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Sony Pictures Digital Productions
Fiscal Year 2010 Budget Overview
February 18, 2009
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
Agenda
Page Number
FY09 Q4 Forecast Update
4-5
FY10 Budget Overview
7 - 14
Film Ultimates
16 - 19
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
FY09 Q4 Forecast Update
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
FY09 Q4 Financial Summary ($ in Thousands)
FY09 Q4
FORECAST
NET REVENUE
Imageworks
Animation
TOTAL NET REVENUE
EBIT
Imageworks
Animation
TOTAL EBIT
NET CASH FLOW
$
140,148
103,383
243,531
FY09 Q3
FORECAST
$
$
(35,092)
13,840
(21,252)
$
$
(98,874)
$
142,103
97,394
239,497
(33,092)
11,840
(21,252)
VAR TO
FORECAST
$
$
(102,064) $
FY09 BUDGET
(1,955)
5,989
4,034
$
223,398
79,817
303,215
VAR TO BUDGET
$
(2,000)
2,000
-
$
248
3,500
3,748
3,190
$
(100,245) $
$
$0
(83,250)
23,566
(59,684)
(35,340)
10,340
(25,000)
1,371
$0
EBIT:
• Q4 Forecast on target with Q3 Forecast. Imageworks worse due to timing of G-Force offset by Animation
favorable timing of Open Season 2 revenue
• Unfavorable Budget variance of ($25M). Successfully held to unfavorable variance of ($25M) since Q2 Forecast
through remainder of fiscal year
Net Cash Flow:
• Q4 Forecast net cashflow slightly improved to Q3 Forecast and Budget. Favorable Budget variance driven by
favorable timing of Cloudy and Hotel Transylvania production spending, offset by lower cash receipts net of cost
at Imageworks
Q4 Risk:
• Imageworks ($1M) revenue timing risk for G-Force and Alice in Wonderland
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 4
FY09 Q4 Cost Savings Initiatives
•
•
•
Achieved savings of $1.3M vs. original FY09 Budget Challenge SG&A of $700K:
– Savings were driven by $1M reduction in maintenance/repair, $300K in materials and supplies
Actions taken in response to Michael & Amy’s memo of October 31, 2008:
– Eliminated overtime for non-production/overhead employees, producing $300K in annualized savings
– Reduced T&E, creating savings of 14% for meetings/conventions expense
– Saved 20% in consulting expense by terminating arrangements
Broader cost reduction initiatives commenced in March 2008 created $56M in savings for FY09:
– Organization. Total savings: $43.2M
• Reduced production and overhead headcount proportionate to shows in production. All new artists hired
for run of production only (show hires)
– Compensation. Total savings: $6.0M
• Reduced average compensation levels by hiring a proportionately younger workforce through the IPAX
program, benchmarking compensation against industry averages and establishing narrower salary
bands for all employee categories.
• Reduced fringe rates by redesigning employee benefits, including reducing non-contractual salary
increases and bonus plans.
