DREAMWORKS REPORTS PROFITS UNEXPECTEDLY.

Byline: GREG HERNANDEZ Staff Writer

GLENDALE -- DreamWorks Animation SKG surprised Wall Street by reporting an unexpected third-quarter profit Tuesday, despite not having any new feature film or DVD releases during the three-month period ending Sept. 30.

The studio reported a profit of $10.5 million, or 10 cents a share, compared with a loss of $0.7 million, or 1 cent per share, a year earlier. Net income was boosted by sales of ``Wallace and Gromit: Curse of the Were-Rabbit'' to pay television markets and continued DVD sales of ``Madagascar.''

Wall Street analysts had estimated a loss of 2 cents a share, according to Thomson First Call.

Still, with no new product out, revenue dropped to $55.6 million, down from $87.1 million in the third quarter of 2005.

``We had a somewhat quiet third quarter financially but we certainly had a lot going on in the creative area,'' CEO Jeffrey Katzenberg told analysts in a conference call after the markets closed. ``Overall, we have a lot in the works and I believe we are set up to be firing on all cylinders in 2007.''

The studio has its latest offering, the CG-animated ``Flushed Away,'' hitting theaters Friday and released its summer box office hit ``Over the Hedge'' on DVD earlier this month. ``Hedge'' has grossed $325 million at the box office worldwide.

``As indicated last quarter, we do not expect `Over the Hedge' to contribute any significant revenue to the company until later in the year because of the upfront marketing and distribution costs associated with its theatrical release,'' said Chief Financial Officer Kris Leslie.

``Madagascar'' contributed $24.1 million in revenue while ``Wallace and Gromit'' generated $17.2 million. Still swimming is the holiday 2004 release ``Shark Tale,'' which brought in $5.8 million while library and other titles contributed $8.5 million.

Katzenberg detailed the studio's future plans during the earnings report. In addition to the theatrical release of ``Shrek 3'' on May 18, 2007, there is a stage musical based on the ``Shrek'' franchise in development for a possible 2008 debut.

In addition, he said the planned direct-to-DVD release of ``Shrek'' spin-off ``Puss in Boots'' has been scrapped in favor of making the film a theatrical release for 2010. It would be held until after the release of ``Shrek IV.''

Katzenberg said DreamWorks is not abandoning the direct-to-DVD market, explaining that the studio ``just hit the pause button on it for the moment.''

Other theatrical releases scheduled are ``Monsters vs. Aliens'' for summer 2009 and ``How to Train Your Dragon'' for the holiday season later that year.

Shares of DreamWorks Animation rose 85 cents, or 3.2 percent, Tuesday to close at $26.45 per share on the New York Stock Exchange.

DreamWorks Animation appears to be well on its way to restoring its credibility on Wall Street after Merrill Lynch has upgraded its stock from ``neutral'' to ``buy'' while J.P. Morgan upgraded it from ``underweight'' to ``neutral.''

Shares had initially risen in September when David W. Miller, a Los Angeles-based analyst with Sanders Morris Harris Group Inc., lifted the company's rating to ``buy'' from ``hold,'' calling DreamWorks' stock price ``too compelling to ignore.''

greg.hernandez(at)dailynews.com

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