Imax Corp (IMAX) 2007 Q4 法說會逐字稿

Welcome to IMAX Corporation's Q4 earnings conference call. Please note that today's conference is being recorded. At this time, I would like to turn the conference over to Brad Wechsler for opening remarks and introductions. Please go ahead, sir.

Thank you very much, operator. Good morning, everyone. Thank you very much for joining us on today's fourth-quarter and fiscal '07 conference call. Joining me is my partner, Co-Chairman and Co-CEO, Rich Gelfond. Also with us are CFO 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 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.

During today's call, references will be made to certain non-GAAP financial measures as defined by Reg G of the Securities and Exchange Commission. Discussion of management's use of these measures and reconciliation to GAAP measures are contained in the Company's earnings release and our 10-K for fiscal '07, which will be filed later today. 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.

Please note that, later on in the call, we will be referencing slides that are being simultaneously webcast on IMAX.com. To access the presentation, click on "Company Info" and then click "Investor Relations."

2007 was a watershed year in IMAX's four-year history. Among other things, we made significant progress in transitioning from film to a digital platform, introduced a new business model, had the best film year in our history, and signed 144 new systems, 110 of which were JVs, all on an existing network of approximately 300 open theatres.

Despite our strategic achievements, the year was challenging from a financial perspective as we lived the effects of moving from film to digital and dealt with the impact of financial restatements and other regulatory issues. We told you last quarter that we believed the business was at an inflection point with regards to emerging from this transition, and indeed, several recent positive developments leave us very well positioned as we head into 2008 and the next exciting phase of our growth.

Today, I will begin by briefly recapping our progress in fiscal '07, which we believe has the foundation for future growth and culminated in exciting recent developments. Then I will turn it over to Rich to take you through our most recent progress in more detail, as well as the impact we believe our initiatives will have in 2008 and beyond.

As we entered fiscal 2007, we knew a transition to digital and the development of a more attractive business model could dramatically expand our potential in many ways. I'm pleased to say that our new model is now firmly in place and we closed out the year having developed a digital system in faster time, at a lower cost of goods sold, and projected higher gross margins than originally budgeted. We accelerated the delivery date of the first system by about six months, in spite of the technical complexity associated with developing this product.

We also believe we're coming in at about $2 million under budget with respect to R&D costs. We are now at the stage of productizing our digital prototype, which has been operating for several months near our corporate headquarters in Ontario, and we are on track to have systems in the field and operating by the end of June with a larger-scale roll-out two to three months after that. The IMAX story has moved from one of development to one of execution and implementation.

Today, we are more convinced than ever of digital's crucial importance to IMAX and our future as a business. First, digital will help facilitate a more rapid buildout of the IMAX network by removing print costs from the system. Second, because of the print savings, the transition to digital will enable us to show even more Hollywood films, up to ten or more a year, compared to six or seven now, and also enjoy enhanced programming flexibility, including the ability to show live-action events. Third, digital lowers installation costs for exhibitors by about $100,000 which, with more films, would help drive the return in our sales and joint venture model. Bear in mind that studios will enjoy a higher return on each picture with no print costs, which provides an incentive for studios to release even more of their blockbuster films in IMAX and to do so year-round.

Obviously, exhibitors will also benefit from digital. In their case, not just from lower installation costs but from more films, which will mean higher revenues and greater per-theatre profitability.

As we stated before, while we work to develop and launch our digital product, signings slowed a bit as exhibitors reigned in their demand pending the introduction of our new digital product. Now, the ability to see our digital system has spurred signing, and we are seeing exhibitors embrace IMAX's digital product with encouraging enthusiasm. This is certainly epitomized by our recent announcement of a 35-theatre lease deal with RACIMEC to install IMAX digital projection systems in Central America and the Caribbean. Rich will discuss the details of this agreement momentarily, but in short, we think it is but one example of the overwhelmingly positive reception to our transition to digital. Importantly, announcements of this magnitude reflect a new level of activity for the Company, with significant interest being generated at a level unlike any that we have ever seen before.