– Efficiency. Total savings: $5.4M
• Improved utilization by creation and implementation of headcount tracking tool
• Gained significant production efficiencies through use of innovative rendering tool
• Reduced production employee overtime
– Facility & CAPEX. Total savings: $1.4M
• Designing new office configurations to further increase density of existing space, accelerating
termination of building leases
• Eliminated underutilized office space, equipment and licenses
• Reduced capital and maintenance expenses, including third party software spend for production
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 5
FY10 Budget Overview
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
FY10 Strategic Objectives
• Prioritize Imageworks around needs of SPA & Columbia,
becoming VFX resource for Columbia and using excess
capacity to service third parties
Improve economics
• Reduce facility size and continue to execute on and identify
additional cost reduction initiatives at Imageworks
• Manage visual effects business on a break-even basis,
charging internal productions “at net cost” (no profit)
Focus on high
margin/growth
businesses
• Increase SPE’s participation and success in family features
market
− CG animated films at the high end ($100M+, Hotel
Transylvania) and mid-tier ($25-50M)
− Animation/live action hybrids (Smurfs)
− DTV sequels (Open Season 2)
• Shepherd Aardman relationship for SPE (Arthur Christmas,
Pirates)
Explore new
opportunities
• Expand digital marketing services beyond SPE to third
parties via Imageworks Interactive
• Increase collaboration with Columbia on digital marketing
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 7
FY10 Budget Highlights – Changes since MRP
•
•
•
•
•
•
Cloudy with a Chance of Meatballs releases September 18, 2009:
– Financial target at $85M DBO with 1.5 IBO multiple and breakeven at $78M
– Downside risk at $65M DBO with 1.3 IBO multiple
– 3D assumptions: 65% of DBO, 20% of IBO; domestic glasses cost is $8.5M, international is $4.6M
Open Season 2 released January 27, 2009:
– Favorable $1.9M due to 21% better-than-forecast home video units sold at Walmart, an unprecedented sales
volume for market/genre SPE title
– Total IBO of $8.4M, $6.3M in Russia
Budget achieves $1.2M in new savings, above Cost Reduction Plan of $800K for Imageworks Interactive and
SPDP corporate
SPI refocused production:
– Total revenue of $155M includes 27% in animation, 73% in VFX; approximately 90% of VFX awarded, 10%
remains TBD
– Production features a more balanced senior/junior mix through IPAX program and other hiring initiatives
Ongoing cost reduction initiatives (total incremental savings of $3.1M+ in FY10):
– Ongoing organizational, compensation, efficiency, and facility & CAPEX initiatives begun in FY09 provide
incremental savings of $1M
– Organizational review and subsequent headcount reductions from eliminating redundancies create at least $2.1M
in FY10 incremental savings
– Further efficiency gains result from improved utilization of workforce through headcount tracking tool
– Increased individual departmental and show budgeting accountability provides added overhead savings
Satellite Production:
– Imageworks New Mexico provides $2.3M in savings realized through tax rebate as facility expands to 105
headcount in a short-term, rented facility. Costs have been dramatically scaled down from original plan that called
for significant investment and build-out of a wholly-owned facility ($6.9M saved in FY09)
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 8
FY10 Budget Summary Financials ($ in Thousands)
FINANCIAL HIGHLIGHTS:
