DreamWorks shares plunge on cost, DVD fears

LOS ANGELES (AP) ? Shares of DreamWorks Animation SKG Inc. plunged on Wednesday after the company reported weaker-than-expected results in the fourth quarter and warned of higher costs and lower DVD sales ahead.

THE SPARK: After the market closed Tuesday, DreamWorks said that fourth-quarter net income fell 71 percent to $24.3 million, or 29 cents per share. That was short of the 32 cents expected by analysts polled by FactSet. Revenue dropped 21 percent to $219 million, beating the $206 million analysts expected.

Much of the profit decline is due to the fact that the studio released only two films in 2011, compared with three in 2010.

But the company also said its two films this year will cost about $145 million each to make, above the typical $130 million, mainly because of longer production times and infrastructure costs.

CEO Jeffrey Katzenberg also warned analysts that DVD sales continued to fall as a ratio of a movie’s domestic box office haul. He said the quarter revealed “challenges for the industry as a whole.”

THE BIG PICTURE: DreamWorks makes two or three big-budget computer-animated features every year, all produced in 3-D. It has ridden the popularity of such movies with families. The movies tend to sell more discs than average as children tend to watch such movies over and over, making a purchase decision easier.

THE ANALYSIS: Higher costs and lower home movie sales can both impact earnings significantly. Meanwhile, licensing deals with online streaming companies like Netflix Inc. have not made up the difference.

Cowen & Co. analyst Doug Creutz noted that DreamWorks’ revenue beat expectations partly because of a licensing deal with Netflix. But some were surprised the licensing revenue didn’t contribute more to the company’s earnings.

He kept a “neutral” rating on the shares but reduced his expectation for adjusted earnings per share to 97 cents from $1.07 for fiscal 2012.

SHARE ACTION: DreamWorks shares fell $1.84, or 9.4 percent, to $17.81 in afternoon trading Wednesday. Shares are off from a 52-week high of $28.50 reached nearly a year ago.