DreamWorks warns of 2Q loss

Earnings picture blamed on weak DVD market

July 12, 2005|By Richard Verrier | Richard Verrier,LOS ANGELES TIMES

DreamWorks Animation SKG's troubles continued yesterday as the studio warned it will lose money because of softer-than-expected DVD sales, the second time in two months it has projected a shortfall in its home video business.

DreamWorks also disclosed that the Securities and Exchange Commission has begun an informal probe into stock trading around the time it surprised Wall Street in May with earnings that fell short of expectations. DreamWorks said it is cooperating with the inquiry.

The disclosure that sales of Shrek 2 and Shark Tale were off sent the computer animator's stock plunging more than 13 percent, or $3.54, to $23.27 a share.

It also raised fresh questions about whether DreamWorks and other studios are being overly optimistic about DVD sales, or failing to adapt to long-term changes in the home video market. DreamWorks' chief competitor, Pixar Animation Studios, recently revised its earnings downward, citing slower DVD sales for its hit film The Incredibles.

Although Shrek 2 sold briskly when it was released late last year on DVD, purchases slowed quickly after the initial burst. Retailers are sweeping older titles from their shelves and returning them in order to make room for the freshest DVDs. Many consumers also have filled their bookshelves with DVDs purchased after buying their first players.

"The market is fast approaching maturity," said Thomas K. Arnold, group editor and associate publisher of Home Media Retailing Magazine. "People who've bought DVD players have got a pretty big library, and maybe they're being more selective."

Ironically, Shrek 2 is one of the top-selling DVDs ever with more than 35 million copies sold. But DreamWorks and its investors expected brisk sales well into this year, mirroring the way the original Shrek continued selling on home video.

DreamWorks Chief Executive Officer Jeffrey Katzenberg told analysts in the conference call that it is too early draw permanent conclusions.

"There is a tremendous amount of product in the marketplace," he said. "It's obviously much more crowded than it has been before. We don't know if this is a short-term issue of if some larger shift is going on."

Wall Street has been unforgiving since DreamWorks first disclosed the shortfalls in May. Its stock is off nearly 45 percent from its peak of $41.98 in December.

DreamWorks is now projecting a second quarter loss of 7 cents to 9 cents a share, down from a previous forecast of no profit. It also lowered its full-year projection to a profit of 80 cents to 90 cents a share, down from $1.00 to $1.25.

"One time is understandable," said Anthony Valencia, an analyst with TCW Group in Los Angeles, said of the earnings revision. "The fact that they're doing it again is something that investors just don't like. It goes to the issue of credibility."

Richard Greenfield, an analyst with Fulcrum Global Partners in New York, responded to yesterday's news by lowering his rating on the company's stock to neutral from a buy.

"They don't seem to have a good handle on where their numbers are," Greenfield said.

DreamWorks did not elaborate on the SEC probe. It said that the agency, as it usually does when it launches an informal inquiry, told the company that the probe "should not be construed as an indication that any violations of law have occurred."

The company also said that six class action lawsuits have been filed related to its earnings shortfalls. The company said the suits are without merit, and that it plans to vigorously defend itself.

The Los Angeles Times is a Tribune Publishing newspaper.

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