Imax Corp (IMAX) 2007 Q2 法說會逐字稿

Welcome to the IMAX second quarter financial results conference call. Today's call is being recorded. At this time I will turn the conference over to Mr. Brad Wechsler for opening remarks and introductions. Mr. Wechsler, please go ahead sir.

Thank you, operator. Good afternoon, everyone and thanks for joining us on today's conference call. Joining me today, as usual, is my partner, Co-Chairman and Co-CEO, Rich Gelfond. Also with us are our interim CFO, Ed MacNeil, Executive Vice President of Finance, Joe Sparacio, and General Counsel, Rob Lister.

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 of 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, including the 10-Q we are filing today.

During today's call references will be made to certain non-GAAP financial measures as defined by Reg Q of the SEC. Discussion of management's use of these measures and reconciliations to GAAP measures are contained in the Company's earnings release and our 10-K for fiscal 2006, as well as our 10-Q for the second quarter of fiscal 2007, which will be filed today, as we said. The full text of the earnings release, along with supporting financial tables, is available on our web site, www.imax.com. Today's conference call is being webcast in its entirety on our web site.

Recognizing that we hosted our last call just three weeks ago, when we filed our fiscal 2006 and first quarter fiscal 2007 results, we will not spend a lot of time today reiterating the items we covered in detail on that call.

In terms of key performance drivers, we are seeing a continuation of a number of very important positive operational trends, including the strength of our film slate, the early success of our newly-signed joint ventures, and our progress in developing a digital IMAX system. That said, as previously discussed, 2007 continues to be a transitional year for the Company from a financial perspective, while longer-term initiatives continue to take hold.

Looking at our second quarter results, total revenues came in at $27.5 million compared to $38.1 million last year. We recorded a net loss from continuing operations of $0.11 per share for the quarter compared to a restated profit from continuing operations of $0.04 a share for the second quarter of fiscal '06. We signed six deals in Q2 of this year compared to 12 a year ago. There were somewhat fewer signings than we had hoped for during the second quarter, which we may believe may have been due to customer concerns about our delayed public filings. We are pleased to be back on track and current with these filings.

Our year-over-year revenue decrease was primarily related to a decrease in systems revenue, which was $14 million in Q2 '07 compared to $21.1 million last year. We recognized sales and sales-type lease revenues on four installations compared to nine in the second quarter of last year. It is important to keep in mind that we also installed three joint ventures in the second quarter of 2007, whereas last year we recognized revenue on all sales and sales-type leases. We will recognize revenue on these JV's over the terms of the arrangement.

We also installed a lease we were obligated to provide a digital upgrade. This installation is treated as an operating lease, whereby we receive cash in accordance with our normal terms, almost all by the time the film projector is installed, but we recognize revenue and expenses over the ten-year lease term. As we look ahead, we expect we will ultimately see less choppiness in systems revenue as we transition to having more recurring revenues from joint ventures, and are less dependent on revenue installs.

Our second quarter film revenue was impacted by a nearly $2 million decrease in distribution revenue, as last year's second quarter includes the distribution of Deep Sea 3D. That said, Q2 '07 gross margin from film was pretty much flat.

We were pleased with the performance of our DMR films, including the record-breaking performance of 300- The IMAX Experience, which brought in $24 million on only 91 screens, significantly above our original estimate. Sony's Spider-Man 3- The IMAX Experience opened May 4, and also performed very well in IMAX, grossing $24.2 million.

Looking at current film performance, we continue to enjoy the success of Warner Brothers' Harry Potter and the Order of the Phoenix, which will play in a total of 144 screens this summer. With respect to the box office performance to date, in less than one month Order of the Phoenix has grossed nearly $28 million in IMAX since it opened July 11, or almost $200,000 per screen, with the important market of China opening this weekend.

Importantly, this past weekend, which was only the fourth weekend of release, the IMAX version accounted for 15-plus percent of the North American box office, and only 91 IMAX theaters, which truly reflects the appeal not only of seeing these types of event films in IMAX, but also the compelling draw provided by our conversion of the 20-minute finale of the film into live action IMAX 3D. This film is holding well, meaning that it has maintained very solid box office results in the weeks following its record-shattering opening, and we think it has better legs than many other films out this summer.

