Imax Corp (IMAX) 2005 Q1 法說會逐字稿

Good day and welcome to this IMAX conference call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Mr. Brad Wechsler. Please go ahead, sir.

Thank you very much, operator. Good morning and thank you all for joining us today for our first-quarter 2005 conference call. Joining me, as always, is my partner, Co-Chairman and Co-CEO, Rich Gelfond. Also with us is our CFO, Frank Joyce, our Senior Vice President of Corporate Development, Steve Abraham, and our IR Director, Cheryl Cramer.

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 first-quarter 2005 financial results were issued this morning in a press release for all of you to review. During today's call, references will be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. Discussion of management's use of these measures and reconciliations to GAAP measures are contained in the Company's first-quarter earnings release. The full text of the release, along with the supporting financial tables, is available on our website, www.IMAX.com.

With that said, this morning, we will walk you through our financial results for the first quarter of 2005 and update you on the progress we're making in our commercial strategy, and then discuss some of the factors that have been driving our recent success.

Our results in the first quarter, both operationally and financially, continue trends that we've been seeing for the last year or so. The momentum in our business is not only continuing but also accelerating on both the signings and film sides and bode well for future earnings. At the same time, our financial results continue to improve, albeit more modestly because of the lag between signings and revenue recognition. Bad-time disparity, however, should begin to condense because the MPX has a shorter cycle from signing to installation than our other systems and, in future periods, recurring revenue should become a larger percentage of our profits as the network grows.

Before I review our results from the first quarter, let me begin by talking about some of the positive trends in our film and theatre businesses, including two recent very significant developments, yesterday's AMC agreement and the recent completion of our 2005 film slate. Yesterday, we announced that we reached an agreement with AMC Entertainment to retrofit five domestic multiplexes with IMAX MPX theatre systems. As I'm sure you know, IMAX is the second-largest exhibitor in North America, operating over 3,500 screens in 229 theatres. When AMC's first two IMAX theatres open next month, in time for the opening of Batman Begins, six of the top ten domestic exhibitors will be operating IMAX theatres, including the top three exhibitors, which together represent about a third of all domestic screens operating in North America today. The structure of this agreement, a joint venture arrangement, is very exciting for us because it shifts IMAX theatre economics more towards a recurring revenue model, something we've recently been making progress on in the film side as well. In short, we are trying to position ourselves to take advantage of the ongoing successful economics captured by IMAX MPX theatres, programs with IMAX DMR films. Rich is going to take you through some of our other recent agreements and some of the details of the AMC venture, including the economics to IMAX, later in the call.

Now, quickly turning to some other highlights on the theatre systems side, new signings, which is the best forward indicator for our business, continued to accelerate in the first quarter, and we just finished the best nine-month period in eight years for theatre signings. From the installation of our first MPX around July 1 of last year through March 31st -- that's just nine months -- we signed contracts for 38 theatre systems, more than we had done for the preceding 18 months. In the first quarter alone, we signed contracts for 12 IMAX theatre systems, double the six signings reported in the first quarter of last year and our best first quarter in seven years.

These Q1 signings comprise deals with both new and existing IMAX customers. All of these signings were with commercial exhibitors and the majority were for our new MPX theatre system. As we have said before, the short period of time required to convert an existing auditorium to an IMAX theatre, made possible with the MPX retrofit, means that some of these new signings can and will install quickly. In fact, half of this quarter's signings are for theatres expected to install in 2005. In addition, all five AMC theatres are also scheduled to install by September of this year.

On the film side, we're pleased to report that, just four months into the year, we have already locked down our entire 2005 film slate. To put that in some context, we didn't have our '04 slate locked until July. Greater clarity on our film slate is very important to our sales efforts, as it gives potential theatre customers greater confidence that there is strong studio and film support for their theatres and ties into the projected financial returns.

For 2005, there are five Hollywood DMR films, including a re-release of Polar Express in 3-D, and two Hollywood-produced original large format 3-D productions, by far the strongest film slate IMAX has ever had. As we have discussed with you many times in the past, our film slate needs to average $1 million per screen, per year, to provide exhibitors with a three-year payback, or a 30%-plus IRR on an IMAX MPX retrofit investment.

Let me take a minute and walk through how we expect to achieve that in 2005. Our year begins with the spillover of Polar Express into January, where it averaged about $100,000 per screen for the month. Later in January, Disney released James Cameron's Aliens of the Deep, which earned over $140,000 per IMAX screen. Next, in early March, we released the IMAX DMR version of Fox's Robots. This was our first ever DMR film released in an early spring slot, an historically slower period for Hollywood films, and the film has grossed approximately $8.5 million in the IMAX theatres to date. This equates to about $110,000 per IMAX screen. Therefore, as we stand here today, IMAX theatres have already grossed about $350,000 per screen, more than one-third of the required $1 million in the slowest quarters of the year for films. Therefore, our remaining five releases this year need to do an aggregate of $650,000 per screen.

Let's walk through them. Our summer begins on June 17 with the release of Batman Begins, which is already getting great buzz in Hollywood, and IMAX DMR format will certainly take this prequel to another level. Then, four weeks later, on July 15, we will release the IMAX DMR version of Charlie and the Chocolate Factory. In the hands of director Tim Burton, this remake should be spectacular, and the IMAX experience will make it even more enjoyable for audiences. Charlie will be followed in September with our release of Tom Hanks presents Magnificent Desolation -- Men Walking on the Moon, an IMAX 3-D Experience.

As the success of the Polar Express clearly demonstrated, IMAX 3-D is a unique and unparalleled experience and audiences around the world are responding to it. To give you a reference point, our last 3-D space film, Space Station 3-D, grossed an average of $550,000 per IMAX screen and over $300,000 per commercial IMAX screen. As Rich will discuss in a few minutes, IMAX 3-D will continue to be a key and an increasing focus for us as we go forward.

