I'm back with another look at one of Pixar's quarterly earnings reports
from when they were an independent public company. In this post we'll look at their second quarter (April - June) of 1998.
The middle of 1998 was a quiet period for Pixar, at least in terms of revenues and earnings. Revenues from the home video release of Toy Story
continued to drop, and there wouldn't be an increase in revenue until the first quarter of 1999 when money from A Bug's Life
began to come in. Revenue for the quarter was only $3.8 million compared to over $14 million in the second quarter of 1997. Of the $3.8 million, $2.9 million was from Toy Story
film revenues and $850,000 from RenderMan sales.
While revenues were decreasing, expenses were increasing, growing from $2.8 million in 1997 to $3.2 million in 1998. Much of this was due to general and administrative expenses, which grew over 73%. Pixar had both A Bug's Life
and Toy Story 2
in production, and were in the early stages of developing Film Four
). In the report, Pixar pointed out production hadn't started yet on Monsters, Inc.
as the story treatment hadn't been approved. They also stated if the story treatment and budget were approved, it was not expected to be released until late 2000 at the earliest. As we all know, it would be a year later before it hit theaters.
Net income was a little over $2 million ($0.05/share) compared to almost $9 million ($0.22/share) in the year before quarter. You might ask, if revenue was $3.8 million and $3.2 million went into expenses, how did Pixar end up with over $2 million in net income? The answer comes in the category of Other Income
which totaled close to $2.2 million. This income was basically interest Pixar earned on their short-term investments - the large cash hoard Pixar still had from their IPO in 1995.
The impact of lower earnings was more apparent by looking at their cash flow statement. For the first 6 months of 1998, Pixar generated $4.4 million of cash from their operations, but they spent $5.9 million on new equipment and $15.1 million on the production of A Bug's Life
, Toy Story 2
and Monsters, Inc.
, for a cash outflow of $16.6 million. Remember, with the Co-Production Agreement
with Disney, Pixar was now responsible for financing half of their film costs. With those higher costs and no expected revenue from A Bug's Life
coming until early 1999, Pixar would be burning through a significant amount of cash for the next couple of quarters. Fortunately, they had over $160 million in the bank so they were well prepared to handle these expenditures.
One item I noticed in the quarterly report was that on June 16, 1998, Pixar had purchased Physical Effects, Inc. ("PEI") for $3 million in Pixar stock (over 60,000 shares) and the assumption of $300,000 in liabilities. PEI was co-founded by David Baraff and had been working on simulation technology, which they had licensed to a third party. I'm guessing Pixar bought the company primarily in preparation for the fur and cloth simulations they would need in Monsters, Inc.
In fact, Baraff is credited with creating Boo's shirt in the film, and he continued to enhance the simulation tools Pixar would use for later films like Brave
and Monsters University
. Baraff is now a Senior Animation Scientist at Pixar and received a Scientific and Technical Academy Award for his work on cloth simulation in 2006.
Pixar's stock had had a good run-up through the first half of 1998, going over $63/share early in July. But after these results were announced their price began to drop, going down to around $50 by months end and getting as low as $28 near the end of August, 1998. Pixar was always known to be conservative in their earnings estimates and often beat expectations, as I discussed in my post
for their first quarter of 1998 earnings report. I think analysts were somehow expecting revenues and earnings would continue to grow even in the absence of a recent film release. As a long term investor I wasn't concerned with the quarterly gyrations of revenues and earnings, but most analysts are only concerned with short term results. I think this quarterly report woke those analysts up and they realized it would be months before revenues would start to grow again.