Now for a few more second-quarter specifics. We installed eight theater systems in the second quarter, three of which were joint ventures, compared to ten system installations in the second quarter of 2006. Our backlog at the end of the second quarter consisted of 79 systems with a value of $123.7 million, including three joint venture arrangements which carry no backlog value, compared with 80 systems with a value of $128.9 million, including one joint venture, at the end of the year-ago period.

With respect to our other revenue lines, theater operation revenues for the second quarter were $4.6 million versus $4.1 million in the second quarter of '06, reflecting the strong film slate. Other revenues were $1 million compared to $1.2 million in the year-ago period. Gross margin for the second quarter of Q2 '07 was $12.2 million compared to $15.7 million in margin for the second quarter of '06.

On the expense side, SG&A expenses were $11.2 million in the second quarter, up from $9.6 million a year ago. $1.2 million of SG&A recorded in the second quarter were legal- and accounting-related fees associated with the ongoing SEC and OSC informal inquiries of the Company's revenue recognition policies. R&D expenses for the quarter were $1.1 million, up from $0.7 million last year, due to investments in our digital technology.

Turning to the balance sheet, we ended the second quarter with $18.5 million in cash in short-term investments compared to $27.4 million at the end of the first quarter. This decrease is attributable mainly to our bi-annual interest payment of $7.7 million. We have not drawn on our credit facility other than for letters of credit, and $21.5 million remains available under our borrowing base calculation.

Now I'd like to turn it over for Rich -- to Rich, for his comments on the remainder of the year.

Thanks, Brad. I'll begin by reviewing the rest of our 2000 (sic) film slate. Today we announced that we will release I Am Legend, with Warner Bros. Pictures, on December 14, for the back end of our 2007 slate. The film stars two-time Academy Award-nominated actor Will Smith, and is an adaptation of the 1954 science fiction novel by Richard Matheson. Smith plays a brilliant scientist who is the last human survivor of a virus that has wiped out all by the mutant victims of the plague. He must race against time to find a way to reverse the effects of the virus, using his own immune blood. We think that combining a highly-successful, time-tested science fiction story with Will Smith and the IMAX experience will result in an action-packed adventure that will really hit the sweet spot of the valuable tech-savvy demographic. We are very excited to offer moviegoers a chance to experience I Am Legend in IMAX's immersive format, and are also delighted again to be working with the talented team at Warner Bros. Pictures, who continue to deliver films that people want to experience in IMAX.

In November we are partnering with Paramount Pictures, Warner Bros. Pictures International and Shangri-La Entertainment to release Beowulf in IMAX 3D. This film is a CGI-animated feature, showcasing the performance capture technology of director producer Robert Zemekis, the acclaimed director of Polar Express. As we indicated on our last call, this is the first time a film will be released simultaneously in IMAX 3D as well as conventional theater digital 3D. We welcome the opportunity to compare the per-screen box office of the two, as we continue to believe the IMAX experience delivers the best, most differentiated moviegoing experience on earth.

Unfortunately, the Rolling Stones concert film, Shine A Light, which we announced several weeks ago as a September release, has had its release date pushed back to early 2008 by the parties involved in the film's production. We are already in a number of discussions to fill the September slot with a replacement film, and have several exciting prospects. We hope we will let you know shortly.

Looking ahead to our 2008 film slate, so far we have announced The Dark Knight, which will be released in July as the next installment of Warner Bros. Pictures' Batman franchise, and again stars Christian Bale as Batman and Bruce Wayne. There are another five or six great prospects for 2008, and we look forward to disclosing more details soon. Our film team is extremely excited about the potential of the '08 slate.

Turning to our joint venture and digital initiatives, we covered each of these areas in great detail on the last call, so I'll not spend too much time on them right now. That said, since we last spoke we have made some exciting progress on the digital front that we'd like to share. First, our prototype digital theater is up and running at a multiplex theater near our headquarters in Mississauga, Ontario, and we have already had several exhibitors through to see IMAX's digital product. Their reaction has been quite positive. One exhibitor said, "This is IMAX."

Going forward, we will also bringing in filmmakers and studios to show how we are maintaining IMAX's wow factor, while insuring that our digital product provides a differentiated and brand-consistent experience to moviegoers.

