Imax Corp (IMAX) 2010 Q2 法說會逐字稿

Good day, and welcome to the IMAX Corporation Second Quarterly Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Heather Anthony, Vice President of Investor Relations. Please go ahead, ma'am.

Thank you, Operator. Good morning, everyone. Sorry for the delay this morning. Thanks for joining us today on our Second Quarter 2010 Conference Call. Joining me is our CEO, Rich Gelfond, and our CFO, Joe Sparacio. Also with us is our Senior EVP and General Counsel, Rob Lister.

This morning, just so you know, we've loaded a PowerPoint presentation in PDF format onto the IR section of our website that's attached to the webcast link to help illustrate some points included in today's discussion. Before we begin, let me remind you of the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking in that they pertain to future results or 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 of management's use of these measures and the definition of these measures are contained in this morning's press release. Reconciliations to adjusted EPS and adjusted EBITDA are included in today's press release. The full text of our second quarter release, along with the supporting financial tables, is available on our website at www.imax.com. Today's conference call is being webcast in its entirety on our website.

Today, Rich will provide a brief overview of the second quarter and the trends we are seeing in our business, and Joe will review our Q2 financial results in detail. With that, let me now turn the call over to Rich Gelfond.

Thanks, Heather. The second quarter of 2010 leveraged our strong first quarter box office performance into another record quarter for theater signings, which should propel significant network and EBITDA growth in 2010, '11, and beyond. Through the first half of 2010, we signed deals for three times as many systems as we did for the whole year in all of 2009, and through today have a backlog which should translate into commercial multiplex network growth of over 50% when installed. This, coupled with our promising 2011 film slate, is providing us with an increased level of visibility into our future business. As Heather mentioned, we've prepared some slides, which you can find in the IR section of our website, which help to illustrate and quantify the value inherent in our year-to-date theater signing activity.

Before putting this into context, let me give you a brief overview of the quarter and then Joe will give you more detail. We experienced strong top line growth across all our key business segments, resulting in total revenue of $55.6 million for the quarter, up 38% compared to $40.4 million in last year's period. We generated operating cash flow of $29 million compared to cash breakeven in last year's second quarter.

Our trailing 12-month EBITDA increased by 172% to $92.8 million, versus the $34 million in the comparable period last year. We retired another $15 million of bank debt in the quarter, putting us on a net debt versus debt positive basis of $12 million net cash. And net income for the quarter was $13.3 million or $0.20 per share, compared to $2.6 million, or $0.05 a share, last year. Excluding variable compensation, net income increased 35% to $8.4 million, resulting in EPS of $0.13. Items such as negative foreign exchange comparison versus last year and expenses associated with new business initiatives and a significant level of new theater deals signed to date negatively impacted the second quarter by about $0.03 a share, which Joe will review in more detail.

In the second quarter, we signed deals for 57 theater systems, compared to seven in last year's second quarter. Through the first six months, we have signed deals for 98 systems. That's 10 times the level of system signings as compared to the same period last year. And since quarter end, we have signed deals for another 20 theater systems for a total of 118 systems signed year to date. Based on our signings to date and the continued discussions we're having with exhibitors, our belief is that we are likely on pace to exceed our previous system signing record - 144 systems in 2007, 100 of which were part of our December 2007 JV deal with AMC.

What is particularly gratifying about all of these signings is the diverse mix of deals we are seeing from all around the world. While many are new customers approximately 80% have been with repeat customers. We believe this demonstrates that once clients are in the IMAX business and see the impact that IMAX can have on their complexes, they are often eager to reinvest in additional locations or upgrade to digital. We tend to see this in the Hollywood film business as well, be it Chris Nolan, Tim Burton, David Hayman, once they're in the IMAX business they tend to enjoy the experience, understand the economics, and come back for more. As a result of these signings, our backlog at quarter end totaled 187 systems, which is up sequentially versus Q1 and year-over-year.

In addition, this morning we increased our installation guidance for 2010 by roughly 20% and we now expect to end 2010 with approximately 362 commercial multiplex systems, up 26%, compared to year end 2009. We have also provided our current outlook for system installations in 2011, based on our current backlog as it stands today. Our signings are providing the catalyst for continued network expansion which should ultimately lead to continued EBITDA and recurring revenue growth, which brings me to slide five of the presentation online in the IR section of our website.

I would just like to take a couple of minutes and walk in detail through what our 118 system signings so far this year mean for IMAX. We thought it would be useful to break it down, because we're not sure it's widely understood how we generate not only upfront revenue, but recurring revenue from system sales. Very simply, every new sales type lease system we install, typically generates a little over a penny in one-time earnings. In addition, as a result of ongoing DMR and maintenance revenue associated with each IMAX theater opened under a sales type lease, we estimate that we receive annual recurring margin of approximately $160,000 per location, depending on where you peg per--your gross box office per screen and the location in the world. In this example, I'm using the $1.2 million that we generated in 2009. For every JV we install, we estimate that each one generates approximately $400,000 in recurring margin. Again, assuming $1.2 million of gross box office. As far as JVs go, for each IMAX theater open under a JV agreement, we estimate that we receive approximately $400,000 in recurring margin, again, assuming the same $1.2 million of gross box office.

Page five of the slide shows you how these estimates work in connection with our 96 new theater signings year-to-date, the 50 new theaters--58 new theaters under sales type leases, and the 38 under JV arrangements. The remaining 22 systems, including in our 118 signings to date, are digital upgrades and those are transacted at basically breakeven margin for us. However, digital upgrades are very important to us, the studios, and our customers, as they will be able to participate in an increased amount of DMR titles, which means more gross box office for them and increased DMR fees for us.

