Friday, December 6, 2013

Disney Animation, Frozen and the Influence of Pixar


A few days ago, I received a tweet from a follower. We had both recently seen Disney's latest animated film, Frozen, and had been singing its praises. It has a strong story with great characters, stunning effects and really good music, for me rivaling the music from The Lion King. One of the tweets in our conversation was:
Do you see how Pixar’s mentality/mindset is creeping into Disney? :)
I was a bit guarded in my response. Yes, since Disney bought Pixar in 2006 and put John Lasseter and Ed Catmull in charge of both Pixar and Disney Animation, we have seen a steady improvement in the films coming from Disney Animation. Besides the first film released after the merger, Meet the Robinsons (which was released in 2007 and was too far into production for the new management to have much impact), all the other films have Rotten Tomatoes ratings of 83% or higher:

Meet the Robinsons200766%
The Princess and the Frog200983%
Winnie the Pooh201190%
Wreck-It Ralph201286%

For comparison, the last film released by Disney Animation prior to the merger, Chicken Little, has a Rotten Tomatoes rating of only 36%.

So yes, I think it's safe to say that Pixar has had a positive affect on the quality of Disney films, especially in a couple of areas, such as coming up with fully developed stories and focusing on the characters and their relationships, researching the topics and environments of their films, and advancing the technical quality of the films (Along these lines, I think Big Hero 6 is going to be stunning). I also think Lasseter and Catmull have introduced the collaborative, director-led culture that has played such a critical part in Pixar's success.

Chris Buck, Jennifer Lee
and Peter Del Vecho
But I don't want to sound like the recent success at Disney Animation is all Pixar's doing. I think the talent and ability was already there at Disney. Folks like Chris Buck, Jennifer Lee, Lino DiSalvo and Lisa Keene, plus all the other animators, effects artists, engineers and production crew had the passion and energy to deliver quality products, they just needed the spark to release them. So while Lasseter and Catmull have provided the appropriate environment, the artists and animators have stepped into that environment and delivered in a big way. I think we have entered a new Disney Animation renaissance that will last a long time. Combined with the strength of Pixar, The Walt Disney Company has become an animation powerhouse that I don't see any other animation studio being able to compete with.

As an aside, I recently listened to episode 452 of Inside the Magic podcast, where a large portion of the podcast covered Frozen with a number of clips from interviews with the filmmakers. I had a blast listening to the clips; it reminded me a lot of listening to the interviews during a Pixar film press day. It was so enjoyable listening to the directors, producer and artists share their excitement for the film and discuss the research they did by going to Norway, building in themes like the power of happiness over fear, and the technical and artistic challenges of designing and lighting Elsa's castle. If you're into behind-the-scenes details I recommend listening to this episode, and keep abreast of future episodes as it sounds like Ricky has a lot more of these interviews that he plans on releasing.

Sunday, November 24, 2013

This Day in Pixar History: Toy Story 2 Theatrical Release

14 years ago today, on November 24, 1999, Toy Story 2 hit theaters. The film became one of the few sequels that matched, and many would say exceeded, its predecessor. It made over $485M worldwide at the box office, spending its first 3 weeks of release in the #1 spot and stayed in theaters for 35 weeks. In addition, it is one of very few films to hold a perfect 100% rating on Rotten Tomatoes (along with Toy Story). Toy Story 2 was directed by John Lasseter and co-directed by Lee Unkrich and Ash Brannon.

Toy Story 2 had quite a roller coaster of a ride to release. It was originally planned as a direct-to-video sequel originally scheduled to be released in late 1998. But Disney management was so impressed with the story that in February, 1998 they upgraded it to a full theatrical release, requiring the story to be reworked and expanding the film length from 60 to about 90 minutes.

One of my favorite Toy Story 2 production stories is how they almost lost the entire film when someone accidentally ran a command on the file server that began removing all the Toy Story 2 files. I first heard this story in The Movie Vanishes Studio Story that can be found on the Toy Story 2 Special Edition Blu-ray/DVD combo pack. The story is narrated by Oren Jacob, who previously was Pixar's CTO and a technical director on Toy Story 2, along with Galyn Susman who was the supervising technical director of the film. I love the animation of Oren Jacob as he and Susman describe how they watched as more and more of the film was deleted and that their backups were bad. As a previous system administrator, I can imagine the panic they were feeling! Recently, Oren Jacob, now co-founder and CEO of ToyTalk, confirmed on Quora that this story is in fact true (the Quora page includes a link to The Movie Vanishes on YouTube).

Back to the production of Toy Story 2. While Disney was very happy with its story, the folks at Pixar realized there were serious problems with the story and with the team developing the film. So at the end of 1998, immediately after the release of A Bug's Life and only 9 months before the film had to be completed, they stopped production of the film and basically started from scratch with re-boarding the entire film. The team worked long hours but delivered the film on time. In a speech to the Stanford Graduate School of Business, Pixar president and co-founder Ed Catmull talks about the lessons learned from making Toy Story 2. Besides talking about the changes implemented afterwards to reduce stress and hours, and the importance of quality, he discusses how critical it is to have the right team, something I have personally experienced in my own career. Catmull states the basic premise or idea of the film never changed, but that the team that came on board at the beginning of 1999 took the good premise and turned it into the fantastic result that Toy Story 2 is. He also speaks of the misconception in the press and by people that a movie, or any product, is often thought of as being a single idea. But in fact, a film or product is comprised of many ideas, and that to have a successful film/product, you need to get the majority of these ideas right, which is another reason why you need to have a strong team that works well. I strongly recommend you listen to the entire presentation as it is full of great ideas for how to run any creative business. If you're interested in the part on Toy Story 2, it begins at about 14:30 of the talk.

Sunday, November 17, 2013

This Day in Pixar History: Pixar Earnings Report, 3rd Quarter 1997

I am back with another look at Pixar's earning reports back before it was purchased by The Walt Disney Company. In this post we'll be reviewing the 3rd quarter of 1997.

Let's freshen our memories of the situation in late 1997. Toy Story was released in late 1995, and Pixar's next film, A Bug's Life, would not be coming out until the end of 1998. At this time, Toy Story 2 was still being planned as a straight-to-video sequel set for a late 1998 release (in the quarterly report it was referred to as the Toy Story Video Sequel as they had still not given it an official name). Pixar's revenues had been doing quite well through 1996 and the first half of 1997 due to first theatrical revenue from Toy Story, and then the home video release and other merchandising of the film. But if you've read any of my previous posts on the earnings reports, Pixar had been warning of decreasing revenues, and in the 3rd quarter we are able to see this quite clearly.

