Imax Corp (IMAX) 2010 Q1 法說會逐字稿

Good day, and welcome to IMAX Corporation's first quarter earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Heather Anthony. Please go ahead, Ms. Anthony.

Good morning, and thanks everyone for joining us on today's first quarter 2010 conference call. And apologies for the late start. We had some technical difficulties. Joining me is our CEO Rich 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 in that they pertain to future results and outcomes. Actually future results or occurrences may differ materially from these forward-looking statements. Please refer to our SEC filings for 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 of management's use of these measures and the definitions of these are contained in this morning's press release. 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 review highlights of the first quarter, our outlook for future growth, the film slate and our general tone of business. Joe will then review our Q1 financial results in more detail. With that, let me now turn the call over to Rich.

Thanks, Heather. We're very pleased with our first quarter 2010 financial results. Our performance highlights the dynamic nature of our business model and what can happen when compelling film content is combined with our growing theater network.

While we recognize is that a film like Avatar is not an annual event, it is important to remember that well would not have been able to capitalize on this cultural phenomena were it not for our transition to digital and the implementation of our new financial model, which accelerated the growth of our network, insured greater box off impact of Hollywood films in IMAX, and most importantly, established recurring revenues. This model is still very much in its early stages, but it is clear that this approach is resulting in significantly stronger operating performance. On our last call we spoke about Avatar and the halo effect it was having on different areas of our business. The first area was of course the financial benefits, which is certainly evident in our first quarter results as is with Alice in Wonderland, which is -- also was a large contributor to our first quarter.

Adjusted EBITDA increased to record $42 million for the quarter, compared to last year's first quarter adjusted EBITDA of $7 million. Adjusted EBITDA for the trailing 12 months ended March 31st was $93.4 million, compared to $15.1 million for the same period last year. Total revenue increased 120% to $72.8 million from $33.1 million last year. Adjusted EPS increased to $0.53 per dilutedshare, compared to a loss of $0.06 on the same basis last year. Reported EPS increased to $0.40 per diluted share from a loss of $0.06 last year, and we reduced net debt down to $16.5 million, comparedto $161 million last year and $30 million as of the end of 2009.

Perhaps more important than the near term financial benefits of Avatar and Alice is the positive impact these titles are having on other areas of our business, namely network expansion, the [furthest] of many of our relationships in Hollywood, and increased consumer awareness and demand for the IMAX experience. Our strong film slate has also benefited several of our other business segments, making our entire enterprise more profitable than we had experienced in the past. In addition, recurring segments like joint ventures, DMR and maintenance represented 65% of total revenue in the quarter, compared to 30% last year and an average of 52% over the last four quarters.

During the quarter we have signed deals for 41 systems, including a minimum of 10 JVs with CJ CGV in South Korea, five JVs with Tokyu in Japan and four JVs with Gaumont Pathe in France. The quarter also included deals with Odeon in the UK for an a additional theater, bringing Odeon's theater count to six,Rising Star in Russia, our first theater with Shaw Brothers in Singapore and our first theater in Croatia. Domestically we signed deals with strong regional operators like Warren Theatres and [Ten] Theaters. We believe this deal activity is a reflection of a strong IRRs our exhibit our partners are enjoying overall and the strong box office results their IMAX theaters are generating,which creates a competitive advantage for our customers in their given marketplace and increases the productivity of their complexes.

Given these as well as other theater deals signed during the first quarter, we now expect to install approximately 40 to 45 joint venture theaters from backlog in 2010, up from our recent estimate of 35-40 out of backlog provided on our March conference call. In addition, we now expect to install 15 to 20 sales-type lease systems, excluding digital upgrades, from backlog in 2010, up from recent outlook of 10-15 installs. And we continue to expect additional signings and installs not yet accounted for throughout the year. As a reminder installations can slip from period to period, usually for reasons outside our control.

Our 41 signings in the first quarter alone is more than the 35 theaters signed in all of 2009. In April we signed deals for another 13 theater systems. If the year was to end today, after only four months, it would rank as our third best year for signings in our history.

We're particularly pleased with the level of international history. Given that we see most of our future growth coming from international markets, this quarter was a great example of how we're seating new and emerging markets, just as we did several years ago here in the US. Many of our new theater deals are in the largest movie-going markets in the world. For example, Japan is the second highest grossing country in the world, and we only have nine commercial theaters, including the resent signings. France was last year's largest movie-going market in Europe, and we have one commercial theater open and four more coming. The UK is consistently among the top, if not the top box office country in Europe, and Russia is one of the world's fastest growing markets and ranked 6th in the world overall last year, and we only have six commercial theaters open. We believe all of these international markets can support significantly more commercial IMAX theaters.

Our worldwide gross box office in Q1 increased to a record $232 million, which compares to $28 million in the first quarter of 2009. We followed our first ever $100 million gross box office quarter in the fourth quarter of 2009 with our first ever $200 million box office quarter this past quarter. Our global per-screen average in quarter one reached $844,000. Domestically our screens that played DMR content generated $695,000 on average. And internationally our DMR screens generated approximately $1.2 million on average during the quarter. Some notable statistics include, 70 of our theaters generated over $1 million per screen in the first quarter, nine theaters did over $2 million per screen in the quarter, and three theaters over $3 million per screen in the quarter.

Again while we recognize that not every quarter will enjoy per-screen statistics of this magnitude, we believe these statistics are a reflection of the consumer appetite for the IMAX experience and IMAX's increased brand awareness as we continue to open new theaters. We certainly saw the continued appetite for IMAX with Alice in Wonderland, which to date has grossed approximately $58.6 million worldwide, making it our third highest grossing DMR title in history.