Now, to make an obvious point, we're in the movie business. Some movies will outperform, some will disappoint. There is inherent seasonality and volatility in the business. Theaters don't all open to the public on January 1. However, if you look at the past couple of years, you can draw some conclusions as to what we believe are reasonable estimates for gross box office per screen performance. For example, $1.2 million was our per screen average in 2009 when we had a very weak first quarter. We are actually at $1.3 million on a per screen basis for just the first half of 2010. However, if you stripped out Avatar completely and assumed nothing in its place, our first half per screen average was $645,000, which on a straight run rate basis would get you to $1.3 million this year approximately without any impact from Avatar or any replacement film from Avatar. So you see there's a basic range based on portfolio theory where you can see our per screen ending up. Now of course, it could be more, it could be less, depending on the film slate that year, but for modeling purposes, it gives you a general idea of where we've come out.

One of the reasons for highlighting this today and for providing some preliminary insight into 2011 is to try and help investors model our business and to understand both the importance of network expansion and about the need to look at our slate as a portfolio, and to understand the various ways in which we're able to create recurring EBITDA on a full year basis. Putting this in sort of different terms, the growth of the network is much more important to us on a go forward basis than the performance of any single film.

We have also recently made further inroads in key international markets, such as Japan and Russia. In Japan, a year ago we installed our first three JV theaters in time for Transformers 2 in June. As I think many of you know, those theaters have performed extremely well. We now have four in operation and nine in backlog, including theaters with Tokyo Cinemas, a new JV partner, United Cinemas for up to five theaters, and one JV with our new partner, Cinema Sunshine.

We're also making significant inroads in Russia and the CIS. Over the course of 2010, we signed deals for 19 systems in Russia, including our announcement for up to 14 theaters with Cinema Park this Tuesday. We expect 27 theaters to be in operation by the end of 2012, making it our third largest market in the world behind the U.S. and China.

We also believe from both the level of signings activity around the world and the elevated box office coming from our international screens, that our previous outlook which called for 1,000 IMAX commercial theaters worldwide, 400 domestic and 600 international, should be increased. And the principal reason for this is China, our second largest market behind the U.S. Our original estimate of 600 international screens only contemplated 90 IMAX theaters in Greater China. While we're still completing our analysis, just given the pace of overall theater complex growth, we believe we could have between 250 and 300 IMAX theaters in China, assuming the rollout of the 40,000 screens the government is targeting, which would bring our international market opportunity closer to 800 theaters rather than the 600 we originally targeted, and our worldwide target to about 1,200 versus the 1,000 we originally targeted.

We believe China's exhibition industry is poised for a period of explosive growth. Today, there are approximately 4,700 screens in China and the stated goal of the Chinese government is to get to 20,000 screens in five years and 40,000 screens in 10 years. We've been participating in this expansion and certainly awareness in demand for IMAX in China is very high post-Avatar, Alice in Wonderland, and subsequently and this week, Aftershock, which I'll discuss in a few minutes.

Given the increased attention and demand for IMAX in China, not only are we seeing more and more exhibitors discussing multi-screen deals with us, like last week's announcement with Jin Yi, which is tripling their IMAX footprint, or the long time partner, Wanda Cinemas, the largest exhibitor in China, which is scheduled to operate 14 theaters, but many real estate developers are similarly requesting that IMAX be part of their complexes.

Importantly, we believe that over time we'll be able to generate increased recurring revenue from Greater China for a number of reasons. First, DMR fees for local content are more in line with what we receive in the States and certainly higher than what was experienced with Avatar, which was unusually low even for China. Second, given our level of comfort working with current exhibition partners, many of whom are observing this market growth in China and seeking ways to penetrate it, we are increasingly looking at our hybrid revenue share model as a way to generate a greater level of recurring revenue from that region.

In addition, we're very pleased with our results opening weekend for the first international DMR title, Aftershock. The film was released on 11 IMAX screens in mainland China and one in Hong Kong and generated more than $640,000 at the box office. Our per screen average of approximately $55,000 for the opening weekend was over nine times the per screen average in conventional theaters. We believe these early positive results bode well for us, as we explore converting other local content in China and elsewhere.

Turning to new business initiatives, during the quarter we finalized our agreement with Sony and Discovery to launch the 3D TV channel in 2011. In addition, last week we announced our Memorandum of Understanding with Laser Light Engines, which as contemplated would enable us to develop larger and brighter digital projectors as part of IMAX's future. Regarding our event theater initiative, which we previously have called the Portable, we are currently testing our first structure and continue to expect to launch it in the back half of the year. And as Joe will talk about in a moment, we continue to spend dollars on other new business initiatives, which we hope will bear fruit in the near future.

Turning to film, during the second quarter we achieved several important milestones. We announced our largest film deal in our history for up to 20 pictures with Warner Brothers. We extended our relationship with Disney with a three-picture deal. Iron Man 2 was our first movie with Marvel, and Toy Story 3 was our first Pixar Disney title. We also extended our notable string of number one movies. We can now say that each of the last 19 films we chose were in first place at the box office on opening weekend.

Looking at the third quarter, we're very pleased with the initial results of our key title for the period, Christopher Nolan's Inception. Through Tuesday the film has generated approximately $21 million worldwide for a per screen average of $84,000. Inception is the perfect example of a film that fits right in our sweet spot and plays to the heart of what we call our secret sauce. Filmmakers who love IMAX understand the format and take full advantage of it to differentiate the IMAX experience. And on August 27, we will re-release Avatar, An IMAX 3D Experience. The release will feature nine minutes of new footage, which we believe will be a draw for fans of the movie, as well as those moviegoers who were unable to see it in theaters.