Revenues totaled $5.3M for the quarter, compared to $13.5M in the 3rd quarter of 1996. Animation service revenue was almost $900,000 from projects related to A Bug's Life.  Software revenue for the quarter was almost $910,000, primarily from RenderMan licenses. Revenue from their patent licensing deal with Silicon Graphics (SGI) was only $28,000. As a reminder, in 1996 Pixar and SGI signed a licensing deal allowing SGI to use Pixar's patents for creating photo-realistic CGI images. The agreement called for SGI to pay Pixar a total of $11M, of which was broken into $6M in cash paid in March, 1996, and the other $5M as a credit for Pixar to purchase SGI hardware and software. As of the end of the 3rd quarter of 1997, Pixar had used over $4.7M of the $5M credit.

Film revenue for the quarter was $3.5M, primarily from Toy Story home video sales. This was a significant drop from the second quarter of 1997, where Pixar had $11.6M in film revenue. It should be pointed out the drop was even larger, as $1.8M of the $3.5M was from a one-time payment from Disney due to a recalculation of the marketing and distribution costs incurred by Disney. According to the Feature Film agreement, Disney received a larger percentage of film revenues until they had been reimbursed for their costs to market and distribute the film. During the quarter, Disney determined they had recovered all their costs earlier than previously thought, therefore Pixar should have received a larger percentage of the revenue earlier than they had. This extra revenue amounted to $1.8M and was paid in the third quarter.

As was usual for Pixar, their gross margins were amazing (I wish all the companies I invest in had margins like these). For the quarter they were over 88%, compared to over 86% in the comparable quarter from 1996. High margins were delivered by all segments. Costs of software revenue was 3%, consistent with the previous year. Since Pixar capitalized most of the costs for developing the software, these costs are basically what it took to package the software. As for patent licensing revenue, there were no related costs.

Costs of animation services revenue was much higher than the other segments at 60%, but this was down significantly from the same quarter in 1996 which was 84%. In 1996 Pixar had decided to get out of the animated TV commercial business to focus on development of feature films and related short-term projects. Pixar needed to focus on A Bug's Life and Toy Story 2, so closing the TV commercial business and refocusing those animators made a lot of sense, and I'm sure with those (relatively) low margins that made the decision even easier.

Finally, cost of film revenues for the quarter was low - only $85,000! This equates to a cost of 2%, compared to 7% in the previous quarter. These costs are small, as Disney reimbursed Pixar for almost all development costs of Toy Story, but Pixar was responsible if they went over budget. To account for these overages, Pixar would capitalize the costs as they occurred, and then amortize the costs as revenue from Toy Story came in. As for A Bug's Life and Toy Story 2, they were developed under the new co-production agreement which required Pixar to pay half of all development costs (but they would get half of all revenue). As of the 3rd quarter of 1997, Pixar had accrued over $23M in film development costs.

As for expenses, Pixar only incurred $658,000, or 12% of revenue, in the 3rd quarter of 1997 compared to $2.8M or 21% of revenue. But this is somewhat an aberration as expenses were reduced by a $2.2M one-time payment from Disney. The co-production agreement was signed in February, 1997, which as mentioned above requires Disney to pay for half of all development costs. Since A Bug's Life and Toy Story 2 had both been in production since 1996, Pixar had already incurred costs for these films, so Disney was obligated to pay for half of those costs. Without this one-time payment, Pixar's expenses would have been $2.8M or over 53% of revenue!

For the bottom line, Pixar had net income of $3.6M (69% profit margin), compared to $10.2M (76% profit margin). It's interesting to note that Pixar made $2.4M just on interest from their cash and investments (Pixar had over $172M in cash and short-term investments).

Given these mixed results, what did the stock market think? I mean, their margins were still stellar but if you take out one-time items like the $1.8M in extra revenue and the $2.2M reduction in expenses, plus non-operating results like $2.4M in interest, it was obvious revenue and earnings were on a downswing that would likely show no improvement for over a year when revenue from A Bug's Life started coming in. But as is often the case in the stock market, investors seem to ignore these results in anticipation of the future and the next film release. Pixar's stock price had slowly increased through the summer, from around $15 to close to $25 by the time Pixar released 3rd quarter results. The stock price only dropped slightly through the end of the year and was still in the low $20s. As we will see in future posts, the stock price took some wild swings throughout 1998 as we approach the release of A Bug's Life and the announcement of Toy Story 2 getting a full theatrical release.

Thursday, October 31, 2013

Monsters University Home Video

It took a couple extra days but it finally arrived! Yes, I'm talking about the Monsters University Home Video! I pre-ordered mine from the Disney Store and thought it would arrive on the 29th, but it didn't show up until late Halloween afternoon. But I think it was worth the wait! I purchased the 3-disc combo pack (Blu-ray, DVD and digital copy). Since I pre-ordered it, I also received a set of 4 beautiful 10" x 14" lithographs, each showing a different scene from the movie.

I haven't had a chance to watch the movie or look at any of the features yet but did download the digital copy. I'm very happy to say the download process was simple. I've downloaded a number of films from Flickster and Ultraviolet, and absolutely hate that process. But downloading Monsters University was a pleasant surprise. I am a Disney Movies Reward member, so I logged in there to record my points for purchasing the film. Once I did that I was given a link to download the film to iTunes. I clicked on that, which launched iTunes and began the download immediately.

As an extra surprise, in addition to the digital copy of the film I received the iTunes bonus content which I wasn't expecting. This includes a look at the music for Monsters University and The Blue Umbrella (the beautiful short by Saschka Unseld that proceeded Monsters University), plus features like Campus Life, Monthropology, Story School, Scare Games, Welcome to MU, Scare Tactics, Color and Light (can't wait to watch that one), Paths to Pixar (excited about this one too), deleted scenes and others. It even includes the Easter Egg I found out about reading The Pixar Post's review of the Blu-ray (The Easter Egg features Adrian Molina discussing the opening title sequence for the film with samples of his storyboards - so cool).  I can't wait to start digging into all of these features, plus those on the Blu-ray bonus disc! It's going to be a fun weekend!


Tuesday, October 22, 2013

Join John Ratzenberger in Pixar's Recording Booth!

@ Fiddler’s Bay Production. All rights reserved.

Have you ever wanted to see more of the behind-the-scenes making of a Pixar film? Like maybe checking out the recording booth, or even hearing one of the actors record lines? Well, here is your opportunity!!

@ Fiddler’s Bay Production. All rights reserved.
I'm sure you know John Ratzenberger, Pixar's lucky charm. John has voiced characters in every Pixar film, including Hamm in the Toy Story series, Mack in Cars and Cars 2 and the Yeti in Monsters, Inc. and Monsters University. John has launched a new television series titled John Ratzenberger's American Made. The series will highlight and promote American manufacturing companies and their products, and he has turned to crowd-sourcing to help fund the series. Some contributions levels include Pixar-related gifts. For instance, if you contribute $45, you will receive a limited-edition, Hamm-styled Pez dispenser signed by Ratzenberger. For $125, you will receive a grab bag of autographed film and TV memorabilia that, while not explicitly stated, looks like will include items John has picked up from working on Pixar films. For $200 you can have Hamm (or any Pixar character voiced by John) as your voice mail answering message. And the big one - if you're able to contribute $3000 to John's series, you will get to attend one of John's recording sessions for an upcoming Pixar film. You'll also receive 2 tickets to the film's screening in Los Angeles and an exclusive after-party, both of which will be attended by cast and Pixar crew!

