Imax Corp (IMAX) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the IMAX Corporation, fourth quarter, financial results, conference call. (Operator Instructions) Please note that this call is being recorded. Today is Thursday, March 11th, 2010. It is now my pleasure to turn the conference over to Heather Anthony. Please go ahead.

Good morning and thanks for joining us on today's fourth quarter and year-end 2009 conference call. Joining me is our CEO, Richard Gelfond and our CFO, Joe Sparacio. Also with us is our senior EVP and General Counsel, Rob Lister. Before we begin, let me remind you 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 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. Discussion and management use of these measures and the definition of these measures are contained in this mornings press release. Full text of our fourth quarter release along with our 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.

Today, Rich will review highlights of the fourth quarter and the year, our outlook for future growth, film slate and view of the competitive landscape. Joe will then review our Q4 financial results in more detail. With that let me now turn call over to Rich.

Thanks, Heather. 2009 was a truly transformative year for IMAX. We grew our network, secured a strong film slate and consistently demonstrated the power and appeal of the IMAX experience to exhibitors, studios, and most importantly consumers. The transformation of IMAX is perhaps best illustrated by our strength in balance sheet and financial performance. Recall that we ended 2008 with adjusted EBITDA of $8.2 million, and net debt of $153 million, including $160 million of senior notes, and a $20 million revolving loan both coming due in 2010.

One year later, we ended 2009 with adjusted EBITDA of $58.5 million just $30 million of net debt, and all of our senior notes have been retired which has freed us from over $15 million in annual interest expense. In addition, in 2009, our revenue increased 67% to a record $171 million. Full year diluted EPS excluding the impact of variable stock compensation increased to $0.38 a share or $0.09 a share after factoring in the variable compensation charge which was primarily driven by the threefold increase in our stock price. And we generated positive cash from operations, of $13.8 million before JV investments. Operationally we also made significant progress. We grew our commercial multiplex theater network by 38%. Our JV theater network grew by 125%. We installed a record 118 IMAX theater systems or nearly double our previous record of 60 installations in 2008.

Our gross box office per screen averaged $1.2 million for both domestic and international theaters up from $918,000 on a blended basis, the -- most importantly, this is the first year, that our international screens have generated the same level of box office on a per theater basis as our domestic screens. Given that much of our future network growth will come from international territories we are very encouraged by this development. Our 52 JV theaters that were open for all of 2009, generated box office per screen average of $1.1 million, significantly ahead of our JV modeling, that assumed a per screen average of $800,000. I should mention that we achieved this goal level of box office with just the first 12 days of Avatar captured in 2009. The one area of business that did not meet our expectations in 2009 was theater signings. During the year we signed contracts for 35 new theaters, 14 of which were for digital system upgrades.

That said we believe that 2010 will be a much stronger year for signings, for the most fundamental reason, that the box office results over the past 12 months, and therefore exhibit a return on investment, were very strong in many potential customers preferred to assess the digital and JV models over a full 12 month period. We believe that yesterday's joint venture announcement for up to 15 theaters with CJ, CJV in Korea, Korea's largest exhibitor, is our only evidence that the level of interest in the IMAX business has gained further momentum with the break out results from James Cameron and Fox's Avatar. On that point I want to congratulate James Cameron, John Landau and Fox for creating the biggest movie of all time. We are honored to have been a part of this ground-breaking title.

To review Avatar and IMAX 3-D experience by the numbers, to date the IMAX version of Avatar has generated over $127 million in box office domestically, and over $91 million internationally for worldwide cum of more than $218 million. Our previous box office record was The Dark Knight which achieved total box office of $50 million domestic and $15 million international for a total of $65 million. We delivered 18% of the domestic box office on approximately 2.5% of the screens. Our domestic per screen average was five times that of digital 3-D and approximately 20 times 2-D. And Regal Cinemas in particular was the highest grossing IMAX operator among the major circuits with a per screen average of close to $700,000. The per screen average for our 85 international screens, is over $1 million. Our four JV screens in Japan have generated $6.3 million of box office alone. In China, $21 million in box office on just 16 screens. In Russia, $7.6 million in box office, in four screens. Incredibly, 62 IMAX screens have each generated over $1 million in box office, from that one single film, Avatar. Just to put that in context for you, in the had history of motion picture, no other film has come remotely close to have having in number of $1 million runs.

Given these results, we believe Avatar has positively impacted our business in four key ways. First of course is the financial impact. While the first 12 days of Avatar contributed to our fourth quarter results the flow through to revenue and earnings will be even more pronounced in the first quarter of 2010. In addition, given that Avatar has far exceeded our original expectations we believe now is the time to strategically reinvest in our brand in the business overall which Joe will review later on. Next, for millions of movie goers around the world, Avatar was their first IMAX experience. Given the thousands of sold-out shows repeat visits and box office results, we believe many movie goers, new to IMAX for Avatar will return to IMAX in the future.

Our record opening weekend results of Disney and Tim Burton's Alice in Wonderland significantly exceeded our expectations, and suggests that we may already be seeing this halo around Avatar. Our opening weekend market share of 10.5% of the North American box office on 2.5% of the screens was the highest level of share we have ever represented for an opening of Alice's magnitude. During the weekdays our share has jumped to approximately 19%. Alice is demonstrating to us that our week to week box office is sustainable at very high levels especially when there's a rapid fire release slate and given the consumer appeal of IMAX 3-D. As of yesterday, we surpassed the $20 million mark in worldwide gross box office for Alice and we look forward to opening in several more key markets around the world in the coming weeks. Third, reflecting the increased consumer appetite for IMAX, exhibitors of IMAX theaters and their multiplexes are enjoying significant market share gains.

