Imax Corp (IMAX) 2003 Q4 法說會逐字稿

Welcome to this IMAX conference call. This call is being recorded. At this time for opening remarks and comments I would like turn the call over to Mr. Brad Wechsler. Please go ahead, sir.

Thank all of you for joining us today on our fourth quarter and full year '03 earnings conference call. With me today is my partner and co-CEO, Rich Gelfond, Frank Joyce, our CFO, and Steve Abraham, Senior Vice President of Corporate Development.

Before we begin, our lawyers have asked me to read the following forward-looking statement language. Our comments and answers to you questions on this call might include statements that are forward-looking in that they address future results or occurrences. Actual future results and occurrences may differ materially from these forward-looking statements. You should refer to our SEC and OSE filings for a more detailed discussion of some of the factors that could affect our future results and occurrences.

Our fourth quarter and full year '03 financial results were issued over the news wire in the form of a press release earlier today for all of you to review. The full text of the press release along with the associated financial tables are also available on our website, www.IMAX.com.

With that said, during today's call we will review our key accomplishments in '03, provide a financial and operational review of the fourth quarter and full year ended December 31 '03, and update guidance. Rich will then discuss how technology developments in the entertainment industry will drive our business in the future and the progress we have made in implementing our commercial theater strategy.

Before we go into the actual text of our conversation today, our speech today, I just want to announce that in the last day or so we have come to an agreement with Warner Bros. to release Catwoman, a day and date in summer of '04. Catwoman will follow Harry Potter. It will be day and date, and again it is an indication of our cementing a thriving relationship with Warner. And it is also a great choice from our perspective for a day and date zone. We expect it to be a large event zone. Its star Hallie Barry. And Warner Bros. has gotten behind the film significantly. And early indications from the studio and from testing is that we think this should be a very big film. And it should look great in IMAX. And we're very, very excited about it.

Before I walk through the numbers, I wanted to review the '03 accomplishments, and even start with a 30 second refresher on what the IMAX vision is. And it is really simple. Its when a family of four wakes up in Sacramento or Toronto or Cleveland and they have an opportunity to see Harry Potter or Star Wars they say, let's go see it at the IMAX theater. And they're willing to pay a premium price to do it.

We have used the analogy of Starbucks in the past, another analogy is flying first-class. Not everybody flies first-class, but it is a superior experience. And we think and increasingly the exhibitors and distributors also believe that people will pay more money to see the best films with the best sight and sound experience, and that is what IMAX is all about. It is clear to us that the consumers like the experience. They recommend it and that they will pay more for it.

So looking back at '03, excluding the refinancing costs that we incurred, our earnings were up at the high-end of projections at roughly 14 cents. We also refinanced our debt. We took aggregate debt down from 300 million to roughly $160 million, plus created additional liquidity in a $20 million line of credit. Our credit in general was substantially upgraded as both S&P and Moody's upgraded us two notches.

We also successfully released two Hollywood DM films, both Matrix films, one of which did about 15 million of growth and the other which did about $12 million of growth. Each one had high per screen averages. They have higher pricing, significantly higher pricing than 35mm pricing. And they gave could good economic returns to the studio.

We also introduced two lower cost projection system, the IMAX MPX. Today there are nine MPX systems in backlog. And this is a plug and play easier to use system that lowers the cost of entry for our customers to get into the IMAX business. We increased signings from 21 to 25. But when you cut through it, we really dramatically increased signings because of the 21 in '02. Five of those were sort of turn-ons, brief switches of Regal Systems that had left our system in the bankruptcy and came back on. And in terms of the new signings with new customers it was really 16 moving up to 25, which was quite an increase.

We have every anticipation that '04 will also be a year of great achievements for IMAX. Obviously there will be challenges. There will be challenges continuing our momentum, bringing DMR films into the IMAX network. They will be continued challenges creating more momentum in theater signings, particularly the importance of bringing the North American chains back into our business in a meaningful way. There will also be continued pressure on us to find new engineering solutions to continue to lower the cost for our customers to enter in our business. But we're very, very confident that a year from now when they look back, we will have released three DMR films, Harry Potter in June of this year, Catwoman in July of this year, and it is our belief that we will also be releasing Polar Express, another Warner Bros. film directed by Robert Zemeckis, with the voices of Tom Hanks among others, and in IMAX 3D, in the holiday season of '03.

We also believe that when we look back a year from now that we will have locked in several additional films for '05 creating greater and greater visibility for our exhibition partners. There are a lot of good pickings for '05. And whether it is a movie like Star Wars or King Kong, or Raiders of the Lost Ark, Superman, Batgirl, Batman, Jurassic Park, or Charlie and Chocolate Factory, which we mentioned in one of our prior releases, we think there are lots of target opportunities.

We also feel when we look back that it will be our third consecutive year of significantly improved profits. And that we will have installed approximately 25 new theater systems, again, a 25 percent gain over '03.

At this point I would like to walk people through some of the numbers that we have reflected in our earnings announcement this morning and also give them a little more color. As part of the repurchase of our old senior notes and the new issues of debt, we incurred significant costs in '03, both in connection with the refinancing itself and because we had to pay a premium price to call the existing debt. As many of you know, there was an accounting change that took effect last year that now requires companies to record these expenses above the line and no longer record them as onetime non-recurring items. Accordingly, we're presenting our numbers in a way that gives you a better picture of what is occurring in our business. For IMAX in '03 the sum total of these costs was $4.9 million.

With that in mind, let me review our reported results for the quarter and the year. For the fourth quarter, excluding the costs associated with the repurchase and refinancing of our notes, we reported earnings from continuing operations of 9 cents per share, which would compare to the 3 cents earned in the fourth quarter of '02. If you include the refinancing costs, which is how our numbers are presented in the financial tables in this morning's announcement, we had a net losses in the fourth quarter of 1 cent.

In the quarter total revenue decreased 19 percent to roughly $30 million compared to the fourth quarter of 2002, primarily driven by an expected decline in film revenues. Looking at our two major lines of businesses, system revenue was down slightly compared to last year's fourth quarter and film revenues decreased more significantly by 46 percent due primarily to the strong performance of IMAX's film, Space Station, in the year ago period.

