NEW YORK (CNN/Money) -
While Pixar delivered a strong third quarter, analysts and investors say the real story is whether the animation company will renew its film distribution agreement with Disney.
They'll have to wait longer than they expected to find out. Pixar chairman and CEO Steve Jobs said today that company will know by the end of the year whether Disney will continue to distribute Pixar's films.
Jobs delivered the news during a conference call to discuss Pixar's stronger than expected third quarter earnings. Shares of Pixar Animation Studios surged nearly 10 percent in after-hours trading after the company reported a quarterly profit increase, along with earnings and revenues that handily beat Wall Street expectations.
But Jobs backtracked on his announcement earlier this year that Pixar would unveil its new slate of films, including a new film set for summer 2007, during the third quarter results conference call, saying that Pixar wants to have its distribution partner sorted out before it releases the titles.
"We are in deep discussions with Disney and I can't comment on them," said Jobs, adding that Pixar will know by the end of this year if it is going to continue its relationship with Disney, because the company needs to begin working with its new distribution partner soon if it is going to meet the summer 2007 deadline for its next film.
Pixar's banner quarter comes as the company is contemplating a new deal with Disney to distribute its films. Under the current agreement, Disney foots the bill for the marketing and distribution of Pixar's movies, and after it recovers those costs, it splits the profits from the films and related merchandise with Pixar. For its part, Pixar wants a bigger cut of the pie.
Numbers are nice - a deal would be nicer
Dennis McAlpine, an independent media and entertainment analyst, said that while Pixar's third quarter was better than expected, the numbers are "irrelevant" compared to the big picture -- what's happening with Disney.
"They got more international TV and more merchandise revenue than expected, but in the grand scheme of things it's immaterial," McAlpine said. He added that all indications are that Jobs wants to continue the relationship.
"Jobs would clearly rather do it with Disney, and I don't blame him – why screw up something that's working?" asked McAlpine.
Steve Lidberg, an analyst with Pacific Crest Securities, said he thinks the two companies will eventually strike an agreement.
"When we get to the end of this saga, you are going to see Disney and Pixar working together because it benefits both companies if this relationship continues to push forward," he said.
On the conference call, Jobs said he likes Disney CEO Bob Iger "a lot" and said that while he thinks Iger is making good moves within Disney, some issues regarding the distribution deal have not been worked out.
"If they were all worked out, we'd be having a different conversation today," Jobs said.
Pixar has released six films so far, which have won 18 Academy Awards and have grossed more than $3.2 billion combined. The company has faced criticism for the fact that it has only released six movies since 1995.
As for the third quarter's better than expected results, Jobs credited Pixar's rise in profit to DVD sales, among other factors.
Pixar reported third quarter revenues of $45.8 million, well ahead of Wall Street's forecast of $31 million, according to a Thomson FirstCall survey, and a slight increase over revenues in the year-ago quarter.
Pixar reported net income of $27.4 million, or $0.22 per share, twice Wall Street's expected 11 cents a share.
The company is also on track to beat the Street's forecast for 2005. Pixar has earned $0.99 per share on revenues of $233.5 million this year; analysts have projected full-year revenues of $263 million and earnings per share of $1.04 for Pixar. Wall Street analysts have forecast fourth-quarter revenues of $45 million and earnings per share of $0.15; Pixar said it expects third quarter earnings of between $0.13 and $0.15.
Pixar posted film revenues of $41.5 million. While Pixar didn't release a new movie in the quarter, it posted $13.7 million in revenues for "Finding Nemo," based on domestic and U.S. video sales, licensing agreements and consumer products sales. "The Incredibles" garnered revenues of $11.8 million. Earlier this year, Pixar lowered its second quarter guidance on the basis that returns of "The Incredibles" DVD were higher than expected.
Pixar executive vice president and CFO Simon Bax said the reason Pixar beat the higher end of its own third-quarter earnings guidance was because of higher than expected continued earnings from "Finding Nemo," a one-time reduction in international home video and television expenses, and non-film factors including a lower than expected tax rate.
Disney deal to end?
The current deal with Disney ends with the release of "Cars," Pixar's latest movie, which is slated for release in June 2006.
Speaking about "Cars" on the call, Jobs said, "I think it will either be a triumphant cap on our relationship with Disney or a huge beginning in a bountiful new chapter in our relationship with them."
Analysts has suggested Pixar may lose some negotiating leverage as "Chicken Little," Disney's first computer-generated cartoon film, opened to $40 million this past weekend, according to Boxofficemojo.com. That strong opener could lead Disney to decide it no longer needs Pixar. But Pixar's films have also performed strongly. In its opening weekend, "The Incredibles" grossed $70 million, well above the opening for "Chicken Little."
There are some positive signs that the two companies could continue to work together, however. One is the deal Apple struck with Disney to sell some of Disney's ABC network shows on Apple's iTunes music store. Also, Pixar CEO Steve Jobs, who is also the CEO of Apple, is said to enjoy a better relationship with Disney CEO Iger than he did with former Disney chief Michael Eisner.
The better than expected quarter jolted Pixar's shares, which fell three and a half percent in trading Tuesday to a closing price of $50.88. Pixar shares have surged this year, trading in a 52-week range of $38.52 to $54.57.
Pacific Crest's Lidberg said he maintains his "outperform" rating on Pixar's stock.
"We continue to think a new deal will be struck with Disney; even if not they will show doubling of profitability in 2007" thanks to the release of "Cars" and the fact that Pixar is reducing the amount of time between new releases, he said.
For more on Pixar's earnings, click here.
McAlpine does not own shares of Pixar or Disney, and his firm, McAlpine Associates, does not do investment banking. Lidberg's firm makes a market in shares of Pixar, but does not own shares of Pixar or Disney. Pacific Crest does not do banking business with either company.