, and fairly considering whether a company with 2 films a year and no ongoing blockbuster franchises is in very good shape. He’s not rooting for them, but he is thinking about all the factors and not smelling his own farts.

You want my personal take? DWA is a little overvalued, but is a very solid business and should probably be taken private again.

There have been 22 DreamWorks Animation films in 14 years. Only 3 of the brands, representing 7 titles (projecting KFP2 into this group) that have cracked $500 million worldwide; Shrek, Madagascar, and Panda. The last DWA movie to do under $200 million worldwide was the first film with Paramount, Flushed Away, in 2006. There are 6 of those titles. And there is the middle class of this business, 9 films, grossing $200m – $500m, with 3D or without.

So excluding The Big Three brands, DWA’s last three films for Paramount grossed $382m, $495m, and $322m worldwide… all three in the Top 20 of worldwide grossers for 2010 and 2009. The weakest grosser for the company in the last 5 years grossed $288 million worldwide, #18 in the world that year.

So tell me… does that business suck? Is there a problem?

Well, the problem is that Wall Street is interested in growth and quarterlies and two film products a year is not enough to sustain either on a consistent basis. In a now aggressively competitive marketplace for animation, sustaining is hard enough, but growing in the way Wall Street wants growth is pretty much impossible. Getting lucky with a particular film is not really a sustainable stock market model.

But it was NEVER a sustainable stock market model.

If you can’t make a go of it with movies that gross $300 million or more every time out of the gate, you have a problem.

If The Market thinks $300 million every time out, with an average gross for your last five releases of just over $500 million worldwide, The Market has a problem… OR you don’t belong in The Market.

And I don’t just blame the analysts. It is the whole overhyped mentality about opening weekend. A little bit of information is a profoundly dangerous thing.

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16 Responses to “Shouldn’t An Average Of A $500m Gross Per Movie Be Enough For Wall Street?”

  1. Foamy Squirrel says:

    Re: Wible – These numbers generally aren’t pulled out of hat. My guess would be that he’s assuming a relatively stable increase in costs (which have been growing ~$60mil annually) and then estimating the box office required to produce cash flows that maintain existing levels of profitability, extrapolating off known box office of DWA previous films and their reported revenues from the annual reports.

    So in effect he’s saying “Costs will be X, box office will have to be Y to generate revenues of Z. Box office was less than Y, so my analysis suggests revenues will be less than Z.”. Combine that with known industry data about DVD and library valuations for and that’s not an unreasonable conclusion.

    Of course people may disagree with his numbers – this is forecasting after all, and even internal DWA finance peeps can be wrong in their estimates.

    ETA – I still can’t believe Bee Movie pulled in $30mil in 2010. For a so-so title, that’s a hell of an impressive haul 3 years out.

  2. eric n says:

    When you think outside DWA, I think it becomes clear that what these “analysts” are reacting to is PR and public impressions more than anything.

    Look at Pixar. If it were still independent, do you think for a moment any of these guys would give it a negative value because they only produce one film a year?

    If you look at these studios side by side, their top ten films have very similar grosses (I’m looking at boxofficemojo’s domestic #s). If we compare these libraries, I think another thing comes to light that Wall Street should value much more.

    DWA’s first release was 1998, so, let’s exclude ‘Toy Story’ so we compare apples to apples. Pixar only has 10 films since 1998, Dreamworks has produced 22. Sure their average is lower than Pixar’s ($165m vs. $264m), but their total gross is way up ($3.6b vs. $2.6b)–I’m assuming $200m for KFP2). This means that, on average, DWA is grossing about $280m in receipts each year compared to Pixar’s $200m annual average. Revenue counts for something, doesn’t it–especially when you don’t have a multi-national conglomerate to secure your financial picture?

    Now clearly, DWA has to do a better job keeping costs down. Spending more than $150 to launch a franchise is a very risky business, no matter how great they are. But if they can reign in the costs–and that’s a big IF considering that their best attempts (i.e., their work with Lord & Park) have not been their best commercial successes. What DWA does do that Pixar hasn’t proven yet, is they’ve been able to create franchises. With three under their belt and a fourth strong contender in the wings (HTTYDragon), DWA has a proven ability to not only create strong original content, but also content that people are willing to see when the poster has a big #2 on it.

    Pixar, however, seems to be above the fray. Their slow burn release schedule is seen as wise, when in reality it should be seen as very risky. One bad movie would reveal the danger. If, for example, ‘Cars 2’ tanks, the studio would have to wait an entire year before they could make up for it–and then, only if the untested ‘Brave’ features lightning in a bottle. Although I’ve been conditioned to think that Emeryville, CA is incapable of such missteps, let’s be realistic. As much as I love him, John Lasseter is as human as the rest of us. Hmmmm, maybe what DWA needs is to hire Lasseter’s PR guy to manage Jeffrey Katzenberg’s image. That seems like the type of thing that would positively influence these Wall Street guys.

  3. Maxim says:

    There is absolutely nothing wrong with Katzenberg’s image. In fact, he coes of as a professional, driven and capable CEO.

    The issue here is greed, plain and simple. What THR is selling is the idea that it’s not enough to be sucessful. Unless every movie you make goes to billion it is still dissapointing (to THR).