$3000 is a lot of money, but opportunities like this don't come around every day! I noticed on the contribution page that someone already has donated at this level. Even if you can't contribute at this amount, there are contribution levels down to $10. To learn more about John Ratzenberger's American Made and the contribution levels, check out the American Made website!

Sunday, August 18, 2013

This Day in Pixar History: Pixar and Disney Film Agreements

In this look at Pixar history, I wanted to dig into the two film agreements between Pixar and The Walt Disney Company. These agreements launched Pixar from being a money-losing software and animated commercial company into creating Toy Story and all its other animated feature films.

Discussions surrounding the first agreement began in late 1990 when Peter Schneider, head of Disney Feature Animation, met with Pixar management to discuss the possibility of creating a feature film. As an aside, this was not the first interaction between Disney and Pixar. Back in the late 1980s, when Pixar was primarily a hardware company, Disney purchased a large number of the Pixar Image Computers for their Computer Animated Production System (CAPS). Disney was extremely happy with the system and this success likely helped pave the way for the feature film deal (If you'd like to hear more about this early Pixar history and the Pixar Image Computer, you should listen to The Pixar Post's episode 14 podcast where TJ, Julie and I discuss these and many other topics).

Discussions continued throughout the rest of 1990 and into 1991, when John Lasseter made his buddy movie pitch to Disney Studios chairman Jeffrey Katzenberg. Katzenberg loved the idea, and the Feature Film Agreement was finalized and announced in the spring of 1991. This agreement was for the development of 3 full-length computer animated feature films and would last through the end of the decade. Pixar would develop and produce the films while Disney was responsible for marketing and distributing them. The agreement called for Disney to reimburse Pixar for almost all production and development costs of the film. In return, when the film was released, Disney would initially receive the majority of all revenue to recover the amounts paid to Pixar, plus its marketing and distribution costs. Once production and marketing costs had been reimbursed, Disney would continue to receive the bulk of any additional revenue from the distribution of the film and associated merchandise such as toys and home videos, while Pixar would be eligible to receive approximately 10% - 15% of the remaining profits. Finally, Disney owned the rights to the characters developed under the agreement, plus controlled the development of any sequels.
Cover of Pixar's first annual report,
which covered the Co-Production
agreement in detail

This agreement was in place until February 24, 1997, when Disney and Pixar announced a new 10 year, 5 film Co-Production Agreement, starting with A Bug's Life. This new agreement split all costs and profits equally between Disney and Pixar, after Disney received a small distribution fee. The agreement covered revenue from the theatrical and international releases plus home video and merchandise sales. In addition, the films would be equally branded as Disney-Pixar and co-owned by both Disney and Pixar, while Disney would have exclusive rights to market and distribute the films. Disney would become an investor in Pixar, purchasing 1 million shares with the option of buying up to 5% of Pixar. As for ownership of the films and characters, the Co-Production Agreement called for Disney and Pixar to mutually agree to any derivative works, but if an agreement couldn't be reached, Disney had the final say. Pixar had no rights to use or distribute any characters or elements from any of the films without first receiving a license from Disney. The 5 films that were produced under this agreement were A Bug's Life, Monsters, Inc., Finding Nemo, The Incredibles and Cars (Toy Story 2 was also produced under the Co-Production Agreement, but since it was a derivative of Toy Story, it was not counted as one of the 5 Co-Production films).

To see how much Pixar gained from the new agreement, let's look at revenue and costs for their first two films, Toy Story and A Bug's Life. From numbers in Pixar's annual reports, the studio made approximately $55M from Toy Story through 1998, while the film earned $362M worldwide, not including home video and other merchandise sales. This film was developed under the original Feature Film Agreement, and Disney was responsible for paying almost all development costs. So we can estimate almost all of the $55M was profit. In comparison, A Bug's Life, which had $363M in worldwide revenue and was  accounted for using the Co-Production Agreement, had brought in almost $115M by the end of 2000. While Pixar was responsible for half of all production costs for A Bug's Life, that amounted to less than 30% of film revenue, meaning Pixar's net income from A Bug's Life was over $80M. So while the original agreement was a breakthrough for Pixar, given it was an unknown and untested studio teaming up with the leader in the animated film industry, it is obvious the new Co-Production Agreement was a much better arrangement in terms of economics.

The Co-Production Agreement was announced just weeks before Pixar's 1996 annual report (their first as a public company) was released, and in the report CEO Steve Jobs did an excellent job explaining why Pixar made the new agreement. The first reason for the new agreement was better economics, which from the previous paragraph we can see worked out perfectly.

The second reason was even more important to the long-term strategy of Pixar. As Jobs explained in the annual report, their goal was to build a world-class studio. In the eyes of Steve Jobs, there were only 2 significant brands in the film industry at the time - Disney and Steven Spielberg. Jobs wanted Pixar to become the third. To accomplish this goal, the new agreement gave Pixar more brand recognition than the first agreement. All products would be equally branded Disney and Pixar, including feature films, home videos, derivative works (sequels), toys and merchandise.

Storyboards of how the new co-branding in films will occur, © Disney/Pixar

I was fascinated to also read that Pixar had contemplated going it alone once the original 3 film agreement expired in 2000, but in the end decided against this direction. As Jobs writes in the annual report,
Going it alone was certainly tempting, especially in the heady atmosphere surrounding Toy Story's success. But it would have been an exercise in hubris.
He goes on to explain the costs and risks of taking on the marketing and distribution functions, noting that marketing can be as expensive as, if not more than, the development of a film. He also points out that Pixar had little experience in marketing, and it was far from their core capabilities of creating memorable animated films. Jobs realized that they would have to grow the company and bring on people with completely different skill sets than the current environment of artists, engineers and production experts. Doing so would have diverted management attention, possibly causing a loss of focus and destroying the unique culture they had built (I have a whole series of posts regarding Pixar's culture stuck in my head, I hope to get it written down someday). Steve Jobs is often referred to as egotistical and arrogant, but I think this gives a much different picture, someone who is savvy, humble and understands the importance of business focus and company culture.

The Co-Production Agreement was in place until 2006, when Pixar was bought out by Disney, just months before the last film of the agreement, Cars, was released. By then, the relationship between Disney and Pixar had soured dramatically to the point where Pixar was looking for a new distribution partner and Disney had plans to move ahead with development of Toy Story 3 without the support of Pixar. That was not a happy time, and is good material for a future blog post!

