Imax Corp (IMAX) 2005 Q3 法說會逐字稿

Welcome to this IMAX third quarter earnings results conference call. This call is being recorded. At this time I would like to turn the call over to Mr. Brad Wechsler, for opening remarks and introductions. Mr. Wechsler, please go ahead, sir.

Thank you very much. Good morning, everyone, and thanks for joining us today for our third quarter '05 conference call. Joining me as always is my partner, co-Chairman and Co-CEO, Rich Gelfond. Also with us is our CFO, Frank Joyce, and our Senior Vice President of Corporate Development, Steve Abraham.

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 third quarter '05 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 third quarter's earnings release and our 10-Q, which will be filed shortly. The full text of the earnings release, along with supporting financial tables, is available on our website, www.IMAX.com.

For the format of today's call, I'll review our financial and operating results, then turn it over to Rich for details on films and other developments. Finally, we'll update you on the remainder of the year and take your questions.

For the third quarter, we reported net earnings in line with our guidance as well as very strong results for new theater signings and film performance. As you know, film helped drive theater signings and our 2006 film slate is coming together faster and earlier than ever. In fact, I'm thrilled to announce that as of this morning, our '06 film slate is nearly complete, with 5 films already confirmed for release next year, versus just 2 films in place at this time last year for '05.

The newest additions to the IMAX '06 film slate are two of next year's highly anticipated films, Warner Brother's Poseidon and Superman Returns. When we first laid out our commercial strategy over a year ago, we envisioned two critical pieces of the IMAX business, theater signings and DMR Films working together to drive future growth and profitability. Today, this is happening and the foundation for this new IMAX has been laid.

With the building blocks in place, we've entered what I would categorize as the blocking and tackling phase of our business.

To that end, our third quarter activities centered on continuing to get more and more traction with commercial exhibitors worldwide, and third, continuing to get the best Hollywood films for presentation in IMAX's format. We accomplished a lot on both of these fronts.

On the theater side, we completed our 5th consecutive quarter of double-digit theater signings, securing future growth of the IMAX network, both domestically and around the world, and our high current level of inquiries bodes well for strong signings activity going forward.

Let me again remind you that signings are the best indicator of our future financial performance, since each signing ultimately becomes revenue and earnings. In the third quarter we signed agreements for 12 systems, bringing our 9-month total to 37. That's more than the total number signed for all of 2004, '03 or any other year since 1999, and bringing us closer to our stated goal of 40 to 45 signings for the full year.

Our Q3 signings included agreements with 10 different customers, both new and existing IMAX customers, spanning North America, South America, Europe and the Middle East, demonstrating the broad appeal of the IMAX experience. Of these 12 signings, 10 were commercial exhibitors and 6 were for the MPX theater systems.

The quarter signings include 4 agreements with domestic exhibitors, including 1 to install an IMAX theater in the leading commercial multiplex in Utah, and another to install a theater system in a brand new multiplex in a suburb of Dallas/Fort Worth; agreements for 2 new IMAX theaters in Mexico, one of our fastest growing markets, including a deal with a joint venture partner of [Loews] called Cinimex; agreements with commercial operators in Argentina and Brazil, representing the first ever IMAX theaters in those countries; a 3-theater deal with Epic, a leading commercial exhibitor in Israel; and an agreement with the largest commercial exhibitor in Ufa, Russia, which will become the fourth Russian city to house an IMAX theater.

As you can see, the quarter signings were 1/3 domestic and 2/3 international, the same split as our total market opportunity. And as a reminder, the economics on a domestic and international agreement are roughly the same.

Today, our backlog, or the backlog at the end of September, consisted of 72 systems with a value of $121 million.

During the quarter, we installed 7 theater systems, which included the 3rd and 4th theaters under our joint venture agreement with AMC. IMAX theaters are now operating in AMC multiplexes in Phoenix, Kansas City, Detroit and Columbus, Ohio. As you know, under this JV arrangement, IMAX contributes the system, AMC contributes the site and the retrofit construction costs and we share in the overall profitability of the theater.

Based on the solid performance of our AMC-IMAX theaters to date, we believe that the return to AMC thus far are very strong and well in excess of the typical hurdle rates for exhibitors.

The third quarter was a very active period for IMAX films, as our 2 summer DMR films drew large audiences through the quarter and our original IMAX 3D Space film opened to excellent reviews.

On July 15th, Warner Brother's Charlie and the Chocolate Factory, the IMAX Experience, opened in 65 domestic theaters, the largest DMR break ever, due to the growing network. In addition, Charlie played on 11 screens outside of North America and its reception internationally has been much better than we and Warner Brothers expected.

For example, Shanghai's Peace Theater has reported running Charlie for 4 to 5 shows a day, at between 55 and 65% capacity, at close to $10 US per ticket. This kind of international success highlights another benefit to the studio, access to the movie-going population it may not otherwise get.

The Chinese film market, for example, is notoriously difficult to enter, because of film quotas and only the IMAX version of Charlie, not the 35-millimeter version, was granted the proper approvals to be exhibited.

Worldwide, Charlie has grossed nearly $14 million and Batman, which was released 4 weeks earlier, has grossed approximately $16 million, a record for an IMAX 2D DMR film. In addition, because of the timing of the releases, these films had to share screen time in much of July. If either film had a little more breathing room, we're confident that they would have grossed even greater numbers than the record-breaking numbers that they did.