On November 18, we will release the IMAX DMR version of Warner Bros. Harry Potter and the Goblet of Fire, the fourth installment in the Harry Potter series. We had great success last June with the third in the series, Harry Potter and the Prisoner of Azkaban, which grossed approximately $14 million worldwide, or about $200,000 per IMAX screen. Then, in late November, IMAX and Warner Bros. expect to re-release the Polar Express, an IMAX 3-D Experience. Given the tremendous popular of Polar, we expect strong results again this year and believe that Polar has the makings of a true perennial. Being able to release two movies so close together -- it allows the theatres to maximize their occupancy -- is a key advantage to doing multiple films with a single studio. As of today, IMAX has released DMR films with Disney, Fox, Universal and Sony.

Before I move on, let me just bring us back to our $1 million goal. All of the 2005 films I just discussed, Batman, Charlie, Harry Potter, Mag Des and the re-release of Polar, together need to gross about $650,000 per screen, or about $130,000 each, less than half the average per-screen performance for our 2004 films.

Now, let me review our financial results for the quarter. For the first quarter of '05, we reported net earnings of $0.03 per share, above our guidant range of breakeven to $0.02 per share. This compares to a net loss of $0.02 per share for the first quarter in 2004. Total revenue was 31.4 million, up from 24.9 million for the year-ago quarter, as we recognized revenue on six systems in the first quarter, including two MPX installations versus two in the year-ago quarter.

Systems revenue for the first quarter was 22.1 million, up from 16 million in the first quarter of last year. Included in systems revenues for the quarter were consensual lease buyout revenues of 6.9 million, which includes the last of the cash we received during the quarter from the settlement of our litigation with UCI. We announced that we had reached this lease buyout in December and stated that part of the settlement would be recognized in the fourth quarter of '04 and the rest in the first quarter of '05.

Even though we discussed the settlement at length our last call, we still receive questions about lease buyouts, so I'd like to stress two important points. First, the lease buyout revenue recognized from the settlement of litigation with UCI is for cash received in Q1 of this year and is not from cash received in prior periods. Second, these buyouts have been a recurring part of our business, averaging 5 to $10 million per year over most of the last decade, and we expect this year to be in the $10 million range.

Continuing down the P&L, film revenue for the quarter was 4.9 million, up from 4.5 million in the year-ago quarter, as an increase in DMR revenue offset a decrease in our film distribution revenues. As we discussed on our last call, we've recently started to participate in the DMR box office by contributing DMR conversion costs in exchange for a share of the box office returns from our IMAX DMR films. This revenue share with the studio varies from studio to studio and film to film. It's presently around 10 to 12.5%, and over time, we would hope that this can be a significant revenue source for IMAX.

As a result of this type of arrangement, the Polar Express and Robots positively impacted our first-quarter film revenues, and DMR film revenue totaled $1.5 million in Q1 of '05 compared to less than $100,000 in Q1 of '04. Partly offsetting this, film distribution revenues were approximately $1 million lower than the year-ago quarter, owing to revenues we generated in March of '04 from the demonstration -- excuse me, from the distribution of NASCAR 3-D, the IMAX Experience.

Theatre operation revenues for the quarter were 3.8 million, about flat versus the year-ago quarter. Other revenues were about 500,000 in Q1 '05, versus about 600,000 in Q1 '04.

Turning to the expenses for the quarter, SG&A was up 1.9 million to 10.2 million. This increase is primarily due to legal fees and the appreciation of the Canadian dollar, which impacts our salary expense for our Canadian employees. We expect SG&A for the year to be around $39 million. R&D expenses for the quarter were about 650,000, down from 1.1 million reported in the year-ago quarter. This was because last year's R&D line included expenses associated with the development of our MPX Theatre system. For the quarter, net earnings were $0.03 per share. This is a significant improvement from the net loss of $0.02 per share reported in the first quarter of last year.

In finishing up with our balance sheet, we ended the quarter with approximately $29.8 million in cash and short-term investments, up slightly from the 29 million at December 31, '04. Our debt remains unchanged at 160 million, with no principal payment due until 2010, and our $20 million credit facility remains undrawn except for some letters of credit.

Staying on the balance sheet for a second, I will also point out that deferred revenue at the end of March was $54.2 million, up 7.2% from the 50.5 million at the end of December.

We raised the deferred revenue point because many of you have recently asked questions about this. Notwithstanding the increase, we believe that deferred revenue is not a very meaningful indicator of our forward earnings. Deferred revenue measures the cash received after signing but before installation. As we continue to ramp up our retrofit strategy, thereby compressing the time between signings and installation, much of the revenue will show up in the income statement and never show up in the deferred revenue account at the end of a period. For example, if we sign a deal in Q1 with a 10% deposit and install the system in Q2, 90% of the revenue will never show up in deferred revenue. Moreover, for the larger and more creditworthy customers, customer deposits may be replaced the collateral, such as letters of credit. For these reasons, we believe that our backlog, which includes the amount of revenue to be reported upon installation, provides a much better indicator of future revenues. At the end of March, our backlog consisted of 66 systems with a value of $113 million, up from 60 systems with a value of 105 million at the end of December. Our first-quarter results clearly show that we're not only continuing to hit our strategic goals, but our financial results are now also starting to reflect this progress.

Now, I will turn it over to Rich to discuss our strategic accomplishments in more detail, including yesterday's AMC announcement, and to update you on what we're currently projecting for the rest of 2005.

Thanks, Brad, and good morning, everyone.

Our confidence in our business continues to increase since our last call just two months ago. Commercial exhibitors around world are showing increasing interest in our IMAX MPX multiplex based system, an easy and profitable way to enter the IMAX business. This is evident not only in our increased signings but also in the tone and quantity of conversations we had recently while out in Las Vegas for Show West.

The level of interest in IMAX is accelerating, which is translating into increased signings. As Brad mentioned, we signed contracts for 12 theatre systems during the quarter, making this our third consecutive quarter of double-digit signings and the best nine-month period in eight years. Just yesterday, we continued our signings momentum with the announcement of a five-theatre deal with AMC, the number two exhibitor in North America. All five of these theatres with AMC will be IMAX MPX retrofits and all five installations are expected to occur by September of this year, helping to quickly grow the IMAX domestic multiplex network. This growth in our domestic network not only makes IMAX more attractive to additional North American exhibitors but also to studios eager to release their event films to more and more IMAX theatres.