In the fourth quarter, our two key titles will be the highly anticipated first installment of Harry Potter and the Deathly Hallows from Warner Brothers, the fifth Harry Potter title to play in the IMAX network, and Disney's Tron Legacy, directed by Joe Kosinski, another picture which will be differentiated for IMAX by taking advantage of our aspect ratio in certain sequences resulting in full screen immersion. We believe both pictures will play nicely to our fan boy audience.

Looking to 2011, we continue to fill out our film slate. We have eight titles lined up so far for next year, as compared to four at the same point last year. Key titles in 2011 include Disney's Tron, which will continue from December, Mars Needs Moms, produced by Robert Zemeckis, whose films have historically performed well in IMAX, such as The Polar Express, Beowulf, and A Christmas Carol, Zack Snyder's Sucker Punch. Zack Snyder directed 300 and Watchman, both of which played well to IMAX fan boy audiences. I should mention that both Tron and Sucker Punch were receiving a lot of buzz at Comic-Con, the convention, in the last few weeks.

Disney's next installment in the Pirates of the Caribbean series, starring Johnny Depp and Penelope Cruz, Disney Pixar's Cars 2, which we're very excited about given our very strong showing in Toy Story 3. Our opening weekend per screen average of $47,000 for Toy Story 3, was the highest opening weekend per screen we've ever generated on a CGI animated picture. And of course, the final installment of the Harry Potter series.

We are in active discussions with literally every studio on a number of titles to fill out the 2011 slate and beyond. And as I mentioned, we've never had so many titles announced for a coming year as we do so far in 2011.

To quickly wrap up, we believe we are poised to deliver significant growth in 2010 versus 2009 and appear on our way to establishing a very solid foundation for 2011. With that, I'll turn the call over to Joe, who will review the financials.

Thanks, Rich. We delivered strong top line results in the second quarter across virtually all of our business segments. Total revenue for the quarter increased 38% to $55.6 million, compared to 40.4 million in last year's second quarter. Gross box office in the second quarter was 114.6 million, up 36% versus last year. Our global box office per screen average in Q2 was $487,000, compared to $410,000 for the same period last year. Our domestic box office per screen average was essentially even with last year's second quarter at approximately $400,000, whereas our international screens were up dramatically - $613,000, compared to $360,000 last year.

The international screens primarily benefited from the release of Alice in Wonderland in many overseas markets and the incremental international-only release of Prince of Persia.

Looking at our key business segments, total revenue increased 20--total film revenue increased 28% to $20.7 million in the quarter, compared to $16.1 million in the second quarter of 2009. DMR revenue increased 20% to $14.5 million and our percentage as a fraction of gross box office was approximately 12.7% in the quarter. Revenue from IMAX system sales increased 108% to $17.3 million in the second quarter of 2010, compared to $8.3 million in the second quarter of 2009. During the quarter we recognized revenue on six full new theater systems with an average value of $1.6 million, compared to three in the second quarter of 2009, which had an average value of $1.4 million.

We also installed 11 digital system upgrades in the quarter, compared to two in the year ago period. As a result of our aggressive upgrade program, especially of our MPX film based systems, we ended the second quarter with 19 MPX film systems in operation down from 44 MPX systems in the year ago period.

Revenue from joint venture arrangements increased 18% to $8.5 million from $7.2 million in last year's second quarter. During the quarter, we installed four JV systems consistent with our guidance on the Q1 call, during which we referenced that our install activity would be weighted towards the second half of the year. We ended the quarter with 126 JVs in operation, compared to 91 at the end of last year's second quarter. Since quarter end, we have opened another four JV theaters and expect to open a total of 15 to 20 in the third quarter.

Joint venture theaters generated an average gross box office per screen of approximately $382,000 for the quarter, in line with our overall domestic PSA and up 12% when compared to the $342,000 per screen last year.

Second quarter 2010 gross margin dollars increased 31% to $27 million, compared to $20.7 million in the second quarter of 2009. The primary drivers of the increase in gross margin were our JV and system sales segments, which was partially offset by additional DMR costs, including costs associated with the exhibition of eight titles throughout the IMAX network in the second quarter of this year, as compared to showing four titles in last year's period.

On a reported basis, second quarter SG&A expenses were 11.1 million, compared to 12.3 million on the same basis last year. Our reported SG&A for the second quarter reflects a $4.9 million benefit from variable stock compensation due to a $3.39 decrease in our closing stock price at quarter end as compared to the closing stock price at the beginning of the quarter. This compares with a $3.7 million charge in the comparable period last year. Approximately every $1 increase or decrease in our stock price results in an impact of approximately $1.5 million on our reported results, based on the number of shares vested at quarter end. You'll note that this impact has declined from $2 million for every $1 movement in stock price as the number of stock appreciation rights has been reduced.

As we have mentioned in the past, we have not granted any stock appreciation rights since 2007, nor do we currently intend to do so. As of June 30, 2010, approximately 1.5 million vested variable stock shares were outstanding and we continue to expect that pool to remain at approximately 1.5 million shares by the end of 2010.

Excluding the impact of variable stock compensation from both periods, the year-over-year increase in SG&A refers--reflects certain items discussed in our prior calls, such as the relative strength of the Canadian dollar versus a year ago, and investment in new business initiatives. Breaking it down further in the second quarter we experienced a $3.4 million variance from foreign exchange, resulting from a $900,000 loss at the end of the second quarter this year, in comparison to a foreign exchange gain of $2.5 million last year, which you may recall.

We anticipate the FX impact in the second half of the year should moderate. However, given the recent rise in the rates, we now project the year-over-year impact to be approximately $6 million. It could be a bit more depending upon where rates go. We also incurred a $700,000 increase in professional fees, which includes work relating to new strategic business initiatives, such as our 3D TV JV with Sony and Discovery. We also incurred an increase of $600,000 in travel and related costs commensurate with the very high level of theater deals that we are signing, which has significantly exceeded our expectations.

