DreamWorks Animation Prepares for Comcast With Strong Earnings, Sales Growth

By Markets Fool.com


Image: DreamWorks Animation.

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One strange aspect of companies that are in the process of being acquired is that they still release their earnings results, even if current shareholders aren't likely to reap the rewards. For DreamWorks Animation , the fact that Comcast unit NBC Universal will purchase the animated feature company for $3.8 billion seems to make its future earnings moot.

Nevertheless, some investors follow the results, and coming into Thursday's first-quarter financial report, DreamWorks investors expected reasonable sales growth, but breakeven net income. Instead, DreamWorks did much better, posting a substantial profit, and showing the potential genius of the Comcast decision. Let's look more closely at what DreamWorks Animation said with an eye toward what might be ahead for the company as its merger approaches.

DreamWorks Animation gives investors a big surprise
DreamWorks Animation's first-quarter results continued to show signs of positive momentum for the movie studio. Revenue was up 14%, to $190 million. Although that wasn't as fast as growth rates in past quarters, it was still greater than the 10% that most investors were expecting. Net income of $13.8 million reversed a larger loss in the year-ago quarter, and earnings of $0.16 per share simply crushed the $0.01-per-share consensus forecast among those following the stock.

Taking a closer look at DreamWorks' performance, the company's segments had very different performances. Feature films revenue fell by more than a quarter, to $94.3 million, and segment gross profit dropped by nearly a third. Although Kung Fu Panda 3 opened to strong results in late January, distributor Twenty-First Century Fox had not yet recouped its marketing and distribution costs, and so DreamWorks didn't report any revenue during the first quarter. Home contributed $18.3 million in revenue, with almost 7 million home-entertainment units sold in total, but few other big wins helped push DreamWorks' numbers higher.

The television series and specials segment, however, saw sales more than triple, to $57 million. The company delivered more episodes under licensing arrangements for episode-based content. Gross profits rose sixfold, as marketing expenses fell, and revenue rose.

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DreamWorks' smaller units were also encouraging. The consumer products division had a jump in sales of nearly half from year-ago levels, with the company pointing to location-based entertainment initiatives for the gains. Segment profit also grew by more than half. For the new media segment, a tripling in revenue came mostly from licensing and distribution of content, with brand sponsorship and talent management also playing a role.

CEO Jeffrey Katzenberg summed up the two main points for DreamWorks. "I am happy to report another strong quarter of financial results," Katzenberg said, "which I believe reflect continued execution on our strategy of transitioning DreamWorks Animation into a global family entertainment company." At the same time, the CEO expressed confidence in Comcast, saying that "they will continue to build on the foundation we've established over the past 22 years."

What's ahead for DreamWorks Animation?
Of course, the biggest part of DreamWorks' future is the Comcast deal. Investors will receive $41 per share for their DreamWorks stock, and the companies expect that the transaction will close by the end of the year if it can get the usual regulatory approvals. Because the controlling shareholder of the company has already given written consent to the Comcast deal, DreamWorks doesn't have to worry about getting shareholders to agree to the merger.

DreamWorks also said that, after the quarter had ended, the company had sold off a portion of its interest in the AwesomeTV unit. The deal involves DreamWorks selling off a minority stake in the unit to Verizon and Hearst, retaining a 51% interest, and reaping about $168 million in total compensation for the deal. Some of that money will remain in the AwesomeTV entity, and DreamWorks will still have effective control over the venture.

DreamWorks Animation stock didn't move due to the results because the all-cash deal doesn't allow much room for the stock to move. For Comcast, though, favorable results could bring rewards to those investors who take their cash and use it to buy Comcast stock.

The article DreamWorks Animation Prepares for Comcast With Strong Earnings, Sales Growth originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends DreamWorks Animation. 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.