Wednesday, July 31, 2013

John Lasseter at the Epcot International Food and Wine Festival (UPDATE)

I love going to Disney World! We try going almost once a year, but being in Minnesota that can be difficult (what we often do is buy annual passes and go twice within a 12 month period, then skip a year and do the same routine again). Probably my most favorite event at Disney World is Epcot's International Food and Wine Festival. It's held every fall and combines 2 things I love - food and Epcot!

© Lasseter Family Winery
If you are going to the Food and Wine Festival this year, then you have an opportunity to meet John Lasseter! John and his wife Nancy will be hosts for one of the Winery Series events held at the Flying Fish Café, where they will highlight wines from the Lasseter Vineyards in Sonoma, California. The Flying Fish Café is an excellent restaurant located on Disney's Boardwalk, just a few minutes walk from Epcot's International Gateway entrance. This will be an intimate meal with the Lasseters on Thursday, October 17. The reception begins at 6pm with dinner starting at 6:15pm. Seating is limited to only 32, so if you are interested, I recommend calling Disney ASAP at (407) 939-5102 as last year's event sold out. I don't have pricing for this event, but last year's event cost $130/person. I will update this post once I get official pricing.

© Disney
Last year, the Lasseters hosted a similar event at Citricos at the Grand Floridian Resort. In addition, John and Nancy hosted a Beverage Seminar inside the Food and Wine Festival Welcome Center (the old Wonders of Life Pavilion). The Beverage Seminars are much less expensive (usually $16/person or less), last 45-60 minutes and include tasting of the beverages being shown. Disney hasn't released the official Beverage Seminar schedule yet, but as soon as they do (and if the Lasseters are hosting one) I will update this post with the news! Last year's event also sold out, so again, you should make your reservations as soon as possible. Disney will start accepting reservations on August 13 at 7am Eastern, but if you are an annual passholder, Disney Vacation Club member, Tables in Wonderland member or Golden Oak resident, you can make your reservations starting August 9. To make reservations, call (800) WDW-FEST (939-3378).

I will be at the Food and Wine Festival this year, but sadly not on the 17th. I'm hoping the Lasseters host a Beverage Seminar while I'm at the festival. I was a bit upset last year, as I was at the festival on the same days that John was there. Unfortunately I didn't know about the events until afterwards! So much for all my planning efforts!

Check back here over the next few days for any updates. If you're looking for more information on the Food and Wine Festival, I strongly suggest checking out the Disney Food Blog, which does a great job covering the festival, with pictures and menus of all the booths plus details on the special events and activities occurring during the festival. And check out my post from last year's festival, which includes pictures of all the different food we tried!

The details for the Beverage Seminars have been released, and the Lasseter Family Winery will be hosting a wine seminar on Thursday, October 17 at 2pm. The cost is $14 per person (annual passholders, Disney Vacation Club members, Tables in Wonderland members or Golden Oak residents receive a $2 per person discount). The Beverage Seminars are held in the Festival Welcome Center (the old Wonders of Life Pavilion). If you are an annual passholder, Disney Vacation Club member, Tables in Wonderland member or Golden Oak resident you can begin making your reservations now, otherwise you'll have to wait until August 13 at 7am Eastern. Call (407) WDW-FEST to make your reservations. Full details on the Beverage Seminars and all the low-cost seminars and demonstrations can be found on the Disney Food Blog! You can also check out my trip report from last year's Food & Wine Festival.

Thursday, July 25, 2013

This Day in Pixar History: Pixar Earnings Report, 2nd Quarter 1997

I noticed that The Walt Disney Company will be announcing their quarterly earnings in a couple of weeks. If you were a Pixar shareholder when the Pixar/Disney merger was completed, you would have become a Disney shareholder as I explained in my previous post on the merger.  For a large company, I think Disney stock has done well, more than doubling from the upper $20s to the mid $60s, and a tripling of the dividend. Of course, the question for those of us who were Pixar shareholders, would we have done better if Pixar had remained independent? We will never know the answer to that question. At some point I hope to write a post on the benefits and disadvantages of the merger.

But for today, I'd like to continue my series on previous Pixar earnings reports, this time going back to the second quarter of 1997. From all accounts, Pixar had a blowout quarter! Revenue increased over 100% to $14.4M from $6.9M in 1996. The majority of this revenue came from Toy Story home video and other related merchandise income, which more than doubled to $11.6M vs. $5.0M in the second quarter of 1996. In addition, their software division did well, bringing in $1.1M vs. $722,000, primarily due to more RenderMan licenses being sold. They also continued to benefit from their patent license agreement with SGI, which contributed $1.5M. Only the animation services group saw a year-over-year decrease, which was expected as Pixar had mostly exited that business in mid-1996. The $269,000 in animation services revenue was due to projects related to A Bug's Life.

As I've said in prior posts, Pixar's gross margins were very high, and this quarter was no exception. Gross margin increased from about $5.7M (or 82.5% of total revenue) in the second quarter of 1996 to $13.4M (over 93%) in 1997. A large part of the increase was due to the decrease in animation services, which had a higher cost of service. Also, film gross margins increased from 92% in 1996 to almost 93.5% in 1997. I have also mentioned that Pixar's operating expenses had been increasing as competition for animation and technical people was rising, and the company was bringing more staff on board. So it may surprise you to learn that their operating expenses decreased this quarter versus the year ago period! This was due to the new Co-Production agreement Disney and Pixar signed earlier in 1997, which required Disney to pay half of all film production costs plus certain R&D and other general/administrative expenses. R&D expenses did increase 18% to $1.4M, primarily for RenderMan research and support. General and administrative expenses stayed roughly even at $1.0M and sales and marketing expenses dropped over 40% to $353,000 due to Pixar exiting the television commercial business. Given the increase in revenue and good expense control, Pixar's net income increased over 86% from $4.8M in 1996 to $8.9M in 1997!

Pixar's balance sheet was also very strong, with cash and short-term investments of almost $179M vs. $161M at the beginning of the year. The majority of the cash increase was due to the 1 million shares of Pixar stock that Disney purchased as part of the new Co-Production agreement. Other items of interest on the balance sheet was the $7.5M Pixar had accrued in film costs, which represented Pixar's share of costs in the development of A Bug's Life. This amount would be paid to Disney by the end of the year. Pixar had also accumulated $19.6M in capitalized film production costs for A Bug's Life and Toy Story 2, which was still being developed as a direct-to-video sequel. These production costs would need to be offset by future revenue for Pixar to show a profit on these films.

Once again, Pixar was very cautious in their expectations for the rest of 1997 and 1998. They stated they did not expect any future revenue from Toy Story home video sales, and did not expect any revenue from A Bug's Life or Toy Story 2 until 1999, thereby causing a significant decline in operating results. Of course, they said similar things in the first quarter 1997 report, and look at how good the results were!

