DreamWorks’ Profit Drops 73%

DreamWorks Animation SKG Inc.’s profit sank 73% in the first quarter as the disappointing “Wallace & Gromit: The Curse of the Were-Rabbit” continued to cast a spell over the animation studio’s results.

The Glendale-based company reported net income of $12.3 million, or 12 cents a share, on sales of $60.1 million in the three months ended March 31.

That compares with net income of $45.7 million, or 44 cents a share, on sales of $167 million during the same period in 2005, when DreamWorks reaped strong home video returns from the computer animated hit “Shark Tale.”

Although the profit was down in the quarter, when the studio did not have a theatrical release, results nonetheless exceeded Wall Street’s estimates. Analysts polled by Thomson Financial had expected the studio only to break even.

“It’s good they were able to under-promise and over-deliver,” said Michael Savner, an analyst with Banc of America Securities.

Other analysts were disappointed. “They beat expectations but earnings were down dramatically,” said Richard Greenfield of Pali Research.

Much of the studio’s revenue was driven by DVD sales from last year’s successful “Madagascar.”

“The title performed well in a highly competitive home video market,” Chief Executive Jeffrey Katzenberg said in a statement.

But DreamWorks said it had “not fully recovered from the marketing and distribution costs” for “Were-Rabbit.”

Despite winning an Academy Award for best animated feature, the stop-motion “Were-Rabbit” was a box office disappointment, forcing the studio to take a $25-million charge in the fourth quarter of 2005. The film was released on DVD in February.

In addition, DreamWorks is still smarting from its miscalculation of demand for “Shrek 2” DVDs. The company was left with millions of unsold discs and less revenue than expected.

The studio’s performance for the remainder of the year will hinge on the success of its next film, “Over the Hedge,” which will be released May 19.

Most analysts expect “Over the Hedge” to make less than “Madagascar,” which grossed more than $530 million worldwide and sold more than 17 million units in home video.

“Over the Hedge” also faces heavy competition, coming about three weeks before the release of Walt Disney/Pixar Animation Studios’ computer animated movie “Cars.”

“It’s a fun movie and we certainly hope people will enjoy it,” DreamWorks Animation President Lewis Coleman told analysts. “However, it’s a very competitive time to be releasing the film.... We will all be watching closely to see how it holds up against major summer releases.”

Another concern for some analysts is the possibility that DreamWorks will initiate a secondary stock offering in the coming months to raise cash.

Results were announced after the markets closed. Shares of DreamWorks Animation fell 75 cents to $26 in regular trading. They rose to $26.75 after hours.