Imax Corp (IMAX) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the IMAX conference call. This call is being recorded. At this time I would like to turn the call over to Mr. Brad Wechsler. Please go ahead, sir.

Thank you operator and a very good morning to all of you. Thanks for joining us today. Here with me today is my partner and Co-CEO Rich Gelfond. Also here with us are Frank Joyce, our CFO; Steve Abraham, our Senior Vice President of Corporate Development; and IMAX's new Director of Investor Relations Cheryl Cramer, who has just joined us. She comes to us most recently from the entertainment technology company Sirius Satellite Radio where she held a similar position.

Before we begin, let me remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking in that they pertain to future results or occurrences. Actual future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and occurrences.

Our second quarter 2004 financial results were issued this morning in a press release for your review. The full text of the release, along with supporting financial tables, is also available on our Web site, www.IMAX.com.

With that said, this morning we will briefly walk you through our financial results for the second quarter and update you on our substantial recent progress with the commercial exhibitors and Hollywood studios.

Those of you who have followed the IMAX story know that 2004 is an important transitional year. Several years ago, we set an ambitious goal -- to reposition IMAX theaters as a premium priced destination in the commercial entertainment marketplace.

Implementing this commercial strategy demanded we do two things. First, we needed to secure a compelling slate of Hollywood films, whether that the Harry Potter, Spiderman 2 or The Matrix. Second, we wanted to develop a newer, simpler and more cost-effective projection system which would be even more compelling to take to the large exhibition companies. As a result, the 2 key measures of our progress, which you have all been monitoring closely, are film releases and new theater signings -- particularly the North American exhibitors.

We have told you in the past that bringing in the North American exhibitors is critical to our future and today we have realized that goal. We have just signed agreements with 2 of the top 10 domestic commercial exhibitors. And we recently released the IMAX DMR version of a Blockbuster film from Sony Corp., one of the top Hollywood studios.

Now, halfway through the year, our commercial strategy continues to take root. And on today's call, we will share with you the continued evidence of our business momentum.

Before we go into the details of these exciting developments, I would like to turn briefly to our financial results for the second quarter.

We reported earnings of 4 cents per diluted share, in line with our guidance and at the high end of the First Call range. This included a gain of 0.5 cent from discontinued operations. Excluding this half cent, earnings for continuing operations were 3 cents per diluted share.

Total revenue for the quarter was 31.7 million, also in line with guidance. Looking at the components of our total revenue, systems revenue was $20.5 million, down from 22.1 million in the second quarter of 2003, as we recognize revenue on 5 theater systems in the second quarter of this year versus 6 in the year ago quarter.

Systems revenue for the quarter includes $2.2 million in revenue related to amendments, terminations, or other changes in lease agreements which results from accounting rules that dictate we book certain revenues upon the termination of or significant changes to lease contracts.

Approximately 1.6 million of this 2.2 million relates to contracts with 2 existing customers that chose to substitute IMAX MPX systems in lieu of previously ordered systems. The 1.6 million represents the difference between the significant cash we've already received for the higher priced system and the contract value of an IMAX MPX. It is important to remember that these 2 systems will remain in backlog. And we will recognize the new value of these contracts when they install.

In the quarter, the remaining 600,000 relates to cash that we received this quarter for two leases that were terminated last year. We expect to continue to book revenues each quarter relating to amendments, terminations, or other changes to lease agreements that occur in the ordinary course of our business, particularly as customers substitute lower-priced MPX systems for higher priced systems where we have already received significant cash payment.

As we said on our last call, the timing of these transactions and the level of revenues and income associated with them is often difficult to predict, since numerous factors -- including, for example, theater geometry, operating costs and the size of the projection booth -- go into a customer's decision about what type of system to install.

Film revenue for the quarter was $6.6 million compared to 7.5 million in the year ago quarter. A decline in postproduction revenue, tied to lower print production revenue, which is essentially a pass-through low margin business, was only partially offset by increases in film production revenue for Harry Potter and in the film distribution revenues for NASCAR 3D.

Theater operations revenue grew slightly to 3.8 million in the quarter from 3.6 million in the year ago period. Other revenue declined to 900,000 from 1.2 million, also in the year ago quarter. Gross margin was 14.6 million, or 46 percent of total revenues, compared to 14.3 million or 41 percent of total revenues for the second quarter of last year.

Turning to expenses -- SG&A for the quarter was 8.6 million, essentially flat versus the 8.5 million reported in the second quarter of 2003. R&D expense declined to 0.9 million from 1.2 million in the second quarter last year, as most R&D relates to the development of our MPX system.

We ended the quarter with 17 million in cash and cash equivalents, down from 23 million at the end of the March quarter. The decreasing cash includes a June interest payment of 7.7 million. Our credit facility remains undrawn at 20 million. And our total debt is 160 million, due in the year 2010.

As of June 30th, our backlog contained contracts for 57 theaters with a value of $117 million. This backlog excludes the theaters announced today, as these will be included in the backlog for the third quarter.

During the quarter, we also removed 5 theater systems that had been ordered by an Indian client now in default of its contractual obligations, and against whom we initiated legal proceedings a few months back. Because the revenue recognition, related to contracts which have been terminated where we are suing for damages, is based upon litigation results and not installations, we will start to break out these systems to provide you with greater detail and give you a better picture of how changes in our backlog can foreseeably affect the P&L.

