As happy as DreamWorks Animation SKG (DWA, Financial) would have made a lot of people who have their animated creations in the past, it has recently lost favor in the stock market. After posting a $263.2 million loss in the Q4 financial results, there has been a 9% drop in the share prices during the pre-market trades. The California-based animation studio is fighting a virtual war to keep itself afloat from further crisis by trying to churn out the next animated blockbuster, but ramifications of the current financial situation is already rubbing off on the company’s human resources. Instead of expansions as some may have thought, there are going to be large scale layoffs dominating the scene from DreamWorks Animation SKG. However, all of this is a dampener when one considers the optimism generated from the 15% rise in revenue to $234.2 million, which was incidentally short of the $246.1 million on estimates put forward by analysts.
Source: By Jorge Gonzalez via Wikimedia Commons
DreamWorks Animation crisis scenario
- In order to go to a better liquidity position, the animation studio let go of its headquarter campus for a price of $185 million, but also managed to refinance its revolving credit circle, which when combined, will give a $235 million cash cushion. One would thus need to watch out, how the core operations of the company would differ from here on in, if and when they decide to move to a new address.
- Dreamworks Animation SKG has also decided to cut down on the number of movies it makes in a year, to just 2. Looking at the situation, that could be the most obvious thing to do, but it could pose challenges in ensuring the revenue registers keep ringing frequently. They have mentioned that quality will now be the focus instead of the quantity of their animated creations.
- The human resources of the company are going to suffering in this dry financial weather. Word is out that there could be as many as 500 positions that would be made redundant, with only the current situation to blame. Restructuring costs added $210.1 million to the company bills.
- Dreamworks Animation SKG will also be looking to prepare itself for absorption of the $57.1 million impairment it suffered, as a result of non-performing movies like "Penguins of Madagascar" and "Mr. Peabody and Sherman."
Competition analysis
It seems like a cruel joke on Dreamworks Studios SKG as its direct competition Disney (DIS, Financial) gains from strength to strength. Being the conglomerate it is, Disney has its footprint across television networks, movie studios, theme parks, cruise ships, even retailing. On the animation front, they have blockbuster hits such as "Frozen" which reportedly raked in $1.3 billion in ticket sales worldwide, thus making it the fifth-greatest animated motion picture of all time. Because of the movie’s success, the operating income for the company rose by 21% in fiscal 2014, and bought in $1 billion from merchandise sales. The DVD sales volumes have topped 15 million in volume, bringing in $250 million, and the soundtrack sales that have sold over 3.5 million copies, which happens to be the second highest of the year.
Final thoughts
Tough times call for tough measures, and some amount of optimism from top management does certainly help. Words from Chief Financial Offer (CFO) Fazal Merchant were, “I feel very good about our current liquidity position and believe these transactions further enhance our financial capacity and flexibility,” which shows that the organization is in trouble, but it is fighting along to keep its word for investors top believe in. The restructuring has begun, and the decision to control the production numbers are first aid measures, too, but what the company needs to focus on is prospects like DreamWorks Oriental, which is located overseas and is also expected to help in the fortunes. Though there is the unwritten code in every industry to not follow competition, keeping a closer watch on Disney could give them ideas about areas where they could innovate. It would at least give them hope of a revival, after analysts put a target price of $19.50 a share for DreamWorks Animation SKG, especially if they churn out a blockbuster and beat all estimates to become a "buy" stock once again.