Continuing down the income statement, gross margin for the quarter was 40 percent of revenue. SG&A was almost flat for the quarter at approximately 8.4 million, and R&D was just under $1 million during the quarter up from $700,000 last year as we incurred increased expenses tied to IMAX MPX system rollout. Finally, interest expense declined by more than $575,000.

I will now move on to our financial results for the full year, which like our results for the fourth quarter, include the costs of the repurchasing and refinancing of our senior note. For the year, and excluding the effect of these costs, we reported earnings of 14 cents per share. Including these repurchasing and refinancing and refinancing costs, again, as it is presented in the tables that were included with our press release this morning, we earned 1 cent per share.

For the year our revenues decreased by 8 percent to 119 million with IMAX system revenues increasing by nearly 7 percent as we recognized revenue on 20 theater systems consistent with guidance. Film revenues decreased by more than 30 percent, which again can be primarily attributed to the stronger performance of films distributed 2002, such as our extremely successful film, Space Station. Also affecting film revenues was the decrease in film post production revenues due to a higher volume of print processing in '02. Theater operation revenues increased by 7 percent for the year.

Our gross margin for the year was 44 percent of total revenue compared to 41 percent in '02. In terms of costs, SG&A decreased by 4.5 percent. R&D increased by 60 percent, primarily reflecting activities pertaining to the launch of the MPX system. And interest expense decreased by 10 percent also compared to '02, due largely to lower average debt balances during the '03 year.

Our balance sheet, which is also included with our press release, shows some of the effects of our senior note refinancing. However, as some of the transactions occurred right after the first of the year, our balance sheet as reported was slightly different than it is today. On a pro forma basis, assuming that all debt retirement had occurred by December 31, we would have had 116 million in debt and approximately 23 million in cash, again, consistent with previous guidance.

Moving on to future guidance, for all of 2004 we expect to install approximately 25 new theater systems for the year, achieve total revenues of between 135 million and 140 million, with gross margins expected to increase to between 48 percent and 51 percent of revenues. We expect to spend approximately 35 million in SG&A, and about 3 million in R&D. All of this to translate into earnings between 25 and 35 cents per share before bond refinancing cost, a little less than 800,000 that carry over from '03.

In terms of guidance on a quarterly basis, we expect to be roughly breakeven in the first quarter before giving effect to the 800,000 carryover from '03 for the debt repurchase and refinancing costs. In the second quarter we expect to perform slightly better and have stronger third and fourth quarters.

Specifically for the first quarter we expect to install 2 systems and have approximately 25 to 35 -- 25 to 30 million in revenue. We expect SG&A to be close to 9 million and R&D expenses of about 900,000 as we move the MPX system into full-scale production. And have interest expense of about $4.2 million, which is a good quarterly run rate for use -- for the use of the rest of '04.

Before I turn it back to Rich, I just want to speak briefly about a couple of things that give us confidence that we are on the right path. And to overstate it a little, besides the intangibles out there a feeling better momentum and traction with our exhibitors and our distributors, I would say it is research, research and more research. One of the things that IMAX has been doing over the last 6 to 9 months is very carefully tracking the response to our DXR strategy. We have qualitative research which indicate clearly that customers recommend IMAX DMR. They pay more for IMAX DMR. And they will continue to come back and pay more for it. That is shown in average ticket prices of around $8.50 in 35mm going to $11.50 for the IMAX DMR.

Also on the qualitative side more than 90 percent of the customers are saying they really, really love the IMAX DMR experience and are going to come back and recommend it to others. On the qualitative side, and very important to our studio and exhibitor customers, I think we have clearly and empirically demonstrated that IMAX DMR is noticeably additive to the pie. We generate incremental growth, which is exactly what these guys are looking for.

Finally, and to reiterate, our key 2004 goal is to hit or exceed our P&L targets. It is to continue to lower the cost of entry for our customers into our business. It is to sign 30 or 35 new system deals with emphasis on bringing in some of the North American larger exhibition partners. It is to continue our international expansion. It is to release three DMR films and create greater visibility into the '05 films. And on a very general basis, but also very, very important, to create a widespread acceptance that IMAX makes money for its partners both on the film side and on the exhibitor side.

And with that, I would like to turn it over to my partner, Rich, who will discuss how our strategy fits into the broader entertainment and technology trends and our commercial business model.

One of the topics I want to discuss today is where IMAX fits into the entertainment landscape with a rapid convergence of entertainment and technology. A major trend occurring across all mediums, and therefore impacting the entire entertainment industry, the increasing demand for higher quality, premium priced entertainment. The dramatic increase in sales of television sets with price heads well above $1,000 is a good indication that consumers are willing to pay more for differentiated entertainment experiences.

These changing consumer preferences are a direct result of advances in technology that present both challenges and opportunities for the entertainment industry. The development that was the most impact on the film entertainment industry in the near-term is the digital distribution of video and film technology. The consensus is that the studio film model will evolve to deal with the potential threat of digital piracy through the compression of film release windows. In other words, the theatrical release and the DVD release will be closed together, so the studio can sell DVDs before consumers buy pirated copies. Different technical challenges cause radical changes in the recording industry, which we have all read about.

Because of the changes in film entertainment, studios will need to release content across all platforms in a shorter time period in order to make a more rapid return on investment before widescale access to free pirated content becomes available. This compression and release windows could present an opportunity for IMAX, because the IMAX experience is so unique, and it allows studios to market their contents via the most impressive showcase on the planet in a much safer, piracy free environment.

We have discussed this point with most of the studios, and they seem to buy into this logic. We expect that IMAX business will become even more attracted to Hollywood studios as IMAX further establishes itself as a profitable release window for Hollywood films through the expansion of the number of theaters playing IMAX DMR products. Similarly, IMAX will become increasingly important to exhibitors as IMAX DMR demonstrates its ability to provide premium entertainment that will draw consumers out of their ever improving home theaters and away from their bigger and sharper computer screens.