AMC's IMAX theatres will be located in multiplexes in Kansas City, Omaha, Oklahoma City, Detroit, and Phoenix. By the way, Kansas City is the home headquarters of AMC. Two of these are expected to open in time for the opening of Batman Begins in June, and we expect the remaining three theatres to open later this year, in time for Magnificent Desolation in September. All of these multiplexes do between 1 million and 1.25 million patrons per year.

Under the agreement, we will contribute the system and installation costs, AMC will contribute the box and the physical conversion costs, and we will both share in the recurring profits of the AMC IMAX Theatres. As you know, our economics on the film side of the business began to shift towards a recurring revenue model, whereby we put up some of the cost of film conversion and share in the box-office receipts.

Because of the economics of the MPX system and our strong balance sheet, we are now able to do something similar on the exhibitor side, significantly increasing our stake in the profitability of the theatre. This joint venture-type structure shifts our model toward recurring revenue and not only will it get a greater share of the box office than our typical guaranteed minimum, but we also have the opportunity to participate in the total profit for the theatre. In fact -- and this is a really important point -- using the same assumptions we run in our standard model for an exhibitor's payback on an MPX investment, $1 million in admission revenue and a 25% cannibalization rate, these AMC theatres would generate significantly more profit to IMAX on a present-value basis than our typical sales-type lease arrangements. Because of the strength of these locations and AMC as an operator, we hope these theatres can be even more profitable than the models result. With a lower upfront capital requirement, the exhibitors' payback period is shortened. We are very excited about this agreement with AMC and for all the reasons I just mentioned. We feel confident that this is the right deal at the right time with the right customer.

We've talked a lot about the economics model for MPX and Brad just walked you through how our 2005 film portfolio is already building towards the $1 million revenue for the three-year payback. Our discussions with the Hollywood studios have never been better. It demonstrates that we made an important strategic jump here, where several films are competing for the same IMAX slot. We also believe that we're now reaching another important tipping point in the IMAX business, whereby it is not just the attractive economics that are bringing in new commercial signings but also the competitive advantage. Recent results indicate that the competition for IMAX Zone is starting to attract exhibitors to enter the IMAX business to ensure that they secure these exclusive rights to deliver (indiscernible) IMAX Experience within their area before their competitor does.

An example of this is our first-quarter deal with CJ CGV Company, an affiliate of Shale (ph) and the largest commercial exhibitor in Korea, which operates 388 screens and 50 state-of-the-art multiplexes across Korea. CJ is a subsidiary also of the leading film distribution and production company in Korea, which is a significant stakeholder in DreamWorks SKG, and they also hold the distribution rights for movies produced by DreamWorks for Korea, China, and Hong Kong.

During the quarter, we signed a fourth theatre deal with this important exhibitor. All four were for MPXs and two are scheduled to install in December of this year. Just to give you some color, we've been approached by this exhibitor about a decade ago. The catalyst that flipped the switch and motivated the exhibitor to enter the IMAX business was not only the compelling economic model but also the fear of losing valuable zones in Korea to a competitive exhibitor who had recently started to show significant interest in an IMAX deal. We have had obvious recent success with such discerning top-ten domestic exhibitors as AMC and National Amusements, and these customers are certainly a critical focus for us.

We believe that deals such as yesterday's groundbreaking announcement will spur on additional interest from other top domestic exhibitors. However, given that the commercial exposition business is highly regional, it is also important for us to focus on some of the smaller regional exhibitors, since they are becoming an important factor in IMAX's growth. In some markets, the top complex may not belong to one of the top-ten exhibitors. Since the contract provides the theatre operator with a zone of exclusivity, even a smaller regional operator that enters the IMAX business can and will be strong competition for a nearby multiplex operated by one of the top-ten operators. For that reason, we are excited to be getting some real traction with the second-tier market, and we believe that deals such as the one we signed this quarter with regional player Star Cinema, will serve to motivate larger operators, going forward. Star operates a 14-theatre multiplex right outside of Madison, Wisconsin and as part of a four-screen expansion, Star will add an IMAX MPX to its complex later this year.

Rounding out the quarter's 12 signings were deals for two multiplex-based theatres in Latin America. One will be with a commercial multiplex in Costa Rica and the other in Guatemala, the first theatres in either country. I believe they were a direct outgrowth over the success of our recent theatre openings in Mexico.

Continuing the string of successes we've had recently in the fast-growing Asian markets, during the quarter, we signed a deal for IMAX MPX system with a commercial exhibitor in Chennai, India and another with a major real estate company in Zhengzhou, China, a city of 2 million people southwest of Beijing. We also signed our first deal in Kuwait, an agreement for two MPX systems with the Kuwait National Cinema Company, that country's largest exhibitor.

Finally, during the quarter, we signed an agreement for an IMAX MPX system with Pathe Netherlands, that country's leading exhibitor. This theatre not only signed but installed and opened during the quarter. The IMAX theatre opened in a multiplex in Amsterdam in March in time for the release of Robots and quickly became the top-grossing theatre in that country for that film, beating out the number two theatre by over 40%. In fact, the Pathe IMAX theatre grossed over 8% of the film's total box office in the Netherlands.

As you know, approximately 600 of our 900 identified zones lie outside of North America. As such, going forward, we would expect a similar proportion, about two-thirds of our signings, to come from international markets. The global economics are virtually identical with the dollar margins on the average theatre system sold to an international customer approximately the same as the dollar margin on a domestic signing. The economic model of an MPX retrofit is essentially identical for an international operator.

I thought I'd give you some additional color on just one of the newest international markets for IMAX, Korea. Korean cinemas are among the most heavily attended in the world with average annual attendance of more than 100,000 people per screen, or nearly three times that of U.S. theatres. This strong movie-going culture, coupled with very high average ticket prices and theatre occupancy rates, makes an extremely attractive market. IMAX has a strong brand recognition throughout Asia. In fact, we opened our first commercial theatre in Korea 20 years ago. Located in Seoul, this theatre has been very successful, averaging as many as 1 million visitors per year in some years. With these average ticket prices and occupancy rates, we believe that the total return to IMAX on the new Korean multiplex theatres through our royalties and other recurring revenues could be well in excess of our expect return on a domestic theatre under our normal deal.

