Imax Corp (IMAX) 2010 Q3 法說會逐字稿

Good day and welcome to the IMAX Corporation third 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.

Thanks, Marcus. Good morning and thanks for joining us on today's third-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.

In addition, this morning we've loaded a PowerPoint presentation in PDF format on the IR section of our website 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, as well as reconciliations to adjusted EPS and adjusted EBITDA are contained in this morning's press release. The full text of our third-quarter release, along with supporting financial tables, is available on imax.com. Today's conference call is being webcast in its entirety on our website.

With that, let me now turn the call over to Rich Gelfond.

Thanks, Heather.

These are exciting times at IMAX. Today we sit at the intersection of the entertainment industry, innovation, and the digital world, which is revolutionizing our business in many ways. The powerful global appeal of our brand is increasing and consumers worldwide are seeking premium out-of-home entertainment experiences, differentiated from the choices in the home and in traditional theatres. These trends are providing wind at our back.

Our third-quarter results reflect these trends, demonstrating the strength of IMAX's business model and the continued demand for IMAX theatres throughout the world. In many respects the third quarter was the best quarter we've ever had, most notably for theater systems signings. These signings have resulted in a backlog that should increase the size of our commercial network by 70%. The simple fact is that consumers are embracing the IMAX brand and experience. As a result, exhibitors around the world are more interested than ever before in being in the IMAX business and studios are eager to provide the IMAX experience for their blockbuster films.

The powerful combination of strong global consumer demand and contracted-in network growth is giving us increased visibility into the future of our business. The third quarter, one which featured only one breakout film, Inception, illustrates how network growth and a diversified film slate can drive financial performance. We believe that for the next couple of years the math is relatively simple. If you hold our film performance constant with historical levels, excluding any impact from Avatar, and simply layer on the growth of our theatre network, our financials will continue on a positive growth trajectory. The slides we have prepared are designed to help illustrate this math.

Before I expand further on the model, let me give you some highlights of the quarter and then Joe will provide more detail. Our 17% in top-line growth resulted in a 150% increase in net income for the third quarter, excluding variable stock compensation. On a per share basis, that translated to $0.15, a 128% increase compared to EPS of $0.06 on the same basis last year. Our trailing 12-month EBITDA increased approximately 140% to $96.5 million versus $40.3 million in the comparable period last year. As a result, cash on the balance sheet was $45.5 million at the end of the quarter and our net cash position was positive by approximately $24 million, up sequentially versus that of the second quarter.

The significant improvement in our bottom line this quarter demonstrates that our new business model is delivering as we had envisioned. As you know, we have shifted our strategy to rolling out more revenue-share theatres in which we share in a percentage of the ongoing box office in return to contributing a digital theatre system. The percentage of ongoing box we receive from a exhibitors is in addition to the DMR revenues which we receive from the studios. The combination of these factors is driving our significant gross margin expansion.

We are often asked what is driving our business momentum. Expanding on my earlier comments, from the consumer's standpoint, we believe IMAX fans seek out IMAX because it is the best way to experience the biggest blockbuster movies of the year, whether in 2D or 3D. For the studios it is the incremental revenues from an IMAX release, the price premium and the marketing boost as IMAX event-icizes a film. From the exhibitor's standpoint, we believe it comes down to the rates of return of the IMAX business model, incremental box office, and market share gains.

As perhaps the best endorsement of all these trends, we signed deals for 100 theatres in the third quarter, which compares to 13 theatre deals in the third quarter of last year. We're particularly proud of the fact that 85% of this year's signings to date have come from existing customers, like Regal Entertainment Group and Rave Motion Pictures. Through the first nine months of the year we signed deals for 198 IMAX theatre systems, which exceeded our annual systems signings record achieved in 2007, when we signed our 100-theatre deal with AMC. And we still have one quarter to go.

Today we are updating our current expectations for network growth for the fourth quarter of 2010 and for fiscal 2011. The midpoint of our 2011 range now implies 80 new theatre openings next year, which are all from our existing backlog. In other words, today's update does not factor in any future signings that may install in 2011. As always, we caution that installations can slip from period to period, usually for reasons beyond our control. Reflecting this update, our commercial network is poised to grow by at least 25% on a compounded basis.

