Less than a year after going public on the strength of hit films such as "Shrek," DreamWorks Animation SKG is battling a DVD market slump...

Share story

LOS ANGELES — Less than a year after going public on the strength of hit films such as “Shrek,” DreamWorks Animation SKG is battling a DVD market slump that forced it to warn yesterday of a loss in the second quarter and to lower its full-year outlook.

The Glendale, Calif.-based company also said its main shareholders — including Microsoft co-founder Paul Allen — decided to postpone indefinitely a planned $500 million offering of common stock because of a slump in DreamWorks’ stock price.

In addition, DreamWorks, which badly missed first-quarter profit estimates due to disappointing home-video sales of “Shrek 2,” disclosed it is the target of a securities investigation into stock trading and release of its first-quarter results. DreamWorks shares tumbled 5.2 percent May 10, before earnings were announced.

The company said it is cooperating with the Securities and Exchange Commission, adding that the investigation “should not be construed as an indication that any violations of law have occurred.”

The disclosures sent DreamWorks shares diving $3.54, or 13.2 percent, to close at $23.27 on the New York Stock Exchange yesterday. The stock had climbed nearly 50 percent after its trading debut in October but now is about 17 percent below $28, its initial public-offering price.

The stock was up about 40 percent in March when DreamWorks announced the now-delayed plans of shareholders to sell $500 million of stock. Allen’s Vulcan Ventures had planned to sell the biggest chunk: nearly 10 million shares.

DreamWorks blamed the weakened earnings forecast on waning demand for home videos. It cited a review of sales and inventory that prompted an increase in reserves for returned products.

“The selling pattern for a tent-pole DVD release has begun to mirror that of a big film release: Everyone rushes out to buy it, and then there’s a quick tail-off,” said David Miller, an analyst at Sanders Morris Harris. Retailers, led by Wal-Mart Stores, the largest seller of DVDs, are more aggressive in pulling DVDs off shelves once sales begin to wane.

DreamWorks now expects a loss of 7 to 9 cents a share in the second quarter; earlier, it had projected breaking even. Annual profit estimates were lowered to 80 to 90 cents a share from $1 to $1.25 a share.

On average, analysts surveyed by Thomson Financial had expected 9 cents a share for the quarter and full-year profit of $1.39 a share.

DreamWorks’ home-video woes are not unique.

Earlier this month, rival Pixar Animation Studios lowered its earnings projections for the current quarter after sales of home videos of “The Incredibles” were weaker than expected.

But the litany of announcements yesterday from DreamWorks was sobering, given the fanfare and expectation that greeted its IPO in October and the Hollywood heavyweights behind the company that spun it off — Steven Spielberg, David Geffen and Jeffrey Katzenberg.

DreamWorks SKG, which the three entertainment moguls formed in 1994, set out to produce content for music, television, animation and film, generating hits like “Saving Private Ryan” and “Gladiator.”

While its animation unit had its share of flops, including “Sinbad: Legend of the Seven Seas,” it proved to be the most consistent moneymaker, with hits like “Shrek” and its sequel, “Shrek 2,” and last year’s “Shark Tale.”

Even powerhouse animated franchises like “Shrek” are not immune to the cooling of the DVD market, the main source of profitability for movie studios and for animated films in particular.

A shift in consumer spending and lower-than-expected sales of animated videos were spotted in May, when Katzenberg said he mistakenly assumed first-quarter sales of “Shrek 2,” the best- selling DVD of 2004, would match the pace set after its release Nov. 5. The DVD sold more than 30 million copies in its first month after grossing $918 million in worldwide box-office sales.

The company now doesn’t expect to see any “meaningful” home-video revenue from “Shrek 2” for the rest of 2005, said Chief Financial Officer Kristina Leslie.

The disappointing box-office release of “Madagascar” in May compounded the shortfall, said Jeff Bray, an analyst at Boston-based Babson Capital Management. The film has taken in $180 million in North American theaters and may reach $190 million, DreamWorks said yesterday. It hasn’t yet been released on DVD.

DreamWorks Animation appears to have growing pains from shifting to a public company and presenting performance targets to investors, said Harold Vogel, head of Vogel Capital Management in New York.

It is also beset by investor lawsuits alleging DreamWorks misrepresented potential DVD sales.

“They’re still new to the game,” Vogel said. “I don’t think they fully understood how that affects their credibility with investors or weakens the confidence in the management.”

Information from Bloomberg News is included in this report.