The planned launch of digital has also played a crucial role in spurring and supporting our joint venture initiatives. Early in 2007, we signed two JVs with Regal. After recouping their investment after just two films, they came back to us and signed a five-JV deal in October. Then, as you all recall, in December, AMC signed a 100-theatre joint venture deal with us. This deal was key for us not only in that it is the largest and most expansive in IMAX's history, but also because it transformed the Company from both a financial and strategic point of view. It will introduce significantly more recurring margin into our business model and will ultimately double the size of the existing IMAX commercial network in North America and almost triple the number of IMAX theatres in North American multiplexes. Deployment starts in the second half of 2008 and continues through 2009 ending in 2010.

As we have previously indicated, we believe that, on a steady-state basis, our agreement with AMC will generate between $30 million and $35 million in incremental EBITDA per year for IMAX, based on conservative assumptions when we are fully deployed, which should be slightly less than three years. We expect payback for a joint venture to be achieved in approximately 2.4 years with an IRR of approximately 37%. This does not include maintenance revenues or DMR fees, which we receive when an IMAX theatre exhibits a film that has been converted into the IMAX format. With these, payback is expected to be in less than two years.

With respect to other significant accomplishments in fiscal 2007, we signed a four-picture deal with DreamWorks Animation to release the studio's first three 3D films in IMAX 3D, which bolstered our visibility in the industry and further validated our digital strategy. As a reminder, these releases will include Monsters vs. Aliens 3D in March 2009, How to Train Your Dragon 3D in March, 2010, and Shrek Goes Fourth 3D in May, 2010.

In addition, we will release Kung Fu Panda in our 2D format on June 6, 2008. We are delighted to have entered into this new and important studio relationship, and also note that last year we also begin working for the first time with Paramount, the studio that distributes DreamWorks Animation's films.

Regarding film performance, as previously reported, in 2007, we generated $145 million from Hollywood releases, four Hollywood releases, which is 56% higher than the $93 million that the IMAX theatre network grossed during 2006. This translated into an 81% gain for IMAX's share of DMR gross box office from 2006 to 2007. On a same-store basis, which tracks only those theatres showing DMR films, (inaudible) open the year ago and therefore strips out the growth of the network, gross box office increased 48% to $1.3 million in revenues per screen. For IMAX, this translates into higher film royalties and theatre participations, and for studios and exhibitors it translates into higher profits.

Clearly, 2007 was a very busy year for us, and we are extremely gratified to see our initiatives already begin to bear fruit. We believe that our focus and progress with respect to film performance, joint ventures, our digital initiative and signing leaves IMAX extremely well positioned for the future with a compelling operating strategy and business model. 2007 bore the brunt of these initiatives from a financial perspective, however. As we mentioned, signings and therefore installations in prior years slowed as exhibitors decided to wait to see the digital product. Results were also impacted by development costs related to our digital initiative and by high SG&A related to accounting and regulatory issues.

Furthermore, during the fourth quarter, we recorded a non-cash write-down of film projection-related assets totaling approximately $4 million, which is reflected in costs of goods sold. This write-down relates to the obsolescence of certain film-based equipment that resulted from the switch to digital. Due to the combination of these factors, we sustained substantial losses on fiscal 2007. However, we believe the pain experienced in '07 will turn into better results in Q4 of fiscal '08 and a profitable year in 2009.

I'm not going to spend a lot of time today reviewing our Q4 results, since they are presented in detail in today's press release. But just to touch on a few key items, total revenue for the fourth quarter came in at $32.3 million compared to $36.5 million last year. We signed 107 deals in Q4 of this year, 100 of which were JV and 7 of which were a sale or a sales-type lease. This compares to nine sales or sales-type leases new signings a year ago.

Systems revenue came in at $17 million in Q4 compared to $20.7 million last year. We recognized sales and sale-type lease revenues on five installations, compared to nine in the fourth quarter of last year. We installed two joint ventures in the fourth quarter of 2007, whereas the previous year we didn't install any. These JVs had only a minimal financial impact on the fourth quarter financials but will provide recurring revenues on an ongoing basis.

Our backlog at the end of the fiscal year consisted of 186 systems with a value of $119 million, including 104 joint venture arrangements which carry no backlog value at all. This does not include our recent South American deal which adds approximately $45 million to backlog. This compares with 74 total systems with a value of $118.4 million at the end of fiscal '06, including one joint venture arrangement.