As we disclosed on our last call, these positive box-office trends run counter to the recent results for traditional 35-millimeter films. In the 35-millimeter world, with just 2 months left to go in the year, the year-to-date domestic box-office is down about 8%, as consumers increasingly choose to stay home and watch DVDs, browse the internet or play video games.

In contrast, the unique experience IMAX delivers cannot be replicated in the home or anywhere outside of IMAX theaters. It continues to pull people off their couches and into our theaters, and as a result, IMAX box-office was up significantly this summer, versus the year-ago period.

In September, we released the original IMAX 3D Space film, Tom Hanks Presents Magnificent Desolation, Walking on the Moon 3D. Reviews of the film, a 3D journey to the surface of the moon, were excellent, garnering high marks from critics and audiences. Mag Des, as we refer to it, produced and principally narrated by Tom Hanks, opened on 85 domestic screens and has grossed over $3 million to date.

While I would characterize the performance of Mag Des in its opening weeks as slower than we expected, it is important to recognize that these original IMAX films have very different economics for IMAX and very different box office characteristics than from a Hollywood blockbuster film. This kind of IMAX film, like Space Station 3D, which has grossed over $90 million to date, tends to build audiences over time, particularly school and community groups. Already, the film has shown strong legs, with box office down only 10% from week 1 to 2, and up 13% from week 2 to 3. In fact, in week 5, the film grossed over 75% of its opening week box office.

In the coming months, Mag Des will have a third release of sorts, as many institutions will begin to pick it up starting later this month. By the end of the year, we expect that Mag Des will have played in close to 120 theaters.

To date, our '05 film portfolio has generated approximately $800,000 per screen domestically and there are still 2 more major Hollywood DMR releases ahead for this year. This puts us on track to exceed the $1 million in revenue per IMAX screen that we model for an exhibitor to earn a 3-year payback on a $1.6 million investment in an MPX retrofit.

In just a few weeks, we will release the IMAX DMR version of Harry Potter and the Goblet of Fire, the 4th in the Harry Potter series. As you may recall, we released the series' third film, Harry Potter and the Prisoner of Azkaban, last June and it went on to gross approximately $14 million worldwide, a record only recently broken by Batman.

By partnering with a studio that clearly understands the value of IMAX as a release window, we continue to benefit from Warner Brother's expertise and strong commitment to marketing the IMAX DMR versions of their films. Every TV and print spot for both Batman and Charlie was tagged this summer and IMAX has been highly integrated into Warner Brother's marketing campaign for Goblet of Fire, generating strong awareness of the IMAX version.

In fact, today, 2 weeks before the opening date, advanced ticket sales are so strong that IMAX theaters throughout the network are already reporting sold out shows for the opening weekend. Goblet of Fire received the first PG-13 rating for a Harry Potter film, so it does skew a little older than the first 3.

We expect that Goblet of Fire will be released in approximately 70 domestic theaters, up from the 49 domestic theaters that showed Prisoner of Azkaban on the break and up from 65 that opened Charlie, highlighting the growth of the IMAX network.

The network growth with our DMR films getting released on more and more screens, add significant leverage to our film business, by growing our recurring revenue base. To remind you of our DMR economics, we typically contribute the cost of conversion for a share of the total box office. This revenue share has been increasing, currently ranging in the 10 to 15% area and continues to trend upward.

These recent trends in pricing, combined with our network growth, should continue to accelerate our recurring revenue growth.

About a week after the release of Harry Potter, we will re-release last year's runaway hit, The Polar Express, in IMAX 3D. Warner Brothers is re-releasing Polar in IMAX 3D only and we hope the film will reach the status of a holiday classic that parents and children will experience together year after year.

Warner is going out with a major consumer DVD campaign, where the IMAX 3D-film experience will be tagged and promoted as well. Last year, as many on this call surely recall, 83 IMAX screens showing Polar grossed $45 million, with some of its best weeks over the Christmas and New Year's holidays. Harry Potter and Polar will share some screen time, with Polar screenings for kids and school groups during the day and Harry Potter screenings in the evenings.

And of course, we're very excited about today's announcement of 2 more films for next year.

But before I let Rich walk you through the details, let me review our financial results for the quarter.

For the third quarter of 2005, earnings from operations were $6.1 million, up 8% from $5.6 million in Q3 '04. Net earnings were $0.05 per diluted share, within our guided range of $0.04 to $0.07 per share and equal to the $0.05 per share also reported in Q3 '04. Total revenue was $33.4 million, as compared to 31.8 million for the third quarter of 2004.

During the quarter, we installed a total of 7 systems, which includes 2 AMC installations, from which we recognize no up-front revenue. The other 5 were for theaters under traditional sales or sales-type lease agreements.

Several installations that were expected to occur in the third quarter have slipped into subsequent periods. As a result, systems revenue for the third quarter was below our expectations, at $20.2 million, owing to lower sales and lease revenue.

This is an important point that we have often stressed in the past calls. Because of significant revenues tied to theater installations, our P&L can be affected in a given quarter by customer delays, and in many instances, delays created by events out of the control of our customers.

In the third quarter, increases in our other revenue areas, particularly in the recurring revenue segment, helped us make up for the installs that slipped this quarter. Signings can turn into revenue, not only upon installation, but also as a result of a consensual lease buyout or when we terminate a contract with a delinquent customer. Included in systems revenue for the third quarter was $2.4 million of revenues associated with consensual lease buyouts, terminations by default and MPX conversion agreements.