Their IMAX theaters command not only increased ticket prices but are significant drivers of incremental traffic and attendance which results in spillover to other auditoriums and the ability to convert those extra patrons into concession sales. Fourth, the Avatar halo effect is further solidifying our studio relationships. The combination of our premium movie experience, higher ticket prices, attendance levels and the marketing buzz IMAX brings to a title result in significantly higher box office opportunity as well as the potential for increased downstream revenues and profits. Film maker interest in IMAX also remains high as it is their desire for the IMAX release of their picture to be differentiated from other formats, a desire we also share and are pursuing more and more. The Avatar effect has created significant brand awareness, for IMAX and we look forward to capitalizing on this even more than we did with past break out titles like Polar Express and The Dark Knight.

Next I would like to talk about growth. Beyond any new business initiatives we may pursue, as you know, the three primary drivers of revenue in 2010 are new theater openings, increased per screen averages, and the increasing number of IMAX theaters, that will be open from full 12 months, as opposed to a part of the year. First, as it relates to new theater openings. At this time we anticipate 35 to 40 JV installations this year, from backlog, and we anticipate layering some JV sign-in installations on top of that. Assuming just those installations from year-end backlog, our JV network would grow by at least 35% this year. From a sales-type lease standpoint we expect 10 to 15 new theaters to install from our existing backlog in 2010, with additional signed and installed theaters above that.

Second regarding our per screen productivity, given our 2010 film slate and the box office we have already generated in the first quarter we anticipate eclipsing our 2009 per screen average of $1.2 million. Obviously, Q1 is off to a great start, illustrated best perhaps with the first quarter box office of approximately $187 million to date which compares to last year's total Q1 box office of just $30 million. From Alice we go to DreamWorks animation, How to Train Your Dragon and an IMAX original title in partnership with Warner Brothers Hubble 3-D to Iron Man 2 to DreamWorks' Shrek Forever after 3-D, Disney's Prince of Persia internationally only, to Disney's Toy Story 3 in IMAX 3-D, to Summit Entertainment's Twilight Eclipse, to Warner Brothers Inception, to other films to be announced, to Disney's Tron 3-D and so on.

We are finalizing our remaining releases for our 2010 film slate and discussing numerous titles with every major studio for 2011 and 2012. The third concept is an important one, and one that is some times overlooked. JV theaters that opened over the course of 2009, will have a benefit of a full year of business in 2010, which will increase the level of revenue derived from those theaters as well as the weighted average number of JVs. For example, the weighted average number of revenue sharing theaters in 2009 was 86 even though we ended the year with significantly more JVs open. Assuming installs from backlog alone all take place this year, that number would jump to 139 weighted average open in 2010, which is an increase of 62%.

The higher number of theaters opened for the full 12 months plus the mix swift toward revenue share theaters, will not only favorably impact revenue, but gross margin as well. In addition we have spend total launch costs associated with the opening of the new JV theaters in 2010, to have a smaller impact on gross margin as revenue from this business segment increases. Over the longer term, as many of you know, we are targeting our global multiplex theater network to grow from 288 as of year-end to approximately 1,000 theaters over time. Currently, we are in 188 out of 400 identified domestic zones. More recently we have become more open to the concept of second theaters in exclusive zones and as a result believe there are opportunities to potentially expand the number of identified zones, to some degree.

Internationally, as of year-end we were in just 100 of our identified 600 zones, given the level of activity abroad and the box office performance we have seen, we are working to insure that our international screens, are getting the type and quantity of titles that work best in their markets. For example, we are DMRing, our first international title, Aftershock, a Chinese blockbuster title set for release in July from YE Brothers Studios.. Assuming the successful release and growth in international markets, we plan to DMR in other countries that derive a good portion of the annual gross box office from local content.

In addition, yesterday we announced that Disney and IMAX will release Jerry Bruckheimer's Prince of Persia, the Sands of Time to international IMAX theaters only as there is an opportunity in the international release calendar given the timing of the World Cup, in other words, the number of films showing domestically aren't being released day and date internationally but will play a different time so we can slot Prince of Persia into there. We are also in the process of hiring an international film executive to report to Greg Foster, whose job would include securing titles that are tailored to certain markets and regions. This is all in an effort to insure our international exhibitors partners remain poised to maximize their IMAX business which we believe will lead to strong long-term network growth.

So, as we look at our business in the model we have developed we believe we have positioned ourselves for healthy rates of earnings and EBITDA growth over the next several years. Throughout this period, we will work to sign more theater deals as we target our goal of a thousand commercial IMAX theaters around the globe and will offer at least 13 new titles a year. Longer term, to compliment our core business, we exploring new business opportunities, such as our potential joint venture with Sony and Discovery for the first 3-D TV channel that we believe makes strategic sense for our brand and can drive recurring revenue and margin at attractive rates of return.

Our goal is to achieve this primarily through brand licensing opportunities in the home, and product extensions outside the home, like the broadcast of live events in IMAX theaters. In addition to projects like our first digital 3-D cameras, and our on going R&D initiatives, we have been working on something called the IMAX portable theater. This theater looks very much like a tennis bubble, can inflate over the course of a day and seat 450 people allowing us to create special events around IMAX releases. We believe the business model we have developed is attractive and will allow us to pursue marketing and sponsorship opportunities, with new strategic partners, and we expect to launch on at least a test basis during is second half of this year.