In 2008, we expect to install 25 to 28 joint ventures, and recognize revenues on 12 to 14 sales or sales-type leases out of our current backlog. Additionally, we anticipate installing up to three more MPX systems early in the year, where we will recognize no revenue until the digital upgrade -- our digital upgrade obligation is complete, most likely in 2009.

Finally, we also anticipate approximately 15 to 20 signed and installed. Those are agreements that we signed in 2008 and will also install in 2008. We project that roughly half of these signed and installed will be JVs, and half sales or sales-type leases. As usual, we should caution you that projected installations are always subject to slippage for reasons generally outside of our control.

Our fourth-quarter film revenue was $10 million compared to $10.9 million in 2006. Quarter-over-quarter comparisons are roughly equal when you exclude production revenues related to 3D conversions that were recorded in 2006 under the DMR revenue line.

For 2007, our share of DMR gross box office increased 81% to $19.9 million compared to $11 million in 2006, excluding production revenues. Production in DMR revenues were $19.9 million compared to $14.6 million, an increase of 36%. Just to make that clear, the first numbers of the 81% comparison stripped out production revenues. When you include production revenues, the year-over-year increase was 36%.

As we discussed in our last call, we were very pleased with the performance of Beowulf in IMAX 3D which generated $24.4 million worldwide and roughly $14.3 million domestically, or 17% of the domestic box office, on less than 3% of the locations showing the film. We were also happy with the performance of Warner Bros. picture pictures I Am Legend on December 14, which did about $16.5 million in IMAX.

Turning to the balance sheet, we ended the year with $16.9 million in cash and short-term investments, slightly higher than budgeted. This is only a slight decrease from the $18.2 million we had at the end of the third quarter of 2007. IMAX has no cash or cash equivalents in auction rate notes were any other types of securities where access is likely to be hampered.

For the year as a whole, cash expenditures associated with legal, accounting and professional fees were approximately $10.5 million, and R&D-related expenditures came in at about $6.9 million.

In addition to our cash balances, we have a senior secured facility with Wachovia, and this allows us to borrow up to $30 million. I should point out that, on December 5, we amended our credit facility so that our EBITDA requirement was reduced to $12.5 million on a trailing four-quarter basis before returning to $20 million at the end of the year, so we're comfortable with regards to availability. We have not drawn down anything from our credit facility to date, other than for letters of credit, which it also specifically allowed for under the senior notes, separate from the $30 million. $19.4 million remains available under the facility's borrowing-based calculation after outstanding letters of credit of $10.9 million.

With that, I'd like to turn it over to Rich.

Thanks, Brad. I'd like to begin by discussing recent developments, and then I will take you through our film slate and discuss what all this means for the business in fiscal 2008.

This past Monday, we announced the largest lease deal and second-largest theatre deal in our forty year history with RACIMEC International Group. RACIMEC is one of most prominent entertainment and public gaming companies in the world, developing gaming applications such as Lotto and soccer lottery for various Latin American countries, including Brazil, Chile, Argentina, Venezuela, Colombia and Paraguay.

Under the terms of our agreement, we will work with RACIMEC to install 35 IMAX digital projection systems in South and Central America and the Caribbean over the next five years. RACIMEC will buy the systems from IMAX under our standard lease arrangement, where we receive significant cash upfront and subsequent minimums against the royalty and then work out arrangements and then RACIMEC will work out arrangements with its partners, which include developers, exhibitors and other entertainment operators, for negotiated economic terms. RACIMEC will then work with their clients to identify the best locations, based on market demographics and cultural trends, which will ultimately result in a substantial network of IMAX theatres throughout the region. This deal will bring capital to these underdeveloped regions while providing IMAX with a contracted cash flow. We are very excited to enhance our presence in South and Central America so significantly, and are pleased to be working with such a well-respected and experienced business innovator who has significant expertise in the region.

It is not only this lease deal that is testament to the strong and growing exhibitor interest in IMAX. As Brad indicated, interest in joint ventures gained significant momentum following the announcement of our deal with AMC. We are currently in negotiations with a number of exhibitors for well over 50 joint venture theatres. We can't predict how many will happen but we can say we expect a significant number of these to be signed, perhaps shortly.