We have just completed some initial test audience surveys to gauge the initial reception to the IMAX digital platform. This third-party research, conducted by the respected marketing research firm, Millward Brown, concluded that surveyed participants greatly preferred the IMAX digital experience to conventional digital presentation, ranking us higher on every single attribute, including sound quality, picture quality, picture clarity, screen size and 3D quality. In rating the overall viewing experience, 72% of those surveyed found IMAX digital to be superior to conventional digital, and 92% said IMAX digital fit with their expectations for the brand. While obviously these results are just the tip of a thorough research and testing process, we're very encouraged by this enthusiastic endorsement.

We continue to believe that, on the digital development front, our cost of goods sold should be even lower than originally projected, our anticipated delivery date of late 2008 to early 2009 is on target, and that R&D costs will come in at or below our original estimates. We're extremely pleased with the course of this initiative to date.

On the joint venture front, as we noted on our last call, we are in many discussions for JV's, both in the U.S. and abroad, with existing and new customers, and we believe our strong film slate and current JV financial results are helping these discussions. Obviously the strong results of Harry Potter have even made the JV results better than those we discussed on the last call. We look forward to keeping you posted as we add incremental momentum to our theater growth, and more quickly realize the benefits of network economics.

Looking ahead now to the third quarter, we expect to install five to seven theaters. Financial results for 2007 as a whole, as we had indicated on our last call three weeks ago, will be affected by increased legal and accounting fees related to the SEC's and OSC's informal inquiries relating to the Company's timing of revenue recognition, and our completed restatement, as well as by R&D costs related to the launch of digital.

While 2007 will be a transitional year from a financial perspective, we continue to make real progress on our various growth initiatives and remain optimistic about IMAX's opportunities and prospects. Bolstered by a great film slate, we remain confident in the underlying momentum of our business and we look forward to keeping you informed as our initiatives take hold and bear fruit, and ultimately drive value for our shareholders.

With that, we'd like to open it up for your questions.

Thank you. (OPERATOR INSTRUCTIONS). Please stand by for the first question. The first question comes from Rich Ingrassia, Roth Capital Partners. Please go ahead.

Thanks. Good afternoon, everybody. Were there signings in the quarter not announced before today? With -- you're counting the six -- counted -- is summing everything through July, or through today?

Well we're announcing through July-- through June 30, and we previously announced this number on our last call, Rich.

Okay. And the time to install these days-- has that changed at all?

No. The time to install is relatively quick. As you know, with the Regal joint ventures we put them in in I think a week, or two weeks at the outside, and we continue to be able to do that quite quickly.

Okay. Thank you.

Your next question comes from Michael Kelman from Susquehanna Financial Group. Please go ahead.

Thanks very much. I've got two different questions. The first one's on the film revenue line. I understand why the overall film revenue line was down, because of the difficult comp's from Deep Sea 3D, but I was surprised to see that the DMR revenue numbers were actually down, given the strength of your films this year in the second quarter. So first, maybe you can help us reconcile that.

And then the second question has something more to do with the revenue recognition that you touched on during the last call that you had. Maybe you can help us understand the decision, whether or not you've made it, whether or not you are going to be recognizing revenue on systems that include a digital upgrade component. And if you have to wait to recognize revenue until the digital projection system has been provided, does that mean that you will not be recognizing revenue on any new systems until the digital projector is ready?

Sure, let me take a shot. Year over year on film, you're just seeing two very strong quar-- I'm sorry Q over Q you're seeing two very strong quarters, Q2 '06 and Q2 '07. I think last year Superman was out there and performing very well on a relative basis. If you look at year over year numbers, the big difference is in Q1, and I think the year-over-year variance in margin in DMR film was almost $3 million, most of that emanating out of Q1. And we had two pretty strong Q2's, both last year and this year.

Your second question about digital upgrades and revenue recognition -- yes, we are developing a policy. I think one of the first things that we have to do is, just because of the nature of the way we do business, we have to make a distinction between when we're entering into joint ventures or operating leases, and what's an appropriate accounting there and then, secondarily, if we sell a system, and what's the appropriate accounting there.

In this previous quarter, basically in the leasing context we basically did make -- we made decisions. We're continuing to account for this as an operating lease, but there is a more accelerated depreciation of the film-based components of the system which, for purposes of the operating lease, will have a shorter useful life because they will be upgraded to digital in a few years.