Finally, I want to touch on the IMAX brand. The competitive landscape is evolving, more digital 3-D screens are popping up daily, and others are introducing their own higher end movie going experiences. With respect to the proliferation of digital 3-D, it is worth remembering that we have been competing head to head with digital 3-D screens for years. For Avatar, we went head to head with digital 3-D, in 162 out of 165 domestic multiplexes, which played IMAX theaters. In fact, those multiplexes housed approximately two digital 3-D screens on average and just one IMAX auditorium, and, as I mentioned, the per screen average on Avatar was five times that of digital 3-D. In fact since Beowulf we typically have delivered between three to six times the per screen average of digital 3-D.

The true benefit of more digital 3-D screens is the ability of exhibitors to have enough screens to accommodate multiple 3-D releases at the same time, to solve the problem the industry is facing right now, with Alice, Dragon and Clash of the Titans all being released within a short time frame of each other. As it relates to IMAX, remember that we will not compete with all 3-D titles that are released at the same time, just on the title we are showing in our theaters. This concept is perhaps best exemplified in the 2-D world when The Dark Knight, Star Trek and Transformers II were released to the IMAX network. They were shown on between 7300 to 9500 2-D screens and yet the per screen average while higher than the 2-D by anywhere from 20 times to 54 times in the case of the Dark Knight.

In fact we believe IMAX may actually benefit from the increased number of 3-D screens since they have and will enable studios to make much more 3-D content available and consumers seem to gravitate to IMAX when a movie is presented in 3-D. As more 3-D titles are released, we believe our theater network will become an even more important area as one of the advantage of the IMAX brand, is the ability for a given title to cut through the clutter and provide a differentiated experience. Given the recent success it is not surprising that other premium formats have recently emerged. However it is important to remember we have faced competition many times over our history. I Works, Show Scan, MegaSystems among others and each time we have maintained our position at the top.

As recently as a few months back one of our international customer introduced its own high end large format screen, however, has since replaced the home-grown system with an IMAX system, and is enjoying considerable uplift in the multiplex with Alice over what it enjoyed when it wasn't an IMAX theater. At the end of the day it all boils down to consumer reaction to the IMAX experience and our brand. Time and again, movie goers vote with their wallets and we continue to see they're voting for IMAX. In fact as I mentioned before, even though premium screens have opened and more 3-D screens have opened, we had a record opening for Alice. We consistently sell out first, more IMAX tickets are bought in advance and movie goers tend to see a movie a second time more frequently in IMAX.

We believe IMAX's brand strength and consumer appeal lies in the sum of its parts, it is not easy to replicate a brand that has been built over 40 years or a Company that has spend significant amounts of capital to develop our projection, sound and camera technology, our proprietary DMR process that allows us to work side by side with film makers, our 25 years of 3-D expertise, these are just a few brand attributes that contribute to the IMAX experience. We have demonstrated throughout our history that we will stay in front of market trends, now more than ever with our strong balance sheet, projected cash flows, and increased bank facility we are poised to invest in our brand and insure our market leading position, only continues to strengthen from there.

In closing we look back on 2009 with a great sense of accomplishment. We delivered strong results for our shareholders, studio, and exhibitor partners and again most importantly, consumers. We've laid a solid foundation for our business, and we look toward to building on it over the years to come. I would like to thank our employees for their tireless efforts over the past year, studio exhibitor partners for their commitment to IMAX, and thank our shareholders for your continued support. With that I will turn it over to Joe.

Thanks, Rich. As Rich mentioned we are pleased with our fourth quarter and full year results as well as our very strong start to 2010. Adjusted fourth quarter net income increased to $12.9 million or $0.20 a share compared to an adjusted net loss of $9.7 million or $0.22 per share on the same basis last year. Adjusted net income excludes the impact of variable stock compensation, for the quarter, which was an $8.9 million charge in this year's fourth quarter as compared to a $700,000 benefit last year which I will review in more detail during my comments on SG&A.

Reported net income increased to $4 million or $0.06 per diluted share, compared to a loss of $9 million or $0.21 per share last year. Total revenue for the quarter increased 98% to a record $54.2 million compared to $27.4 million in last year's period. Looking at our key business segments, revenue from IMAX systems increased 69% to $19.6 million compared to $11.6 million in the period-- same period last year. We installed and recognized revenue on 16 theater systems under our sales, sales type lease model including six digital upgrades, compared to six sales, sales type lease installs in the fourth quarter of 2008, including one upgrade.

Our fourth quarter installation activity of sale, sales type lease systems was well ahead of the previous guidance reflecting higher levels of digital system upgrades than previously anticipated as exhibitors wanted to capitalize on Avatar, and our future film slate. Revenue from joint venture relationships increased more than five fold to $9.1 million from $1.4 million in last year's fourth quarter. We installed 22 JV systems in the quarter, including one digital upgrade. The weighted average number of JVs in operation during the fourth quarter was 110 units, as we ended the year with 117 JVs in operation. In line with our previous guidance of 120.

Total film revenue increased 104% to $15.1 million in the quarter, compared to $7.4 million in the fourth quarter of 2008. The primary driver of the increase was our strong DMR business which increased significantly this year versus last year, reflecting 12 days of Avatar, and our overall strong fourth quarter film slate compared to the prior year. Fourth quarter 2009 gross margin increased to $27.9 million or 51.4% of revenue from $6.5 million or 23.6% of revenue in the fourth quarter of 2008.

Included in the gross margin for both periods were $1.1 million and $1.5 million respectively in launch costs associated with the opening of new joint revenue sharing theaters. In addition, the fourth quarters of 2009, and 2008 included charges totaling $700,000 and $2.9 million respectively in inventory write down, and accelerated depreciation expense of certain of the Company's film-based projectors. Excluding these items from both periods, gross margin was $29.7 million or 54.8% of revenue in the fourth quarter, of 2009 up from $10.9 million or 39.8% of revenue last year.