In terms of guidance for the third quarter, we expect to install between 4 and 6 theater systems and have approximately $30 million in revenue. We expect gross margins of 43 to 45 percent of total revenue. And we expect to spend approximately $9 million in SG&A and $800,000 in R&D. This should translate into earnings per share of between a 2 cent loss and a 2 cent gain.

For the full year, we remain confident that we will exceed the consensus estimate of 22 cents per share for the year, and believe we will come in at the low end of our previously guided range of 25 to 35 cents per share before bond refinancing costs.

Specifically, we expect to install approximately 25 theater systems and generate revenues of $125 to $130 million. As I mentioned earlier, the component of our earnings relate to settlements adjusted or terminated lease contracts, which often involve changeovers, to our new MPX theater systems.

Our guidance remains subject to the timing of these transactions and others, such as a few systems targeted to be signed and installed in fiscal 2004 which, like terminations and settlements, due to the factors I just discussed, can be difficult to predict.

In terms of signings for the year, we now have -- we're a little passed halfway through the year. We have already announced 19 signings, well on our way to our stated goal of 30 to 35 signings for the year.

Overall, we are pleased on the financial side, as both top line and bottom-line results were right in line with our guidance this quarter. However, we are even more excited to be hitting our marks on the strategic side, where our 2004 film slate going into 2005 promises to be one of our best ever. And our progress on the exhibition side is evident in the new multi-theater, multi-year contracts we announced this morning.

The story is simple. Moviegoers prefer to watch an IMAX DMR film at an IMAX theater. They are more likely to recommend the film, and they are willing to pay a price premium of the film. They are also more likely to see the film for a second or third time. This is a simple and compelling business proposition. And all of the research we've conducted and shared with you in the past supports this.

But, the real proof is in the solid box office results our current DMR films have posted, and in the enthusiasm other studios are demonstrated by pursuing IMAX as a new release window for their major event films.

I want to make a point here that Rich will repeat later. We believe that our theater clients can get a 33 percent cash on cash return if the revenue in their IMAX theater is in the $750,000 to $1 million range on their annual basis. The results for Harry Potter 3, Spiderman 2 and NASCAR 3D are tracking at or above these levels.

Importantly, the data also shows that IMAX DMR films have great legs, or sustaining power, at the box office. In June, Warner Brothers' Harry Potter - The IMAX Experience, opened as a day and date release in 49 theaters in North America. To date, to the film has grossed nearly $12 million and has consistently held on to more of its audience week after week than its 35mm counterpart.

In fact, last weekend's box office results show a decrease of less than 5 percent, which comes after an 8 percent increase in the previous weekend. That is for a film now in its 10th week of IMAX release.

As you know, we had originally planned to follow Harry Potter with a day and date release of Warners' Catwoman in July, and learned two weeks before the film was to be released that postproduction delays would make a day and date release impossible. In a matter of weeks, we closed the deal with Sony's Columbia pictures to release Spiderman 2 the IMAX theaters, bringing another major studio on board, the fourth to release a DMR film to the worldwide IMAX theater network.

Spiderman 2 - The IMAX Experience opened on 45 screens across the country, just 3 weeks after its 35-millimeter opening. Now in its third week, the film is performing well, consistent with our expectations. In evaluating Spiderman 2's performance, we are comparing the film to The Matrix Reloaded - The IMAX Experience, which performed very well from both the studios' and the exhibitors' point of view, and which also opened last summer on the fourth weekend after the 35-millimeter film's premier.

Spiderman 2, which has been sharing screen time with Harry Potter and NASCAR, grossed just over $640,000 in its opening weekend versus $679,000 for Matrix Reloaded. What's just as important is how well Spiderman 2 his holding up. Box office results declined only 8 percent in the film second weekend, compared to a 14 percent second weekend decline for Matrix Reloaded.

As an aside, Spiderman 2 in 35 millimeter declined 47 percent in that first to second weekend drop that the IMAX DMR version dropped only 8 percent. Currently, 34 of the 45 theaters showing Spiderman 2 our also showing Harry Potter. And 10 are showing NASCAR 3D as well.

All of these films -- all of these IMAX films playing on the same screen continues to be a major audience draw. In fact, the NASCAR film has grossed over 17 million to date, and continues to open in additional IMAX theaters even into its 21st week.

There are more attractive choice of than ever for the IMAX fan. And the combined box office is a big selling point with commercial exhibitors.

While day and date releases are clearly our preferred strategy, the initial success of Spiderman 2 demonstrates our ability to quickly respond to unexpected film slate changes with a successful release. It took 98 days to convert our first DMR film, Apollo 13, and only 14 days to convert Spiderman 2.

There is already a lot of buzz about Hollywood's 2005 release calendar. And it's sure to be a big year for event films.

Films that would nicely fit the profile for IMAX DMR releases in 2005 include such Blockbuster titles as Fox's Robots, a CGI film from the same people who made the surprise hit Ice Age; X-Men 3 from Fox; and Star Wars Episode 3, also from Fox; Warner Brothers' Charlie and the Chocolate Factory, Batman and Harry Potter 4; Universal's King Kong, to be directed by Peter Jackson; and Disney's Pirates of the Caribbean 2.

With IMAX DMR, a proven with audiences, we're confident that IMAX will be a component of a significant number of the studios' 2005 release strategies. In fact, we are currently in advanced stages of discussion with a major studio for a multi-year multi-picture deal. And of course we would hope that the results from our DMR films to date will bode well for these and other talks.