For the first six months of the year we reported net income of $39.9 million, or $0.60 per diluted share, compared to a net loss of $80,000 last year or breakeven for the same period last year. On an adjusted basis, net income for the first half of the year was $43.7 million, or $0.66 per diluted share, compared to $3.7 million or $0.08 per share last year. Our backlog at quarter end consisted of 187 systems, 117 were sales and sales type lease systems valued at $156.1 million, and 70 were joint venture arrangements, which carried no stated backlog value. I wanted to mention the backlog as of June 30 also includes four sales type lease upgrades.

Turning to the cash flow statement, we generated operating cash of $28.8 million in the second quarter, compared to a cash breakeven position last year. For the six months, our operating cash flow was $40 million, compared to $2 million in the same period last year. Our balance sheet remains in very good shape. We ended the quarter with cash and cash equivalents of $37 million, compared to $20 million at the end of December. We also paid down approximately $15 million of bank debt during the second quarter, and a total of $25.2 million in repayments to date.

Looking ahead to Q3, gross box office to date is $41.8 million, compared to $29.8 million at the same point last year. In addition, we currently expect to install between six and eight new sales, sales type lease systems, excluding upgrades, and as I mentioned, 15 to 20 joint venture theaters, four of which have already opened in the month of July.

For Q4, we expect to install 12 to 15 new sales, sales type lease systems, excluding upgrades, and 16 to 20 joint venture systems. All of these installations for Q3 and Q4 are from our current backlog. As a reminder, installations can slip from period to period, usually for reasons beyond our control.

Our full year R&D expense guidance remains unchanged at between $6 million to $7 million for 2010. Looking at our preliminary assumptions for 2011, based on our current backlog, we expect to install at least 30 to 35 sales, sales type lease systems, excluding backlog, and at least 25 joint venture theaters next year. Again, this is based on our backlog as it stands today and does not include the potential impact of future signed and installs. I would also caution that installs can and do slip from period to period, often based on circumstances outside our control. We believe the combination of a robust film slate, the increased size of our commercial fleet of theaters heading into 2011, and the continued network expansion in 2011 will result in EBITDA growth versus 2010.

There is one number I would like to point out on the call related to the press release this morning, on page six at the bottom of the income statement in the supplemental data. Depreciation and amortization stated for the three and six-month periods should be reversed, and that will become pretty apparent when you look at the schedule. The numbers are fine. It's just the columns that they're in should be reversed. With that, I'll hand it over to Rich.

Thanks, Joe. In closing, we put together a solid second quarter that featured top--strong top line growth, significant cash generation, and key milestones across our organization, which we believe will translate into long term growth for our company and our shareholders. We're doing this on many different fronts, signing multi-picture deals with studios on traditional terms for the biggest blockbusters, signing up new theaters at a record pace, which are balanced between JVs and system sales, each of which has its own differing economic benefits, planting seeds in the area of new business development, so we can continue to bring the IMAX brand to consumers in new ways, exploring local language DMR opportunities, like Aftershock, which further strengthens our brands in international markets, yields network growth and attractive DMR fees, and investing in research and development to ensure that the IMAX experience continues to deliver awe inspiring, mind blowing experiences.

With that, I'd be happy to open it up to questions.

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

Thanks. Good morning, everybody.

Good morning, Rich.

Joe, just quickly on new business initiatives, the spending there for the quarter. Can you give that number again and maybe give us some perspective on how much you expect to see in SG&A on new initiatives in the second half?

Yes, I'm going to answer it, Rich. It was 600,000 was the number Joe gave you. I mean, we have a number of things going on, including some things that if they happen could be significant to IMAX. So it's very difficult to answer that question. Some of these initiatives, Rich, are kind of in the middle of going on, and if they go on to their conclusion, it could be a relatively significant number, like $2 million or $3 million. If they get nipped in the bud, it will be a lower number than that. So I think if you see a large number I think you will see a result coming out of that large number. If you don't see a large number, I think it will mean that these initiatives really didn't progress. So I think it's a little bit of a nuanced answer.

Okay. So I mean, the point--I guess what I'm hearing is that we should allow for maybe more rather than less of your stronger cash flows now to be applied towards these opportunities as you test them and maybe go forward on some.

Yes. And the last thing I want to do is promise or hide something that doesn't exist. But there are some very significant exciting things that we're working on and this has been a very good year for us and that gives us the luxury to chase them down and hopefully put them together. If they're not going to come together, we'll spend less money. But certainly, there is a scenario where we spend money on the opportunities and it doesn't come together. But that's not the way we're trying to manage it.

Got it. Okay. And Rich, give us a high level view if you will of the whole exhibition landscape now with RealD being capitalized of course, and 3D being rolled out in earnest over say the next 18 months, and then also, the--your cinema partners rolling out in some--in limited fashion still an enhanced theater. Just maybe your experience in speaking to them and to the guys at the top of the food chain in Hollywood about where still IMAX sits in that environment.

Rich, I'll start it--the typically glib conclusion, which is the results somewhat speak for themselves. I mean, we've never had a year as good in signings films for next year as we've had so far. As I said on the call, we're talking to every major studio. I can't disclose it for obvious reasons, but yesterday, Greg Foster, our head of Film, got a call from a well known star saying, you've got to release my movie in August. I mean, it's anecdotal, but that's kind of the tenor of our business. And the calls are no longer outgoing from us. They're virtually all incoming and people are applying pressure to get our films. On the exhibition side, obviously, I think I repeated the 118 number enough.