I found two other very interesting tidbits in this quarterly report. The first was that in May, 1997, Pixar paid $5.8M to purchase land in Emeryville for their new headquarters (I wrote about the land purchase in more detail in May, 2012). Pixar stated in the report they would spend over $10M in 1997 and over $12M in 1998 on the construction of the studio, which wouldn't be finished until the end of 2000. Fortunately, with $179M in cash, Pixar would probably be able to fund the construction plus ongoing operating expenses without having to resort to a secondary stock offering or taking on debt.

The other interesting note, from what I can tell, was the first mention that the second theatrical release was being developed. In the Co-Production agreement, Pixar agreed to develop 5 new theatrical films, with the first being A Bug's Life. Therefore, there would have to be four more films produced. But this was the first time I found information that the second film, which would become Monsters, Inc., was actually in development. I should mention that if you're interested in hearing more about Monsters, Inc. you need to listen to The Pixar Post's episode 15, where TJ, Julie and I discuss its development plus other interesting notes like the lawsuits that were brought against it. If you're curious as to why Toy Story 2 wasn't considered the second film, it's because it was a sequel to Toy Story, so it was developed under the original Feature Film agreement.

I will return in 3 months or so with a look at Pixar's 3rd quarter, 1997 earnings.

Tuesday, June 18, 2013

This Day in Pixar History: Toy Story 3, Art of Animation Resort, and Brave!

June has historically been a busy month for Pixar, and today, June 18, exemplifies this! Here are 3 major events that have occurred on this day.

First we have the theatrical release of Toy Story 3, which I also wrote about last year. Toy Story 3 is the most successful (in terms of box office revenue) animated film of all time! It made an astounding $110 million in its opening weekend and ended up with over $1 billion worldwide. Toy Story 3 had it all - great heart, a great story and a lot of humor! I start chuckling out loud when I think of the tortilla scene, or any scene with Ken and Barbie! And who could forget Day & Night, the totally unique short film directed by Teddy Newton? It sounds like Newton is working on a new project for Pixar, and I would love to see what he could dream up for a feature length film.

Next up, a year ago the Cars-inspired section of the Art of Animation Resort at Walt Disney World opened. The Art of Animation Resort opened in 4 phases, the first being the Finding Nemo section in May, 2012. The Cars section was themed like Radiator Springs with the rooms themed like the Cozy Cone Motel. The entire section is full of great details and plenty of life-sized characters from the film including Lightning McQueen, Sally, Doc Hudson and Mater. If you're looking for more information, Inside The Magic did a complete write-up of the new section with videos and pictures of the resort.

Finally, also one year ago on this day, Brave held its world premier at the newly re-opened Dolby Theatre (it had been the Kodak Theater, home of the Academy Awards) in Hollywood! As with all major premiers, Brave had the red carpet out, with appearances by the film's crew such as Mark Andrews, Brenda Chapman, John Lasseter and Katherine Sarafian, plus actors like Kelly Macdonald, Kevin McKidd, Craig Ferguson and Pixar's lucky charm, John Ratzenberger. Another significant moment from the premier was that Brave was the first film completely mixed and released with the new Dolby Atmos audio platform. Dolby Atmos can provide a much more immersive experience as there are 128 separate sound channels. The system can even direct specific sounds and audio to individual speakers in the theater. Very few theaters support Dolby Atmos but hopefully we'll see it get rolled out to more theaters over time. If you're looking for more information and pictures from the premier, the Pixar Times wrote an article covering it!

Sunday, June 16, 2013

Monsters University Related Merchandise

Monsters University merchandise at Barnes & Noble
YES!! It's almost here! I of course mean the release of Monsters University! It's been 3 years since we first heard about Pixar going back to explore the monster world, and I'm very excited to see this film! As with all Pixar films, there is some great merchandise available. Other sites have done a wonderful job showing off a lot of it, including The Pixar Post with articles on the "Build-A-Scarer" plushes and the Series One Vinylmation that is now available. I wanted to highlight some of the books and other merchandise that has caught my eye.

To start with, if you haven't visited the official Monsters University store, you need to! Disney and Pixar have done an awesome job marketing this film, and the Monsters University website is a great example. The site looks just like a regular university site with campus maps, lists of courses, current events and a store that you can buy real merchandise. It's been difficult for me to control my impulse to buy everything; I have limited myself to only a 2 armed MU hoodie (I wanted the 4 arm version but my wife said she wouldn't let me wear it in public with her. What's up with that?!?!)

As for books, as usual there are a wide variety with my favorite being The Art of Monsters University. I just ordered mine, as I knew I'd want to look through it and was afraid of spoilers. The Art of books have great concept art and usually contain little stories and anecdotes about the development of the movie. Karen Paik is a great choice for author; she has previously written To Infinity and Beyond!, a great book on the founding of Pixar, plus worked on The Art of Ratatouille and The Art of Cars 2. In anticipation of the new book, I have been looking through my copy of The Art of Monsters, Inc.; I especially love the drawings of the Monstropolis neighborhoods done by Harley Jessup, the monster drawings by Geefwee Boedoe and Ricky Nierva, and paintings by Dominique Louis.

I also bought the Monsters University Fearbook. This is a "yearbook" style book, and I think it will be a lot of fun! From the book's description:
Go beyond the screen with the Monsters University Fearbook. Learn all about the fraternities and clubs on campus; find out who is most likely to become a Scarer and who is the class clown; get recaps of the year's highlights; see the monsters' class photos; and more. This 80-page full-color yearbook, which also includes ads, memory pages, and signature pages, is perfect for anyone who wishes THEY could attend MU.
Monsters University Fearbook is authored by Calliope Glass and illustrated by Disney artist Lorelay Bove.

I'm a huge fan of movie soundtracks, especially for Pixar films! I am looking forward to the Monsters University soundtrack. The Monsters, Inc. soundtrack is one of my favorites, from the fun music over the opening credits, to the scare floor theme, the emotion of Boo's theme and the song "If I Didn't Have You", so I can't wait to hear how these themes may be worked into the new soundtrack, and hear all the new music. I love the track "Roar" that was already released and could be heard on the "It All Began Here" trailer. The Monsters University soundtrack will be available on June 18, 2013.

One note, many of the books give away the entire story from the film, so if you don't want to be spoiled then I recommend waiting until after seeing the film before cracking them open. And even with the soundtrack, individual track titles may allude to plot points, so again, be careful!

Tuesday, June 11, 2013

This Day in Pixar History: Pixar Earnings Report, 1st Quarter 1997

I'm back with another post reviewing Pixar's quarterly earnings reports from when they were a public company. I started about a year ago with the first quarter of 1996, their first quarterly report as a public company. In this post I'm covering the first quarter of 1997, another positive if uneventful quarter except for the big, new film agreement with Disney that was announced after the end of the quarter (discussed at the end of this post).

