Imax Corp (IMAX) 2009 Q1 法說會逐字稿

Welcome to IMAX Corporation's first-quarter 2009 financial results conference call. Please note that this conference is being recorded today, Thursday, May 7, 2009. At this time I would like to turn the conference over to Heather Anthony. Please go ahead.

Thank you, operator. Good morning, everyone. Thanks for joining us today for our first-quarter conference call. Joining me is our CEO Rich Gelfond and our CFO Joe Sparacio. Also with us is our 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 and that may pertain to future results or outcomes. 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 outcomes.

During today's call references may be made to certain non-GAAP financial measures as defined by Regulation G of the Securities and Exchange Commission. The full text of our first-quarter release, along with supporting financial tables, is available on our website, www.imax.com. Today's conference call is being webcast in its entirety on our website.

Today Rich will provide an overview of the first quarter and discuss our future film slate, followed by Joe who will review our Q1 financial results. With that, let me now turn the call over to Rich. Rich?

Thanks, Heather. We are pleased with our first-quarter results. We have often said that our introduction of digital and our JV initiative would yield improved financial results and that 2009 would be the year when we would start to see the positive impact of these initiatives on our financials. We believe the first quarter reflects early progress towards this goal.

Our install level, particularly of systems under our sales type lease model, is a direct reflection of the availability of and interest in digital, and we achieved the highest level of revenue installs in a given quarter in two years. The revenue generated from these installs, the continued rapid growth of our JV theater network, and our focus on cost containment lead to significantly improved financial results compared to last year.

Highlights of the quarter include total revenue up 43% to $33.7 million; an operating profit of $2 million, up $7.6 million from last year's $5.6 million operating loss; and our loss per share of $0.06 decreased significantly compared to last year's $0.25 loss. We are particularly encouraged with our performance since Watchmen was the first new full-run DMR title of the quarter, and that was not released until March. Given the subsequent success of Monsters vs. Aliens and the remainder of our '09 film slate, we continue to be optimistic about our financial turnaround in 2009 and continue to expect a return to profitability this year.

As many of you know, IMAX digital and our joint venture model are the catalysts behind our increased film supply, demand from our slots from the studios, as well as our rapid network growth which continued in the first quarter. We installed a total of 32 systems in the first quarter or an average of two and a half per week compared to a total of five installs in last year's first quarter. Of the 32 systems, 27 were digital, giving us a total of 73 digital systems in operation at quarter-end. As of March 31, our total network stood at 371 theaters, up 24% year-over-year, and our commercial network stood at 250 theaters, which is up 40% year-over-year. We ended the quarter with 69 JV theaters in operation from 52 JV theaters at the end of December and 11 at the end of the first quarter of last year. We remain on track for 115 to 125 JV systems to be in operation by year end and are on pace with our install guidance for 2009.

Assuming all the planned new systems are installed in 2009, we would end the year with approximately 320 commercial theaters in operation, an approximate 40% increase over 2008 and 440 IMAX theaters in total, a 25% increase over 2008. As we have cautioned in the past, however, installations can slip from period to period often for reasons outside of our control.

Moving onto film, our DMR gross box office for the quarter increased to $29.9 million as compared to $15.7 million last year. While a significant increase year over year, our film performance was somewhat below our internal expectations for The Dark Knight re-release, which played for five weeks in IMAX, as well as Jonas Brothers, which played for one week on only our digital theaters. As I mentioned, given the inherent seasonality of the movie business, our one major DMR release for the quarter, Watchmen, did not happen until March. Watchmen grossed approximately $14.6 million in IMAX theaters worldwide and generated a per screen average of approximately $90,000. Domestically the film delivered $11.8 million or 11% of the box office and a domestic per screen average of approximately $92,000.

On March 27 we released Monsters vs. Aliens: An IMAX Experience, which has performed slightly above our expectation. Through Sunday the film has generated almost $25 million in IMAX worldwide box office for a per screen average of $126,000. Domestically the film has generated $18.3 million, also for a per screen average of $126,000. On just 2% of domestic screens, we have generated 10% of the domestic box office. Looking at our performance versus other formats, we outpaced 2-D presentations by eight-to-one on a per screen basis and other 3-D formats by approximately three-to-one. We believe that this is yet another indicator of the power of the IMAX experience and what it means to the consumer, as well as our exhibitor partners and studios.

