Imax Corp (IMAX) 2005 Q2 法說會逐字稿

Welcome to the IMAX conference call. Today's 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 very much, operator. Good morning, everyone, and thanks for joining us today for our second-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 second-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 views of these managers and reconciliations to GAAP measures are contained in the Company's second-quarter earnings release. The full text of the release, along with supporting financial tables, is available on our website, www.IMAX.com.

We decided to hold this call earlier in the date in order to give our investors a bit more time to digest the quarter's results and listen to our comments before the opening of the market. I should mention that for our next call we are open to your comments and suggestions regarding your time of preference.

Given the earlier timing of our call, Rich and I are going to try to keep our comments a little more brief than usual. I will start with a review of our financial and operating results, and Rich will go through more detail about our recent signings activities and film performance. Finally, we will update you on forward guidance and take your questions as always. In addition, we will spend some time today talking about some of the current industry trends and where IMAX fits into these trends.

Specifically as I'm sure you have all seen, there has been significant pressure on the domestic 35mm box office. This trend poses a significant opportunity for IMAX to continue to differentiate itself from the conventional 35mm release window, as well as other platforms both in-home and out of home. In fact, data shows that IMAX results are running counter to the industry with box office of high customer satisfaction and long box office legs.

This quarter revenues and EPS were in line with guidance and earnings were in line with guidance, and earnings from operations and cash were both up year-over-year. Perhaps even more important, however, are our strategic results. Signings activity continue to accelerate, and our film portfolio is on track to reach the $1 million per screen hurdle we have modeled for exhibitors to earn their three-year payback on an IMAX MPX system. These two metrics, signings and film performance, are the best forward-looking indicators for IMAX as they work together to drive future growth and profitability.

It was just one year ago when we installed the first IMAX MPX system which opened up a large new market for IMAX, retrofitting existing commercial multiplexes. In the 12 months since we have signed deals for 51 systems. That is more than double the 22 signings for the comparable period a year ago. We reported 13 system signings in the second quarter, the most we have reported for second quarter since 1997 and more than triple the four signings reported during last year's second quarter. Signings are such an important indicator of our future performance because each signing ultimately becomes revenue and earnings.

Included in the Q2 signings was an agreement with AMC Entertainment to retrofit five multiplexes with IMAX MPX theater systems. Just six weeks after the signing of this agreement, two of these theaters opened in AMC multiplexes in Kansas City and Phoenix in time for the June 15th opening of Batman Begins: The IMAX experience and a third opened just two weeks ago in Detroit.

As we discussed in our last call, the structure of this deal, the joint venture arrangement, allows us to take advantage of the ongoing economics of MPX IMAX theaters programmed with our DMR films. Each of the first two IMAX AMC theaters have already grossed more than $250,000 per screen, and that is from only seven weeks of operation.

We continue to believe that the AMC JV arrangement was the right deal structure for the right theater locations at the right time and that the MPV of these theaters to IMAX will ultimately exceed that of our standard sales type leases. For those of you don't recall the terms, IMAX contributes the system and AMC contributes the retrofit and startup costs. After both parties recover costs, IMAX and AMC share in the incremental profitability that the IMAX theater generates.

Specifically at $1 million in box office revenue, these theaters generate a net presence value for now IMAX of approximately $1 million. Given their locations and initial performance, we feel these theaters have the potential to do even better than the $1 million hurdle of annual box office which would mean a net presence value to IMAX of more than $1.5 million. The last two AMC theaters are still on track to open in September.

Returning to signings in general, since the cash we receive upon signing does not hit the revenue line on our P&L until future periods, this quarter's signings momentum is most evident in our ending cash position and backlog. At June 30 our cash position, which includes cash and short-term investments, was approximately $34 million, double the cash balance of $17 million a year earlier at June 30, 2004. This is after we made an $8 million interest payment in June.

Our backlog at the end of June consisted of 69 systems with a value of $115 million. Backlog values include only guaranteed payments, so the three AMC systems that were included in the quarter's backlog don't add up -- are not included in the backlog value.

On the film side, we have had been progressing towards a more recurring revenue model based upon contributing the cost of DMR conversions in exchange for a share of the box office. Our arrangements with the studios generally allow for us to collect between 10 and 15% of the gross box office, allowing IMAX to actively participate in the success of DMR releases such as Batman Begins and Charlie and the Chocolate Factory. Both of these films had record-breaking opening weekends and together have grossed nearly $22 million worldwide or over $300,000 per screen in just seven weeks.

Year-to-date our 2005 film portfolio has already generated approximately $700,000 per screen domestically with more play time on Charlie and Batman and three more film releases still ahead. This puts us on track to exceed the $1 million in per screen box office revenue modeled for the exhibitor to earn a three-year payback on his MPX investment.

Even though we're just halfway through 2005, last week we announced that our 2006 film slate is already beginning to take shape. Next August we will release the Ant Bully in IMAX 3D. The film has all the DNA to be a great IMAX film. A family-friendly CGI animated film based on a popular children's book of the same name which will be shown in IMAX 3D. The film is being coproduced by Tom Hanks and Gary Goetzman with Julia Roberts as one of the many primary voices. This is the furthest in advance we have announced an agreement for an IMAX DMR film, and we expect to begin filling in spring and early summer '06 shortly.

The good news is that there are a lot of great films coming up ranging from Supermen to Cars to Poseidon Adventure to Mission Impossible III to The Da Vinci Code. Actually the list is even longer, but I just wanted to give you all a flavor of the type of films that we will be choosing from.