Total revenue for the quarter was almost $7.9 million. As Pixar warned in their annual report earlier in the year, revenues decreased from $8.3 million in the first quarter of 1996 due to a number of reasons. In the first quarter of 1996 Pixar received a large ($6.5 million) patent royalty payment from Silicon Graphics. In addition, Pixar had significantly reduced their commercial animation services business during 1996 to focus on developing feature films, which had a negative impact on the 1997 earnings. On the positive side, Pixar did receive $6.3 million from home video sales of Toy Story, compared to only $76,000 in film revenue in the year ago period. They also increased software sales (mostly from RenderMan licenses) from $911,000 to $1.4 million. But the increases in film and software revenue were not enough to make up for the losses in the other segments.

Cost of revenue as a percentage of revenue continued to be very low. For software sales, cost of revenue was 1% in 1997 compared to 6% in 1996 due to the higher margins received for RenderMan. Cost of film revenue also decreased (as a percentage of revenue) from 12% in 1996 to 9% in 1997. There were no costs for the patent licensing revenue. Therefore, gross margins for the 1997 quarter were $7.3 million, and on a percentage of revenue basis, were 92.7% vs. 90.5% in 1996.

Operating expenses stayed fairly constant, increasing 2% to $2.6 million. Expenses were held in check partially due to the new Co-Production agreement with Disney, who was now paying half of all expenses associated with film production.

Net Income for the first quarter of 1997 was $5.1 million versus $6.3 million in 1996, primarily due to the decrease in revenues from Toy Story. Diluted earnings per share were $0.11 versus $0.13.

In usual Pixar style, management gave a plethora of reasons why future revenues and earnings would be decreasing and why losses should be expected, especially in the 1998 fiscal year. They pointed out that since 1990, about 40 animated films had been released and only 2 of those films had generated more revenue than Toy Story, and both of those films were produced solely by Disney. And in the 5 year period prior to early 1997, no animated feature film produced by any studio other than Disney had generated domestic revenue of more than $25 million, other than Toy Story. The point Pixar was trying to make was that even if their next film, A Bug's Life, was a critical and box-office success, generating results similar to Toy Story would be very unlikely. But as we know, A Bug's Life was a hit, generating almost $163 million in domestic revenue and over $363 million worldwide. As an investor I appreciated Pixar's conservative outlooks - it helped keep the stock price stable and avoided large price drops. It also helped keep analyst estimates in check, and as became a regular occurrence, Pixar would exceed these estimates which would help drive the price up.

The biggest news of the quarter was the announcement on February 24 by Pixar and Disney of a new film agreement between the 2 companies. The new agreement, which was expected to run 10 years, expanded the original 3 film agreement to 5 films. With the new agreement, both Pixar and Disney would have equal billing on the films, home videos and other merchandise.  It also greatly increased the risk and reward for Pixar, as they would now evenly split all costs and revenue with Disney from the films and merchandise (in the original agreement, Disney paid for almost all film development costs and Pixar only received a small percentage of the profits). A Bug's Life was to be the first film developed under the new agreement, and it would run through 2006 and the release of Cars.

In addition, as part of the new agreement Disney bought 1,000,000 shares of Pixar stock at $15/share and committed to hold the stock for at least 3 years. This was a strong signal to the market of the confidence Disney had in Pixar, and Pixar's stock price reacted positively, jumping almost $7 to $21. The higher stock price did not last long though, as investors realized the new agreement wouldn't do anything to increase revenue or profits, at least until A Bug's Life was released about 20 months later. But for patient investors, the future was set and looked extremely promising. We'll find out how the 1997 fiscal year proceeded when I look at second quarter earnings in a couple of months.

Friday, June 7, 2013

Early Pixar Technology Breakthroughs

If you listened to the Pixar Post's most recent podcast, you heard me talking to T.J. and Julie about Pixar's formation and their first year as a standalone company. I love Pixar's early history. I mean, before they made Toy Story, Pixar was a computer manufacturer. And before that, they were part of Lucasfilm revolutionizing digital film-making (actually, creating it). And before that, folks like Ed Catmull, Alvy Ray Smith and David DiFrancesco were at the forefront of computer graphics and animation at the New York Institute of Technology (NYIT). When you look back at that time frame (from the mid 70s to mid 80s), before they could act on their dream of creating a feature-length computer animated film, they had to create the tools. Many of the techniques and algorithms found in today's animation tools (motion blur, texture mapping, rendering) were discovered and created by these pioneers.

I thought it would be fun to highlight some of these people and the techniques they pioneered, plus provide links to further information for those of you interested in learning more.

Ed Catmull

Most people know that Ed Catmull is one of the founders of Pixar (along with Alvy Ray Smith). But more than a decade before spinning Pixar out of Lucasfilm, Catmull was studying computer graphics at the University of Utah. As a graduate student in 1972, one of Catmull's projects (along with classmate Fred Parke) was to animate his left hand. He made a plaster cast of his hand, drew a few hundred polygons on the cast, then measured, digitized and entered the coordinates of each polygon into his computer. He then developed a 3D animation program to animate his reproduced hand. Finally, he used a 35mm movie camera to capture the animation from the screen and record it to film. About a minute long, this is one of the first ever computer rendered movies and an amazing piece of work. Not only does the hand rotate and curl up, the camera goes inside the hand. Portions of the film (along with a film that Parke made of animating his wife's face) ended up in the 1976 film Futureworld. To see the video, along with some "making of" and background footage, check out Robby Ingebretsen's blog. Ingebretsen's dad helped out with the making of the video. I strongly recommend reading his post regarding this video - not only does he provide interesting details on it, he tells a nice story of how he was invited to Pixar and met Catmull. And make sure to read through the comments, which include entries from Fred Parke and children of other graphic experts of the time like Dave Evans and Ivan Sutherland (creators of the first frame buffer).

As part of Catmull's PhD thesis, he developed a solution for tracking distances between objects in a 3D space and determining which portions of an object are hidden from the viewer. His solution is called the Z-buffer, which stores the distance between the viewer and objects at every point in a scene. At the same time, Catmull discovered a way to project an image onto the surface of an object. This allowed objects in a computer to take on the look of concrete, wood or any object and is known as texture mapping.

The Pixar Touch by David A. Price provides a thorough history of not only Catmull's work at the University of Utah but of the key people and developments of Pixar's history, from the earliest days at the New York Institute of Technology and Lucasfilm, through the forming of Pixar as a standalone corporation and its sale to the Walt Disney Company in 2006.

Alvy Ray Smith

Smith was a pioneer in the area of digital paint systems. His first experience with these systems was at Xerox PARC using Dick Shoup's SuperPaint application. Smith developed his own paint application at NYIT, and followed it up with Paint3, which utilized 3 frame buffers simultaneously to provide a palette of over 16 million colors (each frame buffer supported 256 shades of a single color like red, green or blue. 3 frame buffers therefore could support 256^3 different colors).

