DreamWorks Animation Earnings Preview: Lowered Estimates on Weak Ticket Sales

DreamWorks Animation (NASDAQ:DWA) will report its Q2 2011 (ending June) results after market close on Tuesday, July 26, and will host a conference call at 1:30pm PT (800-230-1059, passcode “DreamWorks Animation Earnings” or at www.dreamworksanimation.com).

Expecting Q2 results in-line with our recently lowered estimates for revenue of $200 million and EPS of $0.45, compared with consensus for revenue of $198 million and EPS of $0.40. The company did not provide forward guidance.

On July 5, we lowered our estimates to reflect Kung Fu Panda 2 (“KFP2”) weakness. We note that our domestic ($165 million) and international ($413 million) box office estimates for KFP2 are roughly in-line with the current totals according to www.boxofficemojo.com ($160 million and $422 million, respectively).

We believe a number of factors led to KFP2’s underwhelming performance. KFP2’s review scores (averaging 67, according to www.metacritic.com) were lower than its predecessor (73). Higher ticket prices that included a 3D premium — and IMAX (NASDAQ:IMAX) premium internationally — made seeing the movie a costly event, particularly for families. KFP2 also had more competition for animated ticket sales, with Gnomeo and Juliet, Rango, Hop, and Rio preceding it, and Cars 2 (NYSE:DIS) and Winnie the Pooh just after. We think increasing competition for family movie dollars has impacted DreamWorks, especially when its films receive mediocre reviews.

We expect DreamWorks to struggle to generate significant long-term growth due to sluggish box office performance, declining DVD sales, and a limited number of releases. In early March, the company announced a revised release slate through 2014, with two titles shifting by a year compared to expectations (The Croods to 2013 from 2012, and How to Train Your Dragon 2 to 2014 from 2013). The company plans two movies in 2011 and 2012, and three movies in 2013, partly as a result of the collective underperformance of its recent releases.

Michael Pachter is an entertainment analyst at Wedbush Morgan.

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