Further, if you think about Watchmen and Monsters vs. Aliens in the context of our JV model, which many of you have seen posted on the web from earlier calls, if we were to play 10 films a year that generated similar per screen averages, the per screen box office for our JV theaters would well exceed the $800,000 level that our unit economics model is based on and which we often discuss in our investor presentations.

Watchmen followed by Monsters vs. Aliens represented a nice microcosm of our overall programming philosophy. We looked for a balanced approach to both family titles with action adventure titles that cater to our fanboy demographic, and that balance also pertains to 2-D and 3-D. At the end of the day, we are looking for the best movie in a given timeslot that has the widest (inaudible) whether it is in 2-D or 3-D.

Just an aside, we have begun to post box office results on our current DMR titles on the website, www.imax.com. Assuming approval from the studios, this is a practice we hope to maintain on an ongoing basis as we recognize that the ability to gauge box office performance is an increasingly important metric for our Company given our JV model and the increased number of films being released in IMAX.

Let me move on to the remainder of our 2009 film slate. As I mentioned, the second quarter started off nicely with Monsters vs. Aliens. Tonight at 7:00 Eastern time, we move right into the Paramount Pictures Star Trek directed by J.J. Abrams for a two-week run on 167 IMAX screens, 83 of which are digital. Domestic pre-sales have been quite strong and as of yesterday afternoon were about $2.6 million, which is the strongest level of presales we have had since The Dark Knight, and IMAX tickets accounted for 44% of all Star Trek presales for the entire country on movietickets.com. Worldwide our presales as of yesterday were -- the number I gave, the 2.6, it was 2 million domestic, 2.6 worldwide. So it was about 600,000 internationally, and we're experiencing a high level of sellouts as well.

The movie has received very positive reviews. We also believe that it plays perfectly to our customer demographic and has broad appeal for many science centers and museums.

On May 22 20th Century Fox Night at the Museum 2: Battle of the Smithsonian opens as our fifth Fox film. The first Night at the Museum, which did $575 million in worldwide box office, was very successful in IMAX, having generated an average of $160,000 per screen. The world premiere will be in an IMAX theater at the Smithsonian, in fact one that is shown in the movie, and the actual IMAX screen will be included in several places. We believe Night at the Museum will play on up to 200 IMAX screens.

On June 24 we released DreamWorks Pictures and Paramount's Transformers: Revenge of the Fallen day in day to IMAX theaters. Executive produced by Steven Spielberg and directed by Michael Bay, who we thank for all of his recent kind words, the movie features three sequences shot with IMAX cameras. We believe the unique appeal of having scenes shot in IMAX while add to the interest level of seeing the film in IMAX as it did with The Dark Knight.

As a reminder, the first Transformers generated $708 million in worldwide box office. In July we will release an IMAX version of Warner Bros. Harry Potter and the Half-Blood Prince. This is our fourth installment of the Harry Potter franchise, which has been very successful for us having delivered per screen averages as high as $247,000 per screen.

As a reminder, we are applying our proprietary 2-D to 3-D conversion technology, allowing for sequences of the movie to be featured exclusively in wide-action IMAX 3-D, which can only be seen in IMAX theaters. Due to Harry Potter's release date moving from November 2008 to July 2009, we are still in discussions with Paramount and Warner Bros. to determine which theaters will launch on which dates.

As we have previously mentioned, we should have another DMR title in the fall, which will then be followed by Walt Disney Pictures A Christmas Carol, a 3-D motion capture picture directed by Robert Zemeckis. This will be our third Zemeckis 3-D motion capture film having previously released The Polar Express and Beowulf, both of which were very successful in IMAX.

Finally, on December 18, 2009, we will release Academy Award-winning director James Cameron's groundbreaking 3-D title Avatar in IMAX. We are particularly pleased with the diversity of studios releasing films to IMAX, a trend that should continue going forward. This, coupled with the record number of titles coming through the IMAX network this year, shows that we're much more diversified than ever before and much more tied to the overall success of the films in aggregate, rather than being about one single title. And that's a very important point. When we are only releasing six or seven films, if one was particularly good or one was particularly bad, it really had a much more material impact on our financials than when there are 10 to 12 films a year, one particular film has less of an impact.