In 1978, Smith also made the discovery of the alpha channel, or opacity, which allowed images to be superimposed on top of each other.

These advancements won Smith a Scientific and Engineering Academy Award, along with Dick Shoup and Pixarian Tom Porter, for their "pioneering work in the development of digital paint systems used in motion picture production."

Smith did a fabulous interview (with a detailed companion piece) with Mike Seymour on the fxguide podcast. Seymour and Smith discuss paint systems, the alpha channel and Smith's work at Lucasfilm and Pixar's early days, and is definitely worth a listen. In addition, Smith's website is full of great information on the history of digital paint systems.

Rob Cook

Early on, Catmull realized that for computer generated animation to look believable, it would need to include motion blur. Motion blur is an artifact of using a film camera to record an image with moving object(s). While it is normal to try to reduce or eliminate motion blur when taking a photograph (to stop the motion of a wave crashing on rocks one would use a very fast shutter speed), motion blur is necessary to provide a realistic movie experience. Without it, a film would look similar to stop-motion and have a stutter feeling.

Tom Porter's 1984 pool ball image
droidMaker by Michael Rubin gives a good, in-depth discussion of how Rob Cook solved the motion blur problem while at Lucasfilm. The solution was used in Tom Porter's "1984" pool ball image and in The Adventures of André and Wally B. The book includes interesting bits of the struggles Cook had in finding the solution, and includes the story of the friendly competition between Cook and Catmull to see who could find the solution first.

I am greatly enjoying droidMaker. It is not solely about Pixar like The Pixar Touch, as it is follows George Lucas' career and his impact on the digital film revolution. But Pixar has a significant history with Lucas as Pixar was spun out of Lucasfilm, and the book does an excellent job covering the period of time up to where Pixar was spun out. It also covers a wide range of technical topics such as the beginnings of digital audio, computer graphic workstations and Sun Microsystems (much of my professional career has been done on Sun workstations), which I really enjoyed.

Loren Carpenter

In 1980, Loren Carpenter, then an engineer at Boeing, wanted to get into Lucasfilm. The problem was that everybody wanted to get into Lucasfilm at that time. He knew just sending a resume wouldn't be sufficient, he needed to impress Ed Catmull and Alvy Ray Smith. Carpenter had been applying fractal mathematics in his job and realized he could use fractals to create a whole range of objects from mountains to lightning bolts. He decided he would create a short film for the upcoming SIGGRAPH conference demonstrating his new algorithms. It took him over 4 months to create the 2 minute film, and when it was shown at SIGGRAPH it completely blew away the audience. Catmull and Smith, sitting in the front row, immediately offered Carpenter a job. Carpenter's algorithms were used extensively in creating the Genesis effect for Star Trek II: The Wrath of Khan.

Carpenter has posted his SIGGRAPH video on vimeo, and even today it is a stunning piece of work. It's hard to imagine what he must have gone through to complete that video on the equipment of the day, all in his spare time!

Loren Carpenter and Rob Cook

Carpenter and Cook also were key contributors to Reyes (which stands for Render Everything You Ever Saw), the rendering system at Lucasfilm that later became the basis of RenderMan. Carpenter and Cook won an Academy Award in 2001 (along with Catmull) for their "significant advances in motion picture rendering".

Cook did a very interesting interview with fxguide's Mike Seymour a few years ago. The interview covers a large span of Cook's involvement with computer graphics and rendering, and includes an in-depth discussion of solving the motion blur problem, in addition to the history and advancements of RenderMan. It also covers Pixar's migration from being technology-focused to art-focused. Seymour and Cook also discuss the implications of John Lasseter's phrase, "Art challenges the technology, and the technology inspires the art."

Bill Reeves

Bill Reeves (center) with myself and
my son Sam at the CAM Benefit in 2011
In late 1981, Ed Catmull, Alvy Ray Smith and others in the computer graphics group of Lucasfilm were busy working on the Genesis effect for Star Trek II. Their original concept included exploding volcanoes and mountains growing from the flat landscape of the planet. But then Bill Reeves showed them his revolutionary new particle system. A particle system can be used to model objects that do not have well-defined borders, such as clouds, smoke and water. Reeves' new system gave a much more natural and realistic look to these objects, and Catmull and Smith agreed it should be incorporated into the effect. The exploding volcanoes were replaced with fire that spread across the planet, and the final effect was stunning with a high amount of realism. It was the first use of this technique in computer graphics, and won Reeves a Scientific and Engineering Academy Award® in 1997.

Saturday, May 4, 2013

Pixar Founding Employees

As you probably know, Pixar was formed in early 1986 when Ed Catmull and Alvy Ray Smith spun the computer graphics group out of Lucasfilm (with the funding of Steve Jobs). When Pixar spun out of Lucasfilm, there were 40 employees, including Catmull and Smith. If you visit Smith's website, you can see some of Pixar's founding documents and a list of all 40 original employees. One thing I find fascinating is the large number of these employees that are still with Pixar today!

Neftali Alvarez Annie Arbogast Malcolm Blanchard* George Cagle
Loren Carpenter Ed Catmull* Susan Anderson Catmull Shannon Collins
Don Conway Rob Cook Lynn DeKeyser David DiFrancesco*
Janice Diane Bob Drebin Lisa Ellis Craig Good
Ralph Guggenheim* Charlie Gunn Doug Hagemeier Dennis Jennings
David Johansen Bill Kaiser John Lasseter Mark Leather
Sam Leffler Adam Levinthal Matt Martin Jeff Mock
Lane Molpus Tom Noggle Eben Ostby Tom Porter
Bill Reeves John Seamons Glenn Sharp Alvy Ray Smith*
Deirdre Warin Jim Wilson Sara Wright Bruce Young

In the list above, 15 of the 40 names are in bold text. These are the founding employees still with Pixar, 27 years after its formation!

But even before Pixar was an independent company, before folks like John Lasseter, Loren Carpenter, Bill Reeves and Craig Good joined up with Catmull and Smith at Lucasfilm, some of these folks were together at the New York Institute of Technology (NYIT) back in the late 1970s. The names with an asterisk were all at NYIT. As you can see, 3 people - Malcolm Blanchard, Ed Catmull and David DiFrancesco, have been working together for at least 34 years! In addition, Tom Duff was also at NYIT in the late '70s and is still with the company today (he left Lucasfilm in 1984 but came back to Pixar a few years after the spinoff).

Given today's environment of contracting work out and short-term engagements, the fact that so many Pixarians have stayed with the company is an amazing accomplishment, and a testament to the  culture that Catmull, Lasseter and the others have built. I think their commitment to each other and their common dream of creating computer animated films has a lot to do with the continued success of the company.

Thursday, April 25, 2013

College Track Pre-Release Screening Benefit of Monsters University (UPDATE)

UPDATE: After originally posting this article, I found 2 other Monsters University pre-screenings happening at Pixar.