Fourth quarter Selling, General & Administrative excluding the $8.9 million charge from variable stock compensation was $11.4 million or 21.1% of revenue compared today $10.2 million or 37.2% of revenue, on the same basis in the fourth quarter of 2008. Reported Selling, General & Administrative expenses was $20.3 million for the quarter compared to $9.5 million last year. The variable stock compensation charge was primarily due to stock appreciation rights, our share price at the end of the year was 13. -- $13.31 a 3. -- $3.90 increase over our closing price of $9.41 at the end of the third quarter.

As we move forward, generally speaking, every dollar increase or decrease in our stock price results in an impact of approximately $2 million on our reported results based on the number of vested shares at year end. As a reminder, we have not granted any new stock appreciation rights since 2007 nor do we intend to issue additional shares in the future. As of December 31, 2009, approximately two million vested variable stock shares were outstanding and we expect that pool to decrease to approximately 1.5 million by the end of 2010 which should help to mitigate some of the volatility on our reported results going toward. R&D expenses decreased to $1 million in the quarter from $1.3 million in last year's period. For the year, R&D decreased $3.8 million from $7.5 million in 2008, the period during which we were gearing up for the launch of our digital projection system.

Given the current strength and momentum in our business, we are currently pegging R&D spending at approximately 6 to $7 million for 2010 as we work on the development of new projects such as a digital 3-D camera, the portable IMAX theater, IMAX live and others. In addition, we were internally estimating that underlying SG&A dollars excluding any impact from variable stock comp may increase by approximately 4 to $5 million versus 2009, due to the current strength in the Canadian dollars versus a year ago when we are also looking to some SG&A dollars toward new business initiatives.

Before we move away from the P&L, I just want to mention two housekeeping items. During the fourth quarter we closed one of our owned and operated theaters and net earnings from this theater are reflected in discontinued operations. As of year end, we now open own and operate four theaters. In addition, we took a one-time charge of $800,000 due to the write off of deferred financing costs, triggered by the early retirement of the remainder of the senior notes. Moving to systems signings and backlog during the fourth quarter we signed contracts for 12 systems including eight upgrades compared to a total of eight system signings in last year's fourth quarter.

Our backlog at quarter end consisted of 136 systems, 94 were sales sales-type lease systems, valued at $117.2 million and 42 were joint venture arrangements which carry no stated backlog value. This compares to a total backlog of 213 systems at year-end 2008 which included 107 sales, and sales-type lease systems valued at $144.8 million and 106 joint venture arrangements. The decrease in backlog was primarily related to the aggressive roll out of the AMC and reel theaters in the slower paced societies. . We anticipate signings activity to pick up this year, in light of the success of the film slate, the financial model to exhibitors and the level of activity we are currently seeing.

Regarding system install, we installed 43 sales and sales-type lease systems in 2009 comprised of 27 new systems, and 16 digital upgrades. As I mentioned, this was above our most recent install guidance given in our Q3 call of 30 to 35 systems, and reflects heightened exhibitor interest to upgrade to digital ahead of our strong film slate. We installed 74 JV systems in 2009, 65 new systems and nine digital upgrades which was in line with our most recent guidance. Turning to the balance sheet, we ended the year with cash, cash equivalents of $20 million compared to $27 million at the end of last year. Our year-end cash position also reflects our investment in joint venture theater systems which totaled $7 million in the fourth quarter, and $25 million for the year. To sum up we are very pleased with our 2009 financial results. Let me now turn it back to Rich for final

Thanks, Joe. So to quickly wrap it up we are very pleased will result of 2009 and the strong momentum we are experiencing which we anticipate will result in a very strong first quarter financial results in 2010. We believe Avatar has provided many long-term benefits, besides the short term financial ones. With our projected network growth, high level of business activity and solid film slate we believe 2010 will be a very strong year and we look forward to updating you over the quarters to come. With that, I would like to open up the call to take your questions.

Your first question comes from Jeff Blaeser of Morgan Joseph. Please go ahead.

Good morning and thank you for taking my question. With the recent strength at the movie, the box office, have you seen the ticket prices for IMAX going up, Q3 versus Q4? And with additional releases of digital going forward, that's probably going to spike up some additional prices, do you expect any additional price increases for IMAX, as it is the premier viewing experience In 2010 and 11?

Jeff, I would answer it in two ways. I haven't noticed over the last couple of quarters a movement in ticket price. But that's something that we don't set, the exhibitors do and we would tend to see it later than they would post it. But with that said when you look at what we modeled out in our pro forma for JV which was ticket price of $9.75 versus what we actually achieved which was north of $12 a ticket, they certainly all charged more than we expected going into the year. And, I certainly agree with your analysis with the 3-D titles and up tick, I would think it is not likely to go down but that's more my opinion than knowing the facts.

Okay. Great. And then on the revenue per theater, is there a noticeable difference between a sale lease, a joint venture, international returns that you are seeing?

Well, as I said, international this year was the same as domestic. That's kind of a big deal because international had a lag domestic mostly because of the timing of film releases. So we think that will help us internationally. In terms of digital versus film, it is really all over the place, it is hard to discern patterns from it.

Okay. Great. Finally, with the increased R&D and SG&A you are talking about and the strength of Avatar, and Alice in the first quarter, is it fair to assume some of that may be front-end loaded in the year based on the recent revenue strength?

No, I think if anything, Jeff, it would more likely be back-end loaded because as you gear up for these kinds of activities such as IMAX live or the portable, I would assume we are just announcing the portable here, so . we really haven't spend much on it in the first quarter it would likely show up in the second or third quarter. So I think G&A in the first quarter will be more normalized subject to what I mentioned about the Canadian

Okay. Thank you very much.

You're welcome.

