DREAMWORKS TAKES A DIP 'WALLACE & GROMIT' BLAMED FOR THIRD-QUARTER LOSS; `MADAGASCAR' HOLDS PROMISE.

Byline: Greg Hernandez Staff Writer

GLENDALE - DreamWorks Animation SKG, dragged down by the mediocre domestic box office performance of its current release ``Wallace & Gromit: The Curse of the Were Rabbit,'' posted a third-quarter loss Thursday.

For the quarter ended Sept. 30, DreamWorks reported a loss of $656,000, or 1 cent per share, compared with 2004 third-quarter net income of $20.3 million, or 26 cents per share. Revenue fell to $87.1 million from $241 million a year ago.

The bright spot for the company was ``Madagascar,'' which has earned $525 million worldwide and is the sixth-highest-grossing animated film of all time and DreamWorks' biggest nonsequel hit.

``Now with the plan for a sequel under way, we believe 'Madagascar' has the potential to become our next great franchise,'' DreamWorks Animation CEO Jeffrey Katzenberg said during a conference call after markets closed.

DreamWorks Chief Financial Officer Chris Leslie said she expects the sequel to cost more than the $130 million it took to produce ``Madagascar'' because returning talent, including Ben Stiller and Chris Rock, will be paid more, although the talent costs are not expected to reach ``Shrek 2'' levels.

Katzenberg expects results for the 2005 fourth quarter to be primarily driven by the DVD release of ``Madagascar'' next week.

During the third quarter, ``Madagascar'' contributed about $64.6 million in revenue while still playing in some theaters. The fall 2004 release ``Shark Tale'' contributed $10.3 million in revenue, primarily from pay-television licensing. Other revenue came from the 2004 smash ``Shrek 2,'' which produced $2.6 million in the quarter from consumer products, and $9.6 million in revenue came from the studios' library of other films.

The company's earnings were reduced by several charges, including one charge related to taxes, which had a net impact of about $8 million, or $0.08 per share, as well as a $3.9 million, or $0.04 per share, charge for the partial write-off of film inventory for ``Wallace & Gromit.''

``Wallace & Gromit,'' released Oct. 7, had earned just $53.2 million domestically as of Wednesday. Worldwide, the film has taken in a total of $160 million.

Goldman Sachs analyst Anthony Noto said in a research note Thursday that he does not expect `Wallace & Gromit' to have much more steam domestically, but believes the film's bigger international success could offset those shortcomings.

``We anticipate that Disney's 'Chicken Little' will likely continue to steal away the remainder of the family audience for the next couple of weeks followed by Warner Bros.' new 'Harry Potter' film on Nov. 18, making it increasingly difficult for 'Wallace & Gromit' to attract moviegoers,'' Noto wrote.

Katzenberg touted the company's two 2006 releases: ``Over the Hedge,'' set to bow in May, and ``Flushed Away,'' which has a fall release date.

``Both of next year's films look great,'' he said.

Shares of DreamWorks Animation rose 14 cents Thursday to close regular trading at $26.53 per share on the New York Stock Exchange and rose an additional 17 cents in after-hours trading.

Greg Hernandez, [phone]

greg.hernandez(at)dailynews.com