The first is for the Bay Area Women's Sports Initiative (BAWSI), being held on June 1. BAWSI is a non-profit organization founded by Olympic and World Cup soccer players Brandi Chastain and Julie Foudy, plus former general manager of the San Jose CyberRays women's professional soccer team Marlene Bjornsrud, that brings together women athletes to help children in the bay area. This event includes a reception with food from Pixar's Café Luxo, a silent auction, self-guided tours of the studio and grounds, and the screening of Monsters University. Tickets are much more reasonable at $275 but there are less than 20 tickets left. Check out the announcement for more information!

The second benefit is for the JDRF on June 15. John and Nancy Lasseter have hosted a JDRF benefit for the past couple of years, and it has great significance for them as their son Sam has type 1 diabetes. It is a black-tie dinner party that includes dessert reception plus silent and live auctions. Tickets are only sold by the table with a minimum of 10 people to a table, although the event page states they may open it to individuals closer to the day of the event.

All of these are wonderful organizations, and it's great seeing Pixar supporting them.

Here is my original post:

Do you want to see Monsters University almost 2 weeks before its theatrical release? And get inside of Pixar Animation Studios? Well, this may be your chance! Pixar is hosting a pre-release screening benefit for College Track on Saturday, June 8. The event will include a cocktail party and dinner, behind-the-scenes tour of the studio and campus, and viewing of Monsters University in Pixar's amazing theater!

There are only a couple of these types of events every year at Pixar. I have written about the 2011 Cartoon Art Museum Benefit and the Up pre-screening benefit for Emery Ed in 2009. Tickets are expensive, starting at $1000 for individuals and go up to $50,000 for a group of 10, but it would be an unforgettable day!

For more information, check out the College Track website!

Thursday, April 18, 2013

This Day in Pixar History: Pixar 1996 Annual Report

Once again, I'm back looking at the financial earnings reports from Pixar when they were an independent public company. In my previous posts, I covered their quarterly earnings for the first, second and third quarters of 1996. In this post I'm going to cover their 1996 annual report.

1996 Annual Report cover

For their first year as a public company, Pixar did quite well. The studio ended the year with over $38.2 million in revenues, more than 200% higher than the $12.1 million made in 1995. Almost half of the revenue, $18.8 million, came from their first feature film, Toy Story, released November 22, 1995. $9.1 million came from patent licensing, primarily from Silicon Graphics. Another $6.3 million came from software, such as RenderMan licenses and their 2 Toy Story-based CD-ROM products, The Toy Story Animated Storybook and The Toy Story Activity Center. Finally, they made another $3.9 million from television commercials and other animation services.

Toy Story 2 art

Gross margins for the year were amazing - over 87%, higher than the 80% margins in 1995. As I mentioned in my post for the 3rd quarter of 1996, Pixar had very low cost of revenue. According to the Feature Film Agreement signed with Disney in 1991 (and the subsequent CD-ROM agreement), Disney reimbursed Pixar for almost all costs related to the development and production of Toy Story and the CD-ROM titles. In addition, there were no costs of revenues associated with their licensing revenue. Their total cost of revenue was only $4.7 million, of which $3 million was attributed to their television commercials and animation services. Pixar had announced in 1996 they would be getting out of the commercial business and moving those employees to their feature film development teams. As this segment had the lowest margins (23% vs 95% for the other business segments), it is not surprising that Pixar made the decision to exit it.

Research & Development expenses increased from $4.1 million in 1995 to $7.0 million in 1996, primarily in support of their software tools like RenderMan, Marionette (their animation system), and Ringmaster (a production management software system). General & Administrative expenses increased 87% from $3.0 million to $5.6 million. Pixar stated in the annual report that they expected G&A expenses to continue to increase, partly due to intense competition (and the corresponding higher salaries) for animators and other creative personnel. Pixar also experienced an increase in Sales & Marketing expenses in 1996 compared to 1995 (from $1.6 million to $1.8 million) due to the release of Toy Story and becoming a public company.

Net Income for the year was over $25.3 million, or $0.54/share, compared to only $1.6 million ($0.04/share) in 1995. This is a net profit margin of over 66%! Pixar's balance sheet was also very strong, courtesy of their IPO in late 1995 and the good results in 1996. Cash and short-term investments grew from $144.3 million in December, 1995 to $161.0 million in December, 1996, and liabilities were only $6.7 million with not a dollar of debt on the balance sheet!

Even with all this good news, Pixar raised concerns regarding their future financial situation. They stated they expected a substantial decline in their operating results in 1997. The primary cause of this was the expected drop-off in revenue from Toy Story. They only expected revenue from the Toy Story home video release, and the majority of that would occur in the first half of the year. And according to their agreement with Disney, they received a lessor amount of home video revenue than theatrical revenue.

In addition, Pixar had decided in early 1997 to discontinue its CD-ROM production business. The business had been successful, but Pixar wanted to reassign most of the 60 employees in that department to other groups such as feature film production. This meant Pixar would experience a "material adverse impact" (accounting lingo for "we're going to make less money than we expected") on its operating results in both 1997 and 1998.

Pixar also warned of a decline in RenderMan revenue, as the company focused more on their film business, plus they expected increases in operating expenses from continued growth in their operations and research and development efforts.

Finally, they had no new films due for almost 1 1/2 years. A Bug's Life was to be released in late 1998, and Pixar didn't expect to recognize any revenue until later half of 1999. Also, at this point, Toy Story 2 was still scheduled to be a direct-to-video release, also in late 1998, which meant no revenue from that would be received until 1999. I did find it interesting though that they mention the possibility of releasing Toy Story 2 to theaters rather than direct-to-video. I had always thought that decision had been made late in its production.

It should not be much of a surprise then, given all the cautionary talk on decreasing revenues and increasing expenses, that Pixar stock was stuck in the low to mid teens. I made my first purchase of Pixar stock in April, 1997 for $15/share. Obviously, I was in it for the long term!

I am probably one of those rare (some may say weird) people who enjoy reading annual reports, especially the ones from Pixar! They always started out with an entertaining and informative letter from Chairman and CEO Steve Jobs. His letter in this report was 15 pages long, and include some beautiful drawings, pre-production artwork and storyboards from Toy Story 2, Geri's Game and The Adventures of André and Wally B. In addition to discussing the previous year's results, Jobs provided a good summary of the what's and why's on the newly signed co-production agreement with Disney (I will discuss this agreement in detail in a future post). He also discussed Pixar's 3 core capabilities that would enable them to become a world-class animation studio: Creative, Technical and Production. The annual report also discussed their purchase of land in Emeryville to build a new studio facility. Pixar had put down a $300,000 non-refundable deposit for the land, and while they had not made the final decision to move ahead with building the new studio, the report stated that was their intention.

The next post in this series will cover results from the first quarter of 1997.

Back cover