But beyond the 118 number, included is the 20 we've signed this month and the tenor of our business in the marketplace is such that I would be really surprised if it fell off a cliff next month. I mean, I think that's the level of activity we're seeing. So that's kind of the numerical empirical answer to your question. Sort of the softer answer to your question is I think that the exhibition community seems--sees room for different choices out there. I think when they want a high end premium experience that's going to attract audiences to their multiplexes and give them some exclusivity vis-a-vis their competition, they're going to go with IMAX. And obviously, that was even demonstrated by AMC, which has their own branded entertainment product, ETX, but still chose to install another 25 IMAX theaters. And I think you are going to see that with some of the other chains that have branded products still being in the IMAX business.

I think they are using their branded products really for two reasons. One would be to put the theaters where they can't put an IMAX, or two, to capture the overflow at an auditorium where IMAX is. And then, I think three, RealD exists as more of a less premium experience, a traditional 3D experience, which commands a premium, but not as much a premium. You didn't ask this part of the question, but I'll answer it because I think it's important, Rich, which is a lot of people have been talking about 3D now doing closer to 50% of the box office rather than 70% of the box office, which it did during Avatar. And we've been completely prepared for that and we've expected that. And the fact of the matter is when Avatar happened, we were the first ones to say every film is not going to be Avatar.

If you look right now, we're playing Inception, which as you know is doing quite nicely. The alternatives to Inception are Despicable Me, Cats and Dogs, which opens this weekend, Airbender. And I think betting on a world that's both 2D and 3D is a bet that's going to pay off very well for us in the long run. So I'm--I think the world has sort of evolved and some of this is prescience and some of it is luck, consistent with the way we've seen it evolving. And of course, it's not perfect, but I think we're well positioned.

I guess I'm trying to get you to address the brightness problem in standard sized 3D, non-remastered, non-IMAX 3D and maybe just relate this partnership you've struck with this equity investment and LLE, because I know that technology and I suspect that--I mean, that's a little bigger deal than most people read in the press release.

One of the things that makes IMAX really special is that it's a lot brighter than other versions of cinema experience. And that becomes really extra important in the 3D environment, because the public wears sunglasses essentially. They're not sunglasses, but they act the same. They block out light. So one of the things that IMAX does and you could think of this in the context of Avatar or Alice in Wonderful, the filmmakers create these beautiful environments, but the lack of brightness kind of because of the glasses dims it out and that's one of the distinguishing features of IMAX, that extra brightness. And LLE, it stands for Laser Light Engine, is a company that has developed a technology that moves us from traditional light bulb technology to using lasers to light the screen and it creates a light--a lot more brightness. And we plan on getting involved really in two ways. One would be to develop a replacement for our larger theaters, like the ones at Universal City Walk and Lincoln Square and the BFI in London, and also to increase the general brightness of our system. So I'm excited about it.

Rich, frankly, one reason I didn't go there when you asked the question is I think although brightness is important, IMAX is about a lot more than brightness. It's about the filmmakers, who are our secret sauce, doing special things, it's about the sound system, it's about the theater geometry, it's about our image enhancer. Brightness is one important component, but the more research we do, we find out the public really doesn't identify us with each piece. They really identify us as IMAX and that's what makes it special. And I think that's what gives me a lot of comfort going forward. Virtually any study you look at shows that the public wants to see it in IMAX, referencing back to your question. Of course, improving the experience and staying on the cutting edge is a really important thing, but I think when you cut through it all, IMAX is IMAX and no one else is IMAX.

Thanks, Rich.

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

Hi, guys. A couple quick questions here. First, one for you, Rich. You were commenting that once exhibitors start using IMAX they come back for more. I just wanted to kind of expand on that. It seems like lately, once an exhibitor gets involved in a market, their competitors also want to become IMAX customers and it seems to be the case in Japan and it looks like Russia as well. I was hoping you could just talk a little bit more about the competitive environment between exhibitors once IMAX enters the market and how that impacts your pace of business, and then I've got a question for Joe.

Yes, I mean, it's a good point, James. I think first just to answer it in Japan, our first add-on deal was with Tokyu, which was our existing relationship. I think they had four and they added five more. They had pretty much covered what they wanted to cover. And I think their competitors saw the opportunity and saw the numbers, and then they came in. So I think you're absolutely right that the guy across the street sees all the business going to his competitive theater and that's an incentive for him to get into it. But as matter of doing business, not as a matter of contract, we like to offer our existing customer the first opportunity to expand their relationship and that's one reason it's been happening at a very rapid pace. But if you're in the business, you see the business, you see the numbers, and you want to do more, and if you're not in the business, you see the numbers and you want to get the numbers from your competitors. So it works both ways. And you had a question for Joe?

Yes, the question for Joe was related to SG&A. And this--it seemed like as I kind of ran through those numbers, about $6 million before SARs and backing out $1 million for FX and [whatever], $1 million for professional fees and some travel related nonrecurring type stuff, you get to a run rate it looks like about $13.8 million. And it just seemed to be a little bit higher than what we had before. I just want to know is that kind of a good run rate to go forward?

Yes, I mean, my sense, given where the C dollar is right now, James, I think you're in that range in the low 50ish range. And that wouldn't account for any special projects that we may endeavor to pursue, as Rich explained earlier.

Okay.

And again, just the C dollar, for those of you who don't follow it, a significant amount of our expenses are in Canadian dollars because of our huge workforce in Canada, so therefore, as the C dollar appreciates, it has a negative impact on us.

Okay. I just had one last follow up here and it relates to this--I guess the timing of screen installs. And maybe just help us understand why it was a bit more backend loaded in 2010. And as we look to 2011 does that slate that really ramps up in May end up resulting in some front-end loading in 2011?