Thank you. Your next question comes from [James Marsh, Piper Jaffray]. Please go ahead.

Hi guys. A couple of quick questions. First to follow up on the last question on the per screen international numbers, do you expect that to continue to move ahead, and see international actually be larger than domestic, mirroring what we saw in Avatar?

It is hard to say, James. I mean the most interesting statistic is that we did $15 million was the all-time record internationally. As you know with Avatar we are $90 million. So we particularly attracted strong audiences internationally, really for the first time. And it is, Alice is really big internationally as well, somewhat surprising to us.

So it is possible, because of that and because of local DMR titles that hopefully will come in international releases like Prince of Persia, but it is too soon to say. I think the more important point is by getting in line with domestic return, the IRRs are higher than they have been in the past, and it should help us grow the network internationally.

Then I had a question regarding the created JV that was announced yesterday. It was surprising the size of it, it seemed substantially larger and it led me to wonder if it is just the Korean market that seems a bit bigger than I would have thought or do you think international opportunity is bigger there?

Hard to say, I will say with respect to Korea, we had originally models it out at 18 just in our internal numbers and if they open all 15 that would give them 20 in the Korean market.

So that suggests maybe we are on the conservative side but again I wouldn't infer too much from that about the world although like we talked about domestically, if the results continue much stronger than we thought, when we modeled this, you would have the possibility of second screens in the market and maybe smaller zones.

Okay. Is it fair to assume the JV economics in Korea are consistent with the JV economics domestically.

Yes.

Okay. Thank you.

Thank you. Your next question comes from Richard Ingrassia of Roth Capital Partners. Please go ahead.

Thanks. Morning everybody. Rich, on the Regal Entertainment call [Amy] made it sound like that chain was pretty close to deciding on a new round of IMAX installs. I don't want you to comment on that opportunity specifically but maybe say more about what the next layer of North America looks like. Is it feeling secondary and tertiary markets or more adding second IMAX screens to locations?

I think it will probably be both, Rich. I think, in terms of filling in, missing,where the zones are at, that's a -- that's a combination of local operators, that would go in those markets because the major chains aren't there or an expansion of Regal and AMC. We have certainly begun discussions with Regal and AMC about putting a second theater within a zone.

An example of that would be in New York City, where there are, I think four or five AMC theaters now, we just opened [Kitts Bay] last weekend, for Alice and it pretty much sold out all week en. So I think you definitely an opportunity in a place like New York to put more theaters within the zone, and I mentioned during the call, Regal had such phenomenal results on Avatar, almost $700,000 a screen. I think they're looking carefully at where it makes sense or not.

And in that case, with the second screen, location, do you expect that the economics of the individual theaters might change or any, changes in the clearance or any other aspects of the business as it's done today?

You said location, Rich. Just to be clear, I am talking about in the zone, I mean it is possible it will be the same theater, I think it is more likely that it would be in the zone.

Okay.

I am not sure. We will try to see. Remember, when we model this out and show it to exhibitors, we used an $800,000 gross box office to get the exhibitor, a good return and us a good return. Instead the box offices over $1 million in 2009, and clearly off to a better start in 2010. Even if you see one poach a little from the other one, the returns still should be north of what was in the original model. That's one thing that convinced us to go maybe more quickly than we thought into a second theater in the zone because the returns are better than either side bought into.

Okay. I miss, I guess I want to keep in the shoes of your largest customer here for a minute or two. The PSA speak for themselves but maybe talk a little bit about the so-called good, better and best strategy, how IMAX coexists versus a ETX or even XD in identical locations.

First of all ETX I can't comment on because it just opened for Alice and I really haven't had a chance to analyze the numbers but if you look at the numbers for IMAX versus XD even in the Cinemar circuit alone, the numbers for IMAX are way better on a per screen basis.

And there seems to be based on some early research we have done, a lot more incrementality in the IMAX theaters and the reason for that is you can tell by the uplift in the multiplexes moving from one number to a different number in the standings. So I think the exhibitors know that IMAX delivers more incrementalty, it delivers bigger audiences, bigger numbers, differentiates their multiplex and I think that if you talk to some of them, although I will exclude Cinemar from this part of it but AMC and Regal and others, they say they're not trying to replicate IMAX, what they're trying to do is put a premium theater where they can't put an IMAX theater.

So example where AMC put the ETX we had looked at that zone and we had looked at that actual location but for certain technical reasons and logistics on how the theater laid out vis-a-vis our proprietary geometry we turned down that place. From you AMC and you can't put IMAX, there why not try and put a premium brand there and try and get a better ticket price. And the I think that makes a lot of sense.

So actually you the concept of good, better, best came to us from some people at AMC and the way they're thinking about it and I have no question. I spend a fair amount of time in my remarks talking about this. But I was just out in California last week, and it is incredible how many people now say you haven't seen the movie if you haven't seen it in IMAX, and how many people are waiting to see it in IMAX. I this I the combination of the experience and the brand is automatically going to create that good, better, best paradigm.

Thanks, Rich. Last question, if we assume for a minute that Korea is 20, is Japan 40. Maybe give us an order of magnitude for Japan. Is China 60 or 80?

We modeled out Japan and the number we came out with was like 50 plus. But given the success there and Japan is just wild. I think you know that the IRR in Japan to the exhibitor and us are in the triple digits. So way north of 100% category. So you could see that go higher than the 50, we have modeled.

China is a case unto itself, we have 27 open, we have 23 scheduled to open in the next couple of years, 50 will make us the largest foreign exhibitor. But given the demographic changes, the growth in income, I don't know what the number is, it is very hard to consider it in the abstract but I think there is an awful lot of runway to go in China. The average ticket price in China was over $20 a share and they were being scalped for around $150 for Avatar. It is just-- people I know who have been to China have described it as nothing short of a phenomenon and in fact our interest in China and Japan is way up following Avatar.