Now let me review our financial results for the quarter. For the second quarter of 2005, total revenue was $30.9 million as compared to 31.7 million for the second quarter of 2004. Total revenue was at the high end of our guided range of 27 to 30 as systems revenue came in ahead of our expectations. Earnings from operations were up 7% to $5.4 million in Q2 of '05 from $5 million in Q2 of '04, and net earnings for the quarter were $0.03 per diluted share, just above our guided range of breakeven -- just above our guided range of breakeven to $0.02 per share. This compares to net earnings of $0.04 per share for the second quarter in '04.

Earnings in the June quarter 2005 were impacted by unfavorable foreign exchange translations of about $750,000 or just under $0.02 a share. Our guidance for the June quarter was for seven new systems installations and recognitions, two of which were AMC JVs. In line with that guidance, we have sold seven new systems, the two AMCs, plus five installations of new systems under traditional sales or sales type lease arrangements with an average upfront value of $1.5 million. Of these seven installations, five were MPX systems.

During the quarter, we also recognized some revenue relating to four additional theater systems. This revenue reflects cash we received in connection with changes in lease terms and deferred payments under existing contracts.

Systems revenue for the second quarter was $20.3 million as compared to 20.5 million in the second quarter of '04. As a reminder, we received cash upon a systems signing, and this cash turns into future revenue in one of two ways. Either through an installation, which contributes an upfront payment in recurring revenue, which is the case for the majority of our signings; or a consensual lease buyout which occur in more rare instances when for any number of reasons a customer cannot install the leased or purchased system.

Included in systems revenue for the quarter was $3.9 million of revenue associated with consensual lease buyout. As we have said on previous calls, these cash buyouts have been a recurring part of our business. We expect this revenue to be in the 12 to $14 million range this year and to decrease going forward, particularly as the sign to install cycle shortens due to our MPX product.

At the end of June, our network consisted of 259 IMAX theaters. As the network grows, so do the recurring revenue components of systems revenue. Specifically in the second quarter, ongoing rental revenue was up 11% year-over-year, and maintenance revenue was up 4%.

Continuing down the P&L, film revenue for the quarter was $5.3 million as compared to 6.6 million in the year ago quarter. The lower revenue in this quarter is because last year we released NASCAR 3D, and we did not release an original IMAX film this quarter. Our DMR revenue totaled $1.4 million for the second quarter of 2005 from the run of Robots in the first two weeks of Batman Begins. This is up about 2% from last year and does not reflect the robustness of Batman and Charlie which will show up in our Q3 results. Either operations revenue for the quarter were $4.2 million, up from 3.8 million in the year ago quarter, owing to a 9% increase in average ticket prices and a 3.5 increase -- 3.5% increase in overall attendance. Other revenues were about $1.1 million in Q2 '05 versus $900,000 in Q2 '04.

Turning to expenses for the quarter, SG&A was up 1.2 million to $9.8 million. The increase is primarily due to legal fees associated with the litigation of a patent infringement lawsuit which we initiated in March, as well as higher compensation expense. Compensation expense increased in the quarter due to the strengthening Canadian dollar and higher non-cash stock-based compensation charges.

We also had slightly higher staffing levels in Q2 '05 due to a higher level of anticipated theater system signings and installations in the upcoming year. We still expect SG&A for the year to be around $39 million. R&D expenses for the quarter were about 900,000, essentially unchanged from the year ago period.

Now I am going to turn it over to Rich.

Thanks, Brad, and good morning, everyone. The quarter's results show that our commercial strategy is driving tangible business results for IMAX with on target financial results, accelerating signings and strong box office growth. Our signings momentum continues to build as commercial operators around the world look to differentiate their multiplexes from competitors. And our film performance is bucking recent industry trends, showing long lines and increasing box office year-over-year.

I would like to take this opportunity to give you a sense for where we think IMAX fits into the larger entertainment landscape, and I will tie these comments and observations back to actual IMAX signings and film results.

Both Brad and I were recently out at the Allen & Co. Media Summit (ph) in Sun Valley Idaho and had the opportunity to hear firsthand about both the challenges and opportunities facing the entertainment industry. The one thing that became clear to both of us that IMAX is well positioned to be one of the few industry beneficiaries of the challenging environment. It seems you cannot pick up a newspaper lately without being hid with headlines about the current box office slump. The year-to-date domestic box office is down close to 10% versus last year and close to the record 18-week streak of consecutive year-over-year declines which has snapped only recently. Last weekend the box office fell by about 20%.

It is likely that the domestic box office for full-year 2005 will be not only lower than 2004, but also lower than the box office in 2003 and 2002 -- the worst slump the industry has seen in the past 20 years for which data is available.

Why? There are a variety of opinions on this, and I am sure you have some of your own, but one thing is clear it is getting harder and harder to get people off their couches and into movie theaters. According to a recent instant AOL poll, 73% of people currently prefer to watch a movie at home rather than in a theater. With release windows comprising and DVD players and large screen TVs and surround sound systems becoming practically ubiquitous, out of home entertainment options must significantly differentiate themselves from in-home competition.

In Sun Valley we got a look at some upcoming initiatives such as Intel's initiative with Revolution Studios called ClickStar, which aims for the simultaneous release of film content over the Internet in the home through its entertainment PC with the release of films in theaters. With the penetration of broadband to the home increasing steadily, these kinds of initiatives threaten to even further compress release window -- the time for when a movie is shown in a theater to when it is available at home. It became very clear to us that these industry challenges present a great opportunity for IMAX and our data supports this.

Our results are running counter to the declining box office because IMAX does offer that compelling differentiated entertainment experience that draws people out of their living rooms and back into theaters. Specifically the data shows that the IMAX box office is up significantly year-over-year. The legs of an IMAX film remain consistently strong, and our audience satisfaction rates are excellent.