Alice has performed particularly well in our international theaters, which have generated approximately $21 million in gross box office to date, making Alice our second highest grossing DMR title internationally. In several markets Alice is only in the first or second week of its run. Our four JV theaters in Japan have already grossed a total of $1.3 million after only eleven days into Alice's release.

Over the past several months we've engaged a branding agency to identify what the IMAX brand means to the consumers, how the strength in the IMAX brand translates in international markets,and how we might extend the brand to other businesses and markets. While we are still in the midst of this work, the initial results are very compelling. There appears to be a strong emotional connection that exists between consumers and IMAX, which transcends any single physical attribute of our brand. We believe this emotional connection between our consumers and our brand differentiates us even further and strengthens our strong competitive position.

Yesterday we announced the largest multi-picture deal in our history with Warner Brothers. We believe this announcement of up to 20 pictures through 2013 is an endorsement of the IMAX experience from the studio's perspective and its positive impact off event titles. Our premium movie experience, higher ticket prices, attendance levelsand the marketing buzz IMAX brings to a title result in significantly higher box office opportunities, as well as the potential for increased downstream revenue and profits. This deal, which we believe is a win-win for both companies, brings an increased level of our visibility to our film slate while still giving us the flexibility to fill in the slate with additional titles from other studios. It also gets our existing and potential exhibitor partners excited about what is to come.

Speaking of our film slate, the second quarter is off to a nice start. To date How to Train Your Dragon has generated approximately $26 million in box office, which is in line with our expectations, with several more international markets still yet to open. Our year-to-date box office totals $261 million, which is almost equal to our box office total for all of 2009. When you combine our Dragon results with the continued performance of Avatar and Alice in Wonderland, second quarter to date gross box office has reached $30 million, a 78% increase over the time last year.

We believe that this is a good position to be in as we kick off the summer movie going season with Paramount Pictures and Marvel Entertainment's Iron Man 2. Iron Man 2 opened yesterday at an IMAX theater in France, and in the country as well,and the Netherlands, and opens 49 of our international theaters this week. The tracking on the title is very strong, and we're encouraged by the level of presales we are seeing. And at our theater in Disney Village the movie opened yesterday higher than the opening days for Avatar or Alice. And a reminder, that movie is in 2D.

Domestically, we follow Iron Man 2 with DreamWorks Animation's Shrek Forever After in 3D on May 21st, Disney and Pixar's animation Toy Story 3 in 3Don June 17, and Summit Entertainment's latest Twilight saga installment, Eclipse, will round out our second quarter line up on June 30th. Warner Brothers and Chris Nolan's Inception will follow on July 16th. Our remaining announced titles for 2010 include Warner Brothers and Zach Snyder's Legends of the Guardian, the Owls of Ga'Hoole, in 3D on September 4th;Harry Potter and the Deadly Hallows, Part I, in 3D on November 19th;and then we wrap up the year with Disney's Tron Legacy in 3D in the middle of December.

We believe we have room for up to two more DMR releases in 2010, one of which we expect may be a summer rerelease, and we're in active discussions regarding options for those release windows. As a reminder, we're supplementing our international film slate with Jerry Bruckheimer's and Disney's Prince of Persia on May 21st, as there was an open slot given the change in the release schedules outside of North America on account of the World Cup. In addition, we're DMRs our first non-American title, the anticipated Chinese blockbuster Aftershock, set for release in mid-July from Huayi Brothers studio.

Assuming the successful release for aftershock and continued international network growth, we plan to DMR local content in other countries, where we have a critical mass of theaters that derive a good portion of their annual gross box office from local titles.

Longer term, we've announced some of our future titles through our multi-picture deal with Warner Brothers, namely Harry Potter and the Deathly Hallows, Part 2, in 3D next July;Happy Feet 2 in 3D November 2011; and The Hobbit in December of 2012, not 2013 as stated in yesterday's press release. Briefly touching on the 2011 film slate, as many of you know, that summer is packed with titles that we in the studios are interested in releasing to the IMAX network. We're well into discussions with many of the studios regarding this challenge, and at present we expect to optimize this period through aggressive scheduling.

Regarding new business initiatives, our discussion with Sony and Discovery for the first 3D TV channel are ongoing, and we hope to finalize that venture soon. Regarding our portable theater, we will begin testing our first theater in May, and we continue to expect to launch during the second half of this year. In addition, a prototype of our digital 3D camerais on location and working today with a documentary fill maker in Borneo, and we are pleased with its performance and the images we're seeing so far.

As a reminder, we intend to be highly selective regarding any new business initiative we explore. It must make strategic sense for our brand and must be able to 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, such as the broadcast of live events in IMAX theaters.

In closing so far 2010 has been rewarding not only because of our financial performance, but because of the level of business activity we're experiencing across the entire organization. From theater signings momentum, which continues into Q2, to our strategically significant film deal with long-time partner Warner Brothers, to new business opportunities, we're please we had our general tone of business. We're encouraged by our start to the second quarter, and we believe the line up of titles for the remainder of 2010 is positioning us for continued strong box office performance. This, coupled with theater signings, film announcements and trailing 12 month adjusted EBITDA of over $90 million is providing increased long-term visibility into our business and a solid foundation from which to grow. With that I'll turn the call over to Joe.

Thanks, Rich. As Rich mentioned, we are very pleased our first quarter results. Adjusted first quarter net income increased to $35.3 million or $0.53 cents per share, compared to an adjusted net loss of $2.6 million or a loss of $0.06 per share on the same basis last year. Adjusted net income excludes the impact of variable stock compensation for the quarter, which was an $8.7 million charge this year's first quarter, as compared to less than $100,000 in last year's first quarter, which I'll e review in more detail during my comments on SG&A. Reported net income increased to $26.6 million or $0.40 per diluted share, compared to a loss of $2.6 million or $0.06 per share last year.

