DreamWorks Animation delivered its second profit warning in three months yesterday, adding to Hollywood fears that the red hot DVD market is beginning to cool off.
The warning sent DreamWorks' share price crashing and scuppered a planned $500m (£284m) stock sale by some of its principle investors.
The film studio behind Shrek and the newly released Madagascar also disclosed that it is the subject of an informal inquiry by the US financial watchdog focused on its first quarter results.
The animation company blamed its faltering performance on lower than expected home video and DVD sales. It now expects to make a loss in the second quarter instead of breaking even and cut its earnings forecast for the full year by about 20%.
The company was spun off last year from the DreamWorks Hollywood Studio founded by entertainment moguls Steven Spielberg, Jeffrey Katzenberg and David Geffen.
The firm said it had adjusted its outlook after a review of sales and inventory data pointed to an increase in returns of unsold movies. The studio had cut its 2005 forecast in May after disappointing DVD sales of Shrek 2. Analysts have pointed to tighter shelf space and saturation, especially of computer animation film titles.
Chief financial officer Kris Leslie said the problem could either be specific to certain releases or part of an underlying shift in the home video and DVD market. She said the company had "observed changes in the marketplace" and felt it was prudent to rein in expectations. Shark Tale home sales have also disappointed. Mr Katzenberg added: "It is too early for us to come to conclusions here. There is a tremendous amount of product in the marketplace. We don't know if this is a short-term issue or some larger shift that is going on." Shares tumbled 14% in mid day trade to $23.10.
DVD sales are continuing to grow but the rate of the market's expansion is slowing, causing some concern among Hollywood studios. This year DVD sales are expected to show a 13% gain, down from the heyday of 20% to 30% per annum.
DVD sales now account for almost half a film's expected revenues. According to figures cited by the New York Times, Americans spent $9.1bn on films on DVD last year, almost 48% of movie studios' revenues for those releases.
Earlier in the month, Pixar, the hit-making computer animation studio behind Toy Story and Finding Nemo, issued a similar warning, blaming slower than expected DVD sales of its latest release, The Incredibles.
In a statement, DreamWorks said the informal investigation by the securities and exchange commission concerned trading in its shares and the disclosure of its first-quarter financial results in May. The company said it had also been the target of six lawsuits in recent weeks filed against it and "certain officers and directors, alleging violations of securities laws". The lawsuits, it said, were without merit. Investors including Microsoft co-founder Paul Allen, Lee Entertainment and Vivendi Universal had planned to take part in the secondary offering. At the time of the March announcement, DreamWorks' share price had gained 40% in value since the company floated in October. The firm said it would go ahead with the secondary offering when market conditions improve.
Mr Katzenberg and Mr Geffen are not allowed to sell shares until October 25.
Madagascar, which is about four New York zoo animals that escape to the wild, has received lukewarm reviews but has still managed to take $180m at the American box office, making it one of the top 10 animated films of all time.
DreamWorks Animation's next release is the first feature length outing for Wallace and Gromit, the wry British creations of Aardman Animations. The company is aiming for worldwide sales of $170m.
