Imax Corp (IMAX) 2006 Q1 法說會逐字稿

Welcome to the IMAX corporate first quarter earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Mr. Brad Wechsler for opening remarks and introductions. Mr. Wechsler, please go ahead.

Thank you.

Good morning, everyone and thanks for joining us today for our first quarter 2006 conference call.

Joining me as always is my partner and co-CEO Rich Gelfond, also with us are our general council, Rob Lister, and our CFO Frank Joyce.

Before we begin, let me remind you with 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 results, future results, or occurrences may differ materially from these forward-looking statements. Please refer to our FCC filings for a more detailed discussion of some of the factors that could affect our future results and occurrences, including the 10Q we are filing later today.

Our first quarter 2006 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 pressures as defined by regulation G of the SEC. Discussion of management's use of these measures and reconciliations to GAAP measures are contained in the company's first quarter earnings release in our 10Q. The full text of the earnings release along with supporting financial tables is available on our website www.IMAX.com.

First let me me briefly outline the agenda for today's call. I'll review our first quarter financial and operating results, I'll then turn it over to Rich for our current outlook and an update on the process underway to produce strategic alternatives for the company. Finally, we'll open the call up for your questions.

But before I begin on the nuts and bolts of our operations, and before I turn it over to Rich, I would like to briefly speak to the elephant in the room and tell you our strategic alternatives process is proceeding nicely and the interest expressed in IMAX to date has been described as our bankers as robust.

Now, to the financials.

For the first quarter, we recorded a net loss of $0.14 per share. This was about $0.04 worse than the approximately $0.10 loss we originally guided to. The variance between our projected results and our actual numbers is attributable to a number of factors, including the underperformance of V for Vendetta, which reduced earnings by $0.02. In addition, the increase in noncash compensation related to the increase in stock price after our announcement that we were exploring strategic alternatives, including the potential sale of the company, reduced earnings by $0.01.

In terms of executing our core operating initiatives in commercial strategy, we continue to make progress in the first quarter. In particular, we were successful in our ongoing efforts to utilize our MPX systems to convert conventional and multiplex auditoriums to IMAX theaters and expand our network of theaters throughout the world. Looking at each of these areas in a bit more detail, we had 8 theater deals in the first quarter, 6 of which were in North America. We think this is a testament both to the fact that our existing theaters are performing and of course, to our powerful '06 film play which will now feature a new day-in-day blockbuster film hitting IMAX theaters every 6-8 weeks. Our backlog at the end of March consisted of 69 systems with a value of $111 million. And as we said in the past, signings remain the best indicator of our future financial performance.

To put it in more perspective for you, 7 quarters have passed since we installed our first MPX system in Oviedo, Spain. In the 7 quarters that proceeded that installation, we signed deals for 46 systems. In the 7 quarters that followed, we signed deals for 79 systems. This is the clearest indication of the company's momentum right now, fueled by the combination of the favorable economics of the MPX system, combined with the increasingly attractive slates of DMR films. It is not a coincidence that the growing success of these two technological developments, MPX and DMR, resulted in every single key metric of our business, earnings, revenues, signings, and installations, going up solidly in 2005.

As expected, we completed one installation in the first quarter. As we've indicated previously, we expect 2006 installs to be heavily back-end loaded as they were in 2005. Q2 will be significantly better than Q1, with approximately 10 installations, but the dramatic uptick are scheduled for the second half of the year, and particularly Q4.

Turning to our first quarter film performance, we released the IMAX version of V for Vendetta on March 16 in approximately 56 domestic and 13 international theaters. As we mentioned previously, V was an R-rated, nonfranchise film and as such was a bit of an experiment. Because of the nature of the film, it opened on fewer screens than Harry Potter and the Goblet of Fire or Polar Express, and in some theaters, it shared playing time with our other release, Deep Sea 3D. The film opened reasonably well and enjoyed positive audience response, but it did not hold the audience's attention as long as we had hoped. While the film disappointed from a financial perspective, helped exhibitors during a traditionally slow film period. I should point out, however, even though on an absolute basis, V for Vendetta underperformed, on a relative basis to 35mm, the results were impressive, as IMAX box office trends continue to exceed those of traditional 35mm films. V also presented us with some interesting data relative to other DMR releases. The IMAX DMR version of V of the represented 7% of the total domestic box office compared to the 4-5% share that our other DMR films have typically had on less than 1% of the screens exhibiting the film. While we were disappointed the film did not perform better overall, we believe the relative strength of IMAX versus traditional 35mm film reflects the fact that movie-goers are increasingly voting at the ticket window, seeking out IMAX in order to enjoy a truly immersive film-viewing experience.