Looking ahead to 2010, we are continuing to build out our film slate with four commercial titles and one IMAX original so far. Avatar should carry over from December and be our main title for January and February, which is typically a slower time of the year for blockbuster films. We will then move into Disney's Alice in Wonderland 3-D on March 5, which is being directed by Tim Burton and which stars Johnny Depp as The Mad Hatter and Anne Hathaway as The Queen. On March 26 we will release our fourth DreamWorks Animation title, How to Train Your Dragon 3-D, followed by our fifth DreamWorks Animation title Shrek Goes Fourth also in 3-D on May 21.

We will also working on an IMAX original film in partnership with Warner Bros. currently titled Hubble, which is being shot with IMAX 3-D cameras and will capture in 3-D the final repair of the Hubble space telescope. The cameras are scheduled to launch on board the space shuttle Atlantis this coming Monday, May 11.

Finally, while this is not intended as a formal announcement, the seventh installment of Harry Potter will be released to theaters worldwide on November 19, 2010. Given that we have participated in the last four Potter films, we expect that that will be the case again for next year. For our remaining slots, we are working on many different titles from virtually every other studio, and we look forward to announcing additions to our film slate as the year unfolds.

Finally, from a 30,000 foot level, we continue to be encouraged by the industry's overall box office results. According to various industry trades and reports, year-to-date through Sunday, 2009 domestic gross box office is up approximately 15% over last year, and these reports also indicate that the growth is primarily a result of increased attendance. Given the per screen averages and percentage of box office that we are delivering, we continue to be pleased with the consumer's response to the premium IMAX experience, even in this challenging macroeconomic environment.

Thanks and now let me turn it over to Joe for a review of the financial results.

Thanks, Rich. As Rich mentioned, overall we are pleased with the financial progress made in the first quarter. Total revenue increased 43% to $33.7 million compared to $23.5 million last year.

Looking at our key business segments, revenue from IMAX systems, which includes sale and sale type leases, increased over 100% to $16.5 million compared to $8.2 million last year. We installed nine theater systems under our sales/sales type lease model, including three digital upgrades, compared to four sales/sales type lease installs in the first quarter of '08.

Revenue from joint revenue sharing arrangements increased nearly sixfold to $1.9 million from $348,000 last year. We installed 22 JV systems in the quarter, including five digital upgrades. As a reminder, we do not recognize revenue upon installation for JV theaters by rather over time as recurring revenue. Both our sales type lease installs and JV installs in the quarter were in line with our expectations. Film revenue increased 6% to $7.8 million compared to $7.4 million last year, driven by a 22% increase in film production and IMAX DMR and distribution, which included the impact of the increase in the theater network, stronger performance of DMR titles this year versus last, and as well as the early success of our original film Under the Sea 3-D.

Total gross profit increased 39% in the first quarter to $14.1 million. Similar to the fourth quarter, non-recurring launch costs associated with the 17 new joint venture theaters opened in the quarter negatively impacting gross profit by $700,000. When looking at our business segment table, if you were to add that $700,000 back, our JV theaters would have generated a normalized gross profit of $1 million on revenue of $1.9 million compared to a gross profit of just $40,000 last year. Launch costs per new JV theater are averaging about $40,000, so obviously new theater expenses should have a diminishing impact on our margin as our installed base of JV theaters continues to grow.

Regarding SG&A expenses, our year-over-year decrease on an absolute dollar and percentage of sales basis was primarily driven by our cost containment efforts and lower professional fees, coupled with a slight decrease in stock-based compensation expense compared to last year. As it relates to cost containment efforts, we have instituted a wage freeze, a hiring freeze and a 20% reduction in travel among other things.

Negatively impacting G&A for the quarter was a $1.2 million foreign exchange charge primarily related to the decline since year-end in the Canadian dollar which impact certain receivables and forward contracts. While a negative on the quarter, the exchange rate on the Canadian dollar has since improved dramatically.