I will now turn the call over to Rich, who will discuss our progress on the exhibition side of our business and update you on what we see for the rest of this year.

Thanks Brad and good morning everyone. We've been saying for some time now that 2004 would be our strongest film slate ever. Not only are we delivering on that promise, but 2005 is shaping up to be even more impressive.

As we've said numerous times, a strong film slate is a critical piece of our strategy to accelerate commercial theater signings. Today, we announced two deals which we believe are just the beginning of our commercial theater rollout.

Our strong film slate, combined with today's announcement -- the multi-theater deals with National Amusements and Cinemark USA, demonstrate that we are securing the films to justify a theater's economics and signing the theater deals to justify releasing a film to the IMAX network.

As Brad discussed, the Hollywood studios have really embraced IMAX. And now, as we hoped and expected, major commercial exhibitors are adopting the IMAX experience as well, making it an important part of their offering by incorporating IMAX theaters into their comp book.

National Amusement, the sixth largest domestic theater operator and parent company of Viacom and Paramount, today signed a multi-theater deal that comprised at least 6 and up to as many as 18 new IMAX MPX theaters.

National Amusements operates more than 1400 screens primarily across the U.S. and UK, and has been an industry leader for many years. Specifically, National has recently been making a very significant push in delivering premium moviegoing experience, including theaters with ultra leather seats and stadium and reserved seating.

This is a natural fit for the premium IMAX experience. And in fact, National Amusement's Bridge Cinema Deluxe in West L.A. already contains IMAX theater. National Amusement, owned by Viacom's CEO Sumner Redstone and run by his daughter Sherri Redstone, has developed a reputation as a major force in the film exhibition business over the last 65 years, and is often on the leading edge of new developments in popular entertainment.

We believe that National's endorsement of IMAX MPX is a harbinger and hopefully a catalyst for similar deals to come with other major exhibitors.

Specifically, the National Amusements deal includes a firm commitment for 4 IMAX MPX systems to be installed this year, hopefully before the November release of The Polar Express, plus two additional systems to be installed in 2005 or 2006.

Just to give an example of the importance of this, if you are Warner Brothers, who is releasing The Polar Express, you had an assumption as to the number of theaters that you are releasing it to. And Warner has said they are really in the IMAX business for the long run. By having 4 more theaters they didn't count on, that's just incremental revenues with almost identical costs except for print costs. So it's a very good thing for Warner Brothers.

The first 4 theaters will be located in White Plains, NY; Buckland Hills, Connecticut near Hartford; Stony Brook, Kentucky near Louisville; and Springdale, Ohio near Cincinnati. In addition, the agreement gives National the option to install up to 12 more systems.

A number of the sites that National is considering are in the UK. And they have decided that including IMAX theaters in their complexes will be a significant point of differentiation from competitors. This is a market that is extremely receptive to IMAX DMR as illustrated by the BFI theater's run of Matrix Reloaded - The IMAX Experience, which did about $1 million and was still selling out shows long into its run, and the strong performance of the DMR version of Harry Potter and the Prisoner Of Azkaban throughout the IMAX network in the UK it is also encouraging.

We also announced this morning that another one of our existing customers, Cinemark USA, the third-largest North American exhibitor, has signed an agreement for 2 IMAX MPX systems. Cinemark operates over 3200 screens in 302 theaters worldwide, primarily in the U.S. and Latin America. There are over 2200 Cinemark screens in 188 theaters in the U.S. alone, located primarily in midsize markets throughout the country.

Cinemark has been a partner of ours for 7 years and currently operates 5 IMAX theaters. And our third piece of good news on the North American exhibitor front -- we're in the final stages of an agreement with Famous Players, Canada's top grossing commercial exhibitor, on 2 MPX sites for their systems to be installed in the third and fourth quarters of this year.

So, you may ask, why aren't exhibitors responding to our MPX product offering? First, we strongly believe that the economic model for MPX works. And that's a really important point, because as all of these exhibitors continue to migrate and to be owned by financial players, the economic model is paramount. A single screen retrofit of an existing stadium seat auditorium into an IMAX theater typically costs about $150,000 to construct with an all in cost, including our system, of about 1.6 million.

MPX systems also have low maintenance costs and reduced staffing requirements. The operating and construction costs, coupled with the premium ticket price and strong demand for DMR films, yields what we believe are attractive potential returns for exhibitors.

The model we have designed and which we have been taking exhibitors through is quite straightforward. And we think it answers their primary questions -- how we make money in an IMAX MPX. We believe that they can achieve a 33 percent cash on cash return, or a three-year payback, on all in capital costs of about 1.6 million.

On the revenue side, we believe exhibitors need to generate annual revenues of between $750,000 or $1 million, or approximately $15 to $20,000 per week. The results for Harry Potter 3, Spiderman 2, NASCAR 3D and other films are tracking at or above that range.

We believe that the second reason for the increased exhibitor demand is that for the first time, exhibitors have been able to see the MPX product -- a compelling selling tool. And the response has been extremely positive. Our first MPX installation is now up and running in Oviedo, Spain. And we have a demo system up in Toronto.

