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DreamWorks Animation SKG Inc. (DWA - Analyst Report) reported dismal financial results for the second quarter of 2014, wherein both its top and bottom line significantly failed to meet the Zacks Consensus Estimate. The company’s current theatrical film “How to Train Your Dragon 2” failed to meet box-office expectations.

Moreover, management stated that the Securities and Exchange Commission (SEC) is investigating a $13.5 million write-down charge that the company took in Feb 2014, related to its earlier film “Turbo”. All these negatives translated into a $1.71 (7.5%) drop in the stock price of DreamWorks to $20.95, in the aftermarket trade on Nasdaq.

Quarterly GAAP net loss came in at $15.4 million or 18 cents per share compared with a net income of $22.3 million or 26 cents per share in the year-ago quarter. Excluding special items, adjusted loss per share of 27 cents compared unfavorably with the Zacks Consensus Estimate of a break-even.

Total revenue in the second quarter of 2014 came in at $122.3 million, reflecting an enormous decrease of 42.7% year over year and well below the Zacks Consensus Estimate of $143 million. Segment wise, Feature Film revenues were $69.7 million, Television revenues totaled $20 million, Consumer Products revenues were $18.5 million and the remaining $14.1 million was contributed by Other items.

Quarterly gross profit was approximately $34.7 million against $80.2 million in the prior-year quarter. Feature Film segment contributed $23.9 million in gross profit, Television contributed $1.2 million, Consumer products segment accounted for $7.3 million of gross profit and the remaining $2.3 million was generated from the Other segment.

Overall, operating loss stood at $10.9 million compared with an operating profit of $32.2 million. Adjusted EBITDA was a negative $0.4 million compared with a positive $11.3 million in the year-earlier quarter.

In the reported quarter, DreamWorks consumed $54 million of cash from operations compared with $66.4 million in the year-ago quarter. Free cash flow, at the end of second quarter of 2014, was a negative $71.7 million against a negative $81.3 million in the last-year quarter.

At the end of first half of 2014, the company had $32.2 million of cash and cash equivalents and $300 million of outstanding debt against $95.5 million of cash and cash equivalents and $300 million of outstanding debt at the end of 2013.

Our View

DreamWorks is diversifying its operations to mitigate volatility in the film business. Management has decided to invest in key growth areas in order to expand the company’s operations into TV, consumer product, digital content and location-based entertainment.

In Aug 2014, DreamWorks launched its online TV channel, DreamWorks TV, on Google Inc. controlled YouTube. Notably, the company has also entered into an online streaming agreement with Netflix Inc. (NFLX - Analyst Report). DreamWorks currently has a Zacks Rank #3 (Hold). A better-ranked stock in the media industry is Pearson plc. (PSO - Snapshot Report) with a Zacks Rank #2 (Buy).

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