Turning now to our film slate, on February 15, we released Paramount pictures The Spiderwick Chronicles, a fantasy adventure based on the best-selling series of books. To date, this film has grossed $4.6 million in IMAX, and while we think this is a very appealing story, we note that February is traditionally a soft time for films. As a result, Spiderwick may not have the legs that would generate significantly stronger results over its run.

Following Spiderwick, we're looking forward to releasing the Rolling Stones concert film, Shine A Light, on April 4, which is directed by academy-award-winning director Martin Scorsese. A large portion of the play dates for this film will be in IMAX, and it is expected to be the largest North American IMAX release ever.

Then, as we announced last week, on May 9, we will be releasing Speed Racer in partnership with Warner Bros. pictures. This action packed adventure from the Wachowski Brothers and producer Joel Silver, the creators of The Matrix Trilogy, is based on the hit animated series created by Tatsuo Yoshida and is a fantastic addition to our 2008 film slate.

As far of the DreamWorks Animation deal mentioned earlier, we're looking forward to releasing Kung Fu Panda in June. We have just returned from ShoWest, the Exhibitor and Studio Trade Association conference, where the film was screened and the reaction was extremely positive. Of course we are extremely enthusiastic about our next film, the release of Dark Knight on July 19, which is the next installment of Warner Bros. Pictures' Batman franchise and again stars Christian Bale as the Caped Crusader. We think the innovative sequences that director Chris Noland has filmed using IMAX cameras are stunningly immersive and will really create a spectacular IMAX experience.

Our release of Harry Potter and The Half Blood Prince is scheduled for November. We expect that as with Harry Potter V, certain sections of the film, such as the finale, will be presented in IMAX 3D. We are currently working on adding another film for release in September or October, and look forward to announcing this addition to our '08 slate.

Now, I'd like to turn to what digital and our other initiatives mean to IMAX from a financial perspective. As Brad discussed, the next few quarters will be negatively impacted in part by our digital transition, including increased R&D, installations being delayed by clients wanting to obtain a digital system rather than a film system, and our inability under the accounting rules to recognize revenue on systems where we provided upgrade later. That said, we believe our rollout of digital systems in the back half of 2008 will lay the foundation for improved financial performance which should begin to become evident in the fourth quarter. As Brad indicated, we expect that fiscal 2009 will be profitable.

From our cash flow perspective, we believe 2008 will be cash flow breakeven, before funding requirements for the joint venture rollout, and anticipate that we will drawn down approximately $12 million of our available borrowing in 2008. As a reminder, while we expect to spend approximately $2 million to $3 million dollars funding the initial JVs, these will begin to generate cash and fund other JVs as the rollout evolves. As we mentioned before, there's a very quick rollout period of less than two years, including film revenues. Based upon our operating plan, which incorporates assumptions regarding new signings and the timing of joint venture roll-outs, among other items, our maximum cash drawdown for 2008-2009 under the Wachovia facility is budgeted at less than approximately $18 million.

Before we open it up to questions, it is worthwhile to take a moment to review our business model, which has clearly been transformed by our initiatives over the past year. We would like to walk you through some slides, the first two of which we discussed after the AMC deal to show you the earnings potential of the JV strategy and then how it fits into our overall earnings picture. So if you -- on our Web site the slides are posted. If you go to the first one that says "recent initiatives joint venture", what you see for this pro forma is a gross box office of $760,000, which is about what the AMC joint ventures have done for the trailing 12 months. You should also realize that, in a film world, we release about six or seven films a year, and in a digital world, we will release 10 to 12 films a year, so we haven't really accounted for any uptick for the digital world.