IMAX DMR has already demonstrated that movie goers consider the IMAX experience premium entertainment. A great example is the power of IMAX Theaters to price for The Matrix Revolution. The average domestic ticket price for Revolution was $11.52 at IMAX Theaters compared to $8.50 in conventional theaters, a 36 present price premium. In some markets, including Chicago, Minneapolis, and Phoenix IMAX Theaters were able to charge premiums of more than $5 per ticket, while the premiums at IMAX Theaters in Las Vegas and Sacramento averaged over $6 per ticket.

IMAX DMR has also proven its strength at the box office. For example, both Matrix films at IMAX Theaters consistently generated a significant amount of the total gross box office for only a small percentage of the screens. Also noteworthy is that weekend over weekend drop off at the IMAX runs was far below industry averages. IMAX gave the film more legs.

For example, Reloaded never declined more than 15 percent throughout its first nine weekends at IMAX. And as Brad noted, our research show that the IMAX box office was additive to the overall box office. We anticipate that by 2006 we may be releasing as many as six IMAX DMR films per year, each playing on up to 150 screens. At this point it is feasible that studios could realize as much as 35 to $40 million of incremental gross, or incremental profits of up to $15 million per picture versus the fully loaded cost at that point of about $6 million, including the cost of print and some minor incremental advertising.

With our first contemporaneous releases, The Matrix Reloaded and The Matrix Revolution cumulatively grossing nearly $30 million at IMAX Theaters so far the economics are already profitable for the studio. This does not include the increase in ancillary revenues, including pay TV, DVD and foreign distribution, as well as the indirect revenue from helping to keep the film franchise alive.

This success drove Warner Bros. to identify a new slate of films for IMAX DMR release, including Harry Potter, a perfect franchise film for IMAX's core audience; potentially Polar Express, which would be the first 3D IMAX DMR film; Charlie and the Chocolate Factory, which we are waiting to be green lit for next year; and Catwoman, which Brad mentioned this morning, we will be releasing in July of this year.

Catwoman, which stars Academy Award winner Hallie Barry in the lead role, as well as Golden Globe winner Sharon Stone, and Law and Order star, Benjamin Brad, is on track for July 23rd day and date release for both 35mm and IMAX Theaters. Catwoman, which will debut on the heels of Harry Potter, should form a terrific one two punch of IMAX DMR films for the spring and summer of 2004.

We expect the Harry Potter release will run trailers to the IMAX DMR version of Catwoman, an important marketing tool that could significantly benefit the performance of Catwoman in IMAX and 35mm theaters. With the addition of this film, 2004 shapes up to be the strongest commercial release slate IMAX's has ever had.

The year began with Disney's release of Young Black Stallion, an original production which came out in late September. NASCAR 3D, The IMAX Experience, opens this coming Friday, followed by spring and summer releases of Harry Potter and Catwoman and ending, we hope, with Polar Express, which is slated to be a major Warner Bros. Christmas season release.

Others studios have taken notice of Warner Bros.' success and future plans with IMAX DMR film, and are currently evaluating how to take advantage of this powerful tool themselves. We feel very confident that we will see additional studios in our business in addition to our strong relationship with Warner Bros. In fact, in order to facilitate our relationship with Warner Bros., we unfortunately had to walk away from attractive projects with two studios.

Beyond DMR, 3D movies are also an important driver of theatre economics and theaters sales. And we're having strong success in attracting more and better titles here as well. We expect the popularity of NASCAR, which is the number one spectator sport in the country, combined with the awesome images and sound quality of IMAX 3D will draw a wide audience for our film, which I said is opening this Friday. The film, narrated by Golden Globe winner Keifer Sutherland, will launch in 68 IMAX Theaters making it the widest domestic release in IMAX's history.

We are also encouraged by the buzz the film has generated online. A staggering 90 percent of 26,000 recent visitors to NASCAR.com responded that they were interested in seeing this film. Contributing to the buzz has been the marketing campaign, which is one of most extensive in IMAX's history, including print advertising in every market opening the film, as well as a full-page ad in USA Today, TV spots on all NASCAR races, and lots of copromotion activity.

Importantly, the earlier reviews for the film itself had been extremely positive. Articles praise the film's spectacular visual display of emotion and excitement as well as the film's wide appeal. According to the Associated Press, and I quote, "the only thing missing is the smell of burning rubber and a cold beer."

IMAX has also worked over the years with prestigious partners, NASA and Lockheed Martin Corporation, to produce fascinating 3D space documentaries that have cumulatively grossed more than $350 million. The newest IMAX 3D space film which began production as announced last week is Magnificent Desolation. Scheduled for release in 2005, it will be produced by Tom Hanks and Gary Goetzman’s Playtone as well as IMAX. And it is slated for release, as I said, sometime next year.

We believe the appeal of this film, which chronicles the men who walked on the moon, will be very strong given Tom Hanks' involvement and the renewed interest in the space program and a returning to the moon. We also expect this will be another space film that plays at both commercial and institutional IMAX Theaters for many years. We think this film can potentially have a positive impact on our financials similar to one that Space Station had over the last several years.

Whether it is IMAX DMR or IMAX 3D what is important to note is that this is the content that consumers want to see and are willing to pay more to see, which is driving increased revenue opportunities for IMAX Theaters. The best way for IMAX to continue selling theater systems is to provide a strong return on investment for theater operators. Our IMAX MPX system introduced last year significantly reduces the capital and operating costs of an IMAX theater. What this plug and play system we estimate that a multiplex operators today can achieve an attractive return on invested capital with per screen IMAX attendance of about 150,000 people for new build theater and lower than that for a retrofit.

A deal we signed in the fourth quarter with the almost Yelmo Cineplex, a Yelmo Cineplex joint venture company in Spain for three retrofit IMAX MPX systems underscores IMAX's growth prospects beyond North America, where we have identified a market of 600 additional international theaters. The ability to show Hollywood movies in IMAX's pieces format was a major selling point and will be a major differentiating factor for Yelmo. We believe the ultimate success of these three theaters should translate into additional signings with multiplex operators in the region and beyond.

