Home is a Hit for DreamWorks -- Now Comes the Hard Part

DreamWorks investors got some rare good news this week. The stock spiked after the animated film Home came in first place at the box office last weekend, raking in $52 million in receipts.

Source: DreamWorks Animation.

That was DreamWorks' best movie opening since 2012. The launch haul is close to the first weekend for The Croods, which went on to gross $187 million and was solidly profitable. In contrast, DreamWorks had to take a painful loss on three recent films, Penguins of Madagascar, Mr. Peabody & Sherman, and Turbo.

Domestic box office receipts. Source: Box Office Mojo.

Home could still end up a loser for DreamWorks as it has a mountain of costs to recoup. The production budget was a steep $135 million, above management's goal of spending no more than $125 million per film on development. Add on marketing expenses, distributor fees, and revenue sharing, and the movie would likely need to gross nearly $200 million for DreamWorks to avoid its fourth straight year with a big loss on one of its films.

And it doesn't get much easier for the animation studio from here. Home will be its only theatrical release in 2015. There are just two movies slated for each of the next two years, down from DreamWorks' previous pace of three per year.

Despite CEO Jeffrey Katzenberg's goal of building a diverse revenue stream, feature films make up nearly all of DreamWorks' business. The strategic push into TV and consumer products hasn't changed the fact that movies accounted for more than two-thirds of revenue in each of DreamWorks' last three fiscal years. Disney, by comparison, gets 15% of sales from its studio business.

Management announced a restructuring plan in January that will lower the cost burden on the company, and as DreamWorks focuses on two films instead of three every year, it hopes to produce higher-quality movies with a better-than-average chances of scoring at the box office. That makesHomean encouraging start. The company can also rely on sequels to do some of the heavy lifting. They make up half of DreamWorks' movie pipeline over the next three years, anchored by The Croods 2 and Kung Fu Panda 3. It's good news for shareholders that DreamWorks' first movie after its restructuring change is likely profitable -- despite the fact that it is an entirely new property.

But the company still needs to get its production budgets down to its $125 million goal or lower. It has to post strong growth in its TV business this year to help take pressure off of the slim movie release calendar. And, most importantly, it needs a string of hits before management can claim that DreamWorks' turnaround is in place.

The article Home is a Hit for DreamWorks -- Now Comes the Hard Part originally appeared on Fool.com.

Demitrios Kalogeropoulos owns shares of Walt Disney. The Motley Fool recommends DreamWorks Animation and Walt Disney. The Motley Fool owns shares of Walt Disney. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.