On the other side, we haven't had to address that yet in terms of actually presenting numbers. We're continuing to have dialogues with-- both internally and with PwC. But certainly there are items in the accounting literature that suggest exactly what you said, that we maybe have to defer revenues, and costs obviously, defer revenues and costs, until the installation of the digital system. But a final decision has not been made on that.

Okay.

Yes, the only thing I want to add to that is, as we said on our last call, we're going to try and give you some sense of what that number is and, as we said during our remarks, we've got -- the payment terms are similar to what they were when there was no upgrade, so we received substantially all the cash at the time of installation. As you know, there was one system like that this quarter and, if it were recognized as a sales-type lease, that probably would have been an incremental $1.2 million to $1.3 million in revenue.

Okay. Yes, I just want to -- I understand that on a cash basis there's really no change, but I'm just trying to understand what the P&L impact is, and whether or not we're going to see much revenue recognition outside of what's currently in your backlog, meaning we probably won't see much revenue recognition from a signed-and-installed-in-the-same-quarter, because I assume most new contracts will include a digital upgrade.

I think that's probably right, Mike, but the point I was trying to say is we're going to try and give you a way to build that in, even though you're probably right.

Okay. No, that's helpful. Thank you.

Your next question comes from Eric Wold from Merriman Curhan Ford. Please go ahead.

Hi. Good afternoon. Just a quick question on Q3 and Q4. The five to seven theaters for Q3 -- how many of those are you looking to install? How many of those are JV?

I don't know the answer offhand, Eric. I'm sorry.

Could some of them be JV, or likely those-- the [three] remaining in backlog will be Q4?

I just don't know offhand. I'd be happy to follow up with you later. I just don't know it offhand. So I don't want to guess.

Okay. And then -- if you think about what was in the last filings, how there was 22 of the theaters that were in backlog at the end of the year, were expected to be installed-- they were recognized revenue on -- in this year. Do you know of the current backlog at the end of Q2 -- what are your thoughts of what could fall into the back half of the year? Because I'm assuming that five to seven theaters in Q3 -- if it's five, maybe the remaining queue fall into Q4. You know, just give a sense of what the back half of the year could look like.

The last number that I saw, and this is really an estimate and, Ed, correct me if I'm -- you've seen something more recently, was around 15 for the rest of the year.

Okay. Perfect. Thanks, guys.

Thank you, Eric.

(OPERATOR INSTRUCTIONS). The next question comes from Ken Silver, RBS Greenwich Capital. Please go ahead.

Thanks. Good afternoon, guys. Can you just repeat the film revenue numbers? I missed that.

Ed, do you want to do that?

Sure. Film gross margins -- did you want it in revenues or in margins?

The revenue number, and I guess you were breaking it out between DMR and something else? I just -- whatever you have.

Yes. DMR revenues for the quarter are $3.8 million. Distribution and post-production revenues are about $4 million in total.

How much? Four?

Four. Yes.

Okay. Great. Thank you. And then, the Rolling Stones movie that's getting bumped to next year -- are you going to still show that movie?

We have to look at what else is in the time slot. We'd like to see them -- we'd like to show it. Brad and I had the opportunity to see the movie and we think it's really good. It depends exactly what the release date -- and we hope we can make it work, but we're not sure.

Okay. And then you mentioned, when you were talking about Harry Potter, how the latest weekend was 15% of the total box -- your box office was 15% of the total box office. Do you have those -- the numbers that you used to calculate the 15%?

I do not have them offhand. Again, we can get them to you. Rich, do you?

We did $1.4 million domestic, Ken.

Okay.

I forget what the total number is, but you can look that up obviously.

Okay, that's helpful.

Multiply by six and two-thirds.

Right.

Excuse me?

Multiply by six and two-thirds and that should give you presumably the domestic gross.

Thanks, Brad. Okay. And then, on previous calls there were questions about bank covenants and how I think you had to have EBITDA for the year of about $20 million. Is that an issue? Are you talking to the banks about that?

We are in discussions with the banks. I think that the banks recognize that that might not be the best way to measure what they're after. So we haven't talked to them for awhile, but we talked to them earlier and they agree it may not be the best way to measure what they're trying to measure. We're talking to them about that.

Okay, great. And then lastly -- and if this was in the release I apologize. Can you tell me what your film investment was for the quarter, and what you think it's going to be for the year?

Ed, do you have it for the quarter? I don't know if you have projections available.

