Thursday, August 30, 2012

This Day in Pixar History: Pixar Earnings Report, 2nd Quarter 1996

Welcome to my continuing series of posts on Pixar's quarterly results from back when they were an independent public company. In my first post I covered their first ever quarterly report (as a public company) for the first quarter of 1996 (January - March). This post will cover the second quarter of 1996 (April - June).

If you remember, Toy Story was released in November, 1995. According to their agreement with Disney, Pixar did not receive any revenue until Disney recovered all their marketing and distribution costs. This can be clearly seen in Pixar's income statements - in the first quarter Pixar recognized less than $100,000 in film revenue. But by second quarter that number had grown to $5 million (and as a teaser for next quarter's post, I can say it grows even larger)! Pixar made another $1 million on CD-ROM sales, $700,000 in other software sales (mostly from Renderman), $800,000 from commercials and $400,000 in patent licenses, for a total of $7.9 million in quarterly revenues. This compares to about $8.2 million in the first quarter of 1996 and $8 million in the second quarter of 1995, although it should be noted that $6.5 million of the $8 million was due to a one-time patent licensing agreement with Microsoft.

Most of these segments increased year over year; software sales (CD-ROM, Renderman, etc) increased 91%, and commercials increased 39% from the same 3 month period in 1995. But in July, 1996, Pixar announced they would greatly reduce their commercial business to focus on animated feature films. We should see this reflected in future quarterly reports.

Looking at the first 6 months of 1996, revenues grew a whopping 71% to $16.2 million from $9.5 million in the first 6 months of 1995.

Costs and expenses also increased substantially over 1995 amounts. According to the quarterly report,

Pixar intends to increase operating expenses in a number of areas. First, as a result of intense competition for animators, creative personnel and technical directors, Pixar expects compensation for such personnel to increase substantially. Pixar also plans to fund greater levels of research and development, expand its administrative staff and facilities, expand other operations and incur other significant costs related to being a public company.
As examples, R&D expenses increased 60% from $1 million in 1995 to $1.6 million, and Sales & Marketing increased 50% to $614,000, and General & Administrative expenses increased 81% to $1.4 million from $770,000 in 1995. The report states much of the increase in G&A was connected with stock options granted to employees.

One piece of information I found interesting was the cost of creating commercials. As the commercials became more complex, and competition in the market increased, the profit margin dramatically dropped to only 2% in 1996 from 52% in 1995. This is a significant drop, and probably also impacted Pixar's decision to move away from commercials.

Pixar's net income for the quarter was $4.8 million, down slightly from $5.1 million in 1995. This is primarily due to the large patent licensing agreement with Microsoft in 1995; looking at the first 6 months of 1996, net income was $11.1 million compared to only $4.5 million in 1995. Pixar also had over $146 million in cash and short-term investments at the end of the second quarter. Most of this cash came from their initial public offering (IPO) in late November, 1995.

From a financial standpoint, it looks like Pixar was doing well. Revenue from Toy Story was beginning to come in and would continue to grow for at least another quarter. The studio was ramping up headcount and R&D, and therefore expenses were up accordingly. Even still, the company was hugely profitable, with a profit margin of over 60%!

But while the company was performing well financially, its stock price was not following suit. During the second quarter of 1996, the price of Pixar stock was as high as $25 but trended lower throughout the quarter and was near the low point in the quarter of $17. And with this great quarterly report, maybe you'd think the stock price would then increase? No, in the third quarter it only got as high as $19 and was as low as $12. Granted, no one will say stock prices move in a logical fashion! But I think there were other reasons for the price decrease. I will discuss those reasons in my next quarter's blog post.


  1. Great write up as usual! Stocks moving logically - that's just crazy talk! :) Ha! I agree with you completely on that.

    I used to own Pixar stock (bought it in June 2003...incidentally, the same time I bought Apple stock) and ended up selling the Pixar stock right before it merged with Disney. If there was one thing I wish I would have done (I kick myself all the time) - I wish I would have applied for a stock certificate through Pixar (just to have as a keepsake). I sold my shares and then thought about it - ugh!

    The stock wasn't soaring in 1996 for many reasons, but one reason must certainly be overall history of the company (big ups and downs that required a lot of cash to keep them going) and thoughts of growth potential over the long haul probably scared a lot of investors too...could they strike gold twice and still remain profitable?

    Those were some great margins though - so many companies would love to get those kinds of margins. Any sense what that GM% number is today - I haven't followed the financials in recent years?

  2. Thanks! Yes, logically moving stocks has to be an oxymoron! :) Wow, Apple back in 2003, that was about that time I was considering buying. I finally got around to it about 5 or 6 years later!
    Hopefully you still own some!

    I bought Pixar initially in 1997, then I think sold it all around 2002 or 2003, then regretted selling so bought it back a few months later and owned it through the merger, and now own Disney. I realize merging with Disney was sort of almost a necessity, but from a stock perspective I wish they could have stayed independent, think they would have done much better than Disney has done.

    Yes, being a new company had a lot to do with it, and the fact they didn't have any films being released for more than 2 years. That's a long time to wait for a company that has only released one film!

    You don't see margins like that too often. Certain industries will generate margins like that, such as software companies, and hardware companies like Intel and Apple can have operating margins close to that, but net profit margin will be significantly lower (although still better then most companies - 20-30%). Their margins were one of the reasons I loved Pixar!

    Fortunately we did get a Pixar stock certificate. We somehow "lost" it and couldn't submit it when the merger went through. Thank goodness we found it later! :) We also have a Disney certificate. They are pretty cool - both of them are framed and hanging on our wall.

    Have a great weekend!