With or without Jobs, Pixar is fine

Should he stay or should he go now?

Apple Computer (AAPL) is reportedly pressing interim CEO
Steve Jobs for a decision on taking the chief executive post permanently. But if Jobs formally devotes all his energies to Apple, he would be leaving behind a prosperous, Oscar-winning animation company.

Just last night, Pixar Animation Studios (PIXR) received an Academy Award for the best animated short film. The company has received more than 15 Oscars since it was founded in 1986.

A cofounder of Pixar, Jobs has served as the

computer animation company's chairman since March 1991, as its chief executive since February 1986, and as its president since February 1995. He has split his time between Apple and Pixar since taking on the role of Apple's interim chief executive last September.

Jobs owns 30 million shares of Pixar stock--about 73 percent of the company. Based on yesterday's closing price of 34-1/4 per share, Jobs's stake is valued at about $1.03 billion. He does not receive an annual salary for his service.

The animation studio's stock has appreciated 60 percent since January 1 and beat expectations in its most recent quarter by a whopping margin. The company reported earnings of 9 cents a share, while analysts had expected profits of 1 cent a share, according to First Call.

Analysts say that if Jobs takes on Apple full-time, Pixar won't be missing out on much. For the most part, the company seems to be running by itself just fine.

"Pixar isn't labor-intensive. These are creative people [who] do their own thing. I don't see any impact on Pixar if Jobs [leaves to focus all of his attention on Apple], said Harold Vogel, an analyst at Cowen & Company. "Pixar has
leaders, it has a strategy, it has projects, and it has financing."

Vogel attributed Pixar's stock movement to expectations for the upcoming release of Toy Story 2, the sequel to the 1995 blockbuster Toy Story, scheduled for release during the 1999 holiday season.

Lawrence Levy, Pixar's chief financial officer, attributes much of the company's success to its expanded partnership with Walt Disney, announced about a year ago. Under the terms of the collaboration, Pixar creates and produces films while Disney markets and distributes them, an arrangement that ultimately gives Pixar a bigger chunk of the revenue generated from its films. Levy said that after Disney covers the cost of distribution and marketing, the two companies split the profits.

Pixar has said that it wants to build the greatest animated feature studio in the world. Through the extended deal, which includes five films rather than three, Pixar effectively joined forces with its most formidable competition.

"We have created an enormous branding opportunity for Pixar," Levy said, pointing out that creating stories and characters, not marketing and distribution, is at the heart of what Pixar does.

"Though Pixar will be keeping a much larger share of the profits from each picture, there's no assurance that every one of them will be a box-office blockbuster," Steve Jobs said in a June 1997 letter to company shareholders.

Indeed, the company's revenue stream has been uneven, coming in bursts after the release of a successful feature film, then sinking after those revenues start to fade. Levy acknowledged that creating great films is hardly a sure bet.

However, Jeffrey Logsdon, an analyst at Cruttenden Roth, said in a research report that he is attracted to Pixar because of the highly predictable success of the 1998 release of A Bug's Life, the theatrical release of the sequel to
Toy Story; the evolution of the company's relationship with Disney; and its development of digital transfer via laser technology to film production and distribution.

While Pixar has put a lot of challenges behind it by establishing the partnership with Disney, Levy added, "the real challenge now is to deliver great films. If we can pull that off, everything else is in place."

If Pixar can't "pull that off," the company's revenue likely will fall. For example, for the three months ended September 30, 1997, revenue was $5.3 million, compared with $13.5 million reported for the same period a year earlier.

"The decrease was primarily due to a substantial decline in Toy Story-related film revenues," said a quarterly filing with the Securities and Exchange Commission.

Jobs has tried to assure anxious investors: "I know the lack of traditional incremental growth from quarter to quarter, or even year to year, must drive some of our investors crazy," he said in his letter. "But our life is measured in pictures, not quarters, and we firmly believe we are creating long-term shareholder value as we build our studio into a unique and valuable entertainment asset."

The executive has been spending about two days a week at Pixar and is on the telephone with the company about six times a day, according to Levy. The company's management team is used to Jobs's absence, he said, noting that another of Jobs's ventures, his stint at Next Software, also distracted him from Pixar. Next was acquired by Apple in December 1996.

"We have a great management team and we know how to work together," Levy added. "Jobs spent way more time at Next than he does at Apple. We learned to deal with [his absence] long ago."

Jobs was included in the credits of Toy Story after a controversy over whether he deserved to be listed.

A Bug's Life, which is loosely based on Aesop's fable "Ants and the Grasshopper," is expected to be released this November. A third film is set to be released in 2000, but the company is keeping the project under wraps for now. Levy said it should be announced within the next couple of months.

Pixar's most recent Academy Award was for a short film called Geri's Game. The studio's sixth short film, it was the first to incorporate new technology developed by the company to create more realistic-looking skin and cloth.

Since the release of Toy Story, Pixar has more than doubled the size of its staff to 400, significantly increasing its capacity to make feature films.