Another example of international momentum is the opening of the P Cinema (ph) IMAX Theater, our first commercial theater in China. I just returned from Shanghai about ten days ago where we debuted IMAX DMR with the first public showing of Apollo 13 in the country. Reactions to seeing a Hollywood event film in IMAX's format was overwhelmingly positive, which bodes well for further expansion in our fastest-growing market.

We're seeing high activity levels in international markets where there are greater number of potential locations, more fragmented markets and a higher level of investments in new complexes than in the domestic market. But we are also seeing an increasingly positive tone domestically. We believe that the level of activity we're seeing both internationally and domestically will translate into significant multiplex signings this year. Generally the tone of these discussions have been increasingly positive and importantly are materially better than discussions we were having as recently as six to nine months ago.

Since the introduction of the IMAX MPX last spring we met with virtually every major exhibitor, and in many cases are conducting follow-up meetings. It is our belief that these discussions will result in significant theater signings being announced in coming quarters. New theater signings are a leading indicator of IMAX's future profitability. A signing today becomes revenue. And as our backlog is installed, installations immediately become earnest.

The combination of more Hollywood film product and better economics for IMAX theater owners is translating into more signings. During the year we signed deals for 25 new theaters, 7 of which occurred during the fourth quarter. This is compared to 21 deals signed in 2002, 5 of which in 2002 resulted from the settlement of a bankruptcy litigation with Edwards Theaters.

As a leading entertainment technology Company, IMAX has introduced technology that has changed the way people experience movies. From the most compelling 2D and 3D films to the best presentation of live-action Hollywood event films. While we have been successful in the past, we continue to invest substantial R&D in order to remain at the forefront of technology and to use technology to improve our customers' business.

In conclusion, we are very excited about the future and IMAX's position in the evolving world of entertainment. Through technology we will continue to improve the moviegoing experience for increasingly demanding customers who will pay a premium for a superior product. The momentum is building as we continue to demonstrate the competitive advantages that IMAX provides Hollywood studios and theater operators. The combination of IMAX DMR and IMAX MPX is a very powerful one with compelling economics that have just begun to drive new theater signings. We expect a significant expansion in the IMAX theater network to translate into substantial increases in shareholder returns over the coming year and over the long term.

With that I would like to open the call to questions. Operator?

(OPERATOR INSTRUCTIONS) Eric Wold.

Can you talk a little bit about your revenue shortfall for Q4 '03 versus the guidance you gave originally, what has changed -- what changed from the time you gave that guidance?

I think the difference in guidance was in the $10 million neighborhood, Eric, and it came essentially from three places. The first one is the system that we expected to install in the fourth quarter slipped to the first quarter. We know that is going to happen in any given year. Had we installed that system rather than coming in at the upper end of the range we would have exceeded the range, instead that will be installed in the first quarter of this year.

The second thing is a kind of a technical point. When we did The Matrix Revolution for Warner Bros. we expected to bill Warner Bros. for a lot of the print work that was being done there, which was kind of a flow-through. Instead Warner got billed directly from the lab. So that was a fairly significant swing that had no margin implication for us. And the third thing is The Matrix Revolution did not perform as we expected going into the movie, so there was a little bit of a shortfall in our O&O theaters in particular there.

How much was that flow-through that didn't occur?

That was probably about 3 million.

On '04 guidance the revenue of 135 to 140 can you talk about -- maybe kind of give better color on the three parts of that between your systems, film and other and kind of what are the biggest moving parts that could shift those from guidance either below above or below?

Frank is going to give you the numbers, but before he does that, we're in two businesses the way to think about it, the systems business and then the film business. The film business can be extremely variable. I mean we are releasing the NASCAR movie. It is a very good movie. And the legs it gets is really going to depend on how it -- the way it picked up really in the NASCAR community, which is very difficult to estimate. So particularly on the film side -- I think we tend to be much more comfortable with our revenue productions on the systems side of the business. On the film side they tend to be more variable. And with that, Frank, why don't you go through the general breakdown.

Sure. First off we're expecting revenues in all categories to increase next year. And just broadly, systems revenues we expect to be in the range of about 90 million. Film in the range of around 30 million. Theater around 15, and all other would be probably in the range of around 4 to 5. So that is just a broad breakdown of the revenue.

One last question and I'll let it go back to the queue. On the installs for '04, previously you're talking -- I think the guidance was 25 to 30. Now you're saying about 25. Has that changed at all or is that just wording?

No, it is just wording. One of the things -- as Rich said, it is very difficult to get precise long in advance when you're dealing with people's construction schedules. And there's nothing significant that really changed 25 to 30 to 25.

Tony Gikas with Piper Jaffray.

Could you give us a couple of housekeeping free cash flow estimates for how that came out for 2003, and then the estimates for '04? Capex for '04? And then on the P&L could you just give us a little color on the two line items there, the income from equity, accounted investees and the receivable provisions?

Sure. Let me start out by giving you EBITDA for 2003 which is about 31 million. Included in that is about 12 million of depreciation and amortization, and about 1 million in terms of fixed asset write-downs. Capex for 2003 was about 5 million. About three of that are for film and two is for fixed asset type things.

I think your next questions had to do with recovery of receivable provisions. And I think 2003 and 2002 we experienced some favorable recoveries from accounts that we provided for in 2001 and earlier. And largely these things came about as a result of us negotiating with these clients and coming to favorable terms. So those recoveries were provided for in 2001 and 2002 coming through in '03 and '02.

Let me give a little more specificity on that, Tony, which is as the accounting world changes, and it changes moment to moment these days, the environment changes and the auditors are trying to figure out what their jobs are. That particular -- the bulk of the number that we have broken out, which we haven't broken out in the past, was in the 2000, 2001 period which is really sort of the time that there was the most pressure on the domestic exhibitors. Our auditors had asked us actually to take a reserve against our net investment in leases and some of the future minimum payments that were owed to us because of the turmoil in the exhibition industry.