Not only is our 2000 (sic) film slate complete now, but our 2006 film slate is also starting to take shape. We are currently in discussions with virtually every studio for a significant number of pictures for 2006. Reflecting an important shift in our business, the studios are now approaching us with film opportunities. It's a very different dynamic than when we were selling Hollywood on the idea of a (indiscernible) conversion just a short time ago.

As Brad alluded to earlier, Polar (indiscernible) studios understand the tremendous audience appeal of the IMAX 3-D Experience. We expect that our 2006 film portfolio will comprise approximately five DMR films and one original production, Denizens of the Deep, a 3-D film we are producing with Warner Bros. In all, we expect that several of next year's films will be IMAX 3-D presentations and hope that one of these will be a 2-D to 3-D live-action conversion. We've completed tests for this conversion technology on four different Hollywood films, and the results so far have been excellent. We've already confirmed publicly that we are currently in discussions with several studios about doing a live-action 3-D conversion next year.

A lot of you are starting to take an interest in asking questions about digital cinema since a fair amount of press came out of Show West six weeks ago. At IMAX, we began to take a serious interest in and have been asking questions about digital projection since the mid-1990s. In fact, we've been very aggressive, including acquiring a leading digital cinema company in 1999 and committing significant resources to a digital strategy. As a result, we hold significant intellectual property and other rights surrounding many areas of digital projection and fully expect to be the leader, in time, in developing a large-format digital projection system.

That said, digital cinema has happened a lot more slowly than we or most people expected. There are still a number of unresolved issues surrounding the practical deployment of digital, and there are currently only about 90 digital projectors -- digital screens at of over 35,000 screens in North America. There have been recent rumblings that digital cinema may soon accelerate. If and when digital cinema does evolve in the 35mm world, we will employ our intellectual property and accelerate our rollout in order to take advantage of the significant positive impacts digital projection can have on our business, including the ability to cut print costs and show live-action content, maybe even live-action 3-D.

The value of our brand and our standing as the leader in presenting the best images on the planet, as well as our history of involvement with digital, has already attracted a number of leading manufacturers interested in partnering with us. We feel quite comfortable that the digital revolution in projection will eventually provide a significant opportunity for IMAX.

With that said, let me turn now to forward-looking guidance. In 2004, IMAX really made a strategic jump to commercial entertainment destinations, delivering our best year for signings in seven years and our best film slate. These strategic and operational successes will start to show up in our financial results for this year. In turn, the strategic momentum we expect to accelerate through 2005 will start to show up in a more meaningful way next year.

While signings are not linear throughout the year, the run-rate for the last nine months since our first MPX installation, plus yesterday's AMC announcement and our current level of activity, both domestic and abroad, puts us on track to hit the high end of our previous guidance of 40 to 45 signings.

At this time, we're not going to change guidance but we feel very comfortable with the level of activity around our business. We still expect to install approximately 40 systems, including the five AMCs we announced yesterday, and we expect to generate total revenues of between 145 and $150 million for the year and forecast net earnings of between $0.35 and $0.38. This would represent growth of about 40% from 2004's net earnings of $0.26 per share after bond refinancing costs. Of course, given our joint venture arrangements with AMC and our increasing participation in film grosses from the Hollywood studios, we do expect that our revenue mix will begin to shift starting later this year, with a greater share of our revenues recurring than in the past.

For the second quarter, we expect to install approximately seven systems, which includes two of the AMC theatres. We expect to report total revenues of approximately 27 to $30 million and net earnings of between breakeven and $0.02 per share.

In closing, I'd like to bring you back to the basics. There are two key components to our business, and we've been very consistent in focusing on those (indiscernible). New theatre signings and upcoming film slates are the best forward-looking indicators of our business and its earning potential. We've reported significant measurable progress on both these fronts, especially since the first installation of our MPX system last June. Since then, we've reported the best nine-month period for new theatre signings in eight years, including twelve theatres in the March quarter in eight different countries, all with commercial exhibitors. Of course, our financial results tend to lag our signings, owing to the gap between signing and installation, and reflect some elements of our transformation from an older business model, but our MPX system is even starting to compress this gap. In addition, new financial arrangements with the studios and exhibitors, such as today's deal with AMC, are helping to shift our model toward more recurring revenues than in the past.

On the film side, we are seeing an unprecedented level of interest from the Hollywood studios, much of it unsolicited. Just four months into the year, we have our 2005 film slate in place and our 2006 film slate in various stages of discussion.

Our results suggest that both the exhibitors and the studios are starting to recognize the value of an IMAX slot, whether that is a theatre zone or a film slot. This competitive dynamic is starting to spur additional growth for IMAX. With a multi-theatre deal in place with another major domestic commercial exhibitor helping to grow the IMAX network and new developments such as live-action 2-D to IMAX 3-D conversions promising to differentiate the IMAX Experience, we are establishing IMAX as the premium price destination in the commercial entertainment marketplace.

Thanks for listening, and we are now happy to take your questions.

(OPERATOR INSTRUCTIONS). Rich Ingrassia at Roth Capital Partners.

Good morning, everybody. Rich, in the Pro Forma you just described in the AMC deal, it's interesting to me that you assumed -- or I thought I heard you assume cannibalization of 25% just to sort of paint a worst-case, even though the data has sort of disputed or negated that concern. Was that one of AMC's main obstacles over the years here? Or maybe you can just describe what finally turned a company that's been thumbing their nose at you guys for decades.