BUDGET
REVENUE
Imageworks
Animation
TOTAL REVENUE
EBIT
Imageworks
Animation
TOTAL EBIT
$
$
155,500
208,396
363,896
1,335
(29,685)
(28,350)
OCT 08 MRP
$
$
150,500
191,508
342,008
135
(30,685)
(30,550)
VAR TO MRP
$
5,000
16,888
21,888
1,200
1,000
2,200
$
EBIT Breakdown:
BUDGET
Imageworks
$
1,335
OCT 08 MRP
VAR TO MRP
$
135
$
$
2,551
4,702
729
(29,480)
(9,187)
(30,685)
(30,550) $
1,220
Animation:
Open Season
Surf's Up
Open Season 2
Cloudy
Smurfs
Development reserve/overhead
Subtotal Animation
TOTAL EBIT
$
3,698
7,367
2,666
(33,603)
(1,100)
(8,713)
(29,685)
(28,350)
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
1,147
2,665
1,937
(4,123)
(1,100)
474
1,000
2,220
page 9
MRP EBIT Reconciliation to FY10 Budget ($ in Thousands)
EBIT PER OCT 2008 MRP
$ (30,550)
Corporate Initiatives
• Cloudy savings from marketing reduction
• Cost Reduction Plan - Imageworks Interactive & SPDP
• Telecom/Media Services
Sub-total Corporate Initiatives
Imageworks
• Margin impact of $22.7M increase in VFX work
• Margin impact of $17M decrease in animation work (timing Smurfs, Arthur Christmas )
• Depreciation - Reduced spending in FY09 combined with favorable timing of spend
• Corporate rent allocation - increase from $65 psf to $68 psf
• Travel & Entertainment, Advertising, Refreshments, Materials & Supplies, and other overhead reductions
• Other, net
Sub-total Imageworks
Animation
• Cloudy reduced home video flows from model
• Cloudy change in DBO:IBO assumption from 1.68 to 1.50; incorporated 3D glasses cost
• Smurfs pre-release marketing expense (represents 50% share with Columbia)
• Open Season - primarily timing of ITV revenue
• Open Season 2 timing of DHE revenue
• Surf's Up - primarily timing of ITV revenue
• Other, net - includes T&E and other cost reduction
Sub-total SPA
TOTAL VARIANCE
$
2,500
1,200
100
3,800
3,800
700
(2,000)
1,104
(1,283)
1,111
268
(100)
(100)
(1,500)
(5,123)
(1,100)
1,147
1,937
2,665
474
(1,500)
(1,500)
2,200
EBIT PER FY10 BUDGET
$ (28,350)
0
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 10
FY10 Budget Summary of Net Cash Flow ($ in Thousands)
BUDGET
NET CASH FLOW
Imageworks
Animation
TOTAL NET CASH FLOW
$
5,825
(121,923)
(116,098)
OCT 08 MRP
$
373
(143,456)
(143,083)
VAR TO MRP
5,452
21,533
26,985
$
NET CASH FLOW PER OCT 2008 MRP
Imageworks
• Increased receipts primarily due to timing of Alice in Wonderland billings and additional work
• Increased costs associated with additional work
• Timing of capital expenditures from FY09 to FY10 (primarily ABQ)
Sub-total Imageworks
$
$
Animation
• Production Spending
- Timing of Hotel T
- Timing of Cloudy
- Timing of Smurfs
- Timing of production spending for future projects
• SPDP Overhead allocation - reduced legal allocation
• SPA Overhead
• Other, net
Sub-total SPA
(143,083)
5,000
1,452
(1,000)
5,452
5,452
(3,137)
1,929
6,100
13,803
696
1,605
537
21,533
21,533
TOTAL VARIANCE
26,985
NET CASH FLOW PER FY10 BUDGET
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
$
(116,098)
0
page 11
Imageworks FY10 Budget Revenue ($ in Thousands)
Payroll Periods
Project
Before
FY09
4
4
5
4
4
5
4
4
5
4
4
5
52
Budget
Apr-09
Budget
May-09
Budget
Jun-09
Budget
Jul-09
Budget
Aug-09
Budget
Sep-09
Budget
Oct-09
Budget
Nov-09
Budget
Dec-09
Budget
Jan-10
Budget
Feb-10
Budget
Mar-10
TOTAL
FY10
After
FY10
Total
Project
Live Action VFX:
G-Force
G-Force 3D
2012 (Farewell Atlantis)
Cats & Dogs 2
Alice in Wonderland
Alice in Wonderland 3D
TBD (Avatar, Limpet, John Carter of Mars)
TBD - Spiderman 4
Subtotal
SPA:
SPA - Cloudy
SPA - Hotel T
SPA - Cloudy 3D
SPA - Smurfs
Aardman - Arthur Christmas
Subtotal
49,132
5,213