I'll answer the first part. Joe will answer the second part. The first part, James, is that people tend to install for a movie. So the fact that Harry Potter is opening in November means there's a real push to get installs open in time for Harry Potter. And if you recall, the same thing happened pre-Avatar. So it's almost less seasonable and more movie dependent. And Joe has our quarterly forecast, so why don't you answer the question about '11, Joe?

I think on the JV front, James, at least at this point, and we'll give more clarity as we move closer to the year. But I think on the JV front, even across quarters is as good as anything right now. And as it relates to sales and sales type leases, I'm going to give you six month chunks on that. And I would say we'd probably do half in the first half of the year and half in the second half of the year. And we're going to continue to refine that as we move forward.

Okay. All right. Thanks very much. And excellent highlighting on the screen growth. I love the slides.

Thank you.

Thanks, James.

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

Thank you. I want to get a little bit more color on how you are thinking, because I know you are always looking at ways to make the screens more productive. I mean, they're obviously very productive based on the numbers that you've been reporting. We're focused on the Hollywood titles, but there clearly still are big shoulder periods where it's just not as easy to get the big titles on the screen. So based on your conversations with studios, how much flexibility do you think you have in terms of trying to get some of the smaller, but still important titles, moved to some of those shoulder periods, so that you can smooth out some of the lumpiness?

Good question, Marla. I think the answer is we're seeing that happen on an increased basis over the past, so I'd rather not name the movies on this call. But for 2011, we saw some pictures move their dates in order to take advantage of the IMAX network and people are talking about moving the dates of other pictures to do that, so that's happening on an increased basis. Obviously, the availability of local DMR in local markets, like Aftershock and we'll see where else that goes, helps with shoulder periods, because--I'll give you an example. Like, obviously in the U.S., February is not the best time of year, but in China that's Chinese New Year. It's a good time of year. So we hope to be able to play with local content to be able to do that as well. And then, I think the third thing would be because of digital you can have shorter runs. So if you look at our schedule this fall, because of the release schedules there's not a major blockbuster coming out in September/October, but there are a lot of films going in two or three-week periods. So I think a combination of all that.

Okay, that makes a lot of sense. Now, I know we're always focused on the Hollywood DMR titles, but historically the business has also been very much about edutainment and school groups have played a large part in the past of the IMAX fan base or the IMAX attendance. So is there any training you can do or discussions with some of your exhibitor partners to try to boost the usage on the--the utilization on the screen and early day parts to--won't really move the needle, but on the margin it's just all incremental.

Yes, I mean, two ways to answer that, Marla. One is we're doing some of that. And Hubble, for example, is going to be released to many of the commercial screens in August, so you can get the camp groups and the kids in the daytime and some of the school groups when it spills over in September. But I think the other point you made I just want to underline, it doesn't move the needle that much. So on the edges you can play with it, but it's not a big deal financially.

Okay. And then, lastly, I think you've talked in the past about doing some bundling--content bundling in terms of trying to leverage the whole 3D consumer market. And I think Warner has just recently announced that they would be bundling some titles with purchases of 3D TVs. And those were I think mostly titles that had appeared in the IMAX theaters. Are there any opportunities for you to pursue similar kinds of agreements and do you know about the Warner deal? Will you get any kind of economics from it?

On the Warner deal, the answer is there's a waterfall and we share in the revenues. And if it exceeds the guarantees and things, yes, we share in the revenues. And the second part is, yes, we're looking into bundling deals.

Thank you.

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

Yes, thanks. Great quarter and great outlook. Two first questions, then I've got a couple of follow ups. Joe, you mentioned I think on the new system an average kind of ASP kind of $1.6 million. I want to see is there anything unusual in that, because that's up a little bit and is that kind of a sustainable number?

We had one installation that was a GT system installation this quarter and those generally have a much higher price tag.

Okay. So for modeling purposes, more like $1.2 million is a better range?

You should continue to use the $1.3 million, $1.4 million.

Okay. And then, given the guidance on the JVs, you're basically talking about the Q3 and Q4 of this year, by the end you'd have put in 31 to 40 in that period. The AMC backlog about 25 and the new AMC deal 15 to 25 you signed a few months ago, so that's 40 to 50. But the question is at the end of this year, what percentage of all of that AMC is baked into your total JV guidance?

By the end of this year, we're targeting close to the 100 that was under the original deal, and then the 15 to 25 would be part of next year. Now, in the guidance that I've given you, only the 15 are included in that.

Okay. So with the 100 by the end of this year, that basically takes care of the 25 that have been in backlog kind of?

Yes.

Okay. And then, on the DMR cost, you mentioned the eight films higher there. But my question is, is there a DMR cost in terms of your acquiring the film in the quarter that kind of what turns out to be $1 million to $2 million, or is that kind of spread across different periods, in other words when you were actually working on IMAX'ing the film versus an upfront fee?

No, there's no fees of any sort like that. It's our normal DMR costs of rendering the film, et cetera. When you have a period like this where you're showing eight films, you're going to have a heightened level of cost. You take a film like Prince of Persia, which was done so that we made sure the international pipeline was flush with product. We benefited from that in our system signing lines and in our JV lines, but it didn't necessarily equate to a big margin benefit in DMR. But that's kind of some of the things that are going on as well.

Yes. And then, how about on the hybrid revenue share model? You mentioned China. Can you expand on that anymore in terms of how that's looking as a likelihood and timing and so forth?

Sure. The way that the hybrid model works is that the client puts up the cost of goods sold rather than us. But we don't recognize any margin on the sale. And the way we get our return is through a higher participation at the box office, generally in the 10% to 12% range, something like that. When you do a PV calculation, it's better for us than a sale, but obviously there's some volatility because it depends on performance. So in China we're looking at experimenting in a couple of instances. And they would be with entities that are not headquartered in China, so the contract wouldn't be in China or governed by China law.