On a financial basis, as noted before, V performed $0.02 a share worse than what we had budgeted. On the other hand, we were very pleased with the first quarter performance of, Deep Sea 3D, a 45-minute film, an original IMAX 3D production which we released with Warner Brothers. This film has turned out to be a real bright spot for us, demonstrating consistent strength week after week, and actually gaining momentum since it first opened. To date, this film has grossed approximately $8.8 million. In addition, being bolstered by nearly unanimous positive reviews, Deep Sea's success has been driven by its ability to capture viewers' imagination by offering them a stunning underwater experience. This film is still running in approximately 49 theaters worldwide and continues to perform well.

Finally, I should mention that the DMR version of Harry Potter and the Goblet of Fire has grossed more than $20 million, becoming the first digitally remastered 2D IMAX release to reach this milestone. This gives the film a cumulative per screen average of around $190,000, and we think this success underscores the growing consumer enthusiasm for films that have been digitally remastered into the IMAX experience.

From a cost perspective, I'd like to remind you that the cost for us to convert a 2D film is typically in the range of $1.5-2million. Because this cost doesn't change. we're able to recognize incremental margin growth as we leverage IMAX films over our ever expanding network of theaters. In addition, we'd like to remind you that for a theater to earn $1 million a year on 6 films, they need to average about $160,000 per film. Six of our last 8 films have averaged at this level or better. Also, 3D films tend to perform noticeably better than 2D films, and in 2006, we will release 4 3D films as well as Superman 3D, which will contain 20 minutes of 3D footage.

Before Rich looks ahead to the exciting films still to be released in 2006, I would like to walk you through some of the financial line items for the 3 month period ending March 31 '06.

For the first quarter, total revenue was $20.4 million, as compared to $31.4 million for the first quarter of '05. We had one install in the first quarter compared to 6 in the first quarter last year. There were no revenues associated consensual lease buyouts, terminations by default and MPX conversion agreements included in systems revenue this year compared to $7.1 million in lease buyouts in the first quarter a year ago. Breaking the total revenue down further, film revenue for the quarter was $6.5 million up from $4.9 million in the year ago quarter. Theater operation revenues for the quarter were $3.7 million, versus $3.8 million in the first quarter of '05. Other revenues were $842,000.

Turning to expenses for the first quarter, SG&A was up $260,000 to $10.5 million. As we mentioned, SG&A was impacted by noncash expenses related to the timing and announcement of sale process, including phantom stock appreciation, option grants and other costs. In addition, the strength of the Canadian dollar negatively impacted our results by about a half a cent. R&D expenses for the quarter were roughly $915,000.

With that, let me turn it over to Rich.

Thanks, Brad. And good morning, everybody.

In recent months, there's been a lot of discussion of the impact of digital technology on IMAX. I thought it would be useful to give you our perspective. On our last call, we updated you on developments on the digital front, both in conventional cinema and IMAX. One key update was the release of the first film in digital 3D. At that time, the numbers for Disney's digital 3D version of Chicken Little had just come in, which indicated about $8 million in total 3D box office on roughly 85 screens with approximately one-third of the film's attendance being incremental, or attracting new audience members to the concept. Since then, we've gotten more detail and clarity on the film's performance. The total 3D box office for the film was actually a little less than $8 million and the incremental ended up being slightly less than 33%. Once again for comparison purposes, it seems to make sense to compare the performance of Chicken Little 3D in digital to Polar Express in IMAX 3D because both films grossed around $125 million box office in 35 millimeter 2D. I believe you'll all agree with us that the data underscores that IMAX 3D is an entirely different experience in exhibitor and consumer proposition than digital 3D.

Remember, Polar 3D played on almost exactly the same number of screens as Chicken Little 3D; the 35mm 2D versions of the films were almost identical, and they were both released at the exactly the same time of year to the same target audience. So they're about as good as comparison as you're ever going to get. In fact, the only difference between the conventional films was that the conventional version of Chicken Little featured much more aggressive marketing of the 3D digital version, including give away Chicken Little 3D glasses.