If you look at ATP, that's average ticket price, $9.75 -- which is the actual number from the existing AMC JVs, and it gets you attendance of about 80,000 people. So your gross box office is $760,000 and IMAX's investment is $500,000. Of that $760,000, half goes to the studios, which is $380,000, and half stays with the exhibitor. But let's focus on the exhibitor side for the moment, the $380,000. On top of that $380,000, each of those 80,000 people spend about $3 in gross margin in concessions, which gets the exhibitor another $240,000 or revenues for the exhibitor, net revenues, of $620,000. After that $620,000, our partner -- in this case AMC -- gets what we call a house nut, which is around $80,000 a year, and IMAX gets around $40,000 a year in maintenance revenues. That's for maintaining the system on a regular basis, which is about a 25% gross margin business. That leaves the venture with approximately $500,000 left over. If you go back to the slide, IMAX's share of that $500,000 is what's listed under JV revenue, and we use the 2% inflation factor on costs and on revenues for purposes of this model. So, using those numbers, you get, after seven years, $1.5 million payback on a $500,000 investment, which is, for IMAX, a 2.5 year payback or a 37.5% IRR.

What's interesting about this numbers is the $760,000, as I said, as a number in the film world is even conservative in the film world as Brad said during his comments. During the last year, the average IMAX theatre did close to $1.2 million, so there's a lot of room for upside in this model.

The most interesting thing, though, is that this model does not include the other $380,000, which is the part that went to the studio. As you know, under our model, we get roughly 12.5% from the studio, which would translate into roughly another $95,000. So when you add that $95,000 a year to the $1.5 million we are getting of the seven years from the exhibitor, you get a 1.7-year payback or a 60%-ish return. On top of that, this model is a seven-year deal, and it's renewable by AMC for up to ten years. So, you can see these are very attractive economics.

Again, one reason we're spending the time walking through them again is we believe that, in the short run, there will be some additional joint ventures announced, so we think it's important that our investors really focus on micro economics and understand them.

If you go to the next page, the next page just aggregates this page throughout the entire AMC rollout. So if you go to the year 2011 and you look at JV revenue, and it says roughly $21 million, that's just 100 times the number on the prior page or $200,000. If you look at incremental DMR revenue, that's just 100 times the $95,000 a theatre in DMR revenue. If you look at incremental what maintenance, that's just 100 times the $40,000 in maintenance revenues. So that gives you revenue of around $35 million.

Depreciation -- the cost of these theatres is amortized over the seven-year guaranteed life of the contract. So if you have a total investment of $50 million, you divide it by the seven years, you get $7 million a year in depreciation. The difference between depreciation and total cost is about $3 million, which is our cost of maintaining the system, when I said before it was roughly a 35% gross margin. So you see this particular one deal, modeled on a very conservative basis, brings us roughly $25 million in incremental profit or $35 million -- $30 million to $35 million in incremental EBITDA.

The only other point I want to make for this slide is, if you look at 2008 and you see we are installing 26 systems, if you go to the bottom where it says CapEx, you see the 26 systems at $500,000 a piece is $13 million. However, we are getting $1.8 million that year in incremental cash flow, so the net cost is $11.1 million. That's why this rollout, rather than costing us $50 million, the maximum drawdown -- what you see in '09 -- is roughly $18 million, because theatres are online and you're receiving revenues while you are still financing new theatres.

So where does that all bring us? That brings us to the final slide, which is entitled "hypothetical business model". We showed this at a few recent conferences, and thought it might be helpful to walk you through it on the call. Again, I really want to underline the word "hypothetical"; this is not a business prediction going forward, and obviously as these various deals get announced and happen, we will all have to make adjustments to this, but it's really a way you can create your model and a way of thinking about the business.

We essentially make money in three buckets. The first bucket is one called new sales, which is our traditional lease installation business. The second bucket is from joint ventures, and that's deals like AMC which I just talked about. The third major bucket is in DMR margin, which is the 12.5% of the box office that we get from the studios.

So now just briefly walking you through this hypothetical model, the recurring margin of about $30 million at the top of the page, that's the existing network today. So if return the key off, we got rid of all of our SG&A, we'd never had another sale and we just played DMR films and got maintenance and royalties from our network, that would be $30 million a year.

In new sales, we have a number of 32 theatres a year for the four years going forward. Just to remind you, our backlog was around 85 theatres at the end of the year, not including the 35 theatres from South America, so that's 120 theatres in backlog.

