I'm back with another look at Pixar's earnings from when they were a standalone company. In my continuing series, this post will look at their first quarter 1998 earnings report, which was announced after the market closed on Thursday, April 23, 1998. At this time, little money was flowing in but the company was busier than ever. 3 films were in different stages of development - A Bug's Life, which would be released later in the year, Toy Story 2, which in February, 1998, had been upgraded to a theatrical release (from a direct-to-video sequel), and Monsters, Inc. (officially referred to as "Film 4") was in early development.
Even though the Animation Services department was shut down in 1997 to reassign its artists to A Bug's Life and Toy Story 2, the segment generated $171,000 in revenue due to royalties from their Toy Story CD-ROM interactive games. Software sales of RenderMan generated another $673,000 and patent licensing brought in $117,000, to bring total quarterly revenues to just shy of $5 million versus $7.9 million in 1997. While revenue in 1998 was lower, gross margins actually improved from 92.8% in 1997 to 98.5%! This was due to the lack of any film-related expenses - all costs from the production of Toy Story had already been accounted for. In addition, Pixar was capitalizing almost all development costs for its upcoming films, so while it was showing up on the cash flow statement (in the sum of $7.5 million), it wouldn't actually impact the income statement until it could be offset against the revenue of the upcoming film releases.
Although earnings per share dropped from $0.11 in 1997 to $0.08, the stock reacted very favorably to the earnings report as analysts had expected the company to only breakeven. The stock jumped over 8.7% the day after the earnings report to $44 5/16. This was on top of the almost 6% gain the previous day when Disney announced better than expected earnings and a 3-for-1 stock split. Pixar's stock had a great run in early 1998, more than doubling since the beginning of the year.
There wasn't much else of note in the quarterly report, besides the upgrade of Toy Story 2 from direct-to-video to full theatrical release. Some other minor items included that construction of the new Emeryville headquarters would start in the second half of 1998, and the earliest discussion I recall seeing regarding the studio's Y2K planning and preparation.
I'll be back in a few weeks to discuss Pixar's 1998 second quarter results.