Total revenue for the quarter increased 120% to a record $72.8 million,compared to $33.1 million in last year's period. Looking at our key business segments, revenue from joint venture relationships increased nearly 9 fold to $18.9 million from $1.9 million in last year's first quarter.

We installed six JV systems in the quarter, including one digital upgrade. The weighted average number of JVs in operation during the first quarter was 119, and we ended educate the quarter with 122 JVs in operation. Joints venture theaters opened for the first full quarter of 2010 generated gross box office per-screen averages of approximately $665,000, compared to $152,000 last year. Total film revenue increased 275% to $29.3 million in the quarter, compared to $7.8 million in the first quarter of 2009.

The primary driver of the increase was the five fold increase in our DMR business, reflecting the box office performance of Avatar and Alice, and our overall stronger first quarter film of slate compared to the prior year. DMR revenue as a percentage of gross box office revenue was 10.1% in the first quarter, which reflects the impact of subdistribution arrangements in China, omissions in VAT taxes incurred in certain jurisdictions, and our contributions for film prints, which due to the structure, was accounted for as an offset to revenue as oppose to a component of cost, which is our traditional treatment.

Moving to sales and sales-type leases, we recognized revenue on three full new theater systems in the first quarter of 2010 with an a average value of $1.6 million, compared to five in the first quarter of 2009,which also had an average value of $1.6 million. We also installed nine digital upgrade systems in the quarter, compared to three in a year-ago period. These digital upgrades will to driveour box office revenue, as well as that of our customers, by maximizing the number of IMAX titles they can show. We also installed one used system in both the first quarter of 2010 and the first quarter of 2009. Due to the number -- the lower number of full new system installations this year versus last year, the increased amount of digital system upgrades and settlement revenue of $1.2 million last year compared to zero this year, revenue from IMAX systems decreased 33% to $11 million in the first quarter of 2010, compared to $16.5 million in the first quarter of 2009.

Before we move away from revenue, I want to point out we had some significant increases in some of our other line items, notably theater operations, which where we are again were driven by the strong film slate, and other revenue, which was driven by the large number of 3D glasses sold during the quarter.

First quarter 2010 gross margin increased to $48.3 million, or 66.4% of revenue, from $14.2 million or 42.9% of revenue in the first quarter of 2009. The primary drivers of the increase in gross margin were our DMR and joint venture segments, and the margin derived from new system sales was strong, though it was somewhat masked when you blend in the digital upgrades.

First quarter selling, general, administrative expenses, excluding the $8.7 million charge from variable stock compensation was $10.8 million, which was flat to last year's $10.8 million. SG&A expense on a percentage basiswas 14.8%of revenue, compared to 32.7% of revenue in the first quarter of 2009. This year we recorded a gain of $300,000 from unhedged forward contracts and foreign exchange translation adjustments, compared to a loss in last year's first quarter of $1.2 million. Reported selling, general, administrative expenses was $19.5 million for the quarter, compared to $10.9 millionlast year.

As we have discussed on past calls, the variable stock compensation charge was primarily due to stock appreciation rights. Our share price at quarter end was $17.99, a $4.68 increase above our closing price of $13.31 at the end of the fourth quarter. As a reminder, every one dollar increase or decrease in our stock price results in an impact of approximately $2 million on our reported, result based on the number of vested shares at quarter end. As of March 31, 2010, approximately 1.8 million vested variable stock shares were outstanding, and we continue to expect that pool to decrease to approximately 1.5 million by the end of 2010. As we have mentioned in the past, we have not granted any stock appreciation rights since 2007, nor to we intend to. We are internally estimating that underlying SG&A dollars, excluding any impact from variable stock comp, may increase by approximately $5 million versus last year due to the strength of the Canadian dollar versus a year ago. And we may also put some SG&A dollars towards new business initiatives.

R&D increased to $1.2 million in the quarter from $547,000 in last year's period, reflecting ongoing investment in our digital projects business as well as new business initiatives. We continue to expect R&D expense to range between $6 million and $7 million in 2010.

Our backlog at quarter end consisted of 156 systems. 100 were sale and sales-type lease systems valued at $123.2 million, and 56 were joint venture arrangements, which carry no stated backlog value. This compares to a total backlog of 190 systems at the end of last year's first quarter, which was included 101 sales and sales-type lease systems valued at $135.6 million and 89 joint venture arrangements. As Rich mentioned, we now expect 40 to 45 joint venture system installations from backlog in 2010, with the majority of those opening in the second half and 15 to 20 sales-type lease installations, excluding digital upgrades.

Turning to the balance sheet, we ended the quarter with cash and cash equivalents of $23.5 million, compared the $18.7 million at the end of last year's first quarter and $20.1 million at the end of 2009. We also paid down $10 million of our bank debt during the quarter, resulting in net debt of $16.5 million as of quarter end, down from $30 million at the end of 2009 and $161.3 million in the same year ago period.

To sum up we're very please we had our strong start to 2010. Let me now turn it back to rich for final comments

Thanks, Joe. So to quickly wrap it up, we're very pleased with our first quarter financial results, which are a reflection of what can happen in our business when you combine compelling titles with our growing theater network. While we are pleased with the financial results of Avatar and Alice, the movies are generating longer-term dividends for us, most notably theater signings as well as securing future titles. We're pleased with the signing activity we are experiencing here in the early part of 2010, particularly in international territories, some of which are brand-new, and which overall represents our biggest opportunities for network expansion. We're well positioned for long-term growth and look forward to updating you over -- on quarters to come. With that we would like to open it up for questions.

Thank you. (Operator Instructions). Your first question comes from Richard Ingrassia from Roth Capital Partners. Please go ahead.

Thanks. Good morning, everybody.