Let me share just some of the data on these points. As you know we recently released two of the summer's hottest blockbusters, Warner Bros. Batman Begins and Charlie and the Chocolate Factory. To date Batman has grossed about $190,000 per screen, and in just three weeks Charlie has grossed about $115,000 per screen. Both films also set IMAX opening-day weekends. Batman had the highest five-day opening in IMAX DMR history on June 15th, quickly followed by Charlie which set a new three-day opening weekend record four weeks later on July 15.

While impressive on their own, these record openings are even more compelling when you contrast them to the larger industry. For example, while the domestic box office overall was down 12% in the last two weeks of June 2005 versus the same period in 2004, the IMAX box office was up by 45%. This represents the first two weeks of Batman in June 2005 versus the first two weeks of Harry Potter 3 in June 2004, two films with very similar grosses in 35mm.

While more people are choosing to watch films from their home, more and more people are also showing up for IMAX films. Not only is the IMAX experience pulling people off their couches, but it is also garnering a 30 to 40% price premium, high satisfaction rates and strong word-of-mouth. For the last six IMAX DMR releases, the per screen average is over $200,000 or about 8 times the per screen average for the 35mm version. The IMAX DMR versions of these six films have grossed again on average over 8% of the film's total on less than a 1% of the film's total screens. And while the data is still coming in for Batman and Charlie, both films are already exhibiting strong legs characteristic of an IMAX DMR release.

For example, in the fourth weekend of its run, Batman in IMAX had retained nearly 50% of its opening weekend audience as compared to only 21% for the 35mm version. We recently collected satisfaction data from people exiting the IMAX DMR version of Charlie. 92% were extremely or very satisfied with the experience, and 82% were extremely or very likely to recommend the film to others. These impressive results are similar for our other DMR films as well and higher than they are for 35mm tests on the same films.

IMAX continues to solidify its position as a fundamentally differentiated moviegoing experience. Not only have we taken note of the positive IMAX trends, but the studios and exhibitors have as well. Warner Bros., the studio behind both Charlie and Batman, significantly increased its marketing outreach to the IMAX DMR version of each film, including both voice and video tagging of every TV spot for the film with an IMAX mention.

As we discussed on our last call, the studio benefits significantly from a successful IMAX release, and our studies show that every $1.00 in IMAX box office translates into about $1.00 to $1.25 in profit, not revenues, profit for the studio owing to downstream revenues such as TV and international rights and DVD sales.

The success of Batman and Charlie has very important strategic implications as well. And for the huge success of Polar Express last year, there was some who speculated that it was the 3D effect alone which drove the results and that IMAX 2D did not provide as compelling an experience. The box office draw of 2D IMAX releases, Batman and Charlie, demonstrate that the IMAX difference is not just about 3D but rather about a premium viewing experience at a premium price.

Although we are just three weeks into the release of Charlie, we have already started gearing up for our fall films. In September together with Tom Hanks' Production Company Playtone, we will release the original film, Magnificent Desolation 3D: Walking on the Moon, which chronicles man's first walk on the moon. The film's release is expected to be the widest ever for an IMAX film at over 80 screens on the brink and eventually in excess of 100 theaters. We have already been running the Magnificent Desolation trailer before both Batman and Charlie, and as the release date gets closer, the film will be marketed by Tom Hanks, which focuses on one of his personal passions, space.

IMAX has a history of successful space films, including Space Station 3D which has grossed nearly $90 million since its release in 2002. As with NASCAR 3D, our participation in the box office for this original production will be greater for that of our DMR films.

In November we will release the IMAX DMR version of Harry Potter and the Goblet of Fire. This is the fourth installment of the Harry Potter series. It will be the second Harry Potter film released in IMAX's format. The story centers on Harry's participation in a dangerous competition called the Triwizard Tournament and is sure to include a lot of visual imagery perfect for the IMAX experience.

In fact, we are already getting a great audience reaction to the film's trailer. Harry Potter and the Prisoner of Azkaban was released lass June and grossed approximately $14 million in IMAX or over $200,000 per screen over its run. We expect that Harry Potter 4 will be released in approximately 70 domestic theaters, up from the 49 domestic theaters that showed Harry Potter 3 on the brink which highlights the growth in the IMAX network over the past year in very striking terms.

Finishing up the year, Harry will be followed by the rerelease of the Polar Express in late November. Polar had some of its best weeks over the Christmas and New Year's holiday last year, and we continue to expect the film, the best performing DMR film in IMAX history, to be a perennial, attracting families to come back each holiday season. Warner Bros. is releasing the DVD fairly close to our release date, and we believe there will be significant publicity around the rerelease of Polar.

Our announcement of the 2006 3D release of the The Ant Bully is the furthest in advance that we have ever announced a film agreement and signals the confidence the studio has in IMAX's ability to boost overall box office and enjoyment of the film. With our 3D original film coproduced by Warner Deep Sea 3D already in production, we now have two films slated for next year's calendar. We continue to see an unprecedented level of studio interest in IMAX DMR releases.

We are currently in discussion with five different studios for nearly 20 different films, and Brad just gave you a sense for some of the possible 2006 titles. We continue to expect that about half of our releases next year will be in IMAX 3D, including hopefully our first live-action 2D to 3D conversion. We remain in discussion for the right 2D to 3D live-action project and look forward to announcing it in the future.

Several months ago we initiated litigation to protect our intellectual property relating to this 2D to 3D live-action conversion process against the company we believe is infringing it. The court hearing the case recently denied each sides' motions for preliminary injunction and ruled that despite the definitive defendant's attempts to derail the proceedings, our IT claims will continue to trial and that we should be granted a relatively early trial date on this matter.

