Dreamworks to post quarterly loss

Film studio DreamWorks Animation SKG Inc. today said it would post a quarterly loss due to disappointing sales of home videos, cancelled a stock offering, and said it is the target of a federal securities probe.

Shares of DreamWorks Animation, the producer of animated films like "Shrek," fell 14 per cent to their lowest level since it went public in October. It had previously expected to be at break-even for the quarter.

The company went public last year in a hugely popular spinoff from the DreamWorks movie studio started by entertainment moguls Steven Spielberg, Jeffrey Katzenberg and David Geffen.

But since the initial euphoria on Wall Street, the studio had disappointing sales of DVDs of "Shrek 2" in the first quarter and weaker-than-expected box office performance of "Madagascar," which opened over the Memorial Day weekend.

Late last month, DreamWorks rival Pixar Animation Studios Inc. cut its earnings forecast, citing weaker-than-expected DVD sales for its hit film "The Incredibles." DreamWorks said it expects a second-quarter loss in the range of 7 cents to 9 cents per share, down from a previous forecast of "no profit." It cut its full-year outlook to a profit of 80 cents to 90 cents a share, down from US$1.00 to US$1.25 a share previously.

The outlook marked DreamWork's second profit warning in two months. In May, it said full-year results would be hurt by poor video sales of "Shrek 2." Some analysts believe there is a fundamental change in the way that DVDs are sold at retail stores. Although overall DVD sales have risen, studios are releasing more and more titles, raising the competition for shelf space in stores.

As a result, retailers are quicker to return unsold videos to the studios.

DreamWorks said it reviewing home video sales, retail inventory levels and returns.

"It's too early to come to any conclusions," said DreamWorks Animation Chief Executive Katzenberg in a conference call. "There is a tremendous amount of product in the marketplace. 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." JPMorgan analyst Spencer Wang in a research note said that the large Hollywood studios tend to be insulated from the new trend because they can offset the lower sales of individual titles with a greater number of video releases.

Sanders Morris Harris analyst David Miller noted the changing climate for home videos.

"The downward revision underscores how much of an event DVD releases of hit theatrical product have become of late, as any unsold product is immediately returned, rather than marked down at retail and sold at a discount," he said in a note.

DreamWorks also said it will not proceed at this time with a proposed secondary offering of US$500 million of its Class A common stock, citing its current share price.

Shares of DreamWorks were down US$3.79 at US$23.02 in afternoon trade on the New York Stock Exchange, after earlier hitting a record low of US$22.90. DreamWorks went public last October at US$28 a share and hit a record high of US$42.60 in early December.

The planned stock offering was to have involved the sale of shares held by principal shareholders, and would not raise any money for DreamWorks.

DreamWorks also said it has received a request from the Securities and Exchange Commission and is voluntarily complying with an informal inquiry concerning trading in its securities and the disclosure of its financial results on May 10, 2005.

The SEC said the informal investigation should not be construed as an indication that any violations of law have occurred, and DreamWorks said it intends to co-operate fully with the inquiry.

The company has been sued by investors who accused it of artificially inflating the outlook for sales of "Shrek 2" to pump up the share price ahead of the secondary offering.

- REUTERS