What has occurred is that industry is restructured. Everybody has sort of come out a lot healthier. People are paying their bills. And the reserve that we took was reversed. Oddly enough, just the way -- because of the change in environment over the last couple of years -- when we took the reserves it was not broken out, and it was above -- sort of above the line in the general operational numbers. Now the way the accountants want us to present it, it shows up on that separate line in the summary P&L as a recovery.

I think there's one other item you asked for. In terms of the income from equity accounting investees, in the fourth quarter we were released from a debt guarantee that we had previously provided for, about 2.3 million, so that came through. And it was related to a joint venture, so that came through on that line.

And lastly, we had a recovery of an investment we had in something called Mainframe of about 1.5 million, which relates to the debenture investment we had with them in prior years.

Is there any way to plan for these two line items going forward? I don't have the reserve number in front me? Where does that reserve number stand?

It is impossible to plan, basically because we think it is just part of our normal operating business, and it has to do with a quarterly dialog with the accountants which go both ways.

Every year we take reserves too.

Richard Ingrassia with Roth Capital Partnerships.

I just wanted to get into guidance a little more on Q1, because if I am seeing it right, average revenue per install is trending down maybe a little under 2 by the end of this year from a little over 3 in '02. So if we go year-over-year comp on the theater operations at 5 million that means films in the 15 to 20 million area? Is that ballpark?

For the quarter? Are you talking about the -- I'm sorry I missed the question. You were talking about --?

For the quarter guidance of 25 to 30?

Rich, I think that what you're going to see in the first quarter is I think one of the deals that we talked about before that slipped from the first -- from the fourth quarter to the first quarter is a big deal. And I think you're going to see a higher than average value per system in the first quarter than you have seen the last couple of quarters. That's going to be piece of that.

So what makes that order bigger? Is it a multiple system?

No, you just have to remember that based on the type of system and the part of the world and the type of customer you will certainly get a variance in the value of any one given system.

And also remember that we going to the MPX system. So in the future you'll see more systems, lower value per system. But when we deliver out of backlog it may be a GT or a SR and it just happens to be a big theater in an international market.

Can you --?

And, Rich, also remember you have to include the maintenance and royalties in your calculation as well.

Right. With that lead in, can you break that out for Q4?

Break what out?

Which component?

On the systems side, break out royalties and maintenance from your up fronts?

Basically that is 70 percent. I will look for that right here, but that 70 percent of system number is for installations. Let me announce that later as I go through.

Why don't we take the next question?

Let me just ask on the revenues, are there lease settlements involved there like we saw last quarter?

There are always going to be lease settlements. Let me just talk a little bit about what that is. The way IMAX business model works is when we sign a deal, we get an upfront payment. And then we get ongoing progress payments as we're building the system or we getting ready for the installation. On occasion the third parties decide that they don't want to take installation, and it is generally for extraneous reasons. Like they couldn't get real estate approval.

To give you an example, one of the deals last year in '03 was in Beirut, Lebanon where they had given us -- they had paid as for the system pretty much in full. And then they decided that, I guess because there was a war going on there, it wasn't convenient to open an IMAX theatre. So we got all the money. The system was built, but they didn't open it up for their own reason. And that is the line that it is recognized in.

The analogy I use, Rich, is that something like Boeing net sales, big capital goods items, for whatever reasons third parties decide not to take them after paying a significant amount of the money, and that is what it is. You can't predict it, so when Brad said we are going to do 25 to 30 installs this year, some number of those will say, hey we're not going to install for our own reasons. But you guys have the money and we will just settle it. And it is shows up on that different line.

For purposes of communication when you say that many installs you're including a settlement of that kind as an install, right? Because it was in progress when --?

No, we are not there. On the 25 we are not.

My question should have been can you quantify what the lease settlement number was for Q4?

We going to announce that in more detail in our K, which comes out in a day or two. And I think that is probably the best way to do it.

Fair enough. Just one last quick one on the balance sheet. It looked like $5 million in fixed assets were reclassed to other? What was that exactly? I will take it off-line if you want. I'm sorry, it is a small --.

I'm not sure what -- we can definitely take it off-line.

Steve will call you back with that later, Rich.

Sounds good. Thanks guys.

Jeff Logsdon with Harris Nesbitt.

Can you go through the economics of NASCAR film? Where you'll make some money? And how we can judge that as -- in terms of box office numbers?

NASCAR was basically -- a lot of this is somewhat confidential so I am going to do it from 100,000 feet. But obviously it is a collaboration between NASCAR and Warner Bros. and IMAX. We all have money in the films but in different places, meaning some money is put in on the print, some level is put in as marketing, some money is put in as the negative costs and production costs. If IMAX -- we are distributing the film which is obviously a profit center. So I think in just rough, rough numbers I think from our perspective the film turns profitable at north of $15 million of growth, somewhere in the 15 to $20 million of growth level. But that is over again the lifetime of the film. And again with these be films we expect them to have legs.

I think you have some background on some of the prior IMAX 3D films and how they have done. I think Rich mentioned some of the space films that have done very, very -- knocked out real numbers. And you look at the top end, and I'm not suggesting that NASCAR is going to do $100 million, but T-Rex did do $100 million. Galapagos did $20 million. Cyber World did $25 million so far, and they are still in circulation. Santa in 3D, which is released for six weeks every year, is now at $12 million, and will be released next year, just to give you some context.

The other place where you get a little play on it is through our owned and operated theaters and through our royalty in the third party theaters. So there is not a lot of downside there, but should they perform there it is some upside, particularly at our O&O theaters.

Secondly, systems and backlog at the end of the quarter or end of the year?

61 systems at the value of about 138 million.

Can you be a little more specific, if we're going to do one or two in the first quarter how that plays out. Because it seems like you have shifted the earnings expectations to the back half of the year. Should we be shifting our expectations relative to theater openings to the back half of the year as well?

I don't think we have ever shifted our expectations. If you look at the way this year came out it was very similar. I think we are incredibly optimistic about this year going forward. I think it is just a question of the way the delivery schedule plays out, and that is just a mathematical formula. You look at deliveries and the quarters they are coming out in. But I think all the pieces are really fitting together right now. And I think if you look at '02 versus '03 versus our projections in '04, we're extremely positive.