For the first time, we've been able to show exhibitors firsthand that while simplified and cost-effective, a single screen retrofit installation delivers the genuine IMAX experience that audiences are willing to pay a premium price for. The reactions (technical difficulty)

Thank you for standing by. You're online for today's IMAX second quarter earnings results call. At this time we're awaiting reestablishment of our speakers' lines and should be underway momentarily. We do appreciate your patience and please remain on the line. (Operator Instructions). This is the operator. We do have a speaker line re-established.

I believe that I was cut off in the middle of where I was talking about the reasons why the exhibitors were getting into the IMAX business. The first reason I gave was that the economic model worked well, and there was a 33 percent or three-year payback.

The second reason I gave -- I'm not sure when we cut out -- was that for the first time exhibitors could see the IMAX MPX system. And they have been very impressed with the experience. And that's played a key role in particularly these two signings that we announced today -- their ability to see it.

I will now pick up my text. And I apologize if I'm repeating myself. But the final principal reason for the increased exhibitor demand we're seeing is that the films are here and more are on their way. As Brad discussed and as in the recent research and box office results bear out, moviegoers prefer to see a movie in IMAX.

Moreover, moviegoers want to come back to experience both versions of the film. When moviegoers learn of the availability of an IMAX version of an event film, they want to come back to experience it a second or even a third time.

To validate this we looked at one of our customer's chains of locations for all of North America and gathered data for the first six weeks of Harry Potter and the Prisoner of Azkaban. The data showed that theaters without an IMAX theater showing the film saw box office increased 3 percent compared to Harry Potter 2. That means the complex that had both did 3 percent better on Harry Potter 3 than 2 over the first six weeks.

Those complexes that also had an IMAX theater and IMAX DMR version saw box office go up 77 percent in the same period of time. You can bet that has a lot of exhibitors noticing. Our film slate is only getting better. As Brad mentioned, we are in discussions with other major studios for upcoming DMR films for 2005 and beyond.

Looking to the more immediate future, we will make motion picture history this year when we release The Polar Express, the world's first Hollywood feature in larger-than-life IMAX 3D. We continue to believe that IMAX 3D presents Hollywood studios and theaters with yet another way to reach audiences with a compelling entertainment experience.

The Polar Express, which reunites the Academy Award-winning acting/directing team of Tom Hanks and Robert Zemeckis, will open as a day and date release November tenth, a week earlier than previously announced, in both conventional 2D and IMAX 3D format.

We think this will be a prime example of a repeat business film, as children who see the film in conventional format will pull their parents back to the IMAX theater to see it in 3D. They'll return to experience it in a way where they will be able to reach out and touch the snowflakes and feel the train pulling in right in the seat next to them.

In summary, we believe that a single screen retrofit of an IMAX MPX system, which the majority of theaters announced today will be installing, is a win-win for theater operators and moviegoers because it is an easy to implement platform that provides the IMAX experience for major event films and can provide a potentially strong return to the exhibitor.

For these reasons we believe that today's theater deals are just the beginning. Keep in mind that if the theaters just signed by National Amusements and Cinemark were installed today, they would increase the number of domestic multiplexes with an IMAX theater by an incredible 23 percent. I just want to emphasize how strategically important for us these events are.

While this is impressive, what is even more striking is that the potential market opportunity that still lies ahead of us. Approximately 900 stadiums seat multiplexes in North America. We are aggressively pursuing this large potential market. And we continue to have ongoing discussions with the majority of the top 10 North American exhibitors. And the deals with Cinemark and National should add additional fuel to these already active discussions.

In conclusion, the best way to describe how we feel about our business is that we're moving from theoretical to the actual. What I mean by this is no longer a question of looking out and saying when we get Hollywood films to convert, or when we roll out the lower-cost projector. Those are a reality.

With two top exhibitors stepping up their commitment to IMAX, we now have concrete evidence that our commercial strategy is taking root. We fully expect this momentum to feed on itself as we attract more confidence and make additional theater sales which drives the content further and so on.

We remain confident that this virtuous cycle will help the network of IMAX theaters grow and achieve greater success which will ultimately deliver value to our shareholders. I will turn it now back to the operator. And Brad and I and Frank will be happy to take questions.

(Operator Instructions). Eric Wold, Merriman Curham Ford & Company.

Quick question on the guidance for the year at 25 theater installations -- which translates to about 12 to 14 for Q4. Can you give an indication of how many of those theaters right now are already in backlog of that total 14? And how many would need to be signed, if any, before then?

Basically with the exception of probably about a few -- meaning 3, they are all in backlog. One of the things about the MPX system, which is implicit in the reason why we developed it, is the unbelievably quick turnaround, as Rich sort of mentioned.

Right now, with the National Amusements deal, as well as the Famous Players deal, we plan to have these in early November. So, what we can do is something -- in the old days, you're looking at a one year turnaround between signed and installed in IMAX. That has been truncated rather dramatically -- very dramatically with the IMAX MPX. So, the short answer is we feel that the 3 that we're talking about is highly attainable.

Okay. That actually led to my next question -- on the retrofit, what is your expectation now on the time it would take from start to finish on the construction of the retrofit? And when you said before, you hope to get most of those or 4 of those opened by The Polar Express release, what is that based on? Is that more on your ability to get it done, or more based on National's timetable?

It's actually at the moment, as MPX is a new product, oddly enough it's our constraint. It's not National's. You can retrofit a theater very, very quickly in terms of putting in the new screen, changing the geometry some, doing a couple of things with the sound baffling.