R&D decreased to $500,000 in the quarter from $2.5 million last year. Last year's high level of R&D expense reflects the investments we were making gearing up for the launch of our digital projection system in July of 2008. Our first-quarter operating profit of $2 million represents a $7.6 million improvement compared to last year's operating loss of $5.6 million. As a result of strong topline growth and lower operating expenses, we significantly reduced our first-quarter net loss to $2.6 million or $0.06 per diluted share compared to a net loss of $10.2 million or 25% per share in the year ago period.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $18.7 million compared to $27 million at the end of '08 and $18.1 million a year ago. In addition, at the end of the quarter, we had $11.6 million available on our credit facility. We remain confident that we have the necessary funds to continue the planned rollout of our digital projection systems.

Our Q1 cash position primarily reflects our investment in joint venture theaters, which amounted to $7 million in the quarter. As a reminder with anticipated IRRs of close to 65%, our payback period on our JVs, including our DMR fees, is about a year and a half. Our backlog at quarter-end consisted of 190 systems, including 101 sales/sales type lease systems valued at $135.6 million and 89 joint venture arrangements, which as a reminder carried no stated backlog value. This compares to a total backlog of 245 systems last year, which included 110 sale and sales lease systems valued at $157.3 million and 135 joint venture arrangements.

During the quarter we signed contracts for three new systems under sales and sales type lease arrangements, one of which was installed within the quarter. As Rich mentioned, we are currently tracking to the 2009 installed guidance given on our Q4 call, which called for 20 to 25 sales type lease systems and 65 to 70 JV theater installations. All of these installs are projected from backlog and also include some digital upgrades.

To sum up, we are off to a solid start in 2009 and are pleased with our operational and financial progress. Let me now turn it back to Rich for final comments.

Thanks, Joe. So to quickly sum it up, we are encouraged by our first-quarter results, our success in the second quarter with Monsters vs. Aliens, and our presales for Star Trek. We continue to believe that the key drivers of our business are digital technology, our growing JV theater base and our high profile movie slate should drive significant revenue growth and return us to profitability in 2009.

With that said, operator, I would like to open it up to questions.

(Operator Instructions). Richard Ingrassia, Roth Capital Partners.

Joe, I guess I will start with you. Can you say a little bit more about what you expect normalized gross margins to be on the JV business, and do you have a sense for where consolidated gross margin should be exiting '09?

You know, that is a number that is going to fluctuate over time. If you looked at the pro forma for the JVs that we have been presenting, which roughly generates about $200,000 in cash flow annually and our expenses are about $70,000 against that, including the depreciation, your normalized margin under that profile would be around 65% maybe, perhaps a little bit more.

Now obviously that is going to fluctuate depending upon the volume of business. It could go up. It could go down. So that is a number that is going to move around over time.

And it is probably too early to tell then what the mix is going to be at the end of the year to give an idea of gross margins exiting?

Well, I think you should use that as a starting point for your model, and it will depend on the quarter, right? So if ever quarter where you have weak film performance, it will be lower, and if you have a quarter where you have great film performance, it will be higher. But that, as you know, in the model, sort of the example that is what we do.

Right.

You are looking at it as a blended portfolio as film -- of film as Rich indicated earlier in the discussion.

Right. Okay, I was largely just looking at systems, the systems mix.

I mean in terms of systems, I would anticipate margins to be fairly consistent with historical levels.

Okay. Rich, as the circuit grows here and you guys are taking down a bigger and bigger proportion of the total box office on your DMR releases, is there any indication yet that the studios are inclined to start pushing back on your share, which I think is 12% minimum, right, and as high as 15?

It averages around 12.5 and the deals vary. I would say, no, uncategorically at this point, Rich. As a matter of fact, we are involved in discussions on a number of pictures for 2011, some even 2012, and there is no indication of that. And I think, frankly, as you look at the results, for example, we talked about Watchmen and we talked about Monsters vs. Aliens, where we're bringing in over 10% of the box office and we are bringing in this ticket price and we are emphasizing the movie, I think the studios are very interested in the natural competition for the slots will kind of counter their inclination to try and push back, so I have not seen it.

Yeah, if they'd just take it, that share was originally set just to reimburse you for the postproduction costs on DMR, right? Now it is really more like your share of the contribution to the picture as a whole?