Okay then let's change the phraseology. How should we be mapping out delivery schedules through the year?

I think we gave you the guidance that we're comfortable giving right now. One of the problems we have is as the system gets delivered on March 31st or April 2nd, it could cause a 3 or 4 cent swing in a quarter. And that is why -- we're not playing games, we're just trying to be deliberately ambiguous by saying we expect to be around breakeven in the first quarter, slightly better in the second, and then better in the third and fourth. Because when we look at this tool of moving parts, that is the best we can do.

And I think to say X in the first and Y in the second and Z in the third, I think Steve did talk about the first, or Brad talked about the first. But I think we are uncomfortable giving additional guidance beyond the first.

And I guess the way I would answer it is while we transition our business model from one that focused on institutions to want now a Hollywood commercial market, which has significant consumer acceptance, and while that is going on our earnings in aggregate -- I don't know if they're literally doubling every year, but basically we're talking about earnings of roughly 25 to 35 cents a year. It is hard for us to pinpoint the quarter that an installation is working -- that is going on.

But at the same time our gross margin in the business are going up. The transition of the business model is succeeding. Our earnings are on a very, very positive trajectory. And it is hard for us to nail down exactly what delivery is going to happen in what quarter. We have our internal productions but we don't everybody writing that there is four installs in this quarter and eight in that quarter. And then when it doesn't happen because one moves, everybody is shocked and appalled.

Lee Westerfield from Jefferies & Co.

I have three questions, if I may, and hopefully relatively quick ones. First the systems outlook for -- the installation outlook for 2004, can you give me some insight as to how the mix will shape up in terms of refits, new locations and how many domestic versus international out of the 25 that you are marking for the year?

I'm sure we don't have, Lee, on our hands right now for the systems breakdown. We may have domestic.

We will answer that offline. But the nature of our backlog and the trends that we've been seeing I think we are going to see again a somewhat consistent skew towards international. We would like to see a pickup of the momentum of the signings domestically, particularly with the North American exhibitors. But the backlog has been internationally skewed over the last couple of years, which turns into systems installations obviously.

And then one question to clarify on the film revenue for 4Q 2004. Between distribution and postproduction revenue, the portion of the revenue recognition I think that you changed in terms of accounting policy, did that impact postproduction or distribution? And was it all directly related to Matrix? Was there anything else involved in that accounting recognition?

Let me answer it and then Frank can correct me if I'm wrong. But the accounting policy is -- the reference -- this is an old accounting policy from a couple of years ago when you went into having to expense marketing. And so that would all be on the production distribution side. There isn't not a change of accounting policy with respect to post production. Frank, correct me if I'm wrong.

Correct. If you're referring to revenue swing earlier, it was postproduction. It occurred in postproduction the revenue swing.

The revenue swing, it is not in our accounting change.

There has been no accounting change.

Correct.

But the revenue swing was related to postproduction?

The revenue swing was because -- no, it had nothing to do with accounting. For the Matrix film we were supposed to rebill Warner Bros. for the cost of the print and some postproduction services. But instead of rebilling them, they paid the lab directly.

Because of their longer relationship, they went -- Warner's went to the lab directly.

So it didn't flow through our financial statements. There's all. There is no accounting in any of this.

And that leads to the first third question which is for Harry Potter and now for Catwoman, and I suppose potentially for Polar Express. Is it your anticipation that Warners would release directly to their own print lab, and therefore your revenue guidance for the year actually would be probably more optimistic on your core revenue streams. How would the Warner Bros. relationship be working for those two or possibly three films for this year?

It is interesting question. But again when you lower your revenues that are zero margin, your margins in the business go up and the revenues goes down. Right now we're trying to work it out. Again there is more operational not financial -- is with the film supplier, CFI, and with studios like Warners or Fox or Universal or whatever -- and business with what is the best way to continue to get the print cost down? I don't think it is a matter of importance to us if we're sending zero margin revenues through our P&L.

Frank, was just going to get back up to Rich Ingrassia with an answer to his question I think.

Hi, Rich. In terms of total systems revenues, maintenance, royalties those things were about 6 million. The balance for installations about 14, making a total of about 20.

Next question please.

Morgan Ruttman (ph) with Harvest Management.

A couple of questions. I was confused. I thought at one point someone said 25 to 30 installs in '04 and at another point someone said 30 to 35. So is it --?

It is 25 to 30 installs and is 30 to 35 signings.

Got it. And then you went through the analysis of what you could envision '06 looking like with 150 screens and 6 pictures per year, 50 million a picture, 300 million total, was that the --?

It was 35 to 40 a picture, Morgan.

35 to 40 a picture. So at 150 where are we now on a commercial release? Like on the last few commercial releases what is the total number of screens it has been?

75 to 100.

Is it really 75, or is it really closer to 100, because that --?

I think Matrix Revolutions was 100.

What you're really talking about is another 25 to 35 installs in '04 and '05 that would show commercial fare?

Yes, but again, I wouldn't read too much into it. Just for a poor digression (indiscernible) Allen Greenspan and reading (indiscernible) tea leaves. I think we're trying to be somewhat conservative, Morgan, and to point out that without a significant amount of growth it would be a lot of money in this with studios.

That's what I was trying to get at. I wanted to see whether or not it indeed, given what you're talking about in terms of what you're seeing in '04, it is not a stretch to get to 150 by '06?

No, and in fact, just our NASCAR move is opening domestically on close to 70 theaters. And when you add the international that film can play in 80 or 90 theaters.

Right. What kind of -- when you look at '06 and you say cummulatively it could be somewhere 250 to 300 million gross to the theaters -- in gross. When will we start to make money on a real basis on commercial fare? Is it at that level?

When you say we, when does the IMAX Corporation --?

Exactly.

The answer is, Morgan, it depends on a few things. It depends on the deal we make with the studios. It depends on what our royalties are versus the minimum. The overall performance of the theater. It is just hard to say exactly at what point margin marginal profit kick in. The answer is yes, you would make money at that level, but it is hard to quantify.