Another exciting driver of our growth is our international expansion. We are rapidly growing our business overseas and seeing our international screens produce enormous levels of box office. 41% of this year's gross box office to date has come from our international theatres, up from 25% three years ago.

Let me first touch on China and Russia, two very important markets which are benefiting from an emerging middle class. As discussed on our last call, the Chinese government estimates that the country's cinema industry is expected to grow from 5,000 screens today to 20,000 screens in the next five years. In China we currently have approximately 100 theatres either installed or in backlog. And we are pleased we have signed our first hybrid revenue deal in China with our long-term partner, CJ CGV.

In addition, this quarter we launched Aftershock, our first local language DMR title in China. Not only was Aftershock the most successful Chinese film in history, but the IMAX version generated gross box office per screen of nearly $200,000 or seven times the box office of regular screens. On the heels of that success, we announced that we would be taking part in John Woo's next movie, the $80 million budgeted World War II epic, Flying Tigers, another Chinese film in production.

Turning to Russia and the CIS, our IMAX theatres in this region are on track to gross over $2.5 million in box office per screen for 2010, generating some of the highest per-screen averages in the world. By the end of 2010 we expect to have 19 theatres in that region, or quadruple our footprint in just 12 months. With 27 more theatres in backlog, Russia is now poised to become our third largest market in the world, behind the US and China.

Finally, we continue to penetrate revenue-share markets like Western Europe and Japan, two markets that generate significant box office overall and where IMAX screens deliver box office results that are anywhere from three times to ten times that of typical screens. Over the last nine months we have signed a record number of theatre deals with both existing customers and new customers, and with the leading circuits in several key markets.

Turning to film, during the quarter Christopher Nolan's groundbreaking 2D film, Inception, generated over $50 million worldwide in IMAX gross box office, making it our fourth highest grossing DMR title of all time. The film's IMAX version was particularly strong in China, where on just 16 screens the film generated box office of $4.8 million, or $300,000 per screen and approximately 7% of the total box office for the country on just 0.4% of the screens.

It is also important to remember that Inception is a 2D title. As we have discussed in the past, the IMAX model is about cherry picking the biggest and best titles, whether 2D or 3D, that suit The IMAX Experience. We are proud to be pioneers of 3D and strongly believe 3D is a key part of the future of film. But first and foremost, and especially for our business, our movie selection process is about picking the right movie for The IMAX Experience.

In the fourth quarter, our key titles will be the highly anticipated first installment of Harry Potter and the Deathly Hallows from Warner Brothers, which will be the fifth Harry Potter title to play in the IMAX network, and Disney's TRON Legacy, directed by Joe Kosinski. Of course, we'll also be doing Megamind, which is being released by DreamWorks Animation. We are encouraged by the level of advance ticket sales we are seeing, particularly on the front for Harry Potter and TRON Legacy. In fact, all of the tickets for tonight's Tron Night - An IMAX 3D Experience, during which fans can catch a 23-minute sneak peek of the film, were gone in just 24 hours.

TRON is a great example of a picture that will be differentiated for IMAX. On the marketing side, the sneak preview -- the sneak peek is available exclusively in IMAX, no other theatres. On the technical side, the film benefits from our DMR conversion. And on the content side, 30 minutes of the film will take advantage of our unique aspect ratio, resulting in full-screen immersion. Differentiation in general is something we are very focused on at IMAX, which I'll discuss in more detail in a moment.

Looking ahead to 2011, to date we have announced nine titles, which include TRON, which runs over from December; Mars Needs Moms, produced by Bob Zemeckis, whose films like The Polar Express, Beowulf, and A Christmas Carol have historically over-indexed in IMAX; Zack Snyder's Sucker Punch in March; Disney's next installment of the Pirates of the Caribbean series, starring Johnny Depp and Penelope Cruz; Universal's Fast & Furious 5, which marks the return of Universal to the IMAX business; Disney Pixar's Cars 2, which we're very excited about, given the strong results we had with Toy Story 3; and the final Harry Potter installment. We've identified virtually all of our remaining titles for 2011 and will announce them once finalized over the coming weeks and months.

