Studio moguls always feel that they need their tentpole releases to succeed. But they rarely have as much riding on a single film as DreamWorks Animation CEO Jeffrey Katzenberg will on March 22 when he releases The Croods. His company’s dreary Q4 financial report yesterday, which included an $87M writedown on its Christmas release Rise Of The Guardians, set the stage. If The Croods is a success, then investor concerns about the company “will fade,” Lazard Capital Markets Barton Crockett says. But a miss “would amp concerns about a creative crisis, and the big cash drain that results when movies misfire.” Good box office sales may not be good enough. Barclays’ Chris Merwin says the company needs “an exceptional performance” — he expects Croods to generate $150M domestically, and $300M overseas. Forecasts like his are important for investors who are wondering whether this is a good time to buy DreamWorks shares — which are down 3.4% so far today, and -26% since November 2 when it hit a 52-week high of $21.99. In Wall Street terms, the company seemed to take a “bath” yesterday with its Q4 report. It took $165M in writedowns, resulting in a far bigger than expected loss.
That could make it easy to portray 2013 as a turnaround year. CEO Jeffrey Katzenberg also assured investors that he’s keeping an eye on costs, including by laying off 350 employees this year. The commitment to cost control represents “the silver lining in the weak 4Q results” because expenses have “grown out of sync with the revenue opportunity,” Susquehanna Financial Group’s Vasily Karasyov says. Janney Capital Markets’ Tony Wible says that today’s “high level of pessimism” around DreamWorks “creates a buying opportunity.” But Cowen & Co’s Doug Creutz warns that “there is no guarantee [DreamWorks] can maintain its quality and quantity of output with diminished staff levels.” He adds that the company’s upcoming films look “particularly risky given the presence of only one sequel in the 2013/2014 slate and an increasingly competitive market for animated films.” Even DreamWorks might be unable to overcome the macro problems: The company’s free cash flow, Creutz notes, “has declined every year for the last four years, going from $159MM in 2008 to ($33MM) in 2012.”