I think thumbing their nose is a little strong, Rich. I think they've been, like other exhibitors -- you know, we've said, on these calls, exhibitors have been looking. AMC, I don't know, let's say six or eight months ago, traveled up to Toronto and looked our MPX projection system. I think, you know, AMC has been looking at the data like everyone else, Rich. They have been looking at the film announcements; they've seen the low cannibalization rates; they've seen the film slate fill in. They talk to the studios, you know, more than an ordinary third party, and they've heard from the studios that there's a lot of interest in film. I think all of those things helped to turn -- and I think one of the things that helped to turn them was the structure of the deal we came up with. You know, the deal provides a sharing of risk and a sharing of benefits. In fact, although I don't want to go into the details of it, the economics are keyed off of the real cannibalization, not this theoretical cannibalization rate. But I wanted to make the point that even using a rate which was significantly higher than we believe is the real rate and using numbers for those multiplexes that are significantly lower than what we think they can generate, the deal is worth more on a present-value basis to us than if we had signed the typical third-party deal with AMC. So from our point of view, that's just not a good deal. We got AMC into the business in a way that we think is going to make us more money than the standard deal. I think, from AMC's point of view, this is somewhat of a test. They are opening five theatres, and they are sharing the capital costs upfront with us, so it's a pretty low-risk way for them to get in the business. I think, if it works and -- you know, they're going to have a good bird's eye view of whether it works, because one of their sites is the best multiplex in Kansas City. If it works, I think hopefully they'll get into the business in a bigger way.

It sounds like, from the description of how you're pitching in on the costs, that it's something in the order of a 30/70 split on that cost with you paying the 70%. Is that about right?

Yes. Again, I don't want to go into it other than to say we are paying for the cost to the system and we're also paying for installation costs, just soft costs in installation. They are paying for the retrofit of the theatre, but you know, we're not comfortable in spelling those out just because of our agreements with AMC. But the way the deal is do structured, we think it is very little risk for us. You didn't ask us, Rich, but also, from an accounting point of view -- probably was going to be next question -- our costs will be capitalized, so they will be matched with the revenues in some way; they won't hit at the time of installation in a material way.

Okay, that's good. I guess this would be for Brad. Thanks for the breakout, first of all, on the buyout. That 6.9 is not all UCI though, right? Can you break out what was maybe buyouts and then what was UCI?

The great preponderance of that was UCI, Rich.

Okay. Then do you have a breakout of the maintenance and the royalties?

I don't have that off the top of my head. Can we get back to you on that?

Sure. Finally, maybe if Frank is there, an update on the deferred tax asset. Any potential credit on that valuation, or the valuation allowance, and then maybe CapEx and free cash flow for the quarter? Thanks.

We're not projecting any change in the dilution (indiscernible) at this point in time. CapEx in the quarter was 2.4 million; about 0.3 of that was fixed assets and the balance was film.

Eric Wold at --

Operator, can you speak up? We are having trouble hearing you.

Eric Wold at Merriman Curhan Ford.

Good morning, guys. I want to get to the Q2 guidance. It seems like there might be a little confusion out there of the guidance. Obviously, this is the first time guidance you guys have given. Now, the seven theatres you gave guidance to, since five of those are normal and two were AMC, only five will be counted as kind of normal. The way in the past (indiscernible) being upfront recognition?

Yes.

I mean, for the full year, which I guess you kept the same 35 theatres you had before but then kind of raised -- got on incremental five with AMC?

Correct.

I just wanted -- (indiscernible) commercial theatres, do you have a sense of how many commercial theatres you have installed now in the U.S. and how many will be installed based on kind of that 40-theatre installed number, how many commercial theatres will be installed at year-end?

Now, you're talking about the ones (indiscernible) DMR, is that how you're defining commercial, Eric? Because obviously the Grand Canyon is a commercial theatre.

Yes.

You know, it's about 50 now in the U.S., and my guess is, in the U.S., it will probably be around somewhere between 60 and 65 by the end of the year.

Okay.

That's assuming a fairly conservative signing rate. As we talked about, you can sign and install in a relatively short period time, so it could be more than that but I'm trying to be conservative.

I understand. In thinking now about how many theatres are showing or showed Robots, you know, however you want to paint it out, domestically or internationally or worldwide, how do you think that will change between now and when you get to Harry Potter? How many will show that movie?

I mean you know, we don't think about it. I mean, you can do the math. We don't think about it that way, but if you look at the fact that there are roughly 80 theatres more or less that showed Robots and my sense is, you're probably between 60 and 65 domestic, and the remainder international. If you look -- again, I can't tell you off the top of my head exactly as we go through the next three quarters. Our expect is international installs versus our expected domestic installs. But if you used a gross number when you're looking at our signings and the fact that you may be running two out of three international, you just sort of -- this is a gross way to do it but just sort of paste that in on a linear basis and give you some sense of where we would be by the end of the year.

Okay. Then lastly, I just want to try to head off any confusion that might be out there. Since it looks like a lot of the disconnect between the Q2 guidance you gave and kind what the consensus was, or at least kind of what my number was, was your lower number of installs in Q2 versus kind of what was expected, even though you didn't change here before your number (ph), so more are coming in the back half. Can you just kind of head that off as you go into the back half of the year? Can you give maybe a rough sense of how many the remaining installs will come in Q3 versus Q4?

Yes, I don't think we are prepared yet to give specific Q3 and Q4 guidance, because, I mean, Eric, this is a really hard thing, to know whether a guy installs on June 30 or on July 3, or, you know -- but the most relevant point is that, out of our 35 installations that we have budgeted for revenue-recognition for the year, about 30 are done, so we need about five more to sign and install this year. You saw yesterday, I mean, we signed AMC -- is buying -- is signing and installing five this year. So that's kind of what has to be filled in.

In terms of guidance for the second quarter, we never provided install guidance on a quarterly basis, so you know, the business you're in was pulling -- not you personally but the analyst business kind of pulling it out of the air. Remember, we introduced the MPX in July. The Polar Express results came in January, so the signings came in the first quarter. A lot of those that are going to be installed in the third quarter, or the fourth quarter. Again, we're comfortable with our yearly guidance. A gap of five we think is one that we should be able to fill, but I don't know where anybody else's number came from for the second quarter. But you know, we're sort of pretty much consistent with where we were all year.