4,471
4,349
16,421
50
-
7,337
2,525
1,575
1,781
3,466
100
16,784
6,260
2,558
2,012
1,880
3,685
200
16,595
1,000
1,370
1,800
2,565
5,296
350
12,381
1,688
4,547
300
350
6,885
4,696
450
750
5,896
6,952
550
1,100
27
8,629
5,567
450
1,200
189
7,406
5,700
450
1,800
324
8,274
6,923
550
2,250
432
10,155
5,718
450
1,850
729
8,747
3,800
450
2,200
1,026
7,476
315
675
1,871
1,702
4,563
14,597
6,453
5,387
7,914
56,665
4,975
13,371
4,429
113,791
45,571
63,729
11,666
9,858
12,263
73,086
5,025
13,371
50,000
49,978
5,452
1,650
504
5,603
200
902
29
6,734
5,390
200
1,304
29
6,923
4,981
286
1,102
29
6,398
901
497
547
29
1,974
132
687
7
28
29
883
7
982
28
29
1,046
906
105
29
1,040
1,107
376
435
1,918
1,696
726
474
2,896
1,394
1,286
533
3,213
1,470
1,521
799
3,790
1,821
1,823
750
4,394
17,014
11,246
3,862
5,893
3,194
41,209
44,676
24,107
61,174
66,992
61,374
5,512
30,000
64,872
Other
-
Total Revenue
$23,518
Live Action
VFX
Green - Green Lit / Awarded to SPI
Yellow - Expected to be Awarded to SPI
Red - Not Awarded
Gross Revenue
$
95,991 $
$23,518
SPA
$18,779
Total
41,209 $
-
-
-
-
$8,859
$6,779
$9,675
$8,446
$10,192
$13,051
$11,960
$11,266
$8,957
$
-
155,000
Budget %
137,200
89%
4,429
13,371
-
4,429
13,371
3%
9%
113,791
41,209
155,000
100%
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
page 12
FY10 Budget EBIT Risks & Opportunities ($ in Thousands)
Risks
Opportunities
Net R&O
Imageworks
• Timing of awarded work - $10M shift, assume 40% EBIT impact thereon
• Additional work - $15M, assume 10% EBIT impact thereon
• Production execution risk - additional overtime/resources needed to deliver G-Force and Alice in Wonderland
• Real estate consolidation - opportunity if Smith is vacated before 3/31/10
• Albuquerque rebate - risk if NM recruitment falls short of target (50 vs 105)
• Recalibration of SPI variable facility load to SPA Films
$
$
5,000
(4,000)
1,500
(2,000)
500
(1,000)
5,000
(7,000)
7,000
-
TBD
(1,500)
500
TBD
(1,500)
500
500
(1,000)
1,500
(2,000)
500
(1,000)
Subtotal Imageworks
Animation
• Cloudy FY10 EBIT film peformance risk ($85M DBO vs. $65M DBO)
• Cloudy FY10 EBIT impact from additional variable SPI facility load of $2.5M
• Timing of Smurfs pre-release marketing spend
Subtotal Animation
TOTAL
(4,000)
(1,500)
$
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
(8,500) $
7,500
$
(1,000)
page 13
FY10 Budget Cash Risks & Opportunities ($ in Thousands)
Risks
Imageworks
• Timing of awarded work - $10M shift, assume 40% EBIT impact thereon
• Additional work - $15M, assume 10% EBIT impact thereon
• Production execution risk - additional overtime/resources needed to deliver G-Force and Alice in Wonderland
• Real estate consolidation - opportunity if Smith is vacated before 3/31/10
• Albuquerque rebate - risk if NM recruitment falls short of target (50 vs 105)
• Recalibration of SPI variable facility load to SPA Films
$
(4,000)
5,000
(4,000)
1,500
(2,000)
500
(1,000)
5,000
$
7,000
-
1,000
1,000
(5,000)
(5,000)
1,000
(4,000)
(12,000) $
8,000
(2,000)
500
(1,000)
(7,000)
Animation
• Timing of Development spending
• Recalibration of SPI variable facility load to SPA Films
Net R&O
1,500
Subtotal Imageworks
`
(5,000)
Subtotal Animation
TOTAL
Opportunities
$
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
$
(4,000)
page 14
Film Ultimates
CONFIDENTIAL -- Sony Pictures Entertainment Work Product
Cloudy with a Chance of Meatballs Ultimate ($ in Thousands)
-
0
-
-
-
-
-
-
page 16
Open Season 2 Ultimate ($ in Thousands)
page 17
Open Season Ultimate ($ in Thousands)
page 18
Surf’s Up Ultimate ($ in Thousands)
-
page 19
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