Okay. Thanks everybody.

Thank you. Your next question comes from [Martin Pyconen of Jakel Partners]. Please go ahead.

Thanks a couple questions. One of the JV model two, the numbers (inaudible) what you are talking about look pretty good here. I am wondering to what extent your discussions have any caution or concern about their share in their margins especially on the concession side longer term if that's a factor at all, give me one thing you could look at this and say a lot of these are getting into the market as quickly as they can and using the JV model to get there but may be longer term and a little more reluctant to share on that side. That's the first thing.

And then on the studio side, with the film outlook, you obviously have the ability to cherry pick, as I keep referring to it, and Rich I want to get your thought on how much you want to lock in the calendar each year as you are a few months into 2010, you have one 2011 Spiderman I am sure there are other in discussions but you look at the other side, Twilight that was opportunistic. Whoever thought that would have done that well a couple of years ago. I am curious how you look at wanting to lock in versus keeping the window open in terms of at what percentage, on each side,.

Yes, I am -- on questions, the first one in terms of exhibitors, willingness to, to share the revenue, in a JV model,the exhibitors studio relationship has historically been based on sort of a fixed pie, and fighting over that pie, in terms of split, how much the studio should get and how much the exhibitor should get. So it won't surprise you that the first reaction of most exhibitors is I had rather pay less; right. Most human beings but particularly in this business, it is kind of like you tap the knee and the foot goes up, you are successful and it is like how do I figure out how to pay less. Some of that is evidence not only domestically clout worldwide and the attempt to create new premium brands. It just makes logical sense.

On the other hand, though, when they get knowledgeable about the incrementalty, and they understand that these zones are finite not infinite they will, they come to the understanding, that the IMAX proposition makes a lot of sense for them. You saw that happen in Korea with our announcement yesterday, and there's a lot of activity hopefully you will see that in a lot of other places manifest itself. But, clearly it is a balancing act between, and it gets a little more complicated because in the very short run, there are areas a digital 3-D screen has a monopoly because of the shortage of 3-D screens. That's about to go away with DCIP being implemented. So, I think some exhibitors who thought all 3-D was incremental are going to quickly learn that digital 3-D isn't incremental.

But that IMAX 3-D is incremental, and you just show the data and the data supports our thesis and we will get through it but definitely, what you would predict does happen, and it is part of the negotiating dynamic. That's one reason JV signings may have been down last year and I think they're, that is changing this year, because we have a full year of IRRs to look at. In terms of the studio side, locking in versus a picture by picture basis, it is-- it is a very complicated decision. I think we used to weigh more toward the lock in side because exhibitors needed comfort that there was a film product to come and some sort of confidence especially in the JV model, where we are participating in the upside and down side and they know what our incentives are.

I think they need less of that confidence and you're willing to let us be more opportunistic. I don't think we would lock up films for the sake of locking them up. On the other hand, the dynamic is coming the other way where some of the major studios are coming to us with franchise properties and saying we want to lock them up now. Our point of view is that if it is-- , if it is the right kind of marketing campaign, it is a studio we have a great relationship with, and it is a title that is really great, I mean we are going to do that. So,it is very hard to answer from a policy point of view, other than to say, I don't feel obligated to lock in but the right kind of deal, it makes business sense for both

Just to follow up on that on multipicture deals per studio, to what extent are you trying to push that, and if you could ideally would you like to have multipicture deals with every studio and a follow up the for Joe on the SARS impact.

I was under the impression that might be a little more unwound by the end of the year, you mentioned 1.5 million shares likely, versus two at the end of 2009. I was just wondering what sort of stock price assumption you are building into that or is that something that could change and actually be considerably less than that if the stock was to be --

The number of shares is based upon the current 10B 5 out there, plus the number of shares that are scheduled to vest during the year, which I believe is about 160,000 shares. So, when you couple those two together, you get a reduction of about 500,000 shares.

Okay.

And Martin, on your other point, about locking in, I mean, I think if you just ask me my reference it would with not to do too many multipicture deals and to be flexible. But to the extent you could do a few good one, that create like anchors on your slate, and really bedrock, I will -- we will do those and I think, I wouldn't find it unlikely that you see some of those, but when you look through them and you see titles you will see they're not done for the sake of locking in pictures, they are because they're very big titles. If you do a couple of those things you don't want to do them with every studio because you want to maintain a little bit of flexibility.

Thanks. Great job.

Thank you.

Thank you. Your next question comes from [Mark Argento of Craig Hallum Capital] Please go ahead

Hi. Good morning.

Hi Mark.

A question around-- you have the 400 zones you've laid out in terms of exclusivity domestically and wanted to ask quickly of those 400, how many of those zones are actually taken now? Is it roughly 200.

The backlog is built out, it will be about 250.

Got it Then in terms of the opportunity to work with the regional players and to go into these. we'll say tier two markets or smaller markets, (inaudible) the economic support on a per screen basis being able to go into those markets-- have you started discussions or is there an opportunity to go after those additional 150 exclusivity zones at this time?

We have, and in fact, we didn't announce all of our signings so far this quarter, but in addition to the Korea deal I think we signed five other deals, plus 12 upgrades already for the quarter. So, there is a lot of interest going on there, and one of the things we have to also balance internally, is do we want to go in with the regional one, does he have the best theater or being off going with a national chain, and I think as our discussions evolve with the more major national players you will start to see us work through those issues as well.

Great. Then just quickly on the new product you announced this morning, the IMAX portable, I know it is early on but what do you envision in terms of opportunity, and how many of these do you can you have out there in the future?