In fact, I was in LA last week and I can tell you that securing titles is not an issue. The list of potential titles is longer than it has ever been. Our challenge now is slotting in titles in the right slots and optimizing the schedule to accommodate the IMAX window.

Anyone who knows me well knows my favorite saying is, "It's never as good as it looks, or as bad as it seems." And as a result, we're always looking to identify potential opportunities and roadblocks. Given our backlog, our install activity, our strategic partnerships, and the film slate, we believe the brand is headed on a healthy growth trajectory. Our focus now is on how to continue on this upward trend in the long term.

To achieve this we are starting to focus the organization, particularly in 2011, more deeply on three key strategic initiatives -- brand, differentiation, and reinvestment. Let me highlight each of these.

First, brand -- the IMAX brand and what it represents is undoubtedly our biggest asset and is growing on a global scale. We are taking insights from our recent brand study to continue to grow the brand and to leverage it in new creative ways. As we look ahead we plan to increase investment in brand marketing. As part of this investment we are shortly launching our newly revamped website -- as a matter of fact, next week -- which will be available in seven languages and will offer an improved user experience.

Next, differentiation -- differentiation for IMAX can be achieved in several ways. We will continue to work on technology differentiation through projects like nXos, our groundbreaking audio calibration technology and working with Laser Light Engines, the leading developer of laser-based light source solutions for digital projection. In other words, that second one is a way to make The IMAX Experience much brighter.

Differentiation can also be achieved through content and marketing. For example, events like Tron Night tonight or visionary filmmakers like Chris Nolan taking advantage of our unique aspect ratio and shooting with special cameras. In fact, you may have read yesterday's LA Times in which Chris mentioned that he will use IMAX cameras to shoot The Dark Knight Rises, the third in the Batman trilogy that he's made.

While still very early, we have set a goal that one-third of our DMR titles in any given year will be differentiated above and beyond our proprietary DMR treatment, making the IMAX version of a picture even more awe inspiring for our fans around the world. And I think those of you who see Megamind in the next couple weeks will see significant differentiation from the regular 3D experience.

And third, reinvestment -- the momentum in our business is beginning to focus us on the question of how to deploy the cash we generate. Our first priority is signing and installing revenue-share theater systems. And it's difficult to find a better investment vehicle, given their attractive IRRs.

We also plan to increase investments in R&D and will consider strategic investments in technologies or brand extensions, such as our previously-announced 3D TV channel. You should note, however, that as we evaluate any potential opportunities, they must make strategic sense for our brand and our company, and be capable of yielding recurring revenue and margin at attractive rates of return.

In conclusion, we're very pleased with our third quarter. It is relatively easy to grow your bottom line when you're playing films like Avatar. In this quarter, a 17% increase in revenue drove a significant increase in our bottom line, largely because of our growing network and diversified film slate. We delivered these results while also achieving several important operational milestones, like getting back in business with Universal; delivering our 200th digital system; taking possession of our first portable theatre; and the success of Aftershock, our first non-US DMR'd film.

We're in business with every major studio in Hollywood and we are also now in business with studios in emerging markets like China. Today the IMAX experience is available in 45 countries around the world. As I look back on the business, it strikes me that in 2008 we released The Dark Knight on 110 screens worldwide. Fast-forward to this November's release of Harry Potter and that number will triple to close to 350 screens worldwide.

With that, I'll turn the call over to Joe, who'll review the financials.

Thanks, Rich.

I, too, am very pleased with the quarter. As we look at our results overall, we are hard pressed to find an important metric of the business that did not meet or exceed our expectations. Rich highlighted the third-quarter headlines, so I'm going to jump into the details.

Gross box office in the third quarter increased 70% to $97.7 million versus last year's $57.6 million. Our global box office per screen in Q3 increased 26% to $321,000 compared to $254,000 in the same period last year. Our domestic box office per screen increased 12% to $263,000 and our international per-screen averages increased over 55% to $451,000.

Looking at our key business segments, total IMAX film revenue increased 68% to $21 million in the quarter compared to $12.5 million in the third quarter of 2009. DMR revenue increased 58% to $12.4 million compared to $7.8 million last year.