As we continue to point out, the numbers make the point better than the word count. Chicken Little 3D did approximately $8 million, as I said, in digital 3D. Polar Express did $45 million in its initial run in IMAX 3D. Polar was 95% incremental, meaning it brought virtually an entirely new audience to the complex, whereas Chicken Little was only about 30% incremental, meaning about 70% of the Chicken Little audience was cannibalized from its complex's other auditorium. To elaborate on what we define as incremental, we tracked three CGI films in a certain group of film complexes. If you take what these films did as a baseline, Chicken Little drove the box office 30% higher in those complexes. Polar Express, on the other hand, did 300% better than the baseline. One screen in the country showing Chicken Little grossed $300,000 or more, 90% of the screens debuting Polar 3D, grossed over $300,000. If you look how domestic multiplexes are ranked in the industry, the average IMAX multiplex showing Polar , moved up significantly in these rankings as a result of showing Polar in IMAX 3D. According to the numbers, the average multiplex increased from approximately number 280 in the United States to number 60 as a result of exhibiting Polar Express 3D.

These numbers are not meant to disparage Chicken Little 3D, they're simply meant to demonstrate that just as IMAX 2D is dramatically different than conventional 2D, IMAX 3D just as different from a 3D film in a conventional theater. Just as IMAX's theater design, screen, image quality, and sound can't be matched in a conventional 2D auditorium, those same elements have exactly the same differentiation value in a conventional 3D auditorium, regardless of whether the 3D technology in that conventional theater is analog, digital, or whatever comes next.

IMAX theaters are designed in a way to bring the audience inside the movie, to remove the cues that consumer is watching a film, to create a sense of realism and immersiveness by making the film's boundaries disappear. This is what will always separate IMAX from any other film, and any technology exhibited in a traditional movie theater. And as we work on our own first generation of digital projection system, which we announced previously as a very high research and development priority for us, you must remember these systems will be installed in IMAX theaters featuring the same critical proprietary components that creates the trademark IMAX experience, which consumers around the world have always driven farther for, paid more for, and rated higher than any other cinematic experience anywhere.

As we've said in the past, we will not unveil an IMAX digital projector unless it carries an image quality similar with the IMAX brand. Today our R&D efforts are advancing rapidly, and we expect some significant announcements in the near future. Our early work with digital back in the late 90s could not produce that digital product of this level or quality, nor can any of the chip sets we are seeing begin the conventional digital rollout do so today. However, by using our extensive stable of digital IT and working closely with the premium technology partner, we've made some breakthroughs that we believe will lead us to a digital product of IMAX quality. One that, installed in an IMAX environment, will deliver an experience that consumers have come to expect from us and worthy of our brands. If this product is successful, there'll be tremendous benefits for all of our constituency; as a digital IMAX theater promises enormous print cost savings, the draw of bringing special attractions, such as live events, to the IMAX theater, and a pay back structure many times more profitable than the conventional pay back model. Using conservative assumptions, a $100,000 to $125,000 digital projector and annual print savings of $17,000 per print per year, I'm sorry per year, not per print., for all the print. The pay back on investment of conversion of a screen is 6-8 years. Compare that to pay back that is less than 3 years for the conversion of an IMAX theater from film to digital, and you see why we are quite excited about both the economic and the entertainment opportunities connected with an IMAX digital system.

Now moving on to our film slate.

We're extremely pleased with what we've got lined up for the rest of 2006. Our current slate ensures we have a new release every 6-8 weeks, which is both psychologically and financially important to our exhibitors. It also marks the first time we have developed such a regular flow of content. This is yet another reflection of the success of our commercial strategy.

This Friday, we will release the IMAX DMR version of Poseidon on 62 domestic screens, which includes the largest number of domestic commercial multiplex screens we've ever opened a film on. We will also open in 17 international markets. As many of you know, this high-tech special effects driven film survival story of passengers aboard an ocean liner toppled by a colossal tidal wave. We think the famous scene where the rogue wave capsizes the ship will really take your breath away on the huge IMAX screen.

