"Last month, Kung Fu Panda delivered DreamWorks Animation's best-ever domestic opening for an original film. Having recently crossed the $200 million mark at the domestic box office, it is now our most successful non-sequel since the Company went public," stated Jeffrey Katzenberg, CEO of DreamWorks Animation. "Kung Fu Panda's performance has exceeded expectations not only domestically but also internationally, where it continues to achieve record-breaking openings across both Asia and Europe."
To date, Kung Fu Panda has grossed approximately $210 million at the domestic box office, making it the fourth most successful film of the year. Internationally, the film has set box office records for animated openings in several key territories, including South Korea, Russia, Australia, Mexico and China, where it has become the most successful animated film in that country's history. In total, the film has reached over $510 million in worldwide box office.
For the quarter, Kung Fu Panda contributed $46.4 million of revenue. In addition to consumer products and revenue from the Company's distributor, revenues included a non-recurring benefit from the completion of a strategic relationship, which accounted for slightly less than half of the film's contribution in the period.
Shrek the Third, the Company's 2007 summer blockbuster, contributed approximately $29.9 million of revenue to the quarter, primarily driven by a domestic pay television payment. Through the second quarter, the film reached an estimated 20.3 million home entertainment units shipped worldwide, net of actual and estimated future returns.
The Company's 2007 fall release, Bee Movie, contributed approximately $25.5 million of revenue to the quarter, driven by international home entertainment performance. The film reached an estimated 7.1 million units shipped worldwide through the second quarter, net of actual and estimated future returns.
Flushed Away, the Company's 2006 fall release, and Over the Hedge, the Company's 2006 summer release, delivered $7.3 million and $5.4 million of revenue, respectively, primarily from international pay television.
Wallace & Gromit: The Curse of the Were-Rabbit, the Company's fall 2005 release, contributed approximately $5.3 million of revenue to the quarter, primarily from international free television. Library and other titles contributed $21.0 million of revenue to the second quarter, driven by international free television and continued catalogue home entertainment performance.
Cost of revenue for the quarter equaled $75.2 million while selling, general and administrative expenses totaled $27.6 million, including $8.6 million of stock compensation expense.
Results for the quarter also included a tax benefit of approximately $9.4 million related to the Company's tax sharing agreement with a stockholder, which resulted in a lower effective tax rate. This benefit was partially offset by a $8.0 million increase in cost for the income tax benefit payable to the stockholder (as shown on the consolidated statement of income before the line item, "income before income taxes"), resulting in an overall net increase to net income of $1.4 million, or approximately $0.02 per share on a fully diluted basis.
Looking ahead to the remainder of the year, the Company's third quarter results are expected to be driven by Kung Fu Panda's continued box office performance. To date, the film has been released in the majority of international territories, including Japan on July 26, 2008 and has generated approximately 60% of its box office receipts overseas. Because the Company's distributor reports international results on a 30-day lag, a significant portion of the film's international performance is expected to be recognized in the third quarter.
Due to its strong performance, the Company believes that Kung Fu Panda is on track to become DreamWorks Animation's most successful original film of all time worldwide. That said, the title's international box office performance has benefited from favorable foreign exchange rates. While this generally increases the Company's revenues as expressed in dollars, it also results in higher international theatrical marketing costs for the film. As a result, the Company anticipates that the worldwide theatrical marketing expense will be meaningfully higher than it has observed historically. This change will increase the amount that the Company's distributor needs to recoup and, consequently, lower the Company's revenue in the third quarter. Given the current foreign exchange rate environment, the Company expects that its worldwide theatrical marketing expense will remain at a higher level than it has previously experienced.
Kung Fu Panda will be released into the domestic home entertainment market this November and will likely be the primary contributor of revenue in the fourth quarter. The Company's fall release, Madagascar: Escape 2 Africa, is scheduled to open domestically on November 7, 2008. The Company does not anticipate generating significant revenue in the fourth quarter from the title, as its distributor may not have recouped its upfront marketing and distribution costs.
In addition to results for the quarter, the Company announced an authorization for future repurchases of up to $150 million of its outstanding Class A common stock. These repurchases may be made in the open market, in block trades, or in privately negotiated transactions. Year to date, the Company has repurchased approximately $88.0 million, or 3.7 million shares, at an average per-share price of approximately $24.00.
The Company also announced plans to spend approximately $85 million over the next two years to expand and improve its animation studio in Glendale, California in order to accommodate general business growth, including 3D expansion. The project began during the second quarter of 2008.
Items related to the earnings press release for the second quarter of 2008 will be discussed in more detail on the Company's second quarter 2008 earnings conference call later today.
Conference Call Information
DreamWorks Animation will host a conference call and webcast to discuss the results on Tuesday, July 29, 2008, at 5:00 p.m. (ET). Investors can access the call by (877) 260-8899 in the U.S. and (612) 332-0632 internationally and identifying "DreamWorks Animation Earnings" to the operator. The call will also be available via live webcast at http://www.dreamworksanimation.com.
A replay of the conference call will be available shortly after the call ends on Tuesday, July 29, 2008. To access the replay, please dial (800) 475-6701 in the U.S. and (320) 365-3844 internationally and enter 935325 as the conference ID number. Both the earnings press release and archived webcast will be available on the Company's website at http://www.dreamworksanimation.com.
About DreamWorks Animation SKG
DreamWorks Animation is principally devoted to developing and producing computer generated, or CG, animated feature films. With world-class creative talent, a strong and experienced management team and advanced CG filmmaking technology and techniques, DreamWorks Animation makes high quality CG animated films meant for a broad movie-going audience. The Company has theatrically released a total of sixteen animated feature films, including Shrek, Shrek 2, Shark Tale, Madagascar, Over the Hedge, Shrek the Third, Bee Movie and Kung Fu Panda. Madagascar: Escape 2 Africa opens in theaters on November 7, 2008 and Monsters vs. Aliens, the Company's first film produced in 3D, is slated for a domestic release date of March 27, 2009.
Caution Concerning Forward-Looking Statements
This document includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The Company's plans, prospects, strategies, proposals and our beliefs and expectations concerning performance of our current and future releases and anticipated talent, directors and storyline for our upcoming films and other projects, constitute forward-looking statements. These statements are based on current expectations, estimates, forecasts and projections about the industry in which we operate and management's beliefs and assumptions. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions which are difficult to predict. Actual results may vary materially from those expressed or implied by the statements herein due to changes in economic, business, competitive, technological and/or regulatory factors, and other risks and uncertainties affecting the operation of the business of DreamWorks Animation SKG, Inc. These risks and uncertainties include: audience acceptance of our films, our dependence on the success of a limited number of releases each year, the increasing cost of producing and marketing feature films, piracy of motion pictures, the effect of rapid technological change or alternative forms of entertainment and our need to protect our proprietary technology and enhance or develop new technology. In addition, due to the uncertainties and risks involved in the development and production of animated feature projects, the release dates for the projects described in this document may be delayed. For a further list and description of such risks and uncertainties, see the reports filed by us with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our most recent quarterly reports on Form 10-Q. DreamWorks Animation is under no obligation to, and expressly disclaims any obligation to, update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.