As I am fond of doing, let's step back about 17 years to early 1999, when Pixar released their 1998 annual report. 1998 was an exciting year for Pixar. Early in the year it won an Academy Award for its short film
Geri's Game, and in November they had released their second feature length film,
A Bug's Life. The film was an immediate success, opening at #1 in late November with over $33 million and going on to be the 4th highest grossing film of 1998 with over $363 million worldwide. But looking at the annual report you might not believe it - revenues declined almost 59% to $14.3 million from $34.7 million in 1997, and net income dropped over 64% from $22.2 million to $7.8 million. This was because Pixar hadn't received any revenue yet from
A Bug's Life, and according to the
Co-Production Agreement with Disney, Disney was allowed to recover all marketing and distribution costs before any remaining revenue was shared equally between the two. Pixar didn't expect to start receiving money from
A Bug's Life until the second half of 1999.
Annual reports are full of lots of interesting details. Here are a just a few in Pixar's 1998 report:
- As of January 2, 1999 Pixar had a total of 427 employees.
- As of March 19, 1999, Steve Jobs owned 30,000,001 shares, or 65.8% of
all outstanding shares of Pixar. John Lasseter, the Executive Vice
President of Creative Development owned a little over 1 million shares
(2.3% of shares outstanding) and Chief Technical Officer Ed Catmull almost 613,000 shares, or
1.3%.
- Pixar was busy working on its new Emeryville headquarters. The company had spent $21.2 million through 1998 on the new studio and expected to spend another $38 million in 1999 and $19 million in 2000.
The annual report also gave a nice summary of Pixar's filmmaking process, stating the process was very iterative and required continued re-working of each film. The report stated the process was divided in 4 stages: Creative Development, Pre-Production, Production and Post-Production. It also discussed their
digital backlot, which they equated to a traditional movie studio backlot. For Pixar, it encompassed a database of their digital models that Pixar stated could be used multiple times in future films and other animated products. They also went into their core technology components, consisting of:
- Marionette - The in-house developed system used for modeling, animating and lighting. Also known as Menv, Marionette was replaced by Presto, which was first used on Brave.
- Ringmaster - A complex, distributed system used for scheduling and tracking their animation projects. A key piece of functionality in Ringmaster was its ability to coordinate and schedule the processors in Pixar's render farm.
- RenderMan - The company's award-winning rendering system. Not only does Pixar continue using RenderMan, Pixar licenses it to other studios and third parties, and it has become the de facto industry standard for rendering. RenderMan licensing generated revenues of approximately $3.8 million in 1998.
If you've never read an annual report, companies always include a section on the risks involved with their business. Pixar was no exception, and the report detailed how difficult it was to be successful in creating animated films:
It is rare for animated feature films to achieve extraordinary box office success. We believe, based on available information, that there is a reasonable basis to conclude that of the more than 40 animated feature films introduced since 1990, only two films generated domestic box office revenues greater than A Bug's Life and Toy Story, and both of those films were produced and distributed solely by Disney.
I actually found 3 Disney films that had been released in the 1990s and had done better than
A Bug's Life and
Toy Story -
Aladdin ($217 million),
Beauty and the Beast ($219 million) and
The Lion King ($423 million).
While also demonstrating the risks involved, this next quote shows just how powerful the Disney and Pixar films were in regards to their competition:
During at least the last five years, we believe The Rugrats Movie is the only fully-animated feature film (other than Toy Story and A Bug's Life) produced or developed by a studio other than Disney that has achieved more than $100 million in domestic box office revenues.
The Prince of Egypt also was released in 1998 and went over the $100 million threshold, making a little over $101 million. The report pointed out though that the animated world was changing and competition was intensifying:
While
the release of A Bug's Life was extremely successful, achieving
domestic box office revenues over $160 million as of March 28, 1999,
Antz, The Rugrats Movie and Prince of Egypt achieved domestic box office
revenues of over $91 million, $100 million and $99 million,
respectively. These three films were released during or near the 1998
holiday season and directly competed with A Bug's Life. Each of these
films was more successful than any preceding animated feature film not
released by Disney or Disney and Pixar.
Another section of risks covered availability of key personnel and the possible impact to the schedule of upcoming films:
In addition, John Lasseter, who, while directing A Bug's Life, was providing creative oversight for Toy Story 2 in his role as Executive Vice President, Creative, has now transitioned to the role of Director of Toy Story 2. Using the personnel of future films to meet the immediate deadlines of films nearing release, as we have for both A Bug's Life and Toy Story 2, may have the long term impact of pushing out the targeted release dates of future films, increasing film budgets, and adversely impacting our ability to generate creative concepts for subsequent films on a timely basis. [. . . ] Although we cannot provide any assurances that Toy Story 2 or Film Four will be released on schedule, the targeted release timing of mid 2001 for Film Four is particularly uncertain.
Film Four referred to
Monsters, Inc., whose name had not yet been officially announced, and it in fact did end up getting delayed until November 2, 2001.
In all, Pixar spent 14 of their 71 page report discussing all sorts of risk factors in investing in the company. And this is for a company I consider fairly straight-forward to understand and analyze! I love a company with a simple-to-understand balance sheet that actually has a significant amount of cash, not one with millions of dollars of goodwill or intangibles. A company with a straight-forward cash flow statement where cash from operations exceeds net income. Granted, there were risks in investing in Pixar, but to me, the largest of those risks was easy to understand - Pixar revenue was driven by film releases, and since they weren't releasing films on a consistent basis it led to very lumpy earnings. I could look at the income statement and immediately understand why revenues in 1998 dropped 59% from 1997 - the majority of film, video and merchandise revenue from
Toy Story has been collected, and revenues for
A Bug's Life hadn't started flowing in. So while this "lumpy" behavior might scare off analysts and people looking for consistency, to me it made sense. With their sizable stockpile of cash, there was little risk of going bankrupt. It was just as unlikely that people would
all of a sudden stop wanting to see family friendly films. To me, the only question was, would their future films continue to be successful? From what I had experienced, read and heard, that question was easy to answer. I had confidence Pixar would continue to generate excellent films, I just had to be patient. And in the periods between films, if the stock price began rising too much, like it did in the summer prior to the release of
A Bug's Life, I could take some profit. Or, if the price dropped like Pixar would never create another film again, like it did immediately before the release of
A Bug's Life, I could buy more shares. Pixar was not a company for investors looking for consistency but one for the patient investor. It was one of my most enjoyable investments, and actually still is as I continue to own the Disney stock I received when Pixar was
bought out by them.
One of the best parts of being a Pixar investor in the early years was the cool merchandise the company sent with the annual report. As I mentioned in my
post for the 1997 annual report, I received a VHS copy of the short
Geri's Game. For 1998, I received 2 posters, one celebrating the release of
A Bug's Life with Flik floating on a dandelion (shown at the top of this article), and the second teasing their next film,
Toy Story 2 (shown below). These posters were large and beautiful, I think 16" x 40". Even after only 2 films, I had become accustom to the extras Pixar put in their works, such as the bloopers at the end of
A Bug's Life. So as I analyzed the poster trying to figure out the roles of the new characters (remember, back in the late 90s, in-depth coverage and fan sites weren't as common as they are now!), I noticed tiny Flik waving from the grill of RC!