    I did get a laugh out of the the franchise fatique comment. At the opening of second installment, no less! These morons cannot even understand WHY Panda opened how it opened (pro-tip: it succeeded as counterprogramming and still lost audiences avoiding Hangover 2 crowds) and do not understand why it will show long legs.

    Not that Poland should even be critisizing anyone else, ever.

  4. jennab says:

    @ Eric, in the unlikely event “Cars 2” tanks (looks re-booted with more exciting European location, better voice talent with Michael Cain, etc.), are you aware that the Cars franchise has generated somewhere between $6-$8 BILLION in merchandising worldwide…?

  5. Paul MD (Stella's Boy) says:

    At Target an entire aisle in the toys area is almost nothing but Cars stuff.

  6. eric n says:

    @ jennab, I have two young boys who, with their friends, have schooled me on the strength of the Cars brand. Personally, I think ‘Cars’ is grossly under appreciated and suspect this next one will do just fine.

    @ maxim, Clearly, Mr. Katzenberg doesn’t have a bad image. He may be as well known as Mr. Lasseter and as far as I’m aware, there isn’t much ill thought of him. There is a difference, though, and if Poland is correct in his reporting of Wall Street analysis of DWA strength, I think it’s completely reasonable to suggest that part of the reason finance people are willing to back Lasseter (whose company’s talent was purchased for $7.4b) and are only willing to give Katzenberg’s company a moderate stock evaluation is because they believe that Mr. John “Story is Everything” Lasseter is sure-fire in a way Katzenberg is not. What other factors would you use to explain the discrepancy in attitude between the two companies when Katzenberg is able to generate more content and revenue?

  7. ILDC says:

    Over the Hedge was DWA’s first Paramount movie.

  8. Triple Option says:

    That’s funny, I was just at McDonald’s the other day and overheard some 8-year-olds at a party saying they craved better voice talent along the likes of Sir Michael Caine and Dame Judi Dench in their productions. They also mentioned the stifling and confined feel of their surroundings. They asked was there something beyond their world of playgrounds and jungle gyms, something to reveal the purpose of their existence like in exploration of the cosmos or perhaps animation set in another continent with more esthetically pleasing architecture like Europe. Then they ran off to dive in a tub of multi colored balls.

  9. hcat says:

    The stock issue is not with Katzenberg but with the fact that any company that is only going to have two products a year is bound to live in a feast or famine environment. They rise with a hit and fall with a miss (and David’s arguement above is simply that Panda is not a miss). Its a little apples and oranges to compare a stand alone company to one that is part of a huge comglomerate, and then declare one as a wall street darling. If Pixar was to be purchased as a stand alone company that would have to distribute in the same fashion as DWA I can’t imagine someone tossing out a price like that.

    As for the gross, the weaker opening could easily be atributed to the Thursday opening draining demand from the weekend. As of right now Panda 2 is at the exact same box office point as the original. Of course you could expect an additional bump in the gross due to how well received the original was, and I am sure it was a little disappointing for DW to not gross more but for people to suggest that this might change the long term prospects of the company is ludicris.

  10. Krillian says:

    Or you could say for people to suggest that this might change the long term prospects of the company is Chris Bridges.

  11. David Poland says:

    How people eliminate themselves from being taken seriously: “Not that Poland should even be critisizing anyone else, ever.”

    Of course, the irony is that I wasn’t criticizing THR, except in that they published Greenfield… as the NYT and others do… as though he wasn’t primarily a self-promoter. The man who said Ratatouille and then Up would be the end of Pixar.

  12. David Poland says:

    To be clearer, hcat, my position is that KFP2 may or may not be a disappointment, but we certainly don’t have that answer from the opening weekend… particularly Memorial Day weekend, which has not been a thrilling one for animation.

    The issue of the 3D bump is not insignificant… and we are seeing Thor basically doing Hulk + 3D bump domestically. But the analysts got sucked into the 3D game instead of keeping a rational distance and this weekend’s 3D beatdown feels more like embarrassed payback than thoughtful analysis from 2 of the 3 analysts.

  13. Foamy Squirrel says:

    “KFP2 may or may not be a disappointment, but we certainly don’t have that answer from the opening weekend… particularly Memorial Day weekend”

    But analysts don’t get paid to provide recommendations after the final receipt has been counted. Saying “Lets wait 6 months to see whether you should have bought/sold today” is… counterproductive.

  14. David Poland says:

    Nor are they paid to react to opening weekend domestic box office being a little lower than expected as though their clients should run from a company that has in no way fundamentally changed as a result of that event.

  15. Foamy Squirrel says:

    But if the opening weekend is lower than expected then that means that annual profit will likely be lower than expected which means that share prices are likely to produce less returns than expected. As soon as ANY information is publicly released, analysts have to take into account how they think that will most likely impact prices.

    Whether the company is doing fine or not is somewhat immaterial, it’s the expectation of the size of returns to investors that’s the key decider whether the stock is over/underpriced and whether the analyst recommends you sell/buy respectively.

    ETA – it’s also important to note that Wible retains his “Neutral” recommendation, in that he thinks the long-term prospects are fine despite the expected underperformance of short-term profits. Given that historically ~60% of annual revenue is derived from current releases, that’s a fairly balanced and reasonable view.

  16. There is clearly a lot to know about this. I assume you made some good points in features also. Could you update me with your next post please?

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