I guess I'm looking for some guidance -- at upwards of 300 million in gross commercial fare does that start to become something that moves the needle on an earnings per share basis?

I know how you're getting 300 -- you said 35 to 40.

So it is 250 million then? 240 million.

We haven't quantified it that way, Morgan. The answer is you will start to make money, we just haven't quantified what it is.

Morgan, This is Brad. I think there are two ways that we look at it. One is right as -- right now in DMR we're basically providing the DMR function at cost for the studio. We're not making any money on DMR. The studios aren't making a ton of money. They're making some money. They're making a few million dollars. But they are seeding an ancillary business to try to get to the direction of what Rich described, where in a half dozen films, maybe they can make 15 to $20 million of incremental film rental, not including the value they're going to get from international television or international pay-TV as they get their output deals. As the gross goes up, they will make more money.

So as that occurs two things are going on. One, our network is growing and we're making our $1.5 million per system, or whatever it is, as the theater network grows. And the other thing that is going on is that as the studios are making $20 million, or 15 to $20 million per film, IMAX in essence can begin to charge more than and make more on the conversion process. We won't be giving it away. We will be sharing in the upside in one form and another of the films.

Because what is going to happen is Fox and Universal and Warner Bros., they are going to be fighting for beach front real estate. What is that? That is the May releases, the June releases, the Thanksgiving releases, the December releases. Because that is when they can make the most money and they can help themselves the most in terms of getting their film out in front of people in IMAX, which will help them sell their ancillaries. And we will have -- we will be able to sell some of that beach front property because we control that. And I think that is what happens as you see network economics occur when you hit critical mass.

I understand that. Just to reiterate, we have essentially a monopoly on the DMR conversion. Any DMR converted film can only show on an IMAX theater? Is that correct?

Any DMR film that we convert we have a legal ability to restrict the exhibition of that film to IMAX Theaters only.

To your knowledge is anybody else working on a process of conversion like DMR, or is that something that something that --?

Not in live-action, in animation, which is a much easier and forgiving process. For example, Disney has done it already. We have done it and Disney has done it. but not in live-action.

You can't come, Morgan, even though we have said before that is an important factor, much more important factor is the brand. Because if someone even could do it -- I mean a big deal is a big theater, but they don't get a price premium. It is saying you're seeing it on IMAX this really integral to generating the price premium and the traffic.

And Brad alluded to our research data a little bit. But the IMAX release is a really powerful marketing tool for the film. And if you look at data like repeat visitation, how much people like the movie, so much of it was tied to the IMAX release. And that is all goodwill that is enduring to the brand. So beside just the technical lock, which is an important point, the brand lock in longer term I think is even more important.

I certainly agree. Last but not least, is there any reason to think that in '04 the EBITDA margin should be materially different than '03? If you calculated in out it is about 25 or 26 percent right in '03? Is there anything that structurally should be different in '04 so that we couldn't look at it that way?

No, I think that -- we don't foresee anything that is structurally different.

Capex is still going to be in that same 5ish million range in '04?

That's fair.

We going to go for about another five or ten more minutes.

Jessica Brewer (ph) with Credit Suisse First Boston.

Actually my questions are on the '04 guidance, and they have been answered. Thanks a lot.

Ken Silver with CRT Capital.

Just a couple of housekeeping things. Fourth quarter depreciation and amortization? Do you have that number?

Yes. It is a total of about 4 million.

And you said EBITDA was 31 million, Frank, earlier on the call?

Right. Actually fourth quarter should be 4 million in depreciation amortization, about 1 million in write-downs, if that is helpful to you.

Yes.

I did say 31 million for the full year.

I'm just trying to -- I got a lower EBITDA number of like 28. I guess it is a big enough difference. Let me just run through my numbers quickly with you. (multiple speakers)

For that kind of thing, could you do that off-line please?

I think a lot of people on the phone call what to hear his answer.

We can't generate a line by line --.

Alright fine. Going forward can you guys include in your press release the depreciation numbers, because everybody keeps asking about it? And I think it is a number people want to see before the conference call.

Sure. We can do that.

In terms of the '04 guidance, the gross margin was like -- you said 48 to 51 I think?

Yes.

Why is it higher than '03?

It basically has to do with the mix of films and systems. And some of the lower margin film revenues doesn't go up, your mix of margin heads higher. That wasn't actually very articulate. But the film revenues will be lower on a relative basis to '02. So therefore you will see higher the higher margins coming from our systems business.

So systems in a bigger part of the revenue mix for you?

Yes.

That make sense. I missed what you said about Polar Express. Is this an animated movie?

Yes, that would be -- this is something that actually we and Warners have indicated that we are very interested in doing with each other and we are in the process of doing some testing with Sony ImageWorks right now. It is a -- Robert Zemeckis directed an animated film used using 3D CGI. And because of our technology, our 3D technology, we can easily take that data and turn that into a 3D film where the characters really come out and extend into the audience and fly out over the audience. And we think the test looks great. And we are in the second round of doing sort of finalization of tests. And I guess -- I hope to announce that soon as our firm Christmas release for this year.

To put it context, think of Finding Nemo with the fish swimming out into the audience. We think kids will go crazy about it. Polar Express is a very popular book. You've got Tom Hanks as may be the the popular male actor. Demecus' big Christmas movie -- big marketing budget. It is not finalized, but if it all comes together, we think it could be very, very helpful to our entire efforts.

Is there a possibility of a Thanksgiving release or it would run into this movie, so you're not going to --?

Actually this movie is scheduled for a November release. My expectation is it is going to have a long run.

Marla Backer with Research Associates.

A couple of questions, and one is actually pertaining to Polar Express. Because you're talking about conversion for 3D conversion, would the price of converting be more than we have talked about historically for the other films that have been DMR?

Yes it would. The price of conversion would go up. We have an expectation that the revenue would cut up significantly. And not that it is worth much because it is just crystal ball stuff, I think Rich and I believe that 3D conversions will be even profitable for the studios than 2D conversions. It is so unique. It is so cool. It is amazing.