So just to give you a theoretical example, if it was a Hong Kong company doing business in China, they'd put up the cost of goods sold, we wouldn't have any financial risk, and they'd sign the contract in Hong Kong. We'd get a percentage of the box office and, if it didn't work out on some basis, we'd have remedy in Hong Kong, not in the PRC, and that's the kind of thing we're looking at.

So basically, places where you'd better trust the numbers.

Well, not only the numbers, but the rule of law is more predictable.

Yes, okay. Last question, just on the Portable. You mentioned testing in the back half. Are you still looking at an initial one in China in the fall, September/October, or is it more--?

--I think probably later than that.

Okay, thanks.

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

Good morning. Thanks for taking my questions. On the sale lease guidance. Is that all from backlog, or is that anticipated signings built into that as well?

It's all from backlog and does not include any digital upgrades.

Correct. Okay. So there is a potential if a signing comes through that that could be additive to the [execution]?

Yes.

Are there any particular criteria that moves one to the front of the line versus back? Obviously, the size of the customer I would imagine, but anything strategic?

It could be strategic, based on is it a JV, what's the particular territory, is there a special event, is there a reason? But I think in general, no, but there could be.

Hey, Jeff, I apologize, but we still have about a half a dozen people in the queue and we're running late, so if I could ask everybody to just ask one question. We don't want to miss anybody, but by the same token, I know everybody has to get back to their desk.

No problem. I'll jump off and bug you later.

Thanks.

Thank you.

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

Good morning, guys.

Hi, Mark.

Hi, Mark.

Hey, just a quick question. Could you quantify for us the impact of the AMC deal in the quarter in terms of I believe it was retroactive? I just wanted to get a better feel for what that looked like in terms of the impact to the quarter. And then, just quickly, international screens, could you just explain to me or explain to us how each theater internationally, how they go through the process if they decide to put a movie on the screen or not? Because I know you have a lot larger footprint of international screens versus what we're seeing some of these movies being put on, meaning it's--traditionally I think you've got 70 or 80 screens out there and we're seeing 30 or 40 that are showing movies at any given time. Could you just kind of talk about what those screens are doing when they're not showing one of your movies in a period?

Sure. And Mark, I'm going to do this in shorthand just because of the time.

Sure.

I apologize. And we'll give you more color later, if you'd like. But in terms of the international screens, the deals work very much the same way they do in the U.S. The exhibitors are required to play it, if it's an IMAX DMR film. What you're seeing this year is because of the World Cup, a lot of the film--a lot of the exhibitors didn't play films during that period and the studios didn't release them. So a lot of the films that played domestically, day and date they're playing delays. I'll give you one example. Toy Story 2--Toy Story 3 just opened internationally and did about $500,000 this weekend, which is very nice because it just wasn't released then because of the World Cup. So this year is a little funky. Generally, it's closer to day and date it's released, but it's the same in terms of playing.

On AMC, which is actually a very long answer, and I'll give you a very short one, we're not going to disclose the specific terms because they're confidential. It's an important question though. And the answer is when we did the deal with AMC, as you know, we both modeled it out on a certain basis and we made some of those models public at the time. The IRRs were so strong for IMAX. As you know, they were in the 16ish range. We had DMR film going on there. That--we basically got in a discussion with AMC where they said, hey, guys, if you want us to do more theaters and you want us to extend the term of the theaters, this needs to be more of a win/win. And I think our philosophy was that the value to us of extending the deal and the value to us of getting more theaters was quite significant. So we decided to make those changes.

A not unimportant component of it was also because AMC was such a large customer they had a clause in their deal, a most favored nation clause, which meant that wherever we did a deal in the world, if it was better than the AMC deal, we had to change the AMC deal to that deal. And that put a lot of handcuffs on us, because obviously in territories like India where the ticket price is lower or Japan which the ticket price is higher, it really limited our flexibility in structuring. And I think one of the reasons you've seen so many international signings is that we got that [at MFN] internationally cleaned up as part of the deal also. So I think when you put all of those pieces together it was very much in IMAX's interest as well as AMC's interest to do that.

Great. Thanks for the color.

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

Thanks. I have a question about the screening windows for each film. As you get more product, are you narrowing the number of weeks that you are allocating to each film? And how do you go through that process? And then, I suppose you have the Avatar example, which works against doing so, and you have come back to recapture it. So could you talk about that issue a little bit?

Sure, Jim. It very much depends on the film and the filmmaker and the time of year. So if you look at it right now, we're running Inception and we're running it for six weeks and at a very good time of year. And I think given the [legs] we've seen, that was the right decision. And for Avatar because it ran over into January wasn't that crowded a period and we obviously had a lot of faith in Jim Cameron and the movie, which was obviously repaid in spades by Fox and them. So the windows in general are shortening. We have to try and accommodate as many clients as we can, as many filmmakers as we can. Loyalty is a big part of it with us in terms of who's worked with us before, both on the studio side and the filmmaker side. But I would say with that as a general rule, depending on the film and the filmmaker, we just have to be flexible. And you can't really look at it in a formulaic way.

And are you going to communicate windows a little bit upfront to audiences to create some sense of urgency to come in before the film is gone?

Well, we do do a play date release, which says when it opens and when it closes in IMAX. And I think people have been aware of it. I mean, maybe we need to do a better job of that, but we have tried to do that.

Okay, thanks.

Thank you.

Thank you. Your next question comes from Steven Frankel of Brigantine. Please go ahead.

Good morning. Just quickly, we've heard a lot about signings in China and Russia, but not a lot about the European continent. Could you give us an update on what your prospects look like there?