We are also making it easier than ever for moviegoers to find an IMAX film and buy advanced tickets by partnering with two of the top online movie sites, Fandango.com and MovieTickets.com. IMAX DMR films have extremely high sell-out rates and, therefore, strong demand for advanced tickets sales. Our partnerships would these two sites will enable more advanced ticket sales and also increase overall awareness of IMAX films at no cost to us. While exhibitors are typically restricted to aligning exclusively with one of these sites IMAX information will be available through both.

Strong film performances drive the model for commercial exhibitors and is a fundamental reason behind the acceleration of system signings. During the second quarter, we signed 13 contracts for IMAX theater systems. Those comprise the five AMC joint ventures; a three theater deal with Cinepolis, Mexico's largest operator well within a year of them signing their first theater agreement; a two theater deal with one of India's largest commercial operators; an agreement to retrofit St. Louis' top performing multiplex operated by Wehrenberg Theatres, and two separate deals in China which bring the total number of theaters in that contrary to 25 by the year 2008.

Now let me turn to forward-looking guidance. While signings are not linear throughout the year, the run-rate for the last 12 months since our first MPX installation puts us on track to hit the high end of our previous guidance of 40 to 45 signings for '05, and we expect we will come in at that high-end. We still expect to recognize revenue on approximately 40 installation, which includes the five AMC installations but it excludes the revenue recognitions associated with four existing systems that occurred in the second quarter.

Significantly of these projected installations, roughly 90% are already signed deals. We expect to generate total revenue of between $145 and $150 million for the year and forecast net earnings of between $0.35 and $0.38. This represents growth of between 35 and 45% from 2004's net earnings of $0.26 per share. Given our joint venture agreement with AMC and our increasing participation in film grosses for the Hollywood studios, we do expect that these recurring revenues will be an increasingly significant part of our ongoing business model.

For the third quarter, we expect to recognize revenue on approximately 11 to 13 installations which includes the last three AMC theaters. We expect to report total revenues of approximately $35 to $40 million and net earnings of between $0.04 and $0.07 a share. Backing these numbers out, you will notice that our guidance for the full-year revenues and EPS is heavily weighted to the fourth quarter as it was in '04. This weighting is consistent with other previous years and reflects the nature of our contracts, many of which were called for installation by year-end and the preferences of our commercial customers who preferred to time their constructions for the slower months of the year, September to November.

In closing I would like to leave you with just a couple of highlights. First, the most important indicators of IMAX's future growth are signings, films and more tangibly cash, and each of these metrics is on a solid trajectory. In the trailing 12 months, we signed 51 systems, equal to the number we signed for the previous 24 months.

Finally, our film portfolio is already well on its way to exceeding the $1 million per screen mark for the year of -- which give exhibitors an attractive return, and our films continue to buck the box office trends. While the industry is faced with shortened windows and customers reluctant to leave their couches and HDTVs, IMAX is emerging as a clear anomaly, drawing incremental customers back into theaters who are willing to pay a premium price for a premium experience. These dynamics have been noticed by the studios and exhibitors alike and bode well for IMAX's future ability to flourish in the midst of a tough and changing entertainment environment.

Thank you very much for listening, and now, operator, we would like to open it up for questions.

(OPERATOR INSTRUCTIONS). Eric Wold, Merriman.

On the Q4 you thought the number of installs coming into Q4 -- just a little thought on the large number of installs you will be doing in the fourth quarter. What has been your history in the past of doing that many installs? Do you expect a little G&A pressure in the quarter, or is it pretty comfortable knowing the timing (inaudible) will fall?

No, it is budgeted in there. In fact, the installation costs are largely part of cost of goods sold. So there should not be a blip up in SG&A in the quarter.

In fact, one of the blips up in the third quarter is in anticipation of the fourth quarter. We had to do a little staffing up to deal with the higher level of installations, but the numbers that we described incorporate that.

Okay. And then, a couple of little questions. On the tax rate, obviously a higher tax rate than I had expected in the quarter. Is that a sign that you guys are now kind of fully taxed going forward, or is that kind of a one quarter issue?

No, it is a quarter issue. It is a little bit of on anomaly. What you are seeing in the tax rate is a blend of -- we are beginning to bleed in in income tax which we are paying at a fairly low level of around 10% per quarter or so. But there's also a sort of a onetime capital tax in there, which is anomaly on a quarter to quarter basis.

Okay. So going forward what should we all assume?

I think you should probably model in the 10% range.

Okay. And then on the contribution on the movie side, obviously Batman spanned both Q2 and Q3. You know any thoughts on how the margin contribution of those box office revenues differ between Q2 and Q3 or getting to your much more profitable kind of contribution in the third quarter, or since it is kind of your reporting numbers after you know that 14 million is kind of behind you. Do you kind of -- does the film accounting kind of blend that margin evenly?

Yes, I think you got to the punchline at the end. When Rich and I were talking about -- we were talking sort of businessmen speak when we were saying the robustness of the comparisons of the film on a year-over-year basis in terms of the per screen revenues of Batman and Charlie versus Harry Potter and the fact that a lot of earning power from Batman and Charlie are obviously in the third quarter. Film accounting smooths that. So in terms of variability in margin contribution between second and third quarter, you should not see it.

Okay and just a last question then. On the five studios you're talking to on the 20 different films, how many of those 20 films are for '06?

I think most of them -- virtually all of them for '06. Remember we would not do 20 films. We are planning to do six films, but for example, for the summer slot maybe there are three or four films that compete with each other. And it's a bit of a cascading because we have one which would be our first choice.