The answer is that the returns look as we model them out real disclaimer here, we haven't seen them but the way it works is someone would pay for the sponsorship and you have to really think of this as a tennis bubble, it is a big, big structure, a big billboard, we hope that the sponsor covers most of the cost of building one of these and the cost once we roll it out on a broader basis should be a little bit north of $1 million apiece, they will seat 450 people and then revenues would be shared with the operator and the studio, but there are target markets we're thinking of like-- one example very excited about, think of this film we're doing in China, Aftershock, and rural

China doesn't have multiplexes let along IMAX, and you can put a lot of these things out in rural China, this amazing number, I don't want to guess the cities with over a million people in China, I think it's like 50, I could be wrong, but I think it's something like that.. Where you could put these things and do tremendous business. We have thought about having a premier in Central Park or you could talk about Comacon down in San Diego, putting the theater in the parking lot there and be able to show content. I think there are a lot of opportunities. The way we are going to go about it, is we're going to build a couple of them, we will test them and see what the demand is for sponsorship and consumers. If it works our next phase of the model is ten, but certainly we can go higher than that if it works.

Last question earlier you guy as announced a JV with Discovery and Sony, any idea when we will have a little better idea if you guys decide to take that to the next step. Have your thoughts around that changed at all given the hardware announces on the 3-D TV that we've had recently.

I think we will be back in about a month with, where we are on that. I think, we think it is an exciting opportunity we, as you know, we want to get into the home. We love the Discovery and Sony brands as well as the organizations and really looking forward to it. As I said at the time we announced it we only going to to do it if the ROI makes sense and the business plan makes sense. We are working through all of that right now and within a month I expect to be able to get back to you.

Great. Thank you.

Thank you. Your next question comes from are [Rvinda Calepathy of MacCormack Securities] Please go ahead.

Morning. Thanks very much. Just a couple of questions. First of all, Rich, on film slate. Looking a little bit further ahead, one thing that I think probably affects you going forward, not in 2010 but beyond that, is the timing of the key films like Transformers 3 and Harry Potter et cetera.

Given that you obviously want slightly bigger gap between those key titles so that you maximize on box office, but I am thinking given your growing influence on the studios and you're doing 15 to 20% of the domestic box office, are you able in anyway to influence the timing of those releases so that IMAX can get the best, the best and have a full run on those big releases?

It is on a studio by studio basis, and a director by director basis. Remember a lot of the interest in IMAX isn't only driven by the studio but it is driven by the film maker as well. So in some cases, yes we can have some influence, and we have a discussion with the studio about the optimal release date, and in some case, we can't because there are a lot of external reasons why that date is chosen. But I would if you wanted to graph it as time has gone on we have been able to have a little more input and the studios have been accommodating.

Okay. And I think you have touched on this in different way, but with respect to the international markets, size which you target in 600 systems, are you able to assess how much of this can be JVs is it about 200 or 250.

We are actually working on refining that, and, I think some of that depends on how the particular markets evolve and how hour tests JVs do in the markets. I really will think about it for the next call but don't want to pick a number off the cuff right now. Just by way of guidance obviously it is places like Japan, Korea, perhaps Taiwan, Hong Kong, and Asia, obviously you have a lot of western Europe, which you can do, and we barely penetrated a number of those countries. So, I think we really have to do our work to figure that out.

My last question on the sale type leases, the backlog, you indicated 10 to 15 in 2010. The 94 that's in backlog, I mean aren't there sort of undated installations in that backlog. I mean I was trying to get an idea of the distribution of that backlog considering it is only 10 or 15 in 2010.

The backlog dates vary, and it is just, this is where the dates fell for 2010. When we sign a deal, there's target dates, that theaters will open, and they could vary in terms of the number of years that they go out.

Okay. Thank you, gentlemen. That's all I had. Thanks, Rich.

Thank you. Your next question comes from [Steve Frankel of (inaudible) Advisors ] Please go ahead.

Good morning. Rich I wanted to go back to the domestic expansion, issue, and in a particular zone, if the AMC or Regal, your major partner who had the exclusive today doesn't want to expand, bring a second screen in that zone, is that something you can offer up to somebody else, or if they turn it down, they still have exclusivity in that zone and you can't expand?

If turn it down they still have exclusivity in the zone, and they, we can't expand in that particular zone. I would like to think if the numbers make sense it will make sense to them but, no, we can't control that.

Okay. In the smaller zone, how quickly do you think you will expand? Is that two to three year time horizon or does it take longer to spread into these smaller markets.

Again you can't generalize. It is a zone by zone basis, but I think many of them over the next three years we would be able to penetrate but I don't know that's just a hunch.

And how quickly can you expand,in China, you talk about 23 more screens, is that a multiple year process or is a lot of that front loaded given the strong results and interest there.

Well, the 23 are in backlog and they're scheduled to go in over the next several years. So, I think the bulk of them will. Some of them are new builds so you don't know what happened, to new builds but there's a lot of signing interest in China. So in addition to what's coming out of backlog I would expect to see new deals and more added to the backlog.

Okay. Would you care to quantify the gross margin improvement you are looking for 2010?

I don't think we want to quantify it now. It depends on how the films perform and what the total revenues are. When you look at the increase in the fourth quarter, you see the significant operating leverage that we have, we expect obviously to do more revenues as we mentioned given the comparisons in the first quarter but it depends on where revenues end up and that's hard to project.

Okay. Thank you.

Thank you. We will only take a couple more questions because we are running past our time.

Thank you, your next question comes from Chris Grosso of Hudson Square. Please go ahead.

Hi. It is actually -- Marla

Marla.