I mean, we do the best job we can, obviously, with respect to quarterly installs but as Rich said, just think about it. You are trying to key off a number that has to do with installs, which is a function of either regulatory issues for a third party or real estate issues for a third party, or whether the firemen -- you know, the fire inspector in a given city delays an appointment by two weeks in terms of when he shows up to certify an auditorium, because that impacts when it's installed or not -- very, very difficult. I think that's one of the reasons why it's difficult for us to get precise install analysis or projections on a quarter-by-quarter basis. It's just the nature of the beast. I mean, years and years ago, we used to be on a delivery basis; that was more within our control. But more conservatively, we've moved it to an install and that becomes less in our control.

I understand. Okay, thanks.

Ken Silver at CRT Capital.

Good morning, guys. Guidance -- the full-year guidance, Rich, that you gave during your prepared remarks, I went back and looked at my notes from the last conference call and I had you at revenue of 140 the last time we spoke and now it's 145 to 150. Is that right?

Yes, that is right. We upped it a little bit.

Okay. Installations, I had you at I think 35, maybe 35 -- I think at 35.

Yes, 35.

We haven't changed other than to add the AMC ones.

Fine, fair enough. Though re-release OF Polar Express, how much -- how is that going to work? Is IT going to get marketed? I mean, it's sort of a one-off movie in like 70 theatres. I mean, how is that going to get marketed?

Oh, it will get marketed. I mean, you have Robert Zemeckis, who is an important relationship to Warner Bros. That film was co-financed with Warner Bros.; they have an equity partner in it. You know, they are putting it out there to make money and in order to make money, you're going to have to promote it also. I'm not sure when they plan to sell the DVD of Polar, but I think any heat around the marketing with respect to an IMAX re-release of Polar than any publicity we get in the theatre will probably help their DVD sales as well. So, they intend to market it.

Okay. Then I had a cash-flow question. Your cash went up by a little less than $1 million in the quarter. You did not pay cash interest in the quarter. The coupon is due in June. I mean, I know the EBITDA line is not a cash number, but if I go through the P&L and I go through all of the working capital changes from the balance sheet that you nicely provided, it seems like there's about 4 or $5 million of cash that doesn't -- it's not adding up.

I mean, we should answer that off-line so we can go through it in detail with you.

Was there any one big expenditure that -- like, was there any repurchase of stock or was there any -- (multiple speakers)?

No, we had a film commitment for which we received (inaudible) in the second quarter of last year, about 3.5 million that we paid out in this quarter. So if you look at the accrued liabilities, you will see they are down substantially.

I included -- I did that. All right, I'll talk to you about it off-line.

Well, if you look at it, P&L is up by about 1 million, and cash was up by about 1 million when you look at short-term investments, so --.

(multiple speakers) -- our cash balance, I don't know if it's a timing thing but right now, it's about, you know, the level of magnitude you talked about, higher than it was at the end of the quarter.

Okay, all right. Then the last question I had was about the AMC deal. Did I hear you right that you were contributing the system and you're going to share in the revenues and some of the operating costs, and you think this is a better deal than just selling, you know, what you usually do?

I think the most important thing is (indiscernible) the terms of the specific joint venture. You know, it's more, I think, two things. One is an operating lease. Obviously, it's not a sales type lease and as Rich said, there's no -- both revenues and costs will fall into our P&L over time, and the net present value of a reasonable, expected case in terms of profitability should be more profitable for us in the joint venture type setting than it would be in sales-type lease setting.

I just want to add, though, because these locations are so good and because AMC is such a good operator, that's why we think it's a better deal for us. I mean, it wouldn't necessarily be a better deal everywhere, but in this instance, it's a better deal.

Okay, because I was going to ask you why haven't you been doing this all along then? But that's why, you're saying, right?

Well, I mean there's a lot of reasons. You know, it's a question of what the operator wants, too. A lot of operators would rather protect their downside and keep the upside for themselves.

You know, the analogy -- you know, years ago in the film business -- the first time we did a DMR film, Disney Fantasia 2000, we asked if we could be their partner in the IMAX release. They said, no. You know, we and Disney were going to put all the money and we were going to take all the risk, and we were going to take all the rewards. Then we dealt with another studio, and they said, hey, do you want to share in the risks and the opportunities of being in your own business. We said yes. So, you know, every exhibitor has its own profile in terms of the types of thing they want to do, and you know, we plan to be opportunistic and try to do the deals that we think are in the best interest of IMAX.

Okay. One last question and that is, I mean, your stock is getting killed as this call has been going on, even though you've definitely said some good things. I think it has to do with what you said about the UCI and the lease buy-out revenue earlier. If you're saying that that number is going to be 10 million for the whole year, does that mean we are basically -- we've already done 7 out of 10 in the first quarter?

We said it would be about 10, and I think -- (LAUGHTER) -- you're pretty good at math, so --.

Okay, fine. Nothing else -- just to make sure I heard it the right way, that's all.

Tony Gikas at Piper Jaffray.

Good morning, guys. A couple of questions, just to follow up on this AMC deal. How did this change your current guidance, number one? Then maybe just in terms of comparing what you think the benefits to the economics of this deal are versus, you know, a traditional or typical system install, I mean, can you just compare for us your base case scenario? I mean, is it 1.2 times is profitable, is a typical install, or maybe just give us a little or color there? You don't need to walk through all the details. Then, will the commercial theatre operators here in the U.S. -- are they going to come to expect more of these JV-type structure deals?

Well, just going backwards, in terms will the come to expect, I don't think it's what anybody expects. I think, you know, there are some operators that are going to want to do sales-type leases; I think there are other operators that will want to do joint ventures. I think we will, you know, we will assess the situation sort of on a one-off basis. You know, just because we have been in this joint venture, I don't think you should feel that IMAX is no longer doing sales-type leases any more. And I also don't think you should think that all of a sudden joint ventures are going to become a greater number than sales-type leases.

I think one of the reasons we're excited about the joint venture is we like the notion of moving our P&L off one-time events towards recurring revenues and cash flows. It was important for us to do that in the film area, which we have been doing over the last 18 months. Now we're beginning to do that on the exhibition side. So, I think you're seeing the beginning of what we hope will turn into a trend, but it's not -- this isn't a discrete change in business model where all of a sudden IMAX is just doing joint ventures. It's not that at all. You know, I think I am reluctant to give you assessments as to what the profitability is as a multiple of the sales-type leases. You're asking for a formula.