With the MPX, again, we could probably satisfy more orders for 2004 if it were not for let me call them manufacturing constraints, just in terms of parts we would order and just the ability to manufacture. That should not be in the case in the '05.

Okay. And then last question, and I will turn back to the queue. What is your expectation on tax rate assumptions for the remainder of the year? It looks like you got a little kick in Q2. What should we assume for the last back half of the year?

Were not a taxpayer now, Eric.

And right, it should be (multiple speakers)

Right, it's on the P&L.

Pretty much close to 0.

For the back half or for the full year?

For the back half.

Okay. Perfect. Thanks guys.

Richard Ingrassia, Roth Capital Partners.

Can you Brad or Rich, speak -- give me little more detail on the National Amusements relationship? Namely, do they have the same metric in mind -- that is 20 percent cash on cash returns for its North American installations? Or are they looking at some other benchmarks that may dictate how many of the 12 on the option they will actually deploy?

I think their return parameters are higher than 20 percent. I don't want to comment. But I don't think 20 percent is good enough for them. I think they believe they are going to get a higher return than that from the IMAX MPX.

I think what the 12 really turns on for them -- remember there is a firm 6 -- the 4 they are taking this year and then 2 more in '05 or '06. And then the other 12 really depend on location-specific issues.

They have targeted a number of locations, many of them as a matter of fact in the UK. There are different projects in different stages of development. And I think as those projects become right, they will or will not get into the IMAX business. I think obviously one of the factors is going to be how it does.

One of the things that was particularly gratifying to us about this particular deal was those of you who follow Viacom or know the reputation of the Redstones know that they do not do things in a frivolous way. And they tend to be among the most cautious, numbers driven, serious diligence organizations. So they got comfortable that their return was there to do 6. And I think the other 12, as I said Rich, will depend on location issues as well as how it goes.

Okay. Are they getting something like a right of first refusal on those market in the UK?

They do not have a right of first refusal. I am not going to comment on the specific terms of the deal.

Okay. Fair enough. Is it reasonable to assume now that strategically you might see Paramount step up here as being all in the family with Amusements and Viacom?

You know, I wouldn't make that assumption. I think obviously since it is the same ownership, my guess is they are going to be more aware about what the box office looks like and the legs that it's showing on these other films. And I would assume they will communicate that.

But, there's been a lot of changes going on -- as you know, Jonathan Dolgen left Paramount. So when you look at the number of event films coming out, Paramount is typically not a leader in event films. But if they have a good experience through National Amusements, it wouldn't surprise me that they would call over to the studio.

Rich, the only thing I would say on top of that is Paramount, through Sumner, has signaled a migration of their film philosophy a little more in the direction of event films going forward, as opposed to what they've been doing over the last 5 years. If they do that, I think they would be more of a natural candidate to be in business with us on DMR.

Okay. Thanks, I appreciate that. One last one on margins on the systems. Can you comment on whether that's -- the gross margins are tracking higher or lower now that MPX is obviously a bigger part of the backlog then it has been?

It's pretty much consistent, Rich.

Okay. Same historically though?

Pretty close.

Okay. Thank you.

Tony Gikas, Piper Jaffray.

A couple of questions -- could you break down the new theater openings for us for the remainder of the year between the third and the fourth quarter? And then, does your guidance for the fiscal year include the 4 theaters from National Amusements?

And I think there were 2 from a Canadian operator. Are those included in the numbers? And then the third part -- it seems like the National Amusements looks like an aggressive schedule to actually get those theaters up before November. Have these been in process for awhile? Is this something you have been working on for some time?

Let me start with the end and I will turn over the first part of the question to Brad. Tony, all you're doing with our new product is your taking a stadium seat auditorium and you're converting it.

In fact, our people have already been in while we were negotiating the agreement and have kind of assessed what needs to be done at these locations. We have been building inventory of the MPX projector. So before the Polar Express opening, we'll take them out of inventory and we will go into buildings that were already aware of what the issues are.

Now we said, hopefully -- so we're leaving ourselves a little wiggle room there. But the plan is to open it. And based on everything we know today, we're going to get them open by then. In terms of our guidance for the year, that includes the National deal.

When we started the year, since we knew we were introducing in the MPX product and we knew it was a shorter sales cycle, we budgeted in a number of sign and delivers during the year. In fact, I would say, and as you know Tony, because we've talked about it off-line, the uptake on the MPX was a quarter or so later than we expected. And I think that's one reason why you are seeing so much back end loading in the year, because that's the first time we will be able to do these sign and installs.

That's a good segue to your first question, which is I think our guidance for the third quarter is 4 to 6 installs, which we would have hoped -- would have been -- at the beginning of the year, we would've hoped and expected that that would have been higher. But the MPX was, as we said probably, a little -- about a quarter slower in getting the traction that we thought. And then it was pushed into the fourth quarter.

And then the percent for the balance of the year -- the new theater openings. What percent are the MPX?

I don't know if I can do that off the top of my head. I don't know the precise number. Frank? (multiple speakers) the installations. What percent of the installations for the remainder of the year are going to be MPX installations? I don't think -- I can't do that. Can we get back to you?

Sure, no problem. Thanks guys.

Marla Backer, Research Associates.

I have a couple of questions and wonder which, I lost the connection to the call for couple of minutes. I apologize if you already discussed this. But at your analyst meeting back in May, he talked about potentially 46 additional theaters under discussion. Can you tell us now, with the 2 contract signings announced this morning, how many of those 46 are still active?

