Pixar Follows Earnings Script With Big Drop-Off in Its Profit

Pixar Animation Studios made good on its promise to deliver bad news with its second-quarter earnings, posting a 66% plunge in profit Thursday because of slower-than-expected DVD sales of “The Incredibles.”

The Emeryville, Calif., computer animation studio’s disclosure that it earned $12.7 million, or 10 cents a share, matched Chief Executive Steve Jobs’ revised forecast in late June. That was when Jobs slashed 5 cents a share off Pixar’s projections for the quarter ended July 2, causing the company’s stock to tumble. Year-earlier profit was $37.4 million, or 32 cents.

In a conference call with analysts Thursday, Jobs downplayed Pixar’s $6-million profit shortfall, calling it “small in comparison with our overall business.” Revenue in the quarter was $26.4 million, down 60%.

Jobs said the decline in results was magnified because the second quarter was wedged between Pixar film releases: last year’s “The Incredibles” and next year’s “Cars.”

He noted that “The Incredibles” was Pixar’s highest-grossing holiday film to date.

“I hope every film we release in the holiday window performs as well,” he said.

With $631 million in worldwide box office, “The Incredibles” was a smash. Worldwide DVD sales are at 27.1 million units, the best so far this year.

But studios industrywide are seeing a slowing of the DVD gravy train. Although the DVD business is still growing, the torrid pace Hollywood rode to fatter profits is easing sooner than expected.

Much of that early boom came from purchases by people stocking up on movies for their first DVD players. With machines in so many homes now, that trend is slowing. In addition, DVDs have an increasingly shorter shelf life with retailers, who are returning films after just a few weeks for fresher titles.

Pixar Chief Financial Officer Simon Bax said international DVD sales of “The Incredibles” in France and Japan were especially disappointing -- 600,000 units below the company’s original forecast.

Pixar rival DreamWorks SKG also has been bedeviled by slower DVD sales. Its “Shrek 2” sold briskly at first, but dropped off faster than expected.

Jobs was circumspect in the conference call when addressing whether Pixar and Walt Disney Co. could patch up their longtime partnership with a new deal. He characterized the talks with incoming Disney Chief Executive Robert Iger as “productive,” but noted that he was still “cautiously optimistic ... there are still many hurdles to cross.”

Ever since Michael Eisner announced in March that he planned to step down as Disney’s chairman Sept. 30, Jobs and Iger have been chatting informally about reopening negotiations. However, Jobs has told close associates that the talks with Disney won’t get serious until Eisner is out the door.

Though Pixar and Disney have enjoyed a hugely successful partnership for more than a decade, with six consecutive blockbusters including “The Incredibles” and “Finding Nemo,” Jobs abruptly halted negotiations last year when the two sides couldn’t agree on financial terms. Exacerbating tensions was long-simmering animus between Jobs and Eisner.

Due in theaters in June, “Cars” is the last film under the current Pixar-Disney deal. Pixar has been developing a number of future projects, which Jobs said he expects to announce on or before Pixar’s next earnings call.

“We’ve never been as excited about the future as we are right now,” Jobs said.

Pixar shares fell 31 cents to $41.25 in regular trading, then slipped an additional 15 cents, to $41.10, after hours following the earnings report.