Hi, Rich.

So, pretty dramatic windfall that Avatar brought to the Company here. I suppose no one should be surprised that you're plowing some of that cash into the business. So could you say a little bit more of what kind of investments you would consider, or perhaps have already made, with what you gathered on Avatar?

Yes, I mean, Rich, for example, we announced on the last call that we're launching this portable theater, which is an inflatable structure, very very large, that you could use for a variety of purposes. Whether it would be for special screenings of Aftershock in rural China; or whether it would be a theater at Comic-Con, the comic book convention, which has become key to the movie industry, in San Diego; or whether it's a premier in Central Park; or whether it's a showing of Avatar in India. And the IRRs on that at least model out very high, certainly consistent with the IRRs on our regular theater deals.

And that would be one example, where we're investing in that. As a matter of fact, on my recent trip I discovered there was a lot of interest in that, so that would be a supplement to the way we're growing the Company. Another example would be in our cable channel, which we've talked about before, where we're going to partner with Sony and with Discovery. Other examples is some day you may see an IMAX 3D very, very high-end home entertainment system. Things that are very consistent with our brand that provide kind of this awe-inspiring entertainment, emotional connection with audiences and give us new places to go with our brand than we've gone about.

Thanks, rich. And say a little more about the revenue share on DMR in the quarter. I think it's important to explain how this percentage varies by release, and how it can be impacted by one time items. Some of the stuff that Joe mentioned. And maybe address your expected DMR revenue share on the Warner deal announced yesterday.

Yes, let me start with that. The Warner deal is completely consistent with our revenue share historically with Warner Brothers. And there was a misstated analyst report. Certainly they didn't call the Company. SoI don't know where they got their information, but let me be clear. It's on the same terms as the past deals we've done with Warner. There is a little tweaking around the edges, because we're in this transition from film to digital over the next couple of years. And just to give you a perspective on that, we only have 28 MPXs that is have not been upgraded yet. So we are pretty far through that transition. And on some of the print issues, IMAX has the election -- at our election -- to fund prints and recoup them on some formula, so the economics are identical. End of story.

And from -- we've said before that film revenue will vary DMR from 10% to 15%, depending on a specific film. In the case of Avatar, it was the lower end of that range, and there were really a couple of key reasons for that. One was China was kind of crazy on the revenue side. We did, I think, $24 million on 13 theaters in China. And in China, because of the take of China film and the way distribution works there, we get a lower percentage of the fee. A second thing was, the deal was quite anomalous, because everyone knew the numbers might be very high, so at some level we offered some kind of a print rebate for a portion of the cost of the prints, which was $60,000 each. So again, since the network is converting completely to digital and this was a home run provision, the results were somewhat skewed there. I'll remind you that in the second quarter last year our percentage was 14%. And I think, as a matter of fact, I should make this clear, under the Warner deal and other deals we're doing, in quarters it may be higher or may be lower than the mid-points of that range.

And, Rich, just to add on the point that was just made on the prints, normally when we fund prints you would see them down in cost of sales. This time, because of the nature of the arrangement, they were treated as an offset to revenue, which skews your margin a little as well. (Inaudible - multiple speakers) percentage.

Right, okay. Thanks, Joe. And last question here. Beyond the movies announced as locked, if you will, into the IMAX domestic release dates on this new Warner deal, give us some idea, Rich, of how the process would work if say you're negotiating with Paramount or DreamWorks or Disney for a film in 2011 and Warner comes to you and says well we have this.

And who comes to us? I'm sorry, Rich?

Warner Brothers comes to you and is interested in a film in a slot in a similar time frame.

The way the agreement works is that five of the pictures are locked in by both of us, as long as the release date is met. So Harry Potter 7B, when it comes out -- if it comes out on that date, that is it. Warner has that slot, and it's five of the 20. The other 15 -- one way I think of it, Rich, is kind of a letter of intent on both sides, and that would mean -- so, if -- to make this up, if someone comes to us with a blockbuster movie for next May and Warners hasn't yet green-lit one of the movies that was supposed to go there, we're going to do the blockbuster movie.

If Warners has green-lit the other movie, we'll sit down with Warner Brothers and we'll say to Warner, hey, what is the release date on that one, we have this other movie that we're working on. And we'll try and work it out with them in some way. But there is no commitment on either side to do it, and it's a good jumping off point. And I don't want to be too long winded about it, but I think one trend you'll see is working together around release dates to accommodate the IMAX window. So obviously we have a lot of other pictures we're talking about for 2011 that we have not released yet, but I think it represents an attempt to work together with the studios to fit in as much as possible while respecting the studios' rights. And I think it just says, with Warner, we're going to try to work with them to make it work.

Got it. Thanks.

Thank you. Your next question comes from James Marsh of Piper Jaffrey. Please go ahead.

Hi, guys. I've got one international question and then one related to Iron Man. On the international side you mentioned you had nine screens so far in Japan, and it is the second largest box office market in the world. Help us understand how you see that market evolving over the next few months and years. I think it's kind of interesting. In most markets you go with the market leaders, with the exhibitors. Here you're going with one of the upstarts, I guess, in my view. Maybe you can talk about that, and then I have a follow-up question

Sure, James. Thanks. As you know, I was just there last week, and I spent time not only with our clients, but with virtually all of the other major exhibitors in Japan. And Japan, as I think most of you know, is a country that is somewhat slow to change. So there wasn't a multiplex built in Japanuntil Virgin built the first multiplexes. And then once the first multiplexes succeeded, Virgin as a matter of fact got acquired in Japan, and there were more multiplexes built. And I think we're seeing somewhat of a similar phenomena.