I don't think we break it out that way. None of the discussions we referred to at the Analyst Day a meeting in May are inactive. So, because its fluid -- I'm not trying to be cute at all. Some of the ones that were talking to -- about 6 -- we maybe talking to about 8 now or 4. So we just haven't gone back and retabulated it. But all the discussions we've had with exhibitors are still active.

The only thing that I would add if you had asked us in May at the investor presentation -- you put the ten largest exhibitors on a blackboard and you would've said Brad, how would you (indiscernible) the National Amusements be your first multi-theater deal for an '04 installation? I would not have put them at the top of my list. There were a few other guys that I would've put at the top of the list, which goes to the point that Rich is saying. For in conversations of -- all of the big guys -- but the situation is fluid in terms of when they convert and when we pull them across the finish line.

Okay. Now that makes sense. Now, you also said back then -- and you have done an incredibly impressive job of bringing down the costs and turnaround time with the MPX. But you also did say that you were looking at even further reducing the cost to install the MPX.

But at the same time now, your guidance for 3q is that R&D goes down or stays relatively lower than it was in the first quarter. Are you still looking to reduce the costs -- the entry costs with the MPX system?

Yeah I think -- I think it's a precise point that you're asking about, which was the difference between 2 theater into 1 theater retrofit. The MPX is a projection system. It can be used in three ways. Somebody can take a parking lot at a suburban theater and add on -- build a brand-new IMAX theater. And that's going to cost them $3 million -- a little over 3 million.

Or, they can take 2 theaters, knock down a non-load-bearing wall in between and create a very large IMAX theater. And that will cost them around 2.25 million. What we were talking about was not lowering the cost. It's all with the same MPX projector. But, what we were talking about is doing the stadium seat retrofit -- taking a one theater, large stadium seat theater and retrofitting that into an IMAX theater, with an all in cost of around 1.5 million or 1.6 million.

That's what we were referring to. And that's what we've done. And that's what the commercial exhibitors are actually finding the most attractive.

Okay. And then my last question is, the trend is obviously going in the right direction. And I'm wondering when we could start expected to be see some of this hit the P&L? And even on some of the smaller things, for instance you talk about NASCAR. I think the number was 60 million -- it has passed the 60 million mark. When should we start seeing some of NASCAR hit the P&L?

Film does not have a material impact on our bottom line. You are seeing a little of it hitting the P&L. Obviously, you're asking a very open-ended question. I mean, you're starting to see it hit the P&L in the second quarter which we just reported. Obviously, from our outlook for the rest of the year, we think the fourth quarter at the moment looks to be pretty strong and going into 2005.

I mean, we always said with the year started that if one were going to really look an IMAX, the investment thesis was about attraction we were going to get with our DMR strategy and our MPX projection system with the exhibitors. I think the fact that, as we said during our call, we've had 19 signings so far. That's usually the best forward indicator. So I think probably fourth quarter and going into next year.

Okay. Thank you.

Ken Silver, CRT Capital.

I had a couple of shorter questions and then a couple of longer ones. Frank, what was CapEx in the second quarter?

CapEx was 1.8.

That includes film investment?

It does.

Okay. And what was depreciation?

Depreciation is on the press release.

Oh sorry.

No problem.

Okay. I will find it.

It's about -- we have that -- it's about 4.

Okay. And then I too got cut off. Everybody got cut off. A missed what you said in the beginning about termination revenues. Do you mind just reviewing that, how much they were --?

Yes, this is Brad. It was 2.2 million of termination revenues. But we made a distinction, which is a very important one. The reality of our business -- the accountants make us call certain things and label certain things in certain ways. When people are swapping out more -- larger IMAX systems that they order, the old GT systems or SR systems, which are continuing to sell, but some people for some reasons want to swap that out to MPX systems.

Often, the delta between the cash that we have received and the cost of the more expensive system and the cost of the MPX system, they make us pull into what they call a new line called terminations and settlements. So 1.60 of the $2.2 million were 2 customers that swapped into MPX systems.

So 2 things occur. One, we're booking $1.6 million at the time we make that agreement that we are swapping. That goes on the termination line. But those two systems -- those MPX systems -- are staying in our backlog. We're still going to deliver them and at that time, have more revenue and have more income associated with the actual installation of the MPX systems, which are scheduled to be installed in the normal course.

The remaining 600,000 of that 2.2 million was cash that we received in this quarter with respect to actually, I think it was a terminations -- mutual terminations that occurred last year, because the accountants have again migrated to almost like a cash basis accounting on certain settlements really, terminations and settlements.

So if something terminates last year, you wouldn't -- and people owe us money, you won't book the revenue or income at that time. You wait until you get the cash. And we got 600,000 of cash this quarter. Was that clear?

Yes. Thanks. The press release said that you signed up -- there were 4 signings in the second quarter. Can you just talk about who they were with or what kind of customers they were with?

They were all international (multiple speakers) and I think that let's see -- one or two are with exhibitors internationally -- part of multiplexes. The rest were just different kind of projects.

How many -- I know we talked about the UK. How many IMAX zones are there in the UK?

I'm sorry, Ken, I don't know that offhand. I would be happy to get it for you off-line.

If National Amusement is talking about maybe putting in 12, is that a big chunk of the zones, or not?

Well, I didn't say all 12 are in the UK, by the way. But, I just don't know how offhand how many zones there are. I'm sorry.