At the end of September, our network consisted of 261 IMAX theaters. As the network grows, so do the recurring revenue components of our business. In fact, as I just mentioned, our decreased dependence on systems revenue is evident in this quarter's results, as our recurring revenue streams, specifically maintenance, royalties and theater operations, all improved and contributed to the quarter's on-target earnings.

Film revenue for the quarter was $8 million, up from $6.1 million in the year-ago quarter. Further evidence of our recurring growth, our DMR film revenue was up 31% from the run of both Charlie and Batman, despite the fact that in the year-ago quarter, IMAX theaters were doing very well showing Harry Potter III and the delayed release of Spiderman II.

Theater operation revenues for the quarter were $4.3 million, up 17% from the $3.7 million in the third quarter of '04. This is an important indicator of how theaters are performing in the network. Other revenues were about flat with the year-ago period, at $780,000.

Turning to expenses for the quarter, SG&A was up 1.4 million, to $9 million. The increase is primarily due to legal fees associated with the ongoing litigation of a patent infringement suit, which we initiated in the first quarter of this year, as well as the strength of the Canadian dollar, in which much of our salary expense is denominated.

R&D expenses for the quarter were about $890,000, down from $1 million in Q3 '04.

Now I'm pleased to turn it over to Rich.

Thanks, Brad, and good morning, everybody. Against the backdrop of a challenging entertainment environment, the IMAX experience continues to stand out this quarter as one of the few entertainment options able to draw people away from their plasma TVs and broadband enabled computers. Exhibitors in Hollywood are taking note of these trends, and we believe this is accelerating their interest in IMAX.

Commercial exhibitors around the world continue to add IMAX theaters to their multiplexes, as evidenced by another double-digit quarter for theater signings, our fifth in a row. And Hollywood has increasingly recognized the IMAX experience's ability to boost a film's reviews, box office performance and downstream revenue.

As a direct result, our 2006 film slate is coming together earlier and faster than ever before.

A strong film slate is the key to our commercial growth strategy, as film revenues drop the top line of the exhibitor model. With two months still left in 2005, we already have 5 IMAX films locked in for release in 2006 and 3 of these are IMAX 3D films.

Since we would want to add 1 or maybe 2 more films, our 2006 film slate is almost complete. So exhibitors already know many months or up to a year in advance, that IMAX will be providing them with a strong film slate next year. This is a big deal, as film slate visibility is one of the critical factors considered by IMAX exhibitor customers. As a comparison, at this time last year, we had only 2 films locked in for the coming year.

On our last call, we announced the IMAX 3D DMR release of the CGI animated film, The Ant Bully, next August, and stated that we hoped to soon fill in the 2006 calendar. Well just a couple of months later, we confirmed yet another IMAX 3D DMR release, an animated CGI film called Happy Feet, for November.

While you may not have heard of this film yet, we recently had the privilege of seeing some of the footage and are convinced that like The Ant Bully, Happy Feet has all the DNA of a great IMAX 3D release.

Happy Feet is a musical comedy about a special emperor penguin who overcomes his inability to sing, the way his kind communicate and attract mates. Singing is a big deal in this society, so he learns to tap dance. Similar to Polar and The Ant Bully, Happy Feet uses cutting edge CGI techniques, memorable characters voiced by an all-star cast, including Robin Williams and Nicole Kidman, and simple, but powerful themes that both kids and adults can relate to. We believe that Happy Feet may have Polar Express-like potential at the IMAX box office.

Our third IMAX 3D film for next year is Deep Sea 3D, a 45-minute original IMAX production we are releasing with Warner Brothers in March. I'm happy to report that this film also attracted some top Hollywood talent, as Johnny Depp and Kate Winslet recently signed on to narrate.

Today I'm happy to announce that we've reached agreements to release 2 of next year's highly anticipated films in the IMAX DMR format. In May, we will release the IMAX DMR version of Poseidon, an update of the 1972 disaster classic, The Poseidon Adventure. The film by Wolfgang Peterson, the talented director behind Das Boot, A Perfect Storm and Troy, Poseidon tells the survival story of passengers aboard an ocean liner toppled by a colossal tidal wave, all the makings of a terrific event film, ideal for IMAX.

Then in June, after a 20-year hiatus, one of the world's most beloved superheroes returns to feature film in the very highly awaited Superman Returns. This is generally thought to be one of the big films for next year. The film stars Brandon Routh, Kate Bosworth and Kevin Spacey and is directed by the usual suspects and X-Men's Brian Singer. It is one of the biggest, most talked about films of next year and in IMAX's format, Superman's return will be made even more triumphant.

So before we've even wrapped up 2005, we already have filled in 5 film slots for next year. These are March's Deep Sea 3D, May's Poseidon, June's Superman Returns, August's The Ant Bully and November's Happy Feet. In addition, Disney is releasing an IMAX film this coming January, called Roving Morris.

We remain in discussions with a number of studios for 1 or 2 additional Hollywood releases next year.

As Brad said, the building blocks are in place and we're now in the execution phase of our business. What does that mean? In developing our commercial strategy, we knew that IMAX had to serve three very different constituents; consumers, Hollywood studios and commercial exhibitors, and offer compelling value propositions to each.

For consumers we developed the IMAX experience, the best cinematic presentation available today. For studios we developed the IMAX DMR conversion process. And for exhibitors we developed the IMAX MPX system, making it easier and more profitable for an operator to get into the IMAX business.