We're also very excited to announce that 4 theaters in Mexico will actually begin showing Poseidon a full two weeks before it opens in conventional 35 millimeter format in Mexico. We think this will really help communicate the audiences, the unique proposition we offer movie-goers and underscores IMAX's ability to stand out in the current entertainment environment.

As we see historically, we expect to Poseidon benefit from Warner Brothers strong commitment to marketing the IMAX DMR version of their film. Their efforts to integrate IMAX into their marketing campaign really makes a difference in the performance of these films.

Hopefully you all saw are very exciting announcement a couple of weeks ago, that on June 30, the highly anticipated Superman Returns will become the world's first live-action Hollywood feature to be converted from 2D to IMAX 3D. We will use our proprietary 2D to 3D conversion technology to convert approximately 20 minutes of the film into 3D, and we think the results will be absolutely spectacular. As a matter of fact, we've seen some of the early conversions and they look really terrific as audiences will feel like they are really flying with this timeless superhero.

This is an historic first for IMAX, a real milestone in our company's technological evolution. And we couldn't be happier to bring Superman to live action realism never before seen on our screen. This conversion into IMAX 3D represents a true blending of technology and film that will transport audiences to a whole new level in terms of skill and power, and we can't wait to see their reaction.

Superman will be followed by 6 solid months of IMAX 3D Hollywood films. We remain very excited about the August release of the CGI animated film The Ant Bully. This film is voiced by an all star cast and has a great story line with universally appealing themes, and it's produced by Playtone, the production company run by Tom Hanks that produced My Big Fat Greek Wedding.

Open Season is an animated feature from the director of the Lion King. Another great film for families, Open Season tells the story of a deer who befriends a grizzly bear when the two animals are alone in the woods during hunting season, and the film features an all star cast of contributing voices, including Ashton Kutcher and Martin Lawrence.

We've said before that we're excited about our expanding studio relationship. And to that end, we're pleased to be partnering with Sony Pictures Animation for the release of Open Season, which is Sony's first CGI film. We last partnered with Sony on Spiderman 2, and we look forward to working with them again to provide Open Season movie-goers with the IMAX experience not found anywhere else.

Finally, November will mark the release of another Warner Brothers film, Happy Feet, which is a tale about a penguin trying to find its mate through dance, because of the penguin's lack of ability to sing. It may sound a little corny,but watch out for this film; the buzz is already gaining momentum, and we certainly have high expectations. The film has a great cast that includes Nicole Kidman, Hugh Jackman, and Robin Williams, and is being directed by George Miller who directed the Babe films, Lorenzo's Oil, and the Mad Max trilogy. Overall, we think our 2006 film slate will be instrumental in driving recurring revenue.

As we look ahead, I think it's worth reiterating that our films continue to buck the box office trends for traditional 35mm films. In the 35 millimeter world, domestic box office has seen the impact of consumers choosing to stay home and watch DVDs, browse the internet or play video games. IMAX DMR films, on the other hand, continue to enjoy significant strength at the box office relative to the 35 mm version. The IMAX experience delivers, what IMAX delivers is unique and cannot be replicated in the home or anywhere outside of IMAX theaters.

The box office underscores this. While conventional exhibition was down for the third consecutive year in 2005, IMAX DMR box office was up 35% and that's with 2 less films and 3 less IMAX 3D films than we have on our slate in 2006.

Looking out to 2007, we are in the midst of discussions with multiple studios about some of the best movies of the year. We can't be any more specific on today's call, unfortunately, but we are thrilled about the opportunity open to us and look forward to updating you in the near future.

Now I'd like to provide you with a brief update regarding our process to find strategic alternatives for IMAX.

As you all know, on March 9th, we announced we had retained Allen & Co. and UBS to explore strategic alternatives for the company, including a possible sale. We continued to believe that a partner or an acquirer could help take IMAX to the next level in any number of ways, including providing additional flexibility to accelerate our attractive joint venture strategy, helping us develop new technological innovations, or adding to our brand and marketing reach.

We've been very pleased with the level of interest we've seen to date and how the process is going so far. We are currently evaluating preliminary proposal from a broad range of interested parties and preparing for the second round of the process. Overall, we would characterize the process as very dynamic and robust, and remain convinced that this process will ultimately enable us to derive the best value for our shareholders. We hope you understand that at this stage it is difficult to assign a concrete time frame for this process, but we look forward to additional information just as soon as we can.