Hi.

We can't hear you.

Is this any better.

A little better but if you can get closer it will be better still.

Is this better.

Yes

Okay. Okay. So in the past, during (inaudible) periods or when a movie has underperformed expectations, you have gone back and (inaudible) Hollywood title, so is there any opportunity, codo you think to do something similar with the local content or perhaps with the Prince of Persia in the future if you need it?

I think Marla, that's not a model that we think is really works that well. And the reason is because there's not a lot of marketing budget that's put around the rerelease. If you remember, last year, the first quarter, The Dark Knight which did phenomenally in IMAX, a huge success, when we released without a lot of marketing it didn't do a lot of business. Where I think you might see a difference there is some of the older titles may be rereleased in 3-D, and accompanied by a marketing campaign. Where something like that happens I think we would more likely think about it than just a rerelease without a big campaign.

Okay. That makes sense. And then one other question, given your rising profile with audiences and the upcoming Discovery, Sony 3-D TV launch, do you think there are more opportunities for you to leverage downstream markets for some of your content library?

I definitely do, Marla. If you look at the 3-D landscape, we have been in the 3-D business over 20 years and everybody is relatively new. So between, rights that we have, films we have participated in and other rights that we may acquire, we think we have formidable library, maybe it is certainly as large as anyone else's, maybe larger. I do think there is an opportunity-- and you look at things like streaming video or DVDs, demo content, there's a lot of places where we may be able to take the library and those are the kind of things we are starting to get into right now.

Okay. Thank you.

Two more questions, operator.

Thank you. Your next question comes from [James Goss of Barrington Research. ] Please go ahead.

Okay. Thanks. First, you have addressed a lot of this with regard to the transitions given the volume of titles and availability of screens and your input there, but I'm wondering how big an issue you feel this is going to be since the studios are very much out toward 3-D in particular but certainly tentpole movies as priority.

There's always sort of a fixed number, of tentpole picture that work, and people like to call a lot of things tentpole but our 13 or 14 release during the year, we think covers the ability to get most tentpoles. Now we may lose some and certainly we have a decent track record, but we're not perfect at picking movies. So, I'm sure we'll lose some over time. But our transition to digital which enables us to do 14 instead of five or six gives us enough room.in our portfolio.

I will give you an example last year, we missed Ice Age 3 and I really would have liked to have done it. It competed with Transformer, we couldn't do everything. So, I feel badly about losing that revenue. On the other hand we did over a million dollars per screen average, so you just have to deal with the reality of the way the world is.

Basically, though, do I understand that you have a greater ability to take advantage of realtime attendance results and perhaps play around with the transition dates and you are having a little more impact than you did in the past in negotiating with theaters in that respect.

Absolutely. The second part is that because we have gone digital from film we could accommodate shorter release windows. So whereas if two films are two weeks apart we never could have done that because the economics didn't work in the film world. We can and are doing that in a digital world. So we are certainly more flexible in the ability to have conversations, but just to be clear, we're not going to get every blockbuster film.

Could you hold over a film by having a play a couple of nights a week during the week and give up the weekend to the new film?.

That would be actually between the studio of the new film and the exhibitor. If it makes sense, the way the industry works is historically people work it out, but we don't really have a vote on that.

Last thing. Do your zones start to get redefined at all with actions such as the one you described earlier with AMC where they have put in an alternative, to an IMAX because you weren't interested in that particular site.

Well, we weren't in that site and no one has a theater in that zone, we could go in with another theater in that zone, it doesn't affect us at all in terms of weather an alternative experience has gone in. I haven't looked at that particular zone, but we will certainly consider it if we are not in there.

All right. Thank you.

Okay. Thank you very much. Let's take a last question.

Thank you. Your last question coming from Jim Boyle of Guilford Securities. Please go ahead.

Good morning. What is your biggest competitive threat domestically or international and also what do you see as your preferred potential universe of number of digital 3-D screens, not zones .

I am sorry. The second part of the question I missed.

You talked about your 400 zones, and your in X now. Could you tell us that potential universe what you've done already today in terms of number of screens..

In terms domestically, when we build out our backlog, it's now about 150 of the 400 zones, when we build out our backlog it will be about 250 of the 400 zone but I hope that expands because of a second theater in the zone and internationally, it is a, when it is built out it will be about 150 of 600 zones. And in terms of the greatest competitive threat internationally and domestically. I think internationally, it is the ability to juggle, I wouldn't call it-- I hate to call it a completive threat, but it is really the way to juggle your film slate so you can replicate a full 13 or 14 picture, you can't answer that internationally.

Because each country was different and each has it's own culture and indigenous , product but I think our ability to overcome, that so they can have a full year play schedule, I think internationally. Domestically, if I had to pick something I would say it is our inability to keep providing differentiated content to make sure the IMAX experience is superior, given our box office results that has been mitigated by the fact lots of film makers, and the studios really understand the value of the IMAX experience. But we have to always be cutting edge and we have to always offer not only a better technical experience, but a better theatrical experience and we're all over that.

With that said just to sum up as I reiterated many times, we're really pleased our two key goals for 2009 were addressing our balance sheet issues and becoming profitable, and we address those in ways I would say were better than I would have anticipated when the year began and our model is in place and I think the first quarter of this year, the performance of Avatar and Alice is really going to demonstrate some of the potential of that model and then I think with the winds of Avatar, at our back, and the hope of the film slate in front of us, I look forward to a very good year, and I thank you all for being on the call and our long time share holders, thank you for sticking with us as we put this model together and we hope we can deliver good returns for all of you in the future. Thank

Ladies and gentlemen, this does conclude your conference call for today. You may now disconnect your line and have a great day.