We don't think we're really going to install 32 lease-type sales going forward, even though the numbers would suggest that we have the ability to do that. But what we also blended in here was a number of upgrades, which means people paying us to convert from a film-based system to a digital-based system. So again, these are just kind of directional numbers. You have to fill on your own. You get roughly another $30 million from the lease business.

Then you go to joint ventures, where we've put together 180 joint ventures over the next four years. Keep in mind, we have today, under contract, about 110 joint ventures that haven't been installed, so that's saying just 70 additional ones in the next four years, so again I think this number has room to change as things are announced and disclosed. So the margin from new JVs goes from $6.5 million up to just over $25 million. Then the DMR margin, it just takes 12.5% of the box office of the new incremental theatres opened, whether they are new sales or whether they are new JVs, and you get $7 million going roughly to $30 million. So if you look at this you get total margin of around $73 million going to $117 million. If you take out SG&A and R&D, and we use the $45 million number -- which has been our recent run-rate. One reason we didn't inflate that is, in the last year, it's included extraordinary expenses for R&D to develop a digital system and extra expenses associated with lawyers and accountants to deal with regulatory and reporting issues. So you subtract that out, you get earnings from continuing operations of between $28 million growing to $72 million, or EBITDA going up to roughly $100 million. Again, this is by way of illustration, but I think we've heard from a number of our investors that they would like sort of a simple way to put together a model and put together their own numbers, and that's what we're trying to accomplish by presenting that.

So with that, I'd like to thank you for listening. Brad and I would like to open it up for your questions.

Thank you, sir. (OPERATOR INSTRUCTIONS). Eric Wold, Merriman Curhan Ford.

Good morning. A couple of questions on, I know you probably don't get too granular on guidance or kind of projections, but in the number of installs for this year, what should we think about in terms of -- obviously there's not going to be a lot in the first half of the year until digital comes out, but what should we think about sort of the (inaudible) first half and second half installs?

I don't think we're going to break that out by quarter, but we tried to be reasonably clear about our expectations in the speech. I don't know if you heard the whole thing. What we had said was, in '08, we expect, you know, 25 to 30 joint ventures, and 12 to 14 sales or sales-type leases out of our current backlog. We also expect to install three MPX film systems in the early part of the year. However, we won't recognize revenue on those until they are upgraded to digital, probably in 2009.

Then our third category, which is sign and installs, and as I think many of you know, those are -- and as I said before, those are systems that will sign in '08 but also install in '08. We expect between 15 and 20 sign-and-installs, roughly split 50-50 between joint ventures and sales-type leases. So hopefully that gives you a framework to work with.

Eric, obviously, you know, the digital won't really be installed until the second half of the year, so that gives you a framework to understand the waiting.

Right. No, I understand that and I got all of the numbers from the beginning, so is it a safe assumption that really no one wants to install anything until digital is there, so people push the majority of everything into the back half of the year (multiple speakers)?

No, I don't think it's an assumption that no one wants us to sign anything, Eric. There will be installs, there will be installs in the first and second quarter. Some of them, as Brad said, we won't be able to recognize because they will be subject to upgrade, but others we will be installing we will be recognizing. That's not a reasonable assumption, Eric.

We only have to defer --

That makes sense. I have almost nothing in the first half of the year anyway, sort of confirms that hasn't changed and I think what most people are expecting anyway, so that's fine.

I guess, secondly, on the box office, you know, it looks like you guys -- and hopefully the trend continues -- are getting more successful in kind of garnering a greater rev share percentage. You talked about that 10% to 15% range of box office you get from the studios. Can you talk about how you have been moving maybe closer to the higher end of that range and maybe kind of what the average (inaudible) now versus maybe where it was a year or two years ago?

Eric, one of the things -- I mean, your asking this question gives me an opportunity to say something which I'd didn't really emphasize in the speech. I think, from our perspective, Rich's and mine, we delivered a whole bunch of really interesting good news about what we're seeing in our business.

You know, one number or a series of numbers that pops out at us is just an incredible validation of what we're talking about in terms of building a network -- is the same-store sales growth of DMR revenues of 48% year-over-year, the network growth of 56% year-over-year. And then the number, when we really got granular and really looked at our participation of DMR, it was 81% growth year-over-year, which obviously means that not only are we getting network economics, but it's the point that you just made, that we were skewing -- we were over-indexing on that 10% to 15%, or that 12.5%. That is really because, on some deals, we bet on ourselves and we took the upside, because we knew what was going on in the IMAX network and the way it was growing, and we were able to structure deals that ended up yielding up a disproportionate part of DMR benefit.