Okay. And then do you have Spiderman 3 like third weekend numbers and cumulative gross?

That would be great if we could see into the future. Spiderman 3, you are anticipating (multiple speakers)

Spiderman 2, I'm sorry.

I don't have that number yet. (multiple speakers)

It's been about 3 million so far roughly.

And then the White Plains Theatre that National Amusements is putting in, is that going to be a 1-for-1 retrofit?

Yes.

Yes.

Thank you. I appreciate it.

Dennis McAlpine, McAlpine & Associates.

In your press release you talked about Catwoman being held back to do to postproduction delays. Can we assume that that was Warner's delays, not yours?

Yes.

Were there any losses associated with the work you had done on Catwoman?

No.

No.

You also talked about the film splits improving. Can you talk about what they were and what they will be?

I think there is a misunderstanding there. I don't think -- I don't think we mentioned film splits between the share between exhibitors and studios changing.

Yes.

No. We don't predict that at all.

Okay. And then you talk about building up an equipment inventory of DMX. Do you have enough equipment backlog to -- put aside already to meet your expectations of installations for the year?

Yes. For the year, yes.

Good. Thank you.

Randy Dalke (ph), Euvanich (ph).

First question is on the cash flow. What was the cash flow in quarter and for the 6 months? And kind of with the guidance that you gave, where you do anticipate the cash-flow?

I'm sorry, you keep cutting out. Please speak up.

On (multiple speakers) on the cash-flow I was wondering what it was for the 3 months and for the 6 months and what you anticipate it being for the year.

I don't think we give guidance for the year on that.

Okay. Could you give me the number for the 6 months or the 3 months as to what cash from operations was?

Cash flow from operations for the 6 months was about a 0.5. So 500,000.

Okay. And then the other question on the DMR films, when you do those, what do you get? Or can you just kind of walk me through the economics for you, besides just attraction with the exhibitors?

I think if you're going to do this from 50,000 feet, because it's actually quite simple. And I don't think the details are important. Each studio has a different approach, where you will have one extreme -- and now you're going to mention the studio, that wouldn't want an IMAX penny in a DMR film. They also wouldn't want IMAX to have a penny of upside in the performance of the IMAX -- of the DMR film in the IMAX theaters.

Then, you will have other studios that would like IMAX to put up the conversion costs ourselves. And in those instances, obviously we would recoup the investment we make in the conversion costs and we would have an upside associated with how the film performs in the IMAX theaters.

Prints and advertising are the studios' responsibility by and large. And each one is not a cookie cutter deal. Each studio is a little different. But, that's the contours of the arrangement.

Okay thank you.

Grant Jordan, Wachovia.

Can you give us the EBITDA in Q2?

Yes. Q2 was 8.8.

8.8? And, should we assume that $35 million guidance for the year is still on track?

Yes.

Okay. Second, were there any cash taxes paid in the quarter?

Minimal cash taxes paid in the quarter, don't have the number. But there were no traditional cash income taxes. They would be foreign withholding taxes.

Okay. And then, on the new signings, did you receive any cash up front, in terms of those?

Yes. We did.

Okay. Ballpark range? Or --?

We can't (multiple speakers)

(multiple speakers) decline (multiple speakers)

Not going to do that.

And then in terms of the '05 film calendar, when you hope to be able to be talking about films that you've got lined up and (technical difficulty)

It would be our hope in the next couple of months to be able to start to talk about them.

Great. Thank you.

Rob Medway, Royal Capital.

Two questions -- one, I have seen different numbers for the signings expectations for the year. You had said 25 and the press release had said 30 to 35.

We had guided to 30 to 35.

Okay.

We've got to make the distinction between signings and installations. I mean, you're asking about signings and that's always been in the 30 to 35 range.

And it's still there?

Yes.

Yes, we've done 19 year-to-date. So we think we're tracking to that.

All right. The second question -- are you at liberty to talk at all about how the pricing for the MPX systems or the lease terms have changed over say the last year, if at all?

Remember, we just introduced the product a year ago. And, we've probably only sold so far a dozen, 15, something like that. And, it's pretty consistent with what we expected. It hasn't really moved around very much.

And the recent agreements are on similarly the same terms that prior ones were?

By and large.

That's the ballpark.

Okay. Thank you.

John Johnson, Johnson Capital.

I was just wondering -- one quick question. I got knocked off the call earlier as well. Could you just give me the backlog numbers again -- units and dollars?

It was, I think -- somebody correct me -- I think it was $117 million and 57 systems. The backlog does not include the National Amusements deal, which was technically signed after the quarter. And on the other hand, the Famous Players deal which we referred to are in backlog.

Okay great. My next question -- I wondered if you guys could just walk a little bit more. When you talked about the 33 percent cash on cash returns to the theater operators, is that with 750 to 1 million gross? I just wonder if you could kind of walk through that calculation a little bit more?

I'm sorry. You cut off. Could you say that again?

Yes. I wondered if you guys could walk through the cash on cash return calculation that you talked about before. You said you've got a model now with the MPX as where the theater operators can get 33 percent cash on cash returns. So I wondered if you could just walk through that a little bit more?

Doing it off the top of my head, it shows revenues of between $750 and $1 million. It's coming in from IMAX. It showed costs of 1.6 million up front. The film rental assumption is around 53 percent. The average ticket price is about $10, $10.50. It's another like couple bucks in concessions. And it models out to around a 33 percent return.