So you're talking to the others, but if your first choice comes through, that is what you would go with, and that is really the dynamic that is going on right now. It's a very new and nice position to be in. As you're probably aware, in past years we kind of had to take the film that was offered. Now different studios are offering us different films for the same slot, and we are kind of assessing what would be the best for the network, what are the best economics for IMAX, what are the post production schedules that work, and then we will winnow it down as time goes by.

You know, I can probably mention five films centered around early summer of which we can do one just to name a few. Obviously you cannot do Supermen and Cars and The Da Vinci Code, and I am sure I am dropping a couple out, because they are going to be in competition with each other. You do one of those films.

And when you said that half of the films would be 3D, just refresh us how many total films you're going to do? Is it six DMR plus one or two non-DMR?

I think we're talking about six, seven films for the year, so three or four in 3-D.

Rick Ingrassia, Roth Capital Partners.

Since operating leases are somewhat new to the mix here, it would be recently new, I want to make sure that I and everyone else is looking at this correctly. If we are tracking ASPs, we should be excluding the buyout revenues, excluding royalties and maintenance and then dividing it by seven on the sales type leases, not the nine total with the operating. Correct?

You are going very fast, Richard, but the answer is during the quarter the average selling price (multiple speakers) of a new system is 1.5 million to cut through it. You did not ask that question, but that is where you were going.

Okay. That is what I get by dividing by seven. I guess what I want to do is understand better how the operating lease, the two operating leases in the mix now should influence the quarter?

Very minimally actually. Very minimally.

Well, it is minimal because the AMC theaters will open with only two weeks (multiple speakers) joint venture, right. But, Steve, why don't you answer that?

Yes. But in terms of the upfront value as their operating leases, we don't recognize anything in the upfront number. So you really if you want to come up with an ASP for the sale of a system not a JV, you would want to exclude the two AMC operating leases.

Okay. Then I do have that right. Thanks. Tell me if you can how many systems in backlog are now scheduled for installation in 2006?

I think --

You mean signed and in backlog and (multiple speakers)? About 20.

About 20.

Maybe a little bit more, in the low 20s.

Okay. And then finally, on DSOs, it looks like they came down pretty significantly in the quarter, but it is still running high historically. Should we be just be getting comfortable with a higher number here going forward given the pickup in signings and installs?

Yes, absolutely and also box office performance impacts that as well.

Okay. And one last one, sorry, it's a small amount, but what made the other revenue line double sequentially?

Primarily aftermarket sales to theaters.

That seems like (multiple speakers)

(multiple speakers) -- 3D glasses machines, washing machines, things like that.

Ken Silver, CRT Capital Group.

I just wanted to clarify the install numbers. The press release says that you recognize revenue on nine systems, and five of them were sales type leases. Two operating leases and two AMC theaters, that is how you get to nine?

I'm not calling your math.

Well, you keep using the number seven, and the press release says nine theaters systems were installed and five of them were sales type leases, so -- (multiple speakers)

Five were sales type leases, two were AMC theaters and another four were in a category called other, and they were not installations. But we recognized some revenue on them. What they were it was changes to lease terms.

So, for example, in one situation somebody wanted to move their theater from one place to another place. We gave them permission to do that, but we recognize a little bit of revenue associated with giving them permission. They need to put those in the side. They were kind of relatively minor changes.

All right. Thank you. Got it. In terms of this lawsuit that you have talked about, are you trying to prove damages, or are you just trying to stop this company from infringing on your patent?

I think basically this is keyed up initially as equitable relief on both sides I mean going for injunctions. You know, we felt that IMAX had -- we deserved to have because of our IP period of exclusivity on 2D to 3D conversions. Often in equitable action, you add in damages. And so it is really a hybrid.

Okay. I mean are the damages size significant?

I don't want to comment on that in the context of litigation because everything I say now is going to be part of evidence in the litigation.

Okay. And when do you think it is going to go to trial?

We're hoping as soon as possible, which could be the end of this year. I mean it could slide into early next year, but we're hoping for the end of this year.

Okay. And then you mentioned that you had higher legal costs related to this lawsuit. Are you also incurring legal costs related to the lease buyout activities that have sort of been going on for awhile?

(multiple speakers). No, our internal business affairs staff, the same guys that negotiate the sale of the new systems are involved in any sort of renegotiation or consensual lease buyout. It is all in our SG&A, normal SG&A.

A little of it on occasion you might bring in outside counsel, but it's not a large number.

Okay. I mean SG&A has gone up for the reason you cited. Do you think 2006 SG&A is going to be back down in sort of the mid 30s or lower?

We have not looked at 2006, but I think the way our business is expanding, it will be hard for us to roll it back to where it was.

Okay. And then can you just talk a little bit more about the Deep Sea 3D movie that you mentioned? When is it coming out?

Before we go into that, I just want to add to Brad's point. One thing about our SG&A is that you gear up before the revenue recognition event. So, for example, we have sales offices in Asia and Europe and the U.S. Even those signings are not at -- they started years ago. And you do that and you expense all that through SG&A when you get signings.

So while I agree with Brad's point that I don't see it going back to the mid-30s, I really need to underline the point that I don't think it's going to go up significantly. I think that the fact that we have litigation expense this year that may be replaced by some other expense next year. But I definitely do not see any kind of explosion in SG&A happening. It is not the way our business works.

On the second part of your question, Deep Sea 3D is a film we used to call Denizens of the Deep. It has been renamed, and it will probably come out early next year. We are making it in connection with Warner Bros. Warner Bros. has most of the money up. We don't have a lot of money invested in the film. It is spectacular under sea images. We released a film several years ago called Into the Deep, and this is the same film and its kind of a sequel to that film. And that film, I don't remember the number, but it's something like $70, $80 million it grossed on a worldwide basis, so we think this film will do well for us.