I agree. I'm sure it would be a great film. You talk about the intention or the goal doing three DMRs in '04. One, we already have Harry Potter in the pipeline, now we have Catwoman. It is baked into that third number, is that Polar Express?

That would be our expectation. It could be others, we are -- Rich and I were in California last week. It is too detailed for a call like this, but we were walking around taking, I think, five studios through some of the research findings that we have been doing over the last several months, just about the additive nature of the IMAX release. And not only -- obviously talent and the directors love it but it creates the event status for the film.

But Warner Bros., part of a big company, at the end of the day Warner Bros. wants to make money. And they are not interested in making $2 million a film they are interested in making $20 million a film. And our research is showing that we're making incremental profits for the studios. And we are like traveling salesman, we were just educating people with respect to the empirical data last week. And so it is not just Warner Bros. there are a number of different studios that are highly interested in what we're doing.

Let make sure I understand. Potentially, if you don't get Polar Express, there could be a disappointment in terms of your three DMR goal?

Potentially. But we are talking to other studios, we're not betting the Company on Polar Express. So we're discussing other projects. And I don't know if you have caught it during my comments that we had two other potential movies for the Catwoman slot. So if Catwoman didn't happen, we would not have had a second summer movie. We would have had a second summer movie. So we're talking to other people about that slot also. So if that doesn't happen -- is it guaranteed, no, but our expectation would be that there would be something else in that slot.

Okay. Can you tell us in terms of -- I am switching gear now and going to the theaters that were opened in '03. Can you give us the number of theater closures?

In '03?

Yes.

I don't have the number off the top of my head. Steve will call you.

Can you also just attach a -- I don't know if you gave this number already. I apologize. But the 25 signings, is there a dollar number attached to that?

There is. Frank, do you have it?

I do. It is about 41 million.

The last question is housekeeping. The R&D of 900,000 for the first quarter on the guidance, did you say that represents a good run rate going forward?

That is higher than the run rate. I think we're talking about an aggregate R&D expenditure of around $3 million for '04, which is a little higher than in the past because of our -- two reasons. One is flipping the MPX out of development into production, so the finishing up on the MPX. And also our feeling that it is important to continue to bring the price down -- the cost of entry into the IMAX business, which is in and around MPX and making it more user-friendly.

One last question please.

My last question is, this would be obviously a good problem to have but Harry Potter comes out in June, correct? And then Catwoman comes out a few weeks after that?

No, it comes out end of July.

End of July, okay. So it is several weeks between the two films.

Like seven or eight weeks.

Thank you.

Just one last question, operator.

Abis RatineKash Rangan (ph) with Wachovia Securities.

Just a couple of clarification questions. You haven't talked at all about a retail initiative. And I know you had some press releases out earlier this year also with Warner Bros. about branding IMAX on retail.

And also on the backlog, can you give us any guidance as to what -- if you can hit all these goals what you think your backlog might look like end of Q1 or end of 2004? And I realize, I'm not trying to pin you to an exact number, it is impossible to do that, but maybe a range.

In terms of retail, I think what you are referring to was the fact that we had licensed Space Station to Warner Bros. home video.

Yes. And if I understood it, you wanted to also license some other successful IMAX titles as well.

We have done that -- actually we have done that in the past, again with Warners from the library titles. Actually right now there are two or three titles that -- we're not locked into Warners, and in fact because of talent relationships and other relationships, I think it is likely that the home video in the so-called retail will go out with other studios other than Warner Bros. And we're in conversations with some people right now along those lines. On the backlog --.

On the backlog, we don't give specific guidance on the backlog. But suffice it to say we expect it to grow next year.

You expect the backlog to grow both in number of systems and in dollar value?

Yes.

Rich, you want to wrap up?

I would just like to say that when you go kind of off to a little bit above the ground and you look at 2003 and you look at 2004, in '03 we said we would introduce day and date releases. We said -- which we did with Matrix Reloaded and Revolution. We said we would prove people would pay more and drive farther, and the did. We said we would prove that they would like the experience. They did. We said we would get more studios interested, and we have. We said we would begin to delever our balance sheet. We significantly deleveraged it. We said that we would try and refinance our notes which were due in '05. We refinanced the notes. We had the losses (indiscernible) overhang, which those of you long time investors know, there were 10 million shares out there. They seamlessly went into the market. We said we would launch a new projection system, we did with MPX. And we sold nine of something that didn't even exist in the first year.

So I think looking -- we said we would earn 10 to 15 cents on an operating basis, and today we reported 14 cents. I think when you look back on '03, of course, Brad and I are among the largest shareholders. We always wish we had done more. And do we wish instead of two movies there were four? And do we wish that there were theaters signed? Of course we do. That is what drives us going forward.

I think going back in time, it was an incredibly successful turning point year for IMAX. I think now that we go to 2004, and Brad talked about this at the beginning, what we really want to do is get more international and domestic exhibitors to sign on to MPX, and I think we will.

We want to get at least three releases. And if you back to last year as good as the Matrix properties were, they were both R rated films. And I think that precluded a certain aspect of our audience from attending them. So I think this year we have films with more widespread potential, as we said during the call. I think we're excited on an early basis about the NASCAR release. We're spending a lot of time, as Brad alluded -- you know, you are all on the inside of this story, so your reaction is, why isn't this faster? And one of the answers is, this is all real-time. You've got to get the data out to people. So in addition to visiting the studios and presenting the data, over the last couple of months we had been on the road visiting the exhibitors and presenting the data. And the reaction to all this is, wow, this is pretty positive.

So I think from our point of view the story that we outlined a year or two ago is evolving really nicely, very much on target. We are more inpatient than anyone else on this call. But I think in '04 a lot of it is going to start to come together in a way we all hope. And with that, Brad, I don't know if you have anything to add.

No. I think that was a great summary, and speak to everybody soon. Thank you bye-bye.

That does conclude our conference call today. At this time I would like to encourage everyone to disconnect and have a good day.