The execution phase of our business does not imply that we sit and watch while these innovations work seamlessly together to drive IMAX growth. As you can see from the quarter's signings, this is happening, but the execution or blocking and tackling phase means that we continue to innovate, actively working to improve the value IMAX brings to each of these constituencies.

Specifically, to enhance the moviegoers' experience, we're continuing to develop, perfect and employ new technology, such as IMAX 3D DMR and live action 2D to 3D conversion. For our commercial exhibitor customers, we've made it possible to finance their investment in an IMAX system through GE Capital. And for studios, we continue to monitor new technologies such as digital projection, while developing our own digital strategy and product, which we believe will make us the clear leader in 3D large format digital presentation.

This quarter we announced that we made getting into the IMAX business even easier for our commercial exhibitors, by partnering with GE Commercial Finance. Through this partnership, GE will help commercial operators finance their investment in an IMAX theater system. GE takes on the credit risk and the deal is, therefore, non-recourse to IMAX.

On the consumer side, although it is universally considered to be the best cinematic presentation available today, we were always looking for ways to improve the IMAX experience. Delivering the first ever Hollywood film in IMAX 3D, as we did with Polar Express last year, clearly established a new higher standard for the moviegoing experience and led to '06's 3D releases.

Audiences and critics fell in love with the IMAX 3D DMR presentation and we expect them to have the same reaction when Ant Bully and Happy Feet are released next year.

We firmly believe that 3D is a special experience for the moviegoer and we're happy to see the increased interest in 3D presentations. Specifically, tomorrow, the Walt Disney Company will release its animated film, Chicken Little, in both 2D and in digital 3D in conventional theaters. The recent flurry of articles about 3D cinema has stirred both excitement and confusion about 3D presentations. So let me take a minute to share both our excitement and clarify some of the confusion.

We're very excited to see Hollywood embrace 3D as an appealing format and we really look forward to seeing the Disney film's performance. We believe the availability of more 3D content will be very good for IMAX and our release window.

Recently at [showings], we were delighted to have the opportunity to actually see a small portion of Chicken Little in 3D and we must say it's not a bad 3D small screen experience. But to be clear, it's not IMAX and it never will be.

In IMAX the action takes place around the audience and makes you feel inside the movie. The IMAX 3D presentation, just like the IMAX 2D presentation, is an immersive premium experience, impossible to replicate and entirely different than a small screen experience such as a television or a conventional cinema screen. A mass market 3D presentation for small conventional screens, with less light and tighter viewing angles is aesthetically pleasing, but very different than IMAX.

The basis for that statement is neither ego nor spin. It's simply technology and it's simply fact, a couple of facts relating to the field of view, resolutions, contrasts, brightness, sound, and yes, even screen size. In order for a presentation to be immersive like IMAX, the image must fill much of the viewer's horizontal and vertical peripheral vision. The key is removing the cues that tell your brain you're watching a movie. When the projected image is extended beyond your prime viewing area, its boundaries disappear, the experience becomes totally realistic and you become part of the action. The theater geometry that makes this possible is, of course, proprietary to IMAX.

A 3D effect if limited to the moviegoer's viewing period. And this is a little technical, but important. Which is the cone created by drawing an imaginary line from the tip of the viewer's nose to the four corners of the screen. Because this pyramid is extremely narrow in a conventional theater, only very small objects can be brought close to the audience. So objects will almost always appear to be at the screen or in a plane behind the screen. Large objects cannot appear life-size and lose their realism. The viewing pyramid in an IMAX theater is exactly the opposite, extremely large, allowing 3D objects to maintain their lifelike size and be brought right into the audience space.

Our two decades of knowledge about 3D presentation have also given us the command of the brightness, sound, contrast and resolution needed for a premium 3D experience. The same is true for 2D digital projection. As these digital projectors are designed to replace their 35-millimeter counterparts, not dramatically change film imagery, they will not impact the premium advantage that IMAX 2D has over conventional cinema.

We've seen some steady progress made with digital 2D, particularly on standardized specs, although some recent events appear to have slowed the momentum somewhat. Most significantly, exhibitor concern over whether 2K or 4K should be the technology of choice and the studio's decision not to directly fund the digital rollout, leaving it to third parties to try and raise billions of dollars needed, under what appear to us to be marginal economic assumptions.

However, digital technologies certainly are improving and we expect to build a platform capable of presenting a premium immersive IMAX 3D experience, as well as IMAX 2D experience digitally. Because we hold a significant amount of intellectual property in the arena, we expect that IMAX will not only be the leader in large format digital 3D presentations, but also one of the biggest beneficiaries of digital, since the print savings on the IMAX film are significantly greater than the savings 2D technologies offer to studios under the 35-millimeter model. In fact, IMAX is currently developing a digital projection system capable of delivering large format presentations with the level of quality worthy of the IMAX brand.

Now let me turn to forward-looking guidance for the rest of this year and next. Our signings run rate puts us on track to hit or possibly exceed our previous guidance of 40 to 45 signings for 2005. Through September, we had installed 20 theater systems under sales or leases, which includes the 4 theaters we installed under our AMC agreement.

As Brad discussed earlier, the biggest risk to our numbers is that we have seen some customers install systems more slowly than we had expected, most often due to factors beyond their control.

For the full year, we expect to install approximately 35 systems, including the 4 AMCs, which total 31 without the AMCs. However, because other revenue categories continue to compensate for lower sales of lease revenue, we're not revising guidance for total revenues of between $145 and $150 million for the year, and net earnings of between $0.35 and $0.38 per share for 2005.