Any reason why that shouldn't continue?

Well, trees don't go to the sky. But, I think, from our perspective, you should continue to see really great operating leverage in the film business, particularly as the network grows.

Some of the deals we have in the future, Eric, where we cross a certain threshold, we move to a higher level of recruitment, so it's based on performance. We've been able to get that moreso now that a few years ago, I think, because a function that the films are performing better.

I guess lastly on the number of films, obviously going to digital allows you to put out more films. Before, you talked about ten-plus versus where you are now. Talk about how fast you could get to that higher level. Is that a 2010 situation versus '09? Then how does the dynamic change. Well, if you're putting out more movies, does that mean the window of a movie is shortened? Do you start showing more movies on top of each other where theatres will have two movies, one maybe showing during the day and one at night, whatever it is? How will that drive the dynamic of a movie's performance in your eyes to IMAX?

I think, especially initially, Eric, it's going be mean shorter playing times for each of the movies, rather than playing two films at the same time. The reason for the fact that six or seven movies now, as you know, is the high cost of print, it's $25,000 to $45,000. When that cost virtually goes away, then the studio -- there is virtually no barrier to the studio to releasing a film in IMAX. It's just some minimal marketing costs. So, as a result, the studio doesn't need a six or seven-week window; they only need a three or four-week window. So that's the dynamic which will drive the ability to release more films.

Now, when is it going to happen? I think you might see the beginnings of it '09. I don't think it's like a switch and we will go from 6 to 7 to 10 to 12. Maybe '09 would be seven or eight, something like that, and then 2010 you'd see a fuller slate kick in. Because it's partly a function of the transition; film theatres aren't going to disappear overnight. There will be a few years to work through that changeover. But I would think, by 2010, it's likely that you would see much of that underway already.

Then the dynamic from the studios is incredibly helpful because, as you know, most of the box office is done in the first three or four weeks of the movie. So we would be losing some box office on the film one that we would've kept open, the tail end of them, but you would be replacing them by the opening weekends of additional blockbusters. That should have an extremely positive revenue impact on the network.

Perfect. Thank you, guys. I appreciate it.

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

I would expect that as your digital footprint grows, your exhibitor partners will be able to create pre-show packages and maybe some non-movie content, which they haven't been able to do before. Can you say a little more about that and if it would mean anything directly to your P&L, if you think maybe just improve your sales proposition to the exhibitors?

Well, I think there are two sides to that. Let me just start and then Rich can add. I mean, one thing that obviously -- it's not pre-show but as you go to digital, I mean obviously you can do live programming, and you can do programming such that you have programming flexibility. You can do World Cup soccer, you can do basketball games, you can do the opera, which has been tested already and does very well. Those types of things would have impact, obviously, to our profitability.

With respect to packaging of pre-shows, you know, I'm not exactly clear.

Advertising.

Oh, advertising. That's a more complicated issue and I don't know how to answer that. I don't know. Generally speaking, this is some of the shelf space that the exhibitors husband for themselves. On the other hand, historically we've kept advertising out of IMAX boxes, so I don't have a clear answer on that.

Rich, do you have anything to add?

No.

Okay, a couple more questions. I understand obviously that all of the new deals are for digital systems, but can you talk a bit about plans for upgrading and replacing film projectors, leases that have been in place for more than a year, and what you expect the economic impact would be for that cycle over the next couple of years?

Right, I think you have to kind of think of three separate boxes, Rich. First, think about the deals that were signed years ago, have no digital upgrade language and were installed years ago, which is obviously the bulk of our network. Those are opportunities for us to go back and to sell digital upgrades. I think, internally, we're thinking in the area of about $300,000 in margin per sale for selling those digital upgrades, so that's a large portion of the existing network. That's the first box.

The second box is people who have contracted for a film-based system but have not yet had it installed, so most of those people, if not all, will want a digital system instead of a film system. We are in the process of starting to negotiate with people in the backlog over that issue.