I have the six-month number, not the three-month in --

That's great.

The six-month was about $5.6 million.

Okay.

And as we look forward into the year, we're not doing any original productions right now, so it's really what DMR[-ing] -- certainly Beowulf and I Am Legend and hopefully a film that substitutes for Shine A Light, the Rolling Stones film. So normally, even though -- normally we are in the range for a $1.5 million to $2 million for a DMR. So assume $5 million to $6 million. Beowulf will be in 3D, but I don't think we will have incremental expenditures associated with Beowulf.

Okay. And just lastly, I haven't -- I don't know the Will Smith movie is about, but is it the kind of movie where part of it could be in 3D?

Which movie, Ken?

The Will Smith movie?

No, that won't be in 3D.

All right. Thanks a lot.

I will now turn the call back to management for closing comments.

Well, do you want to ask if there are other questions first, operator?

Of course. (OPERATOR INSTRUCTIONS). The next question comes from [Josh Clark] SalePoint Capital. Please go ahead.

Hey, guys. Thanks for taking the question. I was just curious if you could give us a year-end cash forecast? Do you think that cash burn in the second half will look similar to the first half?

The answer is we don't have a number that we want to put out there right now. But I would be surprised if cash burn in the second half was like the first half. We don't expect it. Historically the cash burn in the first half is greater than it is in the second half.

Great. And the second -- what is -- under that $20 million bank covenant, what is the trailing 12-month bank EBITDA number right now?

My recollect -- certainly north of the $20 million. There was definitely cushion in there. It wasn't extraordinarily tight.

Okay. And do you think -- I know you said you were talking to the banks. Do you think you'll stay above $20 million for the year? Do you think there's some risk because --

I think what Rich was saying -- and this happened quite a while ago, that EBITDA may not be the best test for the banks. And I think -- we don't think we're going to have covenant problems going forward in the year.

Gentlemen, there are no further questions. Please continue.

So with that, I guess Rich and I both have some summary remarks. I think the first things is, obviously, just to be a little redundant, the last five months around here have been a time of heavy-duty work with respect to getting the restatement in -- put a lot of stress on the organization. We are delighted to have that behind us. Not that it's anybody's -- no shareholder's problem -- but in this last -- we closed our books on the second quarter in roughly two-and-a-half weeks just to -- in order to get out there today with this conference call. So we, again, went through sort of a very difficult time for our finance period -- for our finance group. That is behind us.

We are now caught up and, as I think as we said last time, even during this period I think we've been very, very happy about the strides we've been making with respect to some of the strategic initiatives. Rich and I were talking yesterday just how-- we were looking at our business in terms of just -- a triangle, in terms of how we assess it. We look at the films and the film performance, aggregate grosses and per-screen grosses. We're looking at our JV performances where we keep -- the numbers are very, very positive in terms of the rates of return, both to ourselves and to our clients.

And then obviously critically important, and we're very pleased about the digital prototype that we have up and running right now, in a real environment, not in a warehouse, but in a real theater. And it looks really good.

And I think our view is certainly in terms of -- strategically we will focus on those three items and then we will be looking at operating metrics that validate what we're doing in the context of those three things. And at the moment those things are looking pretty good. I'm going to turn it over to Rich.

I think a snapshot of our company right now at the end of a quarter really only gives a partial amount of the picture. Obviously it gives a picture of where you are financially for a period of time. But I think, given what said Brad, and the focus we've had on the financial restatement and filing, etc., it really doesn't show what's going on in our business.

And if you look at a bunch of matrix which are not part of our quarterlies, whether it's per-screen box office, whether it's theater performance, JV theater performance, how our exhibitors are performing, and how our films are performing -- on virtually every measure you look at it, they're up over last year. And I think in time, and I don't mean in long time, but I think in short time, you'll see that translate into concrete results. What I mean by results -- I think you'll see more activity from the exhibitors because they're actually making more money in the IMAX business. And you're starting to see already more and better films, and I think you'll start to see that as well, because the studios are making money in the IMAX business. And when we used to lay out a path for the business, which was to grow the network, the key was really to make more money for those constituencies. And all that is happening in a very good way, and I expect you'll be able to see those results in subsequent quarters. Thank you.

Thank you.

Ladies and gentlemen, this concludes the conference call for today. Thank you for your participation and have a nice day.