We expect signings, installations and film performance to continue to accelerate in 2006. In terms of financial guidance for next year, we are still in our annual budgeting process. The early estimates we can share today are very rough and could easily change by the time we complete our budget. So today I'll just give you a directional look at the major drivers, revenues and cost.

As a base case, let me walk you through the number of systems we expect to install in 2006. There are currently 27 systems in backlog, which are scheduled to install next year. Add to that an additional 5 to 7 systems we're in the process of firming up, during the fourth quarter. Finally, add to that a number of systems we expect to sign and install next year.

Sign and install means an agreement is signed and the installation occurs in the same year. For example, in 2005, we expect 9 or 10 sign and installs, excluding the 4 from AMC. We expect film revenue to be up next year, helped by our great film slate, including the 3D releases and the 2 films announced today, as well as by the growth in our network, meaning there are more theaters to show these films.

On the cost side, we would expect a decrease, particularly in SG&A, owing to lower legal fees next year. We currently believe that this would likely net out at about a 20% earnings growth rate for next year.

I want to reiterate the preliminary nature of these forecasts. We'll give you more detailed guidance on our Q4 conference call early next year when our budget is complete.

In closing, I'd like to leave you with just a couple of highlights. As we keep stressing, the most important indicators of IMAX future growth are signings and films. Each of these metrics is on a solid trajectory. In the first 9-months of the year we signed 37 systems, more than the number we signed for all of last year or for any other full year since 1999.

On the film side, our film portfolio is already well on its way to exceeding the $1 million per screen mark for the year and our films continue to buck the box office trends. We continue to increase the visibility of our upcoming film slate and already have 5 films in place for 2006, 3 of which will be in IMAX 3D.

With our core building blocks in place, we're actively working at continuing to improve our value to each of our constituents, to ensure the continued growth of the IMAX network going forward.

Thanks very much for listening and Brad and I and Frank are now happy to take your questions.

[OPERATOR INSTRUCTIONS] Eric Wold of Merriman Curhan Ford.

If possible, maybe get a little more color on '06 guidance. I know it's still early. But with the 27 theaters in backlog, the 5 to 7 you think could possibly sign in Q4 and then new signings next year, do you expect more installs next year than you've installed this year?

Yes.

And were you going to give a revenue range or just kind of talk behind the scene on the revenues?

I think it's really behind the scene in terms of aggregate revenues at this point.

Eric, for example, we just signed Superman and Poseidon yesterday. So we just want to firm up the year before we do that.

Fair enough. But more installs next year and then does the earnings assume a higher tax rate next year than you have this year?

I don't think we want to comment that specific, Eric. This is really preliminary now.

Okay. And then just one thing on that. Should we assume that lease termination revenues will be - consensual lease buyout revenues will be lower next year that this year?

Yes, they will be down.

Okay. And then going to the film signings or the movie signings for the DMR for next year, one concern that people have had is that all the movies you're getting are Warner Brothers movies. Can you talk about the potential for getting non-Warner Brothers movies on there and with the majority being Warner Brothers, does that impair your ability to get close to the high end of that 10 to 15% revenue share range?

I think a couple of things. Being so closely associated to Warner Brothers is a double-edged sword. On the one hand, Warner has a disproportionate share of event films every year, so they're a natural partner for us.

One other element, and this could be just from working with us or because of their view of the IMAX business, they seem to have a better sense of how to promote, market and leverage off the IMAX brands and the IMAX experience than some of the other studios. And maybe that's simply because we've done more with Warner and they've picked it up as they've gone along. But the notion of, you know, a simple example, audio tags on TV spots. Extremely valuable. Warner is the only studio that does that and that's really quite valuable.

That not withstanding, we take your point. We've heard it. We've heard it from a number of different constituencies. And I think our view is, we're always talking to different studios and we should be in business with a different mix of studios and we continue to be in conversations.

One of the things that we were juggling - not trying to make this answer too long - is we were talking to a couple of different studios with respect to films in the spring and summer into '06. Because of the importance of visibility of future films and just getting the visibility out there, we have been told by our shareholders and people like yourself, Eric, get the films out there as quickly as possible. So, there was an opportunity to do a film on a great deal, Superman, as well as to back in another really good film, Poseidon. So, for purposes of visibility, Warner Brothers marketing, ease of execution, we decided to jump on this. But yes, we should be in business with other studios as well.

Eric, I'd like to give you a slightly different take on it. Which is that we have a choice on any of these films, on who to work with and what film to make. And the fact is, we have choices for next year. And we made these choices, because we thought it was in the best interest of IMAX and the best interest of our exhibitors and the best interest of our shareholders. No one's making us do this.

So when you put, in combination, how great Warner has been on the marketing side, as well as the titles we could get from them, in theory you might come to a different conclusion, but we're really excited. This is where we want to be.

And on the other part of your question, has it affected our ability to get film splits that we find acceptable, it hasn't. Because if you read the New York Times article this week, you will see that Universal wasn't happy that we chose to do Harry Potter instead of choosing to do King Kong. And I can say this, because it's reported. So, we could have done - Universal said they wanted us to do King Kong. But one of the reasons we didn't was we were not happy with the economic terms. So even though we did the deal with Warner Brothers, doesn't mean Warner Brothers doesn't know there's competition for the slot and we can't get the best terms available.

Rich Ingrassia of Roth Capital Partners.

Can you give us an update on the fifth theater in the AMC JV?