While we are very focused on recognizing value for our shareholders as part of our exploration of strategic alternatives, we also remain committed to accomplishing our financial and operational goals as we move forward. While our first quarter financial performance was somewhat disappointing because of expenses related to the sales process and disappointing results from V for Vendetta, we believe these results did not reflect any fundamental weakness in our growth and operating strategy. We continue to expect signings, installation, and film performance to accelerate in 2006 and drive significant growth. Specifically, we plan to sign deals for 45-50 new systems this year.

Moving on to our second quarter expectations, we have plans to install approximately 10 theater systems. We should mention that 5 of these 10 installs are either actually new signings or installations that were moved up because exhibitors were eager to take advantage of our strong film slate.

We expect second quarter revenues to come in at about $40 million and report earnings in the range of $0.05-0.08 a share. As we indicated on our last call, we have not provided full-year guidance given the fact that we remain in the midst of our strategic alternative process. However, we can confirm that we are on track with regard to our objectives to both signings and installation, the company's most important indicators of growth and financial performance.

We hope you all share our enthusiasm for what may develop for IMAX in 2006 and beyond.

Thanks very much for listening.

And I'll now turn it over to the operator, as we're happy to take questions.

[OPERATOR INSTRUCTIONS]

We'll take our first question from Eric Wold with Merriman Curhan Ford.

Hey, good morning.

Hi, Eric.

Recently there's been as usual a lot of concerns raised by others in the press about your finances and how that may affect the sale process. I know you can't talk too much about it, but is there anything you can say about any financing that's been lined up or committed to or anything along those lines for people who may be looking at joint venturing with you or acquiring you?

It's my understanding, Eric, that a couple of investment banks have offered financing to potential acquirers around IMAX and those investment banks did their work long before any recent articles, and the recent articles didn't change their view at all. I think I know what you're referring to, and I don't think there's been anything to change anybody's view. There hasn't been anything changing anyone's view of the process, Eric.

Perfect. And a couple of questions on Q2. In that Q2 guidance of the 10 systems to be recognized, revenue on. What's the mix between North America and international?

You know the answer to that Frank?

I don't have that.

He can look while the call goes on, Eric, and we'll come back to that.

Okay. And you -- was there any, since obviously there was less than $1 million in lease buyout revenue in Q4, nothing in Q1. Anything in Q2, in the Q2 guidance for that?

I don't know offhand, but it's not a material number.

Okay. And lastly, just kind of looking at this year. Assuming, maybe it's updated but assuming, there are no additional signings at all this year, which, is unlikely, no additional signings at all, where would you fall out in terms of what to be schedule to be installed this year, in terms of total number?

Eric, we don't look at it that way. In the comments I just made, a big part of your year includes some sign and install. I don't know what the number is offhand. We're not looking at it that way.

And for the Q2 installations, I see 4 being from North America.

So it's 4 from North America?

Yes.

Correct.

perfect. I appreciate guys, I'll hop back into queue.

Thank you.

I'll go next to Richard Ingrassia from Roth Capital Partners.

Thanks, morning, everybody.

Hey, Rich.

Rich, can you just to be clear, your guidance then for '06 is still between 38 and 45 installations?

You know, this is an area you have to be very precise in, I think we said we're in the giving any guidance on this call. I don't remember exactly what we said on the last call. I just don't want to trip over any words.

Okay. Fine.

What we said is we're on track for whatever we said, okay. I just don't want to reference to what, I don't remember was said on the last call.

That's what I have for last time. What was the amount, if you can, of incremental SG&A in the quarter related to the deal? Looks like it was, came in at $2 million ahead to have the run rate.

No, SG&A wasn't $2 million ahead of the run rate. We were almost flat with last year. But I would say probably, close to $1 million ahead of the run rate, is that what you would say Frank? Because of the stock appreciation charges and some of the other things, deal-related expenses. I would say it's around $1 million.

Okay.

Anything else?

Yeah. I don't know if you can answer this specifically or not either, do you have a number, but last quarter you gave us a way to back into 2006 backlog versus your install guidance for the year. Can you give us a backlog -- some sense for the backlog today for '06?

Probably not answering that question, but the backlog today I think is 69 systems with $111 million.

Of the 69, how many are in backlog for '06?