I guess what I was trying to figure out, I mean, is the theaters pay 50 percent or a little bit more back to the studios. So it seems like if you did 750,000 in revenue, that would leave (multiple speakers) 375 just to start with.

Well, here is the question that you're asking -- the answer. It's the magic answer in the theater business. It's concessions.

Right.

Right? We were talking about box office (multiple speakers) between 800 and 1 million. So it if you picked the middle number of 900, divide it by two, there's 450,000. But associated with that (indiscernible) it's a 100,000 or 120,000 customers, right, going through to put in gross margin per customer of 2, 2.25 per concession on the per caps and you will see that the numbers work.

Right. And it works out. Okay. Second question just along with that, when you guys present this to the theater, do you guys show them an incremental calculation over and above what the old screen was doing? Or is this kind of starting from zero?

Yes, we show it in a different way. We call that cannibalization rate. And you show -- when we first showed the model, we showed 100 percent cannibalization right. We said all you were getting from IMAX was the incremental ticket price and the incremental body.

But, our experience -- and I don't know if you were cut off or you heard this part of the call, one of our customers -- a fairly major theater chain -- between Harry Potter 3 and Harry Potter 2, when they showed Harry Potter 3 in multiplexes where there was no IMAX Theatre, for the first six weeks, they were up by 3 percent. For multiplexes where there was an IMAX Theatre, that multiplex went up 77 percent.

So it seems -- and we have done other studies, some of which we have talked about on other calls -- that have shown close to 0 cannibalization. So the answer is we show them zero. We have shown them 20 percent. And we have shown them 100 percent. And we sort of make your own -- take your own choice. We've given them our data about cannibalization, which seems to suggest it's quite low, and then said you know, you make the decision.

By the way, all the data is public. Either EDI data or Nielsen data -- because you could look at the films -- you go into the complex. You look at the films zones and so, the transparency is great, which is good.

Yep. And then last question is that 750 to 1 million -- that box office. Is that what you're actually seeing? Is that a pretty good number for us to use?

Yes. Actually what we were saying -- were tracking in that range in some instances a little higher just over the last couple of months. What we didn't anticipate, but it is interesting, is that if you look at the IMAX screens right now, they are showing NASCAR, Harry Potter and Spiderman -- obviously the mix is different.

In the conventional 35-millimeter business, screen splitting is kind of unusual, especially between different studios. But here, for whatever reason, because of the event nature of the film, the studios are comfortable with doing it. And when you look at the aggregate that is being dropped -- the revenue lines in the theater from those 3 films, you are definitely tracking in and above that range.

Okay. Thanks very much.

Ken Silver. CRT capital.

Just a quick -- a couple of quick follow-ups. I know we're running long here. You mentioned something about film revenue in the quarter from Harry Potter. Was that like postproduction revenue? Or like some sort of sharing with the box office?

Again, we cannot comment on the specific deals. But it involves our DMR efforts with Harry Potter, whether billed or whether shared.

Okay. And then the 12 million of box office gross on Harry Potter, was that domestic or worldwide?

Worldwide.

And how many screens? Like 60?

It's something like that, Ken. That's a good estimate.

Okay. Do you have -- baked into your guidance, can you tell us where you would come out on cash balance at the end of year?

We're not giving that number right now. We haven't (multiple speakers)

Going to be above or below where you were at June 30th?

I don't remember the number we gave at 30th.

17 or 18.

Probably around the same.

(multiple speakers) the same vicinity.

Okay. And then just lastly -- National Amusements, I know you don't want to comment on the specifics of the deals. But you had discussed how you were offering, in certain cases, local exclusivity or some degree of local exclusivity. Did that happen with some of these deals?

We're not going to comment on specific deals, because we just -- it affects our ability to do deals with other chains.

Okay. Thank you.

This will conclude the question-and-answer session. I will now turn the call back over to today's speakers.

Okay, Richard. I think we're just going to summarize.

Yes. I will summarize. I think this is an exciting time for us. It's been a long time in coming. As I said before, I think when we announced The Matrix films a year ago, and announced our MPX, we thought it was off to the races.

In fact, it turns out the exhibitors were more cautious. They wanted to see the MPX system. They wanted to see the numbers coming out of some of the IMAX films. They wanted to get comfortable with the studios that there were more films coming. And I think we said to our shareholders, be patient. It's going to happen.

Fortunately, we today feel very vindicated. As I said before, I think Brad and I and our whole organization are particularly happy because the first one in, in a major way -- National Amusements, is one of the most sophisticated. They know how to talk to the studios. They know how to crunch numbers. They understand this business very well -- exhibition and film. We think, to some extent, they are seen as a market leader.

We still have lots of discussions going on. No one here is resting on their laurels and saying happy days are here, let's go off to the races. But I think we feel very good about it. We think whereas if you had sat on our calls, Brad and I are fond -- and sometimes we say to each other, if you were on our call a year and a half ago, you would have heard us say we're going into going to invent a lower-cost projector. We're going to get the studios in. We're going to get a price premium. And then the exhibitors are going to come.

For the first time, it has all come together for us. I think we're feeling very good about our business. And, for those of you who have hung with us as the strategy has unfolded, we want to say thank you. And we feel good going forward.

Thanks operator.

Ladies and gentlemen, this will conclude today's conference call. We do thank you for your participation and you may disconnect at this time.