I think we're still discussing exactly where that's going to be. We have a pretty good idea, but it hasn't been totally locked down, so I don't think I want to specify it. But it should be in a major media market.

Okay. And Frank, a couple of questions from the balance sheet end. Starting with the foreign exchange impact, do you have a number there, sequentially, for where the impact was on the cost line?

Somewhere in the range of about 700,000, something like that, year-over-year.

Okay. And why did prepaid expenses jump like they did, about $2 million?

Primarily film costs related to the recent release of Mag Des.

Which we recoup quickly, right Frank?

Yes.

Got it. And I know you said that legal and the Canadian dollar spiked SG&A. It was actually down 1 million sequentially. Where do you think SG&A levels out on a going forward basis next year?

I think we said in our call we'd like to end the year lower than we will this year. But we're still working on that. We're deliberately, Rich - I don't want to be evasive about it, but I don't want to put a number out there that we're not ready to live with.

Okay, you don't have a fixed number then that you have as a target?

As we're putting together--.

We have a target--.

We have a target, but it's too early to know whether it's achievable.

Got it. And then on the conversion deal with Superman and Poseidon, it sounds like you're obviously getting the same kind of terms that you did on Batman. Do you expect your conversion cost to be a little bit lower in '06?

I think conversion costs were roughly the same at this point. There are probably going to be marginal increases of efficiency, but not dramatic decreases in cost.

Okay, got it. And then finally, just to be clear on the signings, the 12 that you're reporting includes actually everything announced through this week, correct?

Correct.

None that were not in a press release?

Oh, I think there were one or two not in a press release, yes. We didn't announce everything. There were a couple that people did not want to announce. I think there were maybe 2 that we didn't announce.

Matthew Harrigan of Janco Partners.

I actually apologize, because I missed part of the call, because there's been a flurry of earnings this morning. But could you comment briefly on the performance on the IMAX screens on the international side? I noticed that there was one screen in Israel with your partner that supposedly did a million patrons over 18 months and there's a $5 incremental price difference. And I thought that was fairly amazing. Was that just probably the best performing IMAX screen in the world or are you seeing some other anomalies in certain markets where screens are putting up that type of performance?

You may have missed earlier in the call, the reference to Shanghai. First, I guess Charlie played this past summer and first of all, you couldn't get Charlie in 35-millimeter, it couldn't get through the quota, but it got through in IMAX and the Shanghai Peace Cinema, about 60% capacity, $10 ticket price, really very, very dramatic numbers. And we're seeing it at different places.

Earlier in the year I think we were charging $12 a ticket and having very, very high capacity in a theater in Moscow as well. So, it's certainly not aberrational to see really high numbers out of some of these theaters.

It depends on a country to country basis. There are theaters in India that are knocking the cover off the ball. There's a theater in Moscow that charges $11 US for ticket price. New theaters opened recently in both Malaysia and Taiwan that started doing extremely well. And then there are some theaters like in Northern England that aren't doing so well. So I think it's as you'd expect, some are doing terrific, some are doing okay and some aren't doing so well.

When you look at your internal strategic planning, I think you talked about 900 IMAX zones, 600 are international, is that prospectively starting to bump up a little bit, or are you holding that steady-state in terms of how you're envisioning the market for a while?

It's currently at a steady state, because we haven't revised our plans. I believe when we look at it more carefully, those numbers will go up. I'm going to give you a domestic example. The people that put together the IMAX film zones are out of our sales and marketing group, which is based in Toronto. And for example, when they did New York, they considered Queens one market, 1 IMAX theater, or Brooklyn, 1 IMAX theater, not knowing that it takes 1.5 hours to drive from one end of Brooklyn to another if you're going through side streets.

And that's certainly more than a film zone. And I think the same thing is going to be true not only domestically, but internationally, that our target will go up from 900 theaters and we'll still be able to maintain pretty wide and dramatic exclusivity for our customers.

Ken Silver of CRT Capital.

Can you tell us what DMR revenue was in the third quarter?

Somewhere around 3 million. I can double-check that.

We'll interrupt later and give you the number, if that's okay.

And the box office revenue that you quoted for Batman and Charlie and the Chocolate Factory, was that all in the third quarter?

No. There's a little bit of Batman that was released in the middle of June. Batman was released around June 19th. What was interesting about it, those two films, is what we said, they overlapped in July and the fact that we think that each film would have done better if they weren't sharing screens in July.

DMR was 3 million in the quarter.

Okay, thank you. What sort of marketing are you or Warner Brothers doing for Polar Express?

There's going to be a lot of marketing. In fact, mostly done by Warner. They're doing their DVD release on the day that we release the film in IMAX. They're doing a combination of tagging, the TV spots for the DVD release, which is a fairly major campaign, with go see the movie in 3D at IMAX and as well, I believe on the boxes themselves on the DVD boxes, they're advertising the IMAX version of it. Then they have individual ads running in markets where the theater is playing, specific ads. That was actually one of our concerns, was before we agreed to do it that there was going to be adequate marketing. We've become increasingly comfortable that there will be a lot f marketing.

Okay. Is Happy Feet getting released on November 17th?

Yes, November 17th.

You talked a couple of times about adding one or maybe even two more Hollywood films. Can you talk about what part of the year you're looking at?

Sure. There's still an opportunity for us to sort of slice in a Hollywood film in the first quarter of next year, of '06, really early. So that's one slot that we're looking at. Clearly there's a slot that occurs after Ant Bully, which is the fall slot. And your question leads to exactly the issue, which is what we're thinking about, which is, is there a possibility to layer something in at the end of the holiday period that would play into January of '07, going forward? And I'm not sure about that. I don't know if there's space for that.