And when is it coming out?

We don't have an exact release date yet.

Probably first quarter of next year (multiple speakers)

And then you're giving guidance, and can you talk about where you think the cash balance would be at the end of the year?

We had said on a previous call 35. We're at 34 now. We're investing somewhat in inventories because of the fourth quarter and '06 build, so I'm quite comfortable saying we will hit our 35 number. We hope to do better than that, but it is premature to revise guidance.

Okay. And what was CapEx -- the film investment in CapEx in the second quarter?

A total of 2.8. Something like 2.6 of that was film.

Okay. Thanks a lot.

Matthew Harrigan, Janco Partners.

This might be somewhat sensitive, but can you comment on what you see happening with Chicken Little 3D and whether could those digital projectors create an installed base that typically someone else is going to be playing a 3D movie? It seems like the exhibitors are giving a somewhat mixed reception to that. And are there any commonalities or among the 3D technologies that you are using and Disney is using, and I guess the best way to frame this is when you're talking about your movies next years, are you talking with all the major studios, or is there a holdout or two in terms of who wants to participate?

And then secondly on the consumer electronics side, there are a number of things happening with 3D, some private companies like Deep Line (ph) and I think even Toshiba on the LCD side, and I'm curious if that has any relevance to IMAX at least as far as driving the market demand for 3-D?

I think there were about eight questions in there, so I will start with the first couple related to Disney and Chicken Little in 3D.

For those of you who don't know, Disney announced a joint venture with Dolby and I guess Christy (ph) and RealD to release this film called Chicken Little this November on digital 3D. And they announced it would be up to 100 screens the release would take place.

We have known about the advent of digital 3D for a while. We think it is inevitable that digital 3D in some spaces will happen in some form. You know we're very comfortable with our market position, and you know basically it's big screen versus small screen. When you look at the 2D world and you look at the results of Charlie and Batman, people have the ability to see those films in either 2D or in 3D. And the work we have done on examining the technology that Disney and others are using, the RealD technology is that we believe that the difference in the IMAX experience is even bigger in 3D than it is in 2D.

So sort of long-term the advent of a broader distribution network in 3D where we believe we have even better differentiators will be a good thing for us because there will be more film content available in 3D and more 3D product. So that is sort of the general overview.

With respect to Chicken Little itself, we thought the announcement was a little bit rushed, and we were kind of surprised by it. Disney -- you know this film is not the kind of film that we have heard a lot about in advance. It's not a really anticipated sort of major release. It was not talked about. A little bit came out of the blue in the last 60 days or so that they were going to launch it.

From our point of view, 3D is a really complicated thing, which, again as I said before, people will get right, but sort of there's a lot of science to it including the glasses. There are special screens. There's a lot of elements. We have been doing it for over a decade. And I just thought rushing it out in the context of a film that is not well-recognized was a little bit odd. And we will sit back and monitor it and see how it does.

Brad, do you want to answer the other part?

Yes, let me just add one little thing to that. In fact, I am going to pick up on something that you said, Matthew, because I think you actually referenced it in your question. Again, we are hearing this from our various contacts, but this is I guess more hearsay than anything else you mentioned in your question.

There are issues as to what type of traction Disney and Dolby are getting in terms of signing up major distributors. You know, as far as we can tell, I think we hear they are making -- getting some independents and some small guys. But as of yet, they certainly have not made significant headway with any of the big guys. That is not to say that that cannot change.

The other thing that we find perplexing is I think everybody read recently that the studio consortium recently settled on specifications. I don't want to say this with authority, but I have heard that the system that they are thinking about putting in for Chicken Little is not DCI compliant, which sounds kind of odd to me and kind of strange. When you get into different specifications, it creates all sorts of operational complexities. But again, as Rich said, we're going to monitor that.

In terms of a couple of your other questions, one, are we dealing with every studio? Yes, I mean virtually we are dealing with every studio on one or multiple projects. Obviously some films and some conversations are more topical; they are more heated up than others. But I don't feel that we are in any particular studio, including Disney for that matter that is doing Chicken Little 3D, there we are not in some dialogue with.

The last part of the question having to do with consumer electronics shows and different types of LCDs, 3D based. There is going to be more and more of that. That is going to be very very -- you know, it's not competitive technologies to IMAX. You know, A), you're talking about various small screens. And two, probably more relevantly when you're talking about small screens for medical imaging or designing a car or something on a computer, is you notice if you look at a computer screen, your head does not move much left to right when you're looking at the computer screen. When you're at an IMAX movie or in a big movie theater, your head is moving.

So some of these systems that these guys are working on, some of these systems involve actually simulated 3-D where you don't even need glasses. But your field of view is extremely narrow, meaning where it is going to work the best -- God knows how much money this country has spent on it -- fighter pilots sitting in a seat flying a plane where their head is sort of locked into a position, they will through one of their eyes be able to get very interesting 3-D data about what is going on while they are flying the plane. That is a very very different technology than what you are talking about in a large out of home entertainment technology.

Sure. I think you have answered all eight questions. Thank you.

They were good questions.

Tony Gikas, Piper Jaffray.

Two questions for you. With the solid ramp of some of the recent film releases, is it possible that looking forward we might be able to see more than five or six films per year?

Second question, what is your view of long-term signings growth looking out to 2006 to 2007?

The third question, the time to installs on average for your recent signings, have they been closer to 12 months or closer to 24 months, and then I have a couple of quick follow-ups?