I mean I think they understand that these slots are valuable, and the opportunity to access the network is worth a lot to them in terms of the marketing around their movie, as well as the incremental box office. And I think that is motivating them to figure out that even with paying us that percentage, it still makes a lot of sense for them.

Sure. One last question for Joe. There was $1.2 million in other revenue there in the quarter. That typically has been in consensual buyouts or terminations, etc. Is that what it was for this quarter?

Yes, we had one settlement in the quarter.

Jeff Blaeser, Morgan Joseph.

A quick question, just curious. You had 32 installs in the quarter, 27 digital. Why would someone install a non-digital system at this point?

You know, our deals take various shapes and forms, and we continue to install some of the bigger systems like the GTs and SRs. There are cases where we have a contractual commitment with a client for a film-based system, and they may opt for it. You know, going forward I doubt that we will be in that situation, but there are a system -- we still sell film-based systems.

And the D&A, it looks like it went down year-over-year. Shouldn't that number be going up with the increase in joint ventures, and how should we look at that for the year?

Well, actually I think you will be somewhat impressed by the fact that headcount was virtually unchanged in the organization. We said this in prior years that we really geared up the organization to execute the strategy, and that is really what we did. We really did not increase headcount I think in that group. I'm sorry -- I thought you said G&A. I'm getting a note that it is (multiple speakers). You asked for the D&A. I heard G&A. I'm sorry, Jeff.

No problem.

I think part of that is just lower costs, especially in the DMR arena. If you recall last year, in the first quarter, we had a $700,000 accelerated hit on a title where we had to take an impairment charge, and we did not have anything like that this year. So it is kind of skewing it a bit.

Okay. And finally, can you -- the domestic seems to be doing quite well. The international versus domestic box office results and is that changing your philosophy? I know you are testing some international areas for more JVs outside the United States, or is that still on a wait and see approach?

No, that has been -- the international and the domestic have been fairly consistent. As a matter of fact, it is not exactly -- we're very close on Monsters vs. Aliens, the domestic and the international box office. You are quite right that we are kind of testing the various markets internationally, and we don't think JV type models so far in two territories in Australia and in England, and we have scheduled to open very shortly in June in Japan and Austria. In the early going I would say that the theaters in England are doing pretty well and should help the cause. I think the theaters in Australia got off to a start not as good as we had hoped for. So that is why we are doing it. We don't want to really deploy our capital in a territory unless we know that it is going to work, particularly our Japan opening which is around June 15. Japan is the second largest film grossing market in the world, and we have no commercial theaters there open at the moment. So these are important tests for us.

Marla Backer, Research Associates.

Rich, you gave us some metrics earlier on how the IMAX 3-D numbers compare to other 3-D formats. I think you said an average of three to one. Now is that an average over the course of the film's run? And if so, my assumption would be that the IMAX accounts for a much higher percentage as the run extends. Can you talk a little bit about how the IMAX legs hold up versus 3-D and other formats?

You are right. I don't want to over-exaggerate the spread widening, but the spread does widen. In this case I think it was like 2.5 on the opening weekend, and by the end of the run, it got closer to three-to-one. So your premise is right that over time the IMAX does outperform.

This last weekend on Monsters vs. Aliens I'm going by memory, but I think we did close to 15% of the box office, whereas on the earlier weekends, we did more like 10% of the box office. So the IMAX legs are better overall for the film, and they are also better versus other competitive 3-D products.

Okay. Thank you. And what is your conversion time now on converting a film to DMR? Because I know in the past, that had been one focus was to shorten that conversion time. Can you tell us where it is now?

It is very fast. We certainly could do it within a month if we had to and probably could do it a little faster than that. If you look at Jonas Brothers, if you remember, we saw that The Dark Knight wasn't really performing in its re-release, and we hastily arranged to do Jonas Brothers. Now that was a little -- that was even faster, but that was because it was already in a digital print not film, and it was because we did not make film prints. We released it in digital, but we can move quite quickly.

And then one last housekeeping question for Joe. The R&D number came in much lower than I had expected. Is that a good run-rate going forward?

We would anticipate that that number will go up as we move through the year. I think in our Q4 call we mentioned anticipated spending in '09 of anywhere from $4.5 million to $5 million. So no, I would not use that as a run-rate. That is certainly not in the plan.