Although, Tony, to give you a little bit of help in it, you know, it obviously depends on what the real performance is and the real cannibalization rates, but in general, all five theatres should generate a little -- if you just model it out on the assumptions we've discussed -- should generate, on a yearly basis, a little bit north of $1 million to IMAX in profits.

Okay. Then how did this deal change the guidance that you have for the year? I mean, internally, maybe it's the mix. Maybe you could just walk us through that. With the signings picking up and the fundamentals of the business having some positive trends, is there an opportunity to change or increase the royalty structure?

Well, I think that's what we did through the AMC deal. As Brad said, by using an operating lease rather than a system lease, we get a much more significant piece of the box office by contributing the system.

I think, longer-term, the way -- if you change the royalty structure was sort of the back end of the remarks we presented, which is that you create competition for slots on the film side and for zones on the theatre side. So when two studios want the same slot, you can get a higher royalty on the film side, and when two exhibitors want the same city, you can get a higher royalty on the theatre side. On the film side, that's beginning to happen already, and on the Theatre side, it's happening in some markets and hopefully the AMC deal will accelerate the pace with which it happens in North America.

Then how did the deal change guidance?

It hasn't. As I said, Tony, if you look at it and you say, you know, basically you model them out and they look somewhat north of $1 million a year, you're not really -- you are installing two in June and then three in September, so it's not enough to make you change guidance for this year. You know, as we said in our remarks, it really starts to kick in in '06.

Matthew Harrigan at Janco Partners.

Two questions -- first of all, you've obviously got a lot of headroom on the IMAX zones and everyone will be happy if you approach the upper end of the collar over a period of years, but if you really do get an acceleration in the number of DMR releases when you move into '07 or '08, let's say -- let's say you have double-digit conversions and you have multiple 3-D releases. Are you going to have to address, in some of the better locales like New York City or whatever, the terms of the IMAX zones and really sort of rethink, in your long-term strategic plan, the number of zones on a global basis?

Then secondly, can you talk -- I think TI was out at Show West and they were showing some technology in concert I think with Sony and maybe with Lucas, where they did not mention you on the 3-D side. I was curious as to how all-inclusive your arrangements with TI were and also if you could comment at all -- I suspect you can't -- on the patent litigation with -- in 3-D.

On the number of zones, I mean, these zones aren't embedded in stone and in fact, you are quite correct that, as the number of releases increases and the network increases, you might want to have more zones. So an example would be, right now, Brooklyn is one film zone and Queens is one film zone. When (indiscernible) get going, it really might be three zones.

The answer is, in the reality of the exclusivities we give, the way they work is we probably, if someone came into Brooklyn now, give them two years for all of Brooklyn, and then give them a much smaller radius for around the theatre for the last part of the contract. So therefore, we will have the flexibility, within the terms of our agreements, to expand the number of zones if that is the way the business evolves. Is that where you were going?

Yes.

With that question?

Yes, that answers my question.

Just jumping around, one -- I think you asked about In-3 (ph) and I think, as you know, we've sued In-3 (ph) for patent infringement where we believe that they've infringed our patents on the 2-D to 3-D live-action technology. You know, IMAX spends a lot of R&D and effort in many different areas. You know, we have lots of IP, and when somebody violates our IP, you know, we protect it. You know, that's what we're doing with In-3 (ph). I don't think there is a whole lot more to say with In-3.

Let me segue into your TI comment and then Rich can augment. Since you were talking about Show West and Sony and TI, you know, I think that there's a -- perhaps a -- you know, I wouldn't call it a standard war but between two big characters, TI and Sony, there's a little bit of a leveraged fight brewing with respect to what the uptick will be in 2-D, with 2-D digital projectors. TI was there first. They are there with a 2-k chip. Sony has announced that they want to work with a 4-K chip. They really -- right now, TI does not have adequate traction in terms of the deployment of their 2-K chip, but if they get a read beachhead, that will be a problem for Sony. I think Sony is hoping that past is a prologue to the future and that TI's deployment will be slower rather than faster and that will give Sony an opportunity to get out there and compete with TI on a basic 2-D digital chip. None of that really has anything to do with IMAX or large format or really top-end digital -- you know, a space where I think IMAX would expect to be at some point in the future. So, Rich, do you want to add?

No, I think you gave a full -- how much -- if there's anything we didn't cover that you'd like us to speak more on.

On TI, I was under the impression that you had some intellectual -- IP cross-sharing rights with TI on a high-end digital. I was aware of the 2-K, 4-K debate, but wasn't -- (multiple speakers) -- showing some 3-D technology that I thought that you had exclusivity in working with Texas Instruments on 3-D projection. Maybe I misunderstood.

No, we have had a form of large-format digital exclusivity with TI and you know, the definition of large-format I can't do off the top of my head, but it didn't discern between 2-D and 3-D.

Terese Fabian at Sidoti & Company.

I actually have two questions. Thank you. One issue that you have talked about before is making an arrangement or some kind of -- I don't want to say a deal, but an arrangement with studio perhaps for getting sufficient film product flowing through I imagine at regular intervals and stuff. Is this going to be going any place, or are you satisfied with where you are in terms of your discussions for 2006?

I think our discussions for 2006 are in really good shape, as we said during the call. There's much more demand from studios for films in the key slots than there is the availability of slots. But you know, as we said in the press, there might be a number of reasons that we decide to, at some point, do something larger with a studio, like have a strategic investor or something along those lines. Those reasons would be just it might accelerate our growth faster; you might be able to lever off some of their infrastructure on the distribution side and some of their credibility with exhibitors. So, that's something we are always thinking about, but I don't think you'll see us do a multi-picture joint venture in '06 in order to get more film products because I think the film side is going very well.

Okay, great. Then my second question is on the lease terminations. Were any of the ones that you had this quarter conversions? I think one in India was that I saw. Were there any others? Did you give a number on the number of lease terminations?

I don't think so. I don't think any of them were, Terese.