Now, the good news for us is that the cost of goods sold in a digital system is less than the cost of goods sold in a film system, so to the extent we deliver a digital projector instead of a film projector, we should have a higher margin.

The third bucket is where we've contracted to upgrade the digital system and we've installed a film system. At the moment, that looks like about 15 theatres. They range, in terms of our duty to upgrade, from putting up all the money, to a cap on the money we put up, to sharing the amount of money we put up. So if you assume we pay for all of them on those 15, that would be -- our cost of goods sold is around $300,000, so it would be around $4.5 million.

So that's sort of the landscape. On some of the ones where we are required to upgrade our joint ventures, but at the time of the upgrade, we extend it as if it is the new term, so we get that benefit.

The costs for that, actually that detail -- the cost there are included in your capital needs that you've stated previously in the call?

Yes, I mean we have modeled in the ones where we have contractual duties, yes.

Okay, two more questions if that's all right. If I remember correctly, there was a time when you were talking to Sony about becoming your digital projection vendor. Now I see it's TI. I mean, what happened there and did you find the same issues with the reliability and costs of the Sony (inaudible) that the rest of the industry has been sighting?

You know, I think you answered the question at the end of your question probably a little more harshly than I would have. I just think we wanted to get out there with a digital projection system quickly. Initially, we had issues as to whether we could do it with underlying TI technology because of our requirements with light output and resolution. Through sort of extensive testing, when we were working with both Sony light engines and with TI light engines, we came to the conclusion that we could get IMAX quality imagery working with two TI light engines with intervening IMAX IT. Because TI has been out there, they were first to market and durability has already been tested, they have I think like 4000 of them out there already -- we figured that we should launch with TI and we're delighted that we were able to officially announce that just a few days ago.

Okay, that's what I figured. Last question -- any chance you could squeeze in Lucas' animated Star Wars feature here in August between The Dark Knight and Harry Potter?

Between? You know, in terms of -- I think I can give you a general answer; I can't give you a specific answer, which is, there is a gap between Dark Knight and Harry Potter, and it's a gap that we would like to fill.

Okay, thank you.

At this time, Mr. Wechsler, we have no other questions, so I'd like to turn the meeting back over to you.

Again, why don't I say a couple of remarks and then Mr. Gelfond will as well.

I think it's got to be clear from our remarks today that we are pretty excited about what we are seeing in terms of all the forward indicators and everything that's going on in our business. You know, obviously we've paid sort of the financial price in terms of the transition and the financials haven't looked very good. Our fundamental view is financials and organization more often than not tend to be backward-looking as opposed to forward-looking. Today, I think we've spent an awful lot of time talking about the really exciting things that we see going on in the business, which aren't that speculative. You know, a lot of them -- this is -- we're talking about backlog projects, we're talking about signed deals, we're talking about actual films and film performance. I think, as we look forward, we see the world look very different than it has in the last couple of years.

Rich?

Now, Brad gave sort of a quantitative answer. I will give a little bit more of a qualitative answer, which is that we just got back Wednesday evening from ShoWest, which is the industry conference. All of the leading studio heads are there, and all of the heads of the major exhibition organizations, not just in North America but from around the world. If you were IMAX three or four years ago, you would have seen that metaphorically we sat in a corner by ourselves with a megaphone sort of yelling "hey, we are over here! We are over here!"

But again being metaphoric, today especially with all the buzz around the release of 3D films, which as many of you read the papers saw was a big focus of it, metaphorically we were sitting right in the middle. We had meetings with the heads of most of the major North American exhibitors, many, many international exhibitors. We spoke at the international lunch -- many of the senior studio executives. And it was the difference between being an outsider and a real insider, and I think that's a different way of saying what Brad is saying from a quantitative point of view.

From a qualitative point of view, we have really evolved the business. Whereas we had to break into the club, now we are members of the club, and I think that is going to manifest itself very shortly in financial results.

With that, thank you all for joining us. We will talk to you shortly on the next quarterly call.

Thank you. Ladies and gentlemen, this does conclude your conference call. Once again, thank you for participating, and at this time, we ask that you please disconnect your lines. Have yourself a good weekend.