Eric Wold, Merriman Curhan Ford.

A follow-up on Marla's question on the R&D. Looking obviously at $0.5 million in Q1 in the range of 4.5 to 5, what are the biggest variable drivers in that? Is that kind of temporary kind of people coming in to help? What movie is that around the most?

I mean we are looking at specific projects, like we are looking at maybe developing more towards an IMAX Live at some point where we could broadcast live events. We're working on technology we call ghost-busting, which is to make the ghosting better in IMAX theaters, and it is just the ramp-up time for a project.

In the first quarter, most of the same people who do that were really focused on making sure that the network was up and running and the up time was the 99.7 where it was. So a lot of those costs and absorptions showed up in gross margin rather than R&D, and as they shift to more R&D projects, you will see it show up in R&D.

At this point is the spending on digital and all that maybe some tweaking and what not, the spend on digital pretty much is done?

Well, I would not say done. I mean we still don't have an upgrade product for the very large theaters. That is a long-term project that we are working on, and we are constantly looking to evolve the system. So I think if you looked at the four to five for the year, the vast majority of that would go to digital and improving our experience.

Okay. And then following up on an earlier question on the split with the studios, you know the 12.5% or so, you mentioned you are in discussions on some 2011 movies. Is there any discussion with the studios knowing that a lot of times the film slate for 2011 with studios moves around, things are not set, things can be canceled, what would give you the -- what would kind of push you over the fence to want to sign a deal with a 2011 movie this early versus waiting as you get closer and kind of see what else is available?

If it is the kind of franchise film that you cannot say no to or the kind of director you cannot say no to.

Fair enough. And then I guess --

I will give you an example. I think, as I said in the call, that Harry Potter 7-A is coming out in 2010, Harry Potter 7-B is coming out in 2011. We have not talked to them about it, and I don't want to be at all coy about it. But that's the kind of film, if they said let's sign it up, we are going to sign it up.

I don't know if this is a question you can't answer, but hypothetically you threw out the Harry Potter example. Let's say you are with a franchise where you have done a number of movies previously with that, whether they do a Night at the Museum 3 and 4 or whatever may be, when you're working with a franchise/studio that you have worked with multiple times and you're kind of negotiating for a future movie, do you have more power in those kind of negotiations to get a possible higher split, or is it more the ones that have never worked with you before that are trying to get themselves into the IMAX system for the first time?

Eric, I don't -- our goal is not to get a higher split. Our goal is we think it's a fair deal now for the studios and for IMAX. In fact, I should have said this before -- the deal is even getting much better for the studios with the same split because they are not paying for film prints anymore. They are distributing digital. So their costs are virtually zero to distribute to the IMAX digital network.

So although it is theoretically possible we could ask for more split, I think that is not where we are going, and we would be happy to maintain our margin. And we think as long as it is a good deal for the studio and it is a good deal for us, we don't have to be greedy, and they don't have to change the deal.

Okay. And then last question and I apologize if you said this in the opening remarks -- I might have missed it. Are you still guiding or guiding to being profitable for the entire fiscal '09 year on the bottom line?

Yes, we are, Eric.

(Operator Instructions). [Chris White], [Greenstone Value Opportunity Fund].

I was just wanting to get a number going forward on your maintenance CapEx, and then also on the -- did you change the depreciation schedule for the quarter at all?

In terms of maintenance CapEx, I think if you were to look historically, the Company used cash of about $2 million to $2.5 million annually. In maintenance CapEx I would not anticipate that changing much. In terms of depreciation, we really have not changed much in the quarter. There was not anything unusual in the quarter.

At this time, sir, we have no other questions registered.

I just wanted to reiterate what I said at the beginning, which is that last year we incurred a lot of expenses transitioning to digital and transitioning to JV. We incurred them in a lot of places whether it was in our R&D or whether it was gearing up our SG&A. We said that we thought that the financial impact of that would start to manifest itself in 2009, and the whole IMAX organization understands that this is our year to deliver. Assuming the films perform, we intend to deliver. We thank you for your support.

Thank you. Ladies and gentlemen, this does conclude the conference call for today. Once again, thank you for participating, and at this time we do ask that you please disconnect your lines. Have yourselves a great day.