I will answer the first -- actually the second and the third question. (multiple speakers). Then I will remind Brad of the first question.

In terms of signings growth, as we said for the trailing 12 months, we signed 51 systems. That is roughly double what it was for the prior 12 months and equal to the 24 months behind that. I mean I think the tone of our business is extremely good. When you look at the number of prospects for the third and the fourth quarter, they are very very strong.

So this year we guided to the high-end, let's call it, around 45. I would be surprised if we did not do better next year and hopefully better in the year after that. It is hard to quantify at this point, but it does not have the feel of a blip. It has the feel of a real change in the fundamental business.

An example of that would be what you saw in Mexico where Ramirez signed for three theaters last August, Cinepolis, they opened the first of them. They were so successful a lot of the competition in Mexico started making inquiries about getting in the IMAX business, and in order to box them out, Ramirez signed another three theater deal this quarter. And we have not really seen that dynamic take hold yet in a lot of places in the world. So I think there is significant room for upside in the growth rate.

In terms of time to install, I don't have it exactly, but my instinct would be that time to install now is probably around the year on average. I think for single theaters it is shorter than that, so Wehrenberg, for example, in St. Louis, at one theater they will install in six months. But I think when you go to like a Lark in Asia or Shell in Korea where they do a four-theater deal, those scatter over a period of time. So probably if you blended them all, it would be around a year or shorter, which is down from 18 months or longer, which is our previous system. That is the first part of the question (multiple speakers)

Yes, are we going to increase -- is there room to increase from five films a year? You know the premise of our strategy is the best films in the best auditoriums with the best audiovisual presentation. So conceptually if there are more than five really good films a year, there is obviously room to grow.

The constraints that we're dealing with right now is we want to make sure that these films have breathing room. Meaning that if we were to go to a dozen films a year and just give a film a month's run, we think that is unfair to the study and unfair to the film given the fact that these films have significant legs in IMAX and tend to play pretty well longer than a month.

So I think the answer is going to be nuanced. Yes, it is going to go up over five if you look at our long-term model. You know, it moves up to seven, but it does not move up to 12, and you know, on top of the seven, you may have two original films a year where we are picking up the distribution rights and distributing such as Magnificent Desolation or NC 3D and things like that. So I think the answer is yes.

Now when the business model changes -- you know, if the growth in the theater network is several years out and you know is dramatically larger than it is today, then I think you can begin to think of multiple tracks in having more films out there.

Okay. Just to follow-up on signings growth, how big is the sales force that you have in the field right now, and do you expect any changes there throughout the remainder of the year?

The salesforce is about probably about 10 salespeople. I don't think you need a bigger one, and the reason is our sale has changed because before we had the MPX, the business was more a one-off business where your salesmen needed to call on a lot of individual entrepreneurs and museum operators and different types of clients. And now the sale is much more calling on the multiplex operators in the chain, and I think you're likely to see more multiple deals like the AMC deal rather than individual deals as we are used to. So even though I think the ramp-up of activity has gone up, I think the number of customers we deal with actually may go down. So I don't think we will need significant growth in the salesforce.

Okay. And then last question, on the Q4 installs, it sounds like you have the teams in place and the ability to get these installs. Are there any that are on the cusp of a quarter that just might be out of your control where an install just may not be ready yet from the other side?

Tony, I mean you're pointing to again the nuance in our business, which is let me overstate, it is probably never the way to do it. At the end of the day, an install -- I mean we have people on the ground. We have people monitoring. We have people looking at the construction. But if there's a cement strike in Spain, that can affect an install. We don't think that is happening. We will adjust our forecast if we thought something like that was going on, and we're giving you our absolutely best sense of what we think is going to occur in the fourth quarter.

And what we try and do is there are ones on the cusp but they go both ways. They are ones on the cusp that are being installed in early January, and there are ones on the cusp that are being installed in late December. And I think, can we accelerate some of those in January? We hope so. We think we might be able to. Are we going to lose some of those in late December? We plan -- we try and plan that that is going to happen. So we blend all that together and we try and come up with our best guess of reality.

Terese Fabian, Sidoti & Co.

I have a couple of questions on your income statement. One is the earnings from discontinued operations, is that something that is continual into the future?

Yes, that is basically -- we sold the company several years ago under a deferred payment scheme where they owe us under some notes. So when we get paid on the notes, that shows up in discontinued operations. You know as long as we get paid, it will show up.

Okay. And in terms of your guidance on lease termination revenues, you had said I think at the May earnings release, it would be around 10 million and you've raised that 12 to 14. Where are those coming from? Are those like old leases, old signings?

Yes, they pretty much re old signings. It is just not new MPXs that people are not getting financing on or not getting approval on. It is largely Legacy issues.

And for this quarter, it was 3.9 million?

Yes.

Okay. And let me ask you a question on your international screens, how are they doing? You talked to them about the domestic. What is showing on the international and what are the numbers there?

I don't have them in front of me. Batman did very well internationally. Obviously I mean it's a market by market basis. So in certain markets, it did really well. In other markets, it did less well. But in general Batman was a success internationally.

Charlie is a more domestic English language kind of picture. So it did not open day to day around the world, so it opened just this weekend in London. I think it's opening in Spain in a week or two. It opens later in places like China and Russia. So it is too early to say because it has not rolled out yet. But the international distribution of Charlie will be much smaller than the international distribution of Batman, frankly, because that tracks a 35mm pattern.