Tokyu opened these four theaters, and the results are kind of off-the-charts positive. For example, one of the Tokyu theaters in Kawasaki is open less than a year, and it's done over $6.5 million to date. So, I mean, it's just a crazy number in the IMAX -- in a retrofit theater. So Tokyu obviously knows its results, and we have a good relationship with them, so they wanted to protect themselves in certain sites and locations. And we agreed to do that with them, because they were first, and they were the loyal customer. With that said, the other exhibitors are aware of what the Tokyu results are, and I would be surprised in time if you didn't see activity coming from them. But it's a more measured place than some other countries.

Okay. That's helpful. And then just two quick questions on IMAX -- or pardon me, Iron Man here. One, Joe, the funding of the prints -- the additional prints there, is that going to be the same accounting that you had in the first quarter related to DMRs?

No. No, it won't be. It will be our traditional accounting

Okay. Good. And just related to that,do you guys plan to show additional show times of Iron Man 2 to try to equal demand?

As you know James, it's not our decision. It's the exhibitor's decision. But from what I've heard about the tracking of Iron Man from people who have seen it, I expect it to be, if not a record, a near record kind of opening weekend. I'm not talking about IMAX. I'm talking about domestic. And I would be really surprised if the exhibitors didn't go to extended show schedules. That is what I would expect. Great. Thanks very much, guys.

Thanks, James.

Thank you. Your next question comes from Marla Backer of Houston Square. Please go ahead.

Marla Backer with Hudson Square. A couple of questions. First of all, obviously your getting a lot of interest now from Hollywood studios. When you're speaking to the studios, when you were discussing the Warners deal, do you talk about the potential for moving some of the content to the cable network down the road once the 3D TV network is launched?

No, Marla, and the biggest reason would be it would be premature. We have not even finalized the deal. It's still in the letter-of-intent stage, and while I expect to finalize the deal, until it's done it's not done. And I think -- and we have partners in it, so that is something that we would not do unilaterally.

And when you're discussing some of the film deals -- there was such high demand for Avatar and for Alice that you did midnight showings. How much flexibility do you think you have now in terms of keeping a film on screen for longer than you precommitted if there is increased demand like that? Are you seeing your flexibility going up?

I do, Marla and I'll answer kind of in two ways. As part of the trip I was recently on I was at Odeon in England, and they were playing How to Train Your Dragon, Alice and Avatar all at the same time, and they gotten the studios to agree to that. And I think internationally there is some history of that kind of cooperation, and I think domestically you're start to see, we're playing Dragon now, and as I think you know, AMC was playing after Avatar at midnight shows, and before that Disney was showing midnight shows of Alice in Wonderland. So think the studios have been much more open to it. I think they realize that what goes around comes around, so to the extent they are flexible someone else will be flexible for them. And I was little obtuse in my comments, but I'll try and make it clearly. When I said with all of the product in 2011, there will be some flexibility on scheduling. I think what will happen is it's likely the studios will work together in some way, in a more cooperative way, so that maybe the exclusive period will be shorter, but they will get shows during the next film. And studio will do the same thing for them.

Okay. And my last question. You've already answered it, but to make sure I understood. The 3D TV joint venture It's still at MOU stage. Have you and Sony and Discovery ironed out any more details since the last time we discussed this.

The answers yes. We've ironed out a lot of details, and if you ask my guess, I think it's going to happen. But until it's done and all of the issues are resolved, it's not done.

Okay. Thank you.

Thank you. Your question comes from Steve Frankel from Brigantine Advisors. Please go ahead.

Good morning. I wonder if you might give us some more detail on the domestic deals you recently signed with regional players. How many screens are playing with those?

I think there are a total of three deals in the first quarter. And those are sales, sales-type leases. No JVs there.

And then --

And then there's a [hand] --

And then the one with Salt Lake City is one upgrade and two new theaters. Also a sales, sales type lease

Are there any plans to enter JVs with some of the larger players?

We're in discussion with some of the larger region players about JVs, as well as with our traditional partners about expanding their commitment. Certainly.

And that was going to be my next question. Where are you in discussion with AMC and Regal about backfilling in some of these zones with additional screens.

We're in discussions.

And would you anticipate some kind of announcement between now and the end of the year?

Between now and the end of the year? Yes,I would anticipate some kind of announcement between now and the end of the year.

Okay, great. Thank you.

Thanks.

Thanks, Steve.

Thank you. Your next question comes from Mark Argento with Craig-Hallum Capital. Please go ahead.

Hi, good morning.

Hi, Mark.

Can you provide a little granularity into -- I know the guidance for the 40 to 45 JVs and 15 to 20 sales, sales leases. Does that include the digital upgrade in those numbers?

No. It does not.

Okay.

And that's, Mark, just to be clear, that is out of backlog. So we had 41 signings in the first quarter. So obviously the guidance went up because of the additional signings went into backlog. And we're not going to try and predict what we're going to sign and install during a year or during a quarter, but given the pace of activity, we hope it's more than that.

Sure. Okay. That's helpful. And then of the -- you said you had 28 MPX systems that you have not yet upgraded to digital. What would be the expectation there in terms of getting those upgraded?

Actually, obviously we operate on a budget, and during the first quarter the amount of upgrades we signed was much higher than we had budgeted for the quarter, and even this quarter I think we're ahead of budget also. So that is actually going pretty well. It's hard to predict exactly when it would happen, but using the generic term, and I'm sorry, I'm not trying be evasion, but Ithink you'll see it happen quickly.

Sure. Okay. And is it -- I'm still trying to understand some of the technology issues. I know on some of the really big theaters that you guys have,is the digital quality not where it needs to be yet, so they still have remain film, or could you cut them all over to digital if the capital was there and the time?