I can't -- I can't tell you off the top of my head.

You can call later and follow-up, we just don't have it off the top of our heads.

Okay, fair enough, thank you.

I'll go next to Ken Silver with CRT Capital.

Hi, good morning. I guess a couple of things.

Just one thing, Rich, I think there are around a dozen that need to have be signed and installed in the budget. Around. Is that the question you're looking for?

He can't come back --

Come back in the queue, Rich, and tell me if that's not the answer you're looking for, okay? Go ahead, sorry.

In the press release it says you recognized revenue on 3 installations in the first quarter, but Brad you said you only installed 1, I know this come up before. But can you just clarify that again?

I think two others were like lease renewals. So whereas the lease term expired the tenure and they elected to renew it, they're not installs, but there's some revenue implications which are significantly smaller than an install.

Okay.

Those are lower margin, obviously.

Okay. And then the second quarter guidance you said revenue would be, you're expecting approximately $40 million, which is basically $20 million higher than the first quarter. I guess there are going to be 9 more installations.

That's what we guided to, yes.

Okay. Can you give a sense for what you expect film revenue to be in the second quarter? How much of that 40 is film?

I think it's, I think it's hard to break that out specifically. But obviously second quarter revenue should be noticeably better than first given the performance of the films in the first quarter.

It's about 12.

Okay. So and those are the two major underpinnings of the higher revenue, the 9 installs and the higher films. Right?

Yeah, if you just want to say 9 installs, and this is probably a little off, but if you say the average install is around $1.5 million, a little bit more, that gets you most of it.

Fourteen out of the 20. Okay.

So that's increases in systems, obviously.

I had a couple of questions about the M & A process. You said you were moving into the second round. Can you describe what the first round entailed?

I'm going to talk generically about it, and not our process. The way these processes work in general is that your investment banks receive a large number of inquiries. And out of that, they decide who to enter confidentiality agreements with, who to send books to. You know, it's kind of a wide net.

And then the bankers, I'm not talking about our process, but in general, they whittle that down by seeking preliminary proposals, and they look at what the proposal is, what's the financial capability of the person making the proposal, what's their representation? What's their time line? What's their likelihood that they'll close? And then that somewhat smaller group goes into a much more intensive diligence phase. And in general, that's what a second round is, is that much more intensive phase.

Okay, so your first round received financial indications of interest?

I'm not going to comment on our process beyond what we've said.

Okay. All right. Thank you.

We'll go to Matthew Harrigan with Janco Partners.

Most of my granular questions were answered.

But is Warner's likely to prominently feature the 20 minute 3D excerpt in its marketing, and can we infer from this that you're more optimistic on the time path for having more 3D live action content in 2007? And then lastly, I know you can't get very specific at all on the strategic alternatives process, but I mean, nobody even your admirers, is allowing for any of the movies you have this summer to do Polar Express type numbers. Can you make an argument that it would be very good for the strategic process to at least extend into the summer to show credibility, if you do manage to have another hit? Maybe not akin to Polar Express, but, certainly, a lot higher than some of the cynics who think that Polar Express was just a one-off would be inclined to believe.

Let me start with the different questions.

First, I think Warner Brothers, like IMAX, is very excited about the notion of incorporating 3D footage into Superman, and I absolutely believe that will be featured prominently in the marketing of the film. It's really, I think, again, Warner's would like to do something special for their audiences. They would like people to come back and see the film another time, and see it in 3D. I think we have developed this very symbiotic relationship with Warner's, particularly as it relates to the best way to marketing the film, to create incremental revenues for Warner Brothers and our theater customers. You should expect to see the marketing.

With respect to, what that means for '07 and beyond. As Rich said in his speech, he sort of underplayed it a little. This is the first time that, we're going to see any footage from a live action, 35mm film converted into 3D. It's very exciting. It's in some sense what IMAX is all about, which is sort of at the cutting edge in both film and technology, and absolutely you start with small steps and you accelerate to larger steps. And I think as we go forward, you'll see more and more of this as we go forward into '07 and '08.

And with respect to your last question about timing and strategic alternatives and trying to be smart enough alternative process with film releases and film performance. You know, A) we're not that smart and B) I think the strategic alternative process has a pacing of its own.

So, you know, I think they really are separate and discrete.

Okay, thank you.