One of the issues, as we said, we think this is going to be a very big film for us next year. So unless we can get something really special, we don't want to truncate the run of the film. Because to give you an example, Polar Express last year, which was released around the same time, did $10 million in January, on 83 screens. So I think we have to play that by ear a little bit.

Okay, so what films are going to be released in the early part of next year or the spring?

Right now you have, at the end of this year, Polar. Polar will probably trickle into January. Then there's Mars Rover, which is a Disney film. And then we also later in the quarter have Deep Sea 3D, which is a crossover film, museums and science centers as well as some commercial theaters.

And what Hollywood films are scheduled to be release during these periods that you're looking at to add?

I don't want to comment specifically on films, but it's not a wonderful first quarter in terms of Hollywood films in general. When you go through the list, there just aren't a lot of names that jump out at you. And if there was a name that jumped out at us, I think we'd do it. And that's part of the challenge where we're sorting through what it makes sense to do or not.

If we were to name names, you'd know exactly who we would pick. We can tell you what we think are the good films in that quarter and we're talking to those studios, so I'd prefer not to identify them.

Okay. And then just lastly, you had previously talked about considering a live action 3D movie. Can you discuss that further?

Yes, we're still working on it. One thing I would say about the technology is that it takes a fair amount of time to convert a live action film from 2D to 3D. And I think given postproduction schedules, until we get the time down, it's going to be difficult to convert one for a day and date release. So what we've been working on is taking part of a film and converting part of it in the initial phases, into 3D. And we are working on several projects for next year, looking at what's feasible to do on both projects that are announced and not announced and we'll see if we can make it work.

Okay and then just lastly, you have a coupon due on the bonds next month. Do you think you're going to end the year with more or less cash than the 34 that you had at September?

I think we gave guidance for 35 earlier in the year and I don't know whether - I don't want to predict up or down from there, but I think we're comfortable with our guidance.

Tony Gikas of Piper Jaffray.

A few questions. Looking at the Q4 installed guidance now, it looks like about 1/2 of this year's installs are coming in that quarter. On the last conference call you were pretty confident about getting those installs completed. Maybe you could just talk about your confidence level and how many might be on the cusp of moving into the next year?

A couple of other questions. It looks like only 27 of the 72 systems in backlog are planned for installation next year. I thought that that process or that timeline was tightening up a little bit more. Maybe you could comment on that? And I have a follow-up.

Tony, in terms of the fourth quarter, I think we said that there would be 35 installs this year, including the 4 AMCs, which is around 31 and I think we've said we have 20 so far, including the AMCs also. So I think that leaves you with a difference of around 15 for the fourth quarter.

When we went through our guidance, obviously we looked at the possibility of slippage, because as we said during the call, during the third quarter there was some slippage and it was made up for by revenue from other sources and earnings from other sources. So the pool we're looking at is obviously greater than 15.

We tried to budget in a number that would allow for some slippage. But I want to reiterate what we said on the call, we always make our best judgment on these things. But in the last quarter there was a construction strike in Eastern Europe and that's what flipped something. When we put this together we try and have very real time information. We talk to people in the field and we try and make our best estimates. And as I said, we try and account for what we think is some slippage, which we think will undoubtedly occur.

But it's just that, Tony, it's our best expectation.

In terms of next year, we said there are 27 out of the 72 in backlog. I think when you go through our backlog, a lot of the commitments we have, like for example, one we have with Lark Entertainment in Hong Kong is a multi-theater, multiyear rollout. It's the same with the Korean theater chain, it's a multiyear, multi-theater rollout.

So what we try and do is, again, make our best guess as to what we think is scheduled to install in '06 and what's going to happen and that's our best guess.

Okay. And then on the 2006 film slate--.

One other thing, Tony, which is really important. Steve's giving me a note, which is maybe the most important point. Thank you, Steve. Which is, some of the 72 are scheduled for installation in quarter four, Tony, of '05. So you can't say 27 of 72. I don't know the math, but if you assume the 15 were coming out of the 72, that would give us 27 out of 58, or about half, which is a lot different.

Okay. And then looking at the 2006 film slate, is there an opportunity to - I guess, characterize what you think on a per-screen basis, you can do next year? It sounds like they'll be up next year. Is a 1.1 million or greater?

What we have been doing is just keeping the eye on that million-dollar number. Now we exceeded 1 million last year, we're going to exceed $1 million again this year. I don't think we have built to an aggregate number per theater, whether it's 1 million, 2 million, 3, we haven't built the model up yet. But it tends to be trending upward.

Okay and last question. Could you just remind me what the economics are when an IMAX theater is playing a non-IMAX film and how often does that take place?

I didn't hear it, I'm sorry.

When an operator is playing a non-IMAX film?

Generally, Tony, although the deals vary, we do not share in the box office of that. However, our contracts require most of them to play DMR films. So it's between runs of DMR films that they would play them. We still get our minimum royalty, but we don't participate in the box office and they keep the economic benefit of that.

The other aspect of that, which is non-economic, but is very important to us, where we are getting some traction, is the exhibitors are increasingly putting cards up and making sure that the audiences know that they are not seeing an IMAX film, that they're seeing a 35-millimeter version of a film in the IMAX auditorium. That's very important to our brand.