It's a question of brightness that holds you back, which is you could do it now, but what makes IMAX is all of these elements that you combine, and brightness is one of them. And we're working on different ways to get the adequate brightness to do the really large screenings, and it's very hard to predict the date and some of this is R&D, and we hope to do this in the next two to three years.

Okay. And lastly in some of these other line items in terms of revenues. I know postproduction was about $2.6 million. Theater operations you touched on earlier. Postproduction, is that for traditional institutional movies, or is there something going on there?

It's third party producers of film, so last year with the credit crunch a lot of productions kind of halted. This year things are back to a level of normalcy, if you will. But that business was a bit choppy and will vary from quarter to quarter.

Sure. And then I know you mentioned the other category. You guys clearly have been selling more glasses. Typical margins are on that, what, 50%? Or how should we think about that?

It really varies, and I would not want to put a percentage on it.

Great. That does it for me. Thank you.

Thanks.

Thank you. Your next question comes from Jeff Blaeser of Morgan Joseph. Please go ahead.

Good morning. Thanks for taking my question.

Hi, Jeff.

Hi. I know you don't give guidance, but can you give us a ballpark or some estimates for Q2 theaters showings for some of your upcoming films? Iron Man, Shrek, Persia, Toy Story 3? Something to go with on a modeling basis?

I mean, I think we feel pretty good about our slate. One tool we use is the Hollywood Stock Exchange, which predicts the first four weeks of box office, so I think their guess is better -- the way it works is internally we put together an ultimate, and that is how we prepare our budget. And as we said, that's why we said How to Train Your Dragon was in line with our internal expectations, but so far to date we're ahead of our internal expectations because we didn't expect to get continuing revenue from Alice and from Avatar, particularly internationally. But that -- and the way that we look at it is we use Hollywood Stock Exchange as one tool. Obviously we see the film. Our film department makes their own predictions, but I think predicting films is like predicting stocks. You cannot be perfect it on. So I would suggest you take your own stab at it, Jeff.

I understand. You would not want to project movies, because that is out of your control. I was thinking more in terms of IMAX theaters. Iron Man you said 250. How should we look at Shrek, Persia and Toy Story in terms of IMAX theaters showing it, and then I'll kind of back in --

I think Shrek will be a similar number,pretty high penetration in the network. Toy Story, it's a shorter run. I'm just -- I'm not sure, and I don't want to misspeak, Jeff. Certainly there will be some of film prints will be in there. I don't know if it will be the full network, but it will be a pretty robust run. Twilight I think also will be a fairly robust run. And what am I leaving out there? Prince of Persia's is international only, and I think that is a territory by territory basis, and I just haven't heard where Disney is at in the distribution pattern now, so I don't know.

Okay. And I know it's early and you may not have any feel, but any impact from the increased ticket prices in terms of revenue? And maybe the concession portion that you get on your end within the joint ventures.

Yes, it's hard to say, and as you said, it's really early. In my gut I don't feel one right now. We have not seen a big tail off in demand. And as I said, again we have only our first benchmark, one day from international markets, which was in France. It will be very interestingin 2D. I mean, a lot of people think of IMAX as 3D, but if you get back and look at the 2009 film slate, most of our movies were 2D. And in fact Iron Man, Twilight, Inception; those are 2D. So I think we're in a territory where we're learning, but I would be surprised especially with the shorter runs. I think maybe if you have longer runs, Jeff, that it might be more elastic. The price demand. But I think when you have these shorter windows that we have that people that want to see in it IMAX are going to see it in IMAX, but we'll see.

Okay. And then finally, if you have handy, do you have the joint venture gross profit for the quarter?

It's right in the press release in the back. Hold on a minute.

Oh, it is? Then I can look it up. I apologize, I missed that.

$16.8 million for the quarter

Thank you very much.

Thanks, Jeff.

Thank you. Your next question comes from Aravinda Galappatthige from Cormark Securities. Please go ahead.

Thanks very much. Morning, guys. I just wanted to understand the digital upgrades a little bit better. I guess on my count, it's probably 140 nondigital commercial screens out there. And I think you mentioned MPX systems are 30. How much of the overall film-based systems do you think would digitize over time, or is it only the digital systems -- the MPX systems that are being upgraded right now.

Well, Joe's looking at the numbers for you. But while he is looking that up, many of the SRs are upgrading as well as. Not only the MPXs. And for those of you who haven't been around long enough, I mean, we -- in the film world we have three systems; a GT, an SR and an MPX. And the MPX being the multiplex retrofit, so as I said, there is about 30 of those left. We're in the process of doing a number of the SRs, and then it's the GTs that are two to three years away.

But that is a smaller problem than you think,because those tend to be very large theaters with a lot of seats, so they are very high grossing boxes. So think Sony in Lincoln Square. So think the BFI in London. Think of Universal CityWalk. The Metreon. So the studios are willing to provide prints there for a longer period of time, because the grosses are so high in those theaters. So not to say it's not important to do that, we will get there. But it's more important to get the more marginal grossing theaters converted over quicker. Joe, why don't you --

Yes, I would say, Arvinda, you got the 28 MPX units, and those are certainly -- this would be appropriate. You also have 47 SRs, which there will be a subset that which can be converted. And then we have 88 GTs, and as Rich said, many are not a problem. And this really goes to the point that Rich mentioned earlier, and that is a digital solution for the bigger theaters at sometime in the future. The rest of the screens, if you look at it, are flat screened or domes, which we really don't have a solution for --

Yes, and those are not playing commercial product, to be clear.

All right. Just to follow up on that,what are the -- what is the average selling price your getting for the digital upgrades? And what is the rough margin that you've been getting, particularly for Q1?