And in that case, what are the international theaters showing? Are they showing more (multiple speakers)

Right now they are pretty much showing Batman. See Batman has an artificially truncated run because it was so close to Charlie and its release window. Usually you like to have eight to 10 weeks. In this case we had only four weeks between Batman and Charlie. So even though Batman has done well, it is around $14 million. It's run was cutoff. Internationally most of them are still playing Batman, and then I think they are also mixing in library films before they open with Magnificent Desolation.

One of the other things that I would say, one of the reasons why we emphasize the domestic business, historically not just in IMAX but in the entertainment business is changing a little, but domestic has been the leading-edge of what rolls out international.

And in terms of I think if you look at overall blend of films, mix of films internationally versus U.S., probably you would see a number of the international either having a higher percentage of traditional IMAX films, whether that is early in the year as Aliens of the Deep, which is a 3D film or Wild Safari 3D, I think over time that mix is going to migrate more and more to the domestic mix in terms of DMR traditional films.

But if you look at the whole world versus the U.S., it is still more probably a greater percent of traditional IMAX films versus DMR versus domestic playing all the time.

Katharine Dalton, Merrill Lynch.

I am just wondering in terms -- you gave us the total IMAX box office per screen to date is about 700,000. I am just wondering, do you have any data that breaks that out in terms of dollar per screen for just the MPX screens given they are a little bit smaller? And I am just wondering how many MPX are installed to date?

And in terms of the DMR conversion, I am just wondering if you can give us the details on what the percentage you got for Charlie and just any trends you're seeing whether you think you'll be working up toward more of the 15% range in the future?

Why don't we answer the second question first, and then Steve or Frank can give you any guidance on the first question. The question was, how did we build to the 700,000? I don't know if we have that -- (multiple speakers)

No, the question was what is the MPX per screen revenue?

The MPX, we don't have that.

We don't have it broken down that way, Katharine. Feel free to call Steve and we can break it down for you that way after the call.

Okay.

And I'm sorry, where were you going?

And then the other question, Katharine?

The percentage of box office you got for Charlie for the DMR conversion, I am just wondering in terms of general trend you sort of get 10 to 15% of box office. Do you think you're going to work towards the upper end of that range going forward for '06?

(multiple speakers) -- we think so. But right now in terms of this year, I think we're looking at numbers of either 10% in certain instances and 12.5% in other instances. I think we feel that as DMR gets more and more traction and has more and more competition for slots that there might be some ability to push the prices up a little -- royalties up a little higher. But right now I think in terms of 10% and 12.5% of being more the norm.

And to be specific, although we cannot disclose it, the Charlie splits are better than any of the splits we had last year.

And just going back to the lease buyout revenue, I mean you upped your guidance I guess from about 2 to 4 million, but you did not raise your EPS guidance. I am just wondering if there is anything behind that because I am assuming that that extra 2 to 4 million is pretty much right to the bottom line?

Well, again we have 1.2 million more legal fees this year, and we expect that there is some SG&A widening. So I think -- but we do again -- there are a lot of different moving pieces in different places. We are also 750,000 of negative FX. So you can see that to some extent we are drilling a hole.

Grant Jordan, Wachovia Securities.

Great. I think you almost gave this, but could you give the breakout by film of the 700,000? Second, what was the consensual lease buyout revenue in the second quarter of last year? And finally, what is the non-cash comp in this quarter?

Okay. Breaking down the screens, first of all, Polar this year contributed 105,000 from January 1st. Again, we're talking about this year. Aliens of the Deep was 162,000. Robots was 127,000. Batman was 190,000, and Charlie was 116,000, which should add up to 700,000.

And that was through June 30th or through today?

I think that is through today actually. And I'm sorry because when I was reading this, I lost track of the other question.

Consensual lease buyout revenue last year.

2.2 million last year in the quarter.

And non-cash comp in this quarter?

Do you know the number? (multiple speakers)

Frank, do you know the number?

Yes, 1.2. I think we are going to have one last question if that is okay.

Actually the market is I think way open, so why don't we just summarize. And I'm going to make a couple remarks from me, and I will turn it back to Rich.

I just want to repeat what really Rich said at the end of his speech. There are a lot of good things going on at IMAX. In particular, starting from the biggest and the broadest, when you look at where we fit in terms of the macro landscape, you know some of the trends of in-home contracting windows piracy, these are all neon signs planning to the value of IMAX.

The last question just hit another very important point. You know $1 million a year of box office revenue generates 30% cash on cash returns for our customers, and through seven months of the year, we have $700,000 in the bank with the number of films coming. Signings over the last 12 months have been over 50 compared to the low 20s in the previous 12 months, the best forward indicator in our business.

And then let me end again with a nonfinancial observation, which I think is again critically important, the customers. They like the movies more in IMAX, and they pay more for the movies in IMAX. So I think we have a space very well triangulated both in terms of financial indicators and macrotrends and then where it probably even counts the most with the customers.

The only thing I would like to add is just consistent with what Brad said, not only do we have momentum in the marketplace, but I think the decision leaders in the entertainment industry really recognize that we are onto something special. And my eyes were really opened at the Allen conference because -- I am using a pun in the movie industry, you're always in the box you live in. And the Allen conference got us in a different box, which was people in different areas of the entertainment industry. And when Intel finished its presentation talking about windows shrinking even more and showing off these beautiful screens and what the images are going to look like in the home, at the end of the presentation throughout the conference, probably about 10 different people came up to Brad or myself and they were really leaders, thought leaders in the entertainment industry. If I told you their names, you would know all of their names, and they all said you guys are really one of the few winners in this thing. And I would say I came out of it just so energized because it really put in perspective what we are onto at IMAX and where we can go.

And with that, thanks for your support as shareholders, and we hope to continue to deliver results.

That does conclude today's call. You may disconnect at this time.