How DreamWorks Lost (Wall) Street Cred

Madagascar isn't as hot as promised -- one more thing to make investors howl

The critics weren't wowed by Madagascar. But the DreamWorks Animation blockbuster about a bunch of animal escapees is plenty popular, passing the $100 million milestone at the box office in nine days. So how come the studio's stock price has slid 27% in the last month, to around $28 -- its lowest since going public back in October?

It's a question currently exercising DreamWorks Animation SKG Inc. (DWA ) founders Jeffrey Katzenberg, David Geffen, and Steven Spielberg. The answer, according to most analysts, is that's what you get when you use a Hollywood sales job to impress investors. Disappointing the critics is one thing, underwhelming the Street another. Madagascar is a case in point. It opened at a respectable $61 million, but investors were expecting a $70 million-to-$80 million first-day take thanks to DreamWorks Animation's enthusiastic previews. "When you talk up a film the way they did, you'd better deliver," says Fulcrum Global Partners LLC analyst Richard Greenfield, who says DreamWorks Animation's "credibility has evaporated."

Only seven months ago, it was a very different picture. Fresh from the success of megahits Shrek 2, and Shark Tale, the animation unit's spin-off from DreamWorks SKG raised $933 million in the Oct. 28 initial public offering. Within hours, the stock zoomed to $38.75 from its $28 offering price.

But the miscues since then have made DreamWorks Animation execs look like rookie directors. In March the studio predicted that worldwide DVD sales for Shrek 2 would exceed 55 million units. By May the company had cut that back to 50 million amid slower-than-expected sales overseas. Although the Shrek 2 DVD has sold a spectacular 35 million units to date, a grim Katzenberg was forced to admit in a May 10 conference call that "we have learned from this." Executives at DreamWorks Animation and NBC Universal Inc., which distributes the studio's DVDs, declined to comment.

DreamWorks Animation managed to overpromise with Madagascar, too -- and underestimated the competition, to boot. In conference calls with investors, execs raised expectations by saying the film tested even better than the original Shrek, which grossed $267 million in the U.S. and sold more than 49 million DVDs worldwide. The studio also failed to account for the strength of the latest Star Wars movie, which is playing better with younger kids than expected.


The animation unit has also shown itself to be woefully unprepared for life as a public company. On May 10, the day the studio was due to release first-quarter earnings, a report, citing DreamWorks insiders, surfaced on Newsweek's Web site, saying that earnings would be "substantially below the 60 cents per share that Wall Street analysts had estimated." Not only did the earnings come in at 44 cents, but the leaked report badly spooked investors. The stock went into a two-day tailspin. Since then, shareholders have filed four lawsuits, accusing Katzenberg and the company of making "material false and misleading statements" about business prospects.

Moreover, Wall Street is still seething over the March announcement of a $575 million secondary offering. Behind investors' ire: The offering would benefit just three major shareholders, including 59% owner Paul Allen, and could put further pressure on the stock. So the offering is certain to be put off till next year, say informed sources. Still "they're in a no-win," says David W. Miller of Sanders Morris Harris Group Inc. (SMHG ) "If they pull it, this could be misconstrued that Madagascar isn't working."

Getting Wall Street's confidence back won't be easy, despite the likelihood of a hefty worldwide box office for Madagascar and an impressive 2007 lineup that includes Shrek 3 and Jerry Seinfeld's first animation film, Bee Movie. Still, a little less Hollywood hype and a lot more delivery could turn DreamWorks Animation into a Wall Street blockbuster again.

By Ronald Grover in Los Angeles

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