We'll go next to Michael Kelman with Susquehanna Financial Group.

Thanks. Gross margins were only around 30% in the quarter, obviously significantly below the 50% level experienced over the last few years, obviously that was driven mostly by the revenue shortfall. But can you walk us through the variable fixed cost structure, particularly the cost of sales given the weakness in gross profit?

Well, clearly gross margin is driven by the number of installations, and there's a certain amount of fixed costs within the cost of sales that cover as more installations go. So looking at gross margins in the quarter and the significant variance, clearly it's the number of installations.

Yeah. SG&A, I know you're talking about cost, you know, cost of sales.

Right.

A big part of the, obviously the selling effort is in SG&A. One item in cost of sales, which is obviously variable, is literally the systems cost, which you don't debit out of inventory when a installation is deferred. But I think the big answer to your question is really when you go down to three installs, the mix of your revenue drifts dramatically to the other parts of your business out of systems, which is the very high margin of our business.

Okay. That makes sense, thank you.

We'll go next to David Marsh with Friedman Billings Ramsey

Thanks. Guys, could you disclose what the amount of noncash comp was in the quarter?

When you say noncash comp. Sure the stock charge was around $500,000, the stock appreciation. That was one. There were deal-related expenses, and this is just by memory, but it's close, which were a couple hundred thousand dollars, there were some option expenses in connection with retention agreements related to the sale which around $300,000. Couple of other things, but that's pretty much the bulk of it.

That's helpful. In terms of the backlog, how many of the 69 systems in backlog are MPX?

You know the answer to that Frank?

Yeah. About 65%. Or 45 systems.

Okay. And then with regard to the 2D to 3D conversion to live action, you guys haven't done it in the past, this is kind of your first foray into it for public consumption, but do you guys have an estimate of how much it would cost you to do a whole film, 2D-3D live action?

I'll give you an estimate and also make an observation. I think our estimate is probably around, you know, $8 million or so. $8-10 million to do it initially. But I think, and the key thing is, we're talking about a new technology here and just the way, with shareholders many, many years ago. The first time we did a DMR film, which was Apollo 13, the conversion process took us 7 months and was fairly expensive, and now takes us 2 weeks or in some instances even less and it has become highly automated. So over time, we expect to see certain decreases in the cost and increasing amounts of automation in the process. Right now, it's a little too labor intensive, and that's because it's new.

Sure. Sure. Okay. That's it, thanks.

We'll go next to Dennis McAlpine with McAlpine & Associates.

Thank you, and good morning.

Hi, Dennis.

Following up on that. Can you talk about the cost splitting on the 3D conversion, how much you're taking versus Warner? Are they taking any of that cost?

I can't comment specifically on the deal, Dennis, but the bulk of it is borne by Warner.

And on the V for vendetta, when you say it was $0.02 less than expected, you're not saying it's a $0.02 loss?

That's correct.

Lastly, if you were to do a digital 3D or digital IMAX, would it make sense for you to go into a digital distribution, AE, AIX, Christie or something like that? And what's it cost you currently per print?

One of the reasons why digital is actually such an exciting opportunity for IMAX, I'm going to try to make this as simple as possible. The ratio in the 35 mm, the AIX world, the ratio of the cost of a projector to a print cost is about 100-1; $100,000 to buy a projection system, $1,000 per print. We expect that the ratio of projector cost to print cost in the IMAX world is 15-1, which means after 15 films, you can basically pay for the cost of the digital projector, that is unbelievably compelling in terms of pay back and deployment.

And Dennis, I don't known if you were going here, but if you were asking the question, whether something like virtual print fees could finance the rollout of IMAX digital, that's something we've been examining closely.

Have you concluded on that examination yet, whether it's something that you want to get into? Or something you would like a third party to get involved?

We would definitely get into it ourselves.

Good. Thank you.

We'll go to Ken Silver with CRT Capital.

My question was answered, thanks.

I think there are no more questions in the queue.

Thank you all for joining the call today.

I think you all agree, IMAX is a very exciting juncture as its evolution as a company, and we look forward to updating you both in the project of our strategic initiatives and our process underway as well as our progress as a company with a very exciting film slate coming up starting this week.

Thank you very much.

And this does conclude today's conference, thank you for your participation, you may disconnect at this time.