I think they look very good and we just announced two days ago in Russia, which is part of Europe, a 10 to 14 theater deal. We announced I think one or two deals with Odeon. This year we announced the joint venture in France with Gaumont Pathe for four theaters. Late last year we did The Netherlands. There is a lot of activity. And perhaps equally importantly, the theaters are doing quite well. The ones in France just opened for Inception and Europalaces, which is the owner, was quite pleased with the results. They were good. In Holland, they were extremely good. So there's a lot of activity and I think we'll see activity out of there.

Great, thank you.

Thank you. Your next question comes from Gary Schnierow of 79th Street Capital. Please go ahead.

Hi, guys.

Hi, Gary.

Your backlog should be about 124 screens by the end of 2010 give or take. How much of that is 2011 and how much of that is beyond?

I don't think you should assume that number, Gary, because I think what you're doing is you're taking the current backlog and subtracting our install guidance. And I don't think we've signed our last deal for the year given the level of business activity. So I can't predict what it's going to be, but I don't think that's the right number. And I think when Joe gave you the install guidance, that was our best guess as to what we're going to be able to install in 2011. As he said, things can slip. Life isn't perfect, but we tried to do a bottoms up estimate and that's what it is.

I completely understand that. I guess my question is, looking out, some of it's for 2010, some of it's for 2011, some of it's 2012. I was just hoping for a little bit of a ballpark segmentation of after you install 2010, is 80% of it supposed to be for about 2011?

Gary, we've given an indication of 2011. I think there's just too many variables to go any further than that at this point.

Okay, thanks.

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

Thanks. Good morning. A question for Rich. I just--I'd love to get your thoughts on the current kind of pricing environment. There was a little back and forth with ticket prices for the various tiers and your premium product versus non-premium and 3D and all that. Give your thoughts on where IMAX pricing is 2D versus 3D kind of and where you think it could go from here.

Really good question, Eric. I mean, typically now, we've been actually--we just started, but we've tried to rather than rely on the popular headlines or people's guesses, we've been doing both quantitative and qualitative research and it's really early in the game. But the typical IMAX price, adult price, is about 30% higher than the 2D price, which when we look at it and we do our polling and we look at our empirical data, we really don't think there's a lot of price resistance at that point. And you look at sort of the Inception results and the Toy Story results, they support that.

Now, you could obviously point to, gee, Shrek, which wasn't as good as an example, what happened there. When you look at the kids' prices on the price premium versus 2D, it's much higher on the kids' prices than it is in the adult prices, and in some cases it was 50% or 60%. So I think what you're seeing is for the family films the price is affecting a family of four's ability to go to the movie for that amount of money and I think it may be having an effect. For the adult prices, I don't think it is and I think that will play a factor for us going forward in what our film selection is. And as a reminder, we don't set prices. It's set by the individual chains and I hope to make them aware of some of this and see if they'll react to it. But frankly, I was somewhat surprised and I'd lie if I didn't say I'm pleasantly surprised in looking at the qualitative data, which again I have to say is limited so far, but the price does not really seem to be a factor for adults.

Perfect. Thank you.

Okay, thank you.

Thank you. The next question comes from Michael Kass of Blue Mountain Capital. Please go ahead.

Hi. Thanks a lot for taking the call and congratulations on the results. I was looking at the page five for the supplemental. And I'm just trying to--when I look at kind of the DMR fees estimates or the EBITDA impact, it looks as though you're getting about a--based on the $1.3 million average that you were talking about, the 12.5% DMR fee at like the 93% margin. And I'm just wondering if kind of going forward--I understand that's kind of been the historical rate--if you're seeing any kind of positive or negative kind of movement in DMR fees or the costs associated with them, whether that's print fees or just the cost of conversion.

Michael, first of all, we're using 1.2 on the model.

Oh, you are? Okay.

The assumption we use. No, we're not, and in fact, our DMR deals we're signing with the studios are consistent in every way with our prior deals, so there really hasn't been erosion. On the cost side, it's highly sensitive to the length of the movie, 2D, 3D mix, things like that. Obviously, 3D costs more than 2D. Longer costs more than shorter. But if anything, costs have stabilized or come down slightly as we get more experience doing this. It really hasn't been material.

Okay. And then, just quickly, and I know that you--there are a lot of questions in queue. On the windows, you mentioned that you have eight signings for 2011, double what you had for this year last year. And I'm just wondering what you think the optimal number is in terms of forward signings. And you mentioned that you've picked kind of 19 number one hits in a row. And I'm wondering if--what the tradeoff is between signing ahead of time versus waiting to see what has buzz.

I think the optimal number is about what we're doing this year and last year, which is in the 15ish range. I think one of the difficult questions is a lot of people want to put their films in IMAX and there's a lot of people we want to please, so there's a tradeoff between giving a film enough play time, enough brand exposure, and accommodating everyone. So I think that's a tough task. It's a high class problem, but it's a tough task for us.

In terms of doing it in advance or doing it closer to the play date, I mean, I think in an ideal world you'd want to do it within a year of when the film is going to be released, because you know who the director is, you know who the cast is, you have a lot of certainty as to the release date. But on the other hand, when you talk about kind of franchise properties, like Harry Potter or Pirates or Toy Story, those kinds of things, I think, as you go to a franchise property you get more comfortable committing farther out.

I'm just going to say maybe one or two more questions. I don't know if there are any more, but probably everybody's got to get on with their day.

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

Okay. Well, I'd just like to say that as a company, I have to say morale at IMAX is extremely high. I think when we look at our matrix for future growth and what makes the business work, it's really our relationships with our three key constituencies, the studios, the exhibitors, and our customers at the box office. And I think the data we're seeing, which is not only anecdotal but empirical, is that our customers, our three key constituencies, are happy with the direction we're going in and we're trying to capitalize that and I think we're building a good base for long term growth. And with that, thank you all.

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