First of all, before Joe answers that specifically , we made a strategic decision to make a low or no margin on our digital upgrades. And the reason we did that is we wanted to preserve our DMR revenue stream, and we wanted to accommodate the theater owner so they could continue to get prints when the studio was cutting back on providing prints to a more marginal theaters. So that was our strategic decision, which is one reason why the upgrades are going quicker. And, Joe, why don't you answer

Generally the cost of an upgrade is in the $350,000 range, and that is pretty much where the sales price is targeted. Maybe a little higher or lower, depending upon the age of the screen or the nature of the client. But it's basically -- the way to look at that is a break-even business right now, and that's why when we're giving guidance in terms of installations we have pulled those number out.

Okay, I'll seen squeeze one more in if you don't mind. In terms of the JV market size, I think we talked by the before in previous calls. You're looking at 1,000 scenes as your initial target, and if you throw in the backlog, you're close to 500. And obviously 600 of the 1,000 is international. How much of that 600 do you think would be a reasonable JV target?

Very, very difficult to answer, Arvinda. I think you have to really do it on a country by country basis, and a place like Japan I think you can do 50. Some of the European countries like England, France, Germany, Italy, Spain. You probably could average 30 in each of those countries. I just think you have to go through it like that. Maybe in a place like India you do something like in South America, where you are strategic partner and you do a broader deal, where you get comfortable with the risks, because you've got a partner who's accountability outside of India. And those are the kind of things that we're thinking about. So if you want like a rough guess, I would say there is potential of about half of them, but that would be a wild guess, or maybe more than that.

Okay. Great. That's great. Thank you.

Thank you. Your next question comes from Jim Goss of Barrington Research. Please go ahead.

Thank you. A few items. One is you eluded earlier to the first DMR on an international film. I was wondering if over time you would think you have increasing local and regional titles in some of your foreign locations to fill in with some of the bigger blockbusters that come out of America. And also, regarding the thousand IMAX zones, are you having any early stage rethinking of just what that ought to be, or just pursue what you have and then revisit that idea? And then one other thing. Do you think -- I'm thinking if there winds up being an eventual fatigue with 3D with people less willing to pay the premium, IMAX would have less of a risk for that because it has something extra as premium experience. And as you pointed out, a lot of them are in 2D. I'm just wondering how you're looking at the whole concept for the theater industry and for IMAX specifically.

Sure. Good questions. In terms of international DMR, it's really a function of three things. It's the territory, and how dependent on the territory is it on USbox offices versus local box office. So you take a country like Japan, where 50% of the box office is Japanese and 50% is US. So obviously that would be a market that would be more interesting than the UK, where a higher percentage of the box office is US. Second factor is the theater count in that country. So it's no accidents that we're doing it in China first, because we have 27 theaters in China. So we looked to do it in a market where we had a fairly significant critical mass of theaters.

And then third think would be kind of understanding the kinds of movies they make and how the distribution patterns work. So obviously in a country like France, where if you have a big enough market, it might make sense to do it. If it was a love story of two people in a winery, it might not be conducive to an IMAX experience versus more of an event type film. So you kind of have to blend those factors and figure out when and where do you it. But I think if it works in China, and we keep growing in the local markets, you'll see more of that.

Your second question about the 1,000 zones and reconsidering. I mean, to some extent internationally, where we haven't drawn the map, we're giving some consideration. When we drew the zones we were in a film world, and we thought there were six to seven to eight, maybe eight films a year, rather than 14 films a year. And we had a box office, if you recall in our pro forma, about $850,000 per year. And on a worldwide average we've passed the pro forma already for this year. So I think to the extent you have more free hand in drawing the zones, thatis something worth thinking about a little bit. Although I have not drawn a conclusion.

And your question about 3D. I mean I certainly have no doubt that 3D will endure. And we've said this since the beginning. We don't think 3D is a magic bullet, where you can take a bad movie, and you put in it 3D, and all of sudden it has a good box office. But I think if it's the right kind of movie and done the right way, I think 3D will endure and it will have a price premium. And the reasons for that include the new technology for creating 3D, whether it's kind of cameras Jim Cameron invented, or whether it's motion capture, which Bob Zemeckis uses, or whether it's CGI, which DreamWorks Animation and Pixar use. I mean, those are new tools that were not around before, and then it's in the hands of some of the greatest filmmakers in the world. Some I mentioned, whether it's Jim Cameron or Tim Burton or Zemeckis, or Spielberg doing a film, or Jeffrey Katzenberg. So I think people with a -- and I don't mean to leave anyone out, there is a lot more. But to the extent you have people with that kind of vision using these tools, and then you have the projection technology, particularly including IMAX to show it, I think is going to be a special experience. But whether it's going to be 40 movies a year or 80 or 20, that is a harder one to predict and we have to see how that shakes out over time.

Okay, great. And one more thing. You mentioned midnight shows, and it seems likeyou have carved out some additional shelf space. And I'm wondering what sort of attendance and dollars you tend to get at those showings. And is that a way to keep, say, a blockbuster movie around for a while?If so, do they become somewhat cult classics? Might provide additional up charges?

Well, a significant and more growing part of the IMAX audience is what we refer to as a fanboy audience. That would be the audience that would go to see Matrix or Iron Man, and Tron is certainly a much anticipated fanboy movie. So I think you can program in the later slots to that audience. I think it will work less well for family fare than it will work for the other ones. But Regal and AMC have been really smart about how to program their theaters. And they've done a good job of taking the shelf space and maximizing it, and I think they understand, and I think they will do more the of it.

All right, thanks a lot.

Thank you. Your next question comes from Martin Pyykkonen of Janco Partners. Please go ahead.