Chris Rowen of Robinson Humphrey.

On the deals or the installs that slipped out of the third quarter, can you give us an idea of what percent of those slipped into the fourth quarter, versus a longer delay? And also, what percent of those slips were commercial?

I can't give you the specific numbers, because I don't know them. I would assume that the bulk were slipping from one quarter to the next, but that doesn't always occur. Sometimes they can slip for 6 months.

My sense is that most of them were - I don't remember the number, but my sense is they're slipping, most of them were slipping to the next quarter. That's my memory.

So one or less slipping into never or a year out?

Again, I don't remember the specifics. But right now we're identifying slippage, not deals going away.

Right. And then what percent of them, and again, rough numbers is fine, but were commercial versus institutional?

I don't know the answer to that.

And then my last question is--.

You know, I'll give you the answer in a different way. I think a bigger percentage was new builds, rather than retrofits. Because I think that's what you're getting at a little bit. As you go to the MPX model and you're retrofitting, you should have more predictability of when it installs. Like the example I gave you of the one in Europe was a new build and there was a construction strike on the site. So I believe most of them were new builds, almost all of them I think, not retrofits.

And then, I think the international spread is great, but I guess a lot of what investors are waiting for is the second helping from the major domestic chains. How do you feel progress is with those guys?

It's going slower than we would hope. That's the answer. I think the AMC results from their theaters are quite encouraging in the early going. We're now on a road show somewhat, where we're taking the IRRs of each of the exhibitor theaters as we calculated them and we're sharing them with the exhibitors. So we're hopeful that a combination of educating them on the IRRs, plus the coming together on our film slate will get the big North American guys going. But it's gone slower than we'd hoped.

The other thing that we should say, we have not really aggressively marketed the notion of the joint ventures. In fact, we've really basically only teed that up with AMC and it seems to make a lot of sense. I think we've said, the expected net present value of a deal like that to us is greater than our one-time sale. We're generating really good IRRs and AMC is good IRR. So one of the things that we are talking about right now, as we look at the '06 budget, is whether and to what extent we should more aggressively go out with the joint venture notion with other North American exhibitors. And obviously, that reduces their capital cost or the cost of entry into IMAX business as well.

We're going to take two more questions, Operator.

Michael Kelman of Susquehanna.

Just really kind of a housekeeping question. I know, Brad, you talked about 5 signings plus the 2 AMC JVs, but in the press release you talked about 6 installs plus the 2 JVs. I'm just trying to understand the difference between those two numbers.

One is actually physical installs and the other is a revenue recognition install. And that's what the press release referred to as a revenue recognition install, rather than a physical install. And if you ask me to go into it in more detail, I suggest you call back, because it's highly technical.

Okay, not a problem. And one last thing. Can you give the revenue breakdown for the theaters systems revenue between sales and lease, ongoing rent and maintenance?

For the sales and sales-type leases was about 13 of the total. The balance was maintenance [financing] [unintelligible] balance.

Grant Jordan of Wachovia Securities.

Just a couple of questions. First, if you could go through the average revenue per screen that builds up to the 800,000 that you talked about year-to-date? Second, if you could give us the amount you spent on CapEx and film investments in the quarter? And then finally more just kind of a bigger question, the product that Disney and Real D are using on the Chicken Little release, do you know if that's exclusive to Disney or are there other studios - is that open to other studios, I guess is my question?

I'll answer two of the questions then give it to Frank for CapEx. In terms of the product, if you mean the technology, the technology is open to other studios. I think that the platform Disney is releasing on, so far they have one other film that they're releasing, which is in August or September of next year and it's called Monster House and that's by Sony. So I know other people can use the technology. But to date, I don't think they have any other films except for that one.

In terms of per screen numbers, Polar Express, in January did 105,000 per screen. Aliens of the Deep, a Disney film, did 160 per screen. Robots from Fox did 125. Batman did 230. Charlie and the Chocolate Factory did 190. And Mag Des to date has done 25, which averages 835,000 per screen.

Total CapEx was 3.2. 2.5 of that was film CapEx in the quarter. And that was Mag Des.

This does conclude today's question and answer session. At this time I'd like to turn the call back over to Mr. Brad Wechsler for closing remarks.

When we look back on the quarter, we look at it as one where we really achieve some important strategic milestones I'd say through today, which is firming up the film slate much earlier than we did last year, having 5 films instead of 2. And it's hard to really overstate the importance of that in terms of getting exhibitors comfortable in buying into the whole system going forward.

We have 12 signings, which is very positive. As we look at the level of activity in the fourth quarter, discussions going on, contracts out there. It remains extremely strong. We remain quite confident. You know, at the same time, we recognize the realities of our business, which is things don't happen as fast as you want them to happen.

I guess everyone who's in the world of running a public company is in that balance between building your business for the long-run as well as managing it for the short-run. And I think we're doing - making the right choices in terms of balancing those two concerns and we feel extremely good about putting the building blocks in place for the business going forward.

When we put together this speech, Steve and Cheryl said, gee, this was a quarter where we kind of didn't change strategic initiatives, we kind of put the pieces together. And Brad said it in his speech. And I think it's a lot of blocking and tackling. But I think when you put it in context, we're doing a really good job of blocking and tackling and as we said, I think '06 is going to be a better year than '05. And we feel very good about the direction the business is headed.

And with that, I guess we want to say thank you for joining the call and we'll talk to you with our year-end results. Bye.

And this does conclude today's conference call. At this time you may disconnect.