Oh really? Maybe that was for them the second quarter. I thought that, in India, there were two; one was cancelled or two were started or something but I may have misread. Thank you.

David Marsh at FBR.

Thanks for taking the question. Guys, as we talk about the film slate, I think you have put together a pretty good film slate but there's a --.

Could you speak up? I'm sorry, we're having trouble hearing you.

Sure, sure. I just wanted to focus on the film slate for a second. You know, I think you've put together a pretty good film slate for the year, but there's a pretty major picture coming out two weeks from today by a gentleman with whom you've had some relations in the past, who seems to like your product. Are we too close to the release window for you to do anything with that, or are you just not interested in doing anything with that film?

Are you talking about Star Wars?

Yes.

I believe we were interested in doing something with that film, but a variety of factors, including their post-production schedule as well as the potential economics to us, just didn't work out. So you know, every picture you have, there's a lot of criteria that go into it, and it includes the nature of the film, where they are in the post-production process, how practical it is for you to do it. A big one is what are the financial terms going back and forth. It is a picture we had talked to them about but for a variety of reasons, it isn't going to happen. As Brad went through the math in his -- the first part of the presentation, to make this really attractive for exhibitors, you need to do $1 million a year in box office, and we're really comfortable we have a great film slate. You know, if it could have worked out, that would have been great, but we think our film slate is great without it.

That one might have given you 500,000 out of the gate! That particular producer has publicly expressed an interest, you know, in perhaps reformatting all of the films. Could you just talk about what the potential is with regard to that and how that might play into a future film slate?

Then also, just more generally, has the time in fact decreased in terms of your ability to turn a film? I think the last time we had spoken, you were at about a month for you to re-format a film. Have you been able to compress that at all?

I think we can go to the second question first. I think we are even quicker than a month for Spiderman last year, right?

I think for Robots, it was eleven days -- (multiple speakers).

(multiple speakers) -- yes, so I think we are doing in half that time. So, yes, we continue to make progress. You know, you can't -- it's not like Moore's Law. You can't keep dividing by 2 every six months, because we're not going to be able to do it in a day. But we're doing it in 14 days.

You know, in terms of Lucas reformatting his Star Wars films in the future, I think this is something that -- you know, he's been talking about this for a while. I think initially he said he planned to start doing it in '06 and then there was a correction in the press, actually, where they said, well, we're talking about one a year and maybe starting in '07. I think -- you know, here is total speculation, but I think the Lucas organization is obviously going through a major change. I mean, they are doing their last big feature film right now, and I think they are trying to define what their future is. I just read in the New York Times (indiscernible) the trades recently that they are announcing some television programs and TV spinoffs, and there doing cartoons. We've heard speculation that maybe in San Francisco someday there will be a Star Wars museum where there's a perpetual showing of Star Wars, various episodes of Star Wars. So, I think what you're hearing with the reformatting of the six films is just their musing and their speculating about what their business is going to be look like as they look forward to the next five years.

Sounds good. Well, if you could do it in 11 days, you might want to -- (LAUGHTER) -- throw another call at them! (LAUGHTER). Anyway, thanks, guys.

Ladies and gentlemen, this does conclude the question-and-answer portion of the call. I would like to now turn the call back to Mr. Brad Wechsler for additional or closing remarks.

You know, I think the only closing remark that I would like to make is, you know, I just again -- I want you to hear and be aware of the enthusiasm in Rich's and my voices when we look out over the horizon of what we're trying to do. You know, you take down from 100,000 to 50,000 feet, it's unbelievably simple, which is not -- as somebody on the call said, gee, you know, your stock is going down, you know, it probably had to do with UCI. UCI is backward looking for us. It has to do with something that happened in 2001 in a settlement that occurred this year and cash that we've got. When we assess our business -- I mean, we are operators; we don't have our finger on a buy/sell button every minute. But we do look at key indicators of our business. The key indicators of our business are signings and films, prospectively, because it feeds that circle where films bring signings and more signings means the film makers can make more money in IMAX. What we do -- we have the best signings in the last nine months in eight years. It's an -- we had 12 signings in the last quarter. It's an unbelievable forward indicator. We've collapsed the period between signings and delivery. We are moving the model more towards a recurring revenue and a recurring cash flow business. We've locked the '05 slate. We haven't talked about it at all today but the '06 slate -- for the '06, there's at least a dozen films that we've been in conversations with the studios that are really, really great films. We are migrating towards an area that the public is really very, very interested, as evidenced in Polar Express with more and more 3-D.

So I think the punchline for Rich and I is we're just extremely bullish about the future. We feel really good about where the Company is an what the foreign indicators are, and that's my conclusion.

So, thank you very much. Rich?

I was going to actually -- we don't script a conclusion of how to react to the call, and I was going to say something kind of similar to what Brad said. I actually said that's internally, which is if there are a half-dozen or eight criteria that one would look at in our business in any particular quarter or year-over-year, you would see the great preponderance of them going in a very positive direction, as Brad said, whether it's signings or installs or earnings on a year-over-year basis. You know, we can come up with many others. But in IMAX's stock, which is your world and not our world, we have a constituency out there, which is actually a very large short position. The way they make money is by shining a giant flashlight on the one criteria that doesn't sync up with the others. So last quarter, for example, it was deferred revenues. You know, I think, on this call, we spent a lot of time, even though deferred revenues are way up, saying that they are not a good indicator, so don't give us credit for them. They are not something that we look at. You know, I've learned not to underestimate people's ability to shine the giant spotlight on one or two of the criteria that aren't syncing up with everything else. But if you step back and you look at the facts that, last July, we introduced a new product and since that time, including the AMC signings yesterday, I think we have 41 signings, in just over nine months. I think you see film deals -- last year -- I joke and I say, our head of film used to have to go begging around Hollywood and this year, his phone is ringing with too many prospects. I think, yes, as we said during the call, some of our earnings that we report on in the present reflect some legacy of our past business, but I think, if you let people shine the light in these corners, you're missing the big headline, which is that our business is really on a breakout.

With that, thank you very much, everybody.

Ladies and gentlemen, thank you for joining us. This does conclude the conference, and you may now disconnect.