Yes, thanks. A great quarter obviously. A couple of questions more or less around the JV model, and then I have a 3D home one after that. The gross margin, 89% on the JV, significantly above, and know not a long-term trend. So my question there is what do you feel a sustainable gross margin is on the JV segment? Also the DMR segment, well above average at 83% gross. Going back over -- looking at the last five or six quarters in particular, kind of what was driving that? (Inaudible) question. And then on the international view for the JVs, obviously right now it seems like a lot of what is going on is a rush to build and get capacity. Avatar having been a big driver. I'm just wondering if for the JV deals you have signed outside of those markets, where you essentially don't trust the box office data. And we know where those are. Could a substantial majority of those be a JV deal, when you look internationally as opposed to a sale or lease type sale?

I am going to answer the second question first, and then Joe will answer the first question. I just want you to rotate a little bit your of words rush to build. In fact, remember we're still coming out of the financial crisis, so there is not a lot of new building going on. A lot of mall development got stuck in the middle. A lot of financing dried up, so I think one of the things that makes IMAX particularly attractive is you don't have all of these new screens going up, and you have to figure out a way to get more revenues out of your existing network, and I think IMAX is a good way to do that. And I think that's one of the things that's fueling it. Number one.

Number two, I have to point out that really without Avatar last year our domestic box office and our international box office were virtually identical. And as I said during my remarks, this year our international box office per-screen -- I'm talking per-screen -- our per-screen international box office is higher than our domestic per-screen box office. And I think that is a real driver rather than any individual -- obviously Avatar is part of that, but that followed through, and Alice, and some places it followed through on Dragon. I just want to make it clear, it's not really one movie. It's a lot of what is going on. But in the right countries, we would hope to drive the business to the JV model, and that certainly is our intention. And in the first quarter that proved true. And a lot of the discussions we have going on right now are JV discussions. So we're trying to steer it that way. And, Joe, his other question?

Yes, in terms of the JV margin, a big component of our cost -- what hits cost of sales is the depreciation on the equipment. And that is basically a fixed cost, so when you have a high-volume quarter like this, the margins are going to go much higher. Now when we did the annual pro forma, based on $800,000, and we then updated it to $1.1 million. Your annualized normalized margin was in the mid-60s to 70% range when you averaged it out. But you could be higher or lower, depending upon business volume. This was a high-volume quarter. A large percentage of our costs are fixed,so you're going to get that result.

And it's pretty much the same answer to the DMR front. That is the importance of widening the network is, when we go through the DMR process for a film, that $1 million or $1.5 million we spend per film is a fixed cost. So when you have a high-volume period these are the types of margins that you can generate.

Okay. And then on 3D in the home, I know this is a longer term opportunity. You are obviously very well positioned for what might develop. You mentioned, Rich, about the high-end home entertainment system. I'm curious, as you're thinking of it now, is that something we would more likely see where you actually deliver the product? Because you deal with your audio technology in the theaters today. Or would it be more of a licensing-driven model where you would license the IP and we would find it in Best Buy's home theater kind of room? And then secondly, on this 3D channel, I know all the details have to be finalized, but as you see it now, is this mostly a one-time or say for a series that you might render, say, Discovery's content from 2D to 3D? Get a fee for that? Or is there is any kind of revenue share, essentially even on the affiliate side, as the cable channel gets paid by the cable operators?

On your -- the second part of your question, 2D to 3D, we do have provisions in the agreement that provide if there are conversion services. We have the opportunity to provide them. And we're hoping that that will prove to be a revenue source in the future. We'll see.

On your other point I think we'll try most of our model to be either licensing or joint venture model, so I don't think our strength is manufacturing on a wide scale. So we may provide other values, such as your example of very high-end home entertainment system. That is the case where you're not delivering tens of thousands of units. But any kind of mass product, I'd be really surprised if we were involved in the manufacturing in any way.

Okay, thanks.

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

Hi, good morning. Just a quick question, thinking about as you look into your schedule for next year. Obviously, given that the growing IMAX screen base has made it pretty easy, or easier I guess, to get a good box office initially when the movie comes out. Have you thought about what becomes the optimal number of weeks that you would want a movie to show to give you more flexibility, and is that different from what a studio typically wants the number of weeks to be?

Eric, I think it's completely depends on the film and the time of year. Right? So if it's more of a shoulder period year, where there is less competition among films, I think we would be more amenable to a longer run. I think if it's around Memorial Day or July 4th, obviously there is more competition for the slots. If you asked me in the abstract, I think the ideal for IMAX would probably be two or three weeks, depending on what the film was. And as I mentioned earlier, I think there would be some kind of accommodation between the studios where hopefully in the future during those high-congestion periods the studios will accommodate each other.

And on that point, I know you kind of ran into it with Avatar and Alice and Dragon . Have the studios been fairly accommodating to kind of give up some times?Obviously with dragon at midnight, you're probably not giving up many kids going there. But have they tended to kind of work together and give up time slots and kind of help each other

Increasingly so, Eric. I think if you would have asked the question a year ago, I would have said no. But I think that they understand that, as I think I said before, what goes around comes around. And I think their understanding, hey, if I give this studio the ability to play a midnight during my run, they will give me the ability to play a midnight during their run. So we're definitely seeing more cooperation, and as we go into 2011, and we start to talk through dates with different of the studios, I think they are showing some of flexibility.

Perfect. Thanks, guys.

Thanks, Eric.

Thank you. There are no further questions at this time.

Okay, well all I would say is thank you very much. We've been saying for years that, as we transition to digital and JV, we're going to build a network that was not only going to be good for consumers, but that will be a very good financial and business model. And I think the film results in the first quarter, we've proven that out. And then I think, given the success -- the amount of which consumers are enjoying the IMAX experience and connecting with our brand. Given the financial returns to exhibitors and studios, we're pretty much off track and feeling good about things. And we want to thank our employees particularly, but also certainly our shareholders for your support. And we'll talk to you in a couple of months. Thank you.

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