Revenue from our joint venture arrangements increased 89% to $6.5 million, reflecting increased revenue per screen, as well as the growth of our JV network. During the quarter we installed 18 new JV systems and one digital upgrade. Our joint venture theatres generated an average box office per screen of approximately $269,000 in the third quarter, up 44% versus last year. We are pleased that during the quarter our domestic and international JV screens performed relatively consistent with the overall per-screen averages of the IMAX theatres in their respective regions.

Revenue from IMAX systems sales decreased to $14.8 million in the third quarter of 2010 compared to $20.1 million in the third quarter of 2009. During the quarter we recognized revenue on seven full new theatre systems with an average value of $1.4 million compared to eight systems in the third quarter of 2009 which had an average value of $1.5 million. The lower average revenue per system reflects the mix of units sold in this year's third quarter as compared last year. We also installed three digital system upgrades in the quarter compared to five in the year-ago period. It should be noted that our gross margin rate on our new sales-type lease systems increased to 64% in the third quarter versus 59% last year.

Gross margin dollars for the third quarter increased 38% to $25.9 million. As a percentage of revenues gross margin increased 760 basis points to 50.8% versus 43.2% last year. The primary drivers of the increase in gross margin were our JV and film businesses. Film was driven by strong DMR results and the distribution benefited from the continued performance of our original documentary Hubble 3D, as well as content licensing revenue. The only other thing I'll point out here is that we incurred launch costs of approximately $1.1 million in the third quarter, primarily related to our 18 new joint venture theatres that opened during the period.

Excluding the impact of variable stock compensation, SG&A for the third quarter of 2010 was $13 million. On a reported basis, third-quarter selling, general and administrative expenses were $16.1 million compared to $12.8 million on the same basis last year.

Our reported SG&A for the third quarter includes a $3.1 million charge for variable stock compensation due to the $2.26 increase in our stock price at quarter end as compared to the closing price at the end of the second quarter. This compares with a $2.8 million charge in the comparable period last year. Currently every $1.00 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 vested stock appreciation rights at quarter end. As of September 30th, approximately 1.5 million vested variable stock appreciation rights were outstanding compared to 1.9 million as of September 30th, 2009.

All of this has resulted in adjusted earnings per share of $0.15 compared to $0.06 on the same basis last year. Reported earnings per share increased to $0.10 versus $0.02 last year.

Our backlog at quarter end consisted of 257 systems, our highest level since the first quarter of 2008. 175 were sales and sales-type lease systems valued at $203.1 million, and 82 were joint venture arrangements, which carried no stated backlog value. 20 of the 175 sales-type lease systems in backlog as of September 30th are systems designated for digital upgrades.

Our balance sheet remains in very good shape with cash increasing significantly versus year end. We also paid down another $3 million of bank debt during the third quarter, reducing our debt level to $21.9 million at the end of the quarter.

Looking ahead to Q4, gross box office to date is up approximately 17% versus the same period last year with our biggest titles still to come. We anticipate SG&A expense of approximately $14 million in the fourth quarter, excluding the impact from variable stock compensation. In addition, we estimate R&D expenses of approximately $2 million in the fourth quarter.

This morning we increased our fourth-quarter install guidance by approximately 30%. We now expect to install between 20 to 24 new joint revenue sharing theatres and 15 to 20 new sale-type lease systems. We are not including digital system upgrades in this guidance. And remember that, as you model your fourth-quarter, we will incur launch costs associated with the 20-plus new joint venture sites.

We are also increasing our fiscal 2011 outlook for network growth by approximately 40%. We now expect to install between 35 and 40 new sales-type lease systems and 40 to 45 new joint revenue share systems. Both of these numbers do not include any upgrades.

As Rich mentioned earlier, all of the installations for Q4 and fiscal 2011 are from today's backlog only. There are typically also systems that get signed and installed within the same year. By way of example, in 2010 we have signed and installed, or will install, over 30 new theatres, including JVs, which were not part of our original install guidance given back in early -- in March of this year.

Before I wrap up I wanted to mention that we have included a unit economics slide which extrapolates the potential annual run rate impact per 100 new theatre openings. We have assumed that these theatres are evenly split between JVs and sales-type lease systems and that they generate about $1.2 million in box office per screen over a 12-month period, consistent with recent historical box office levels which exclude Avatar. From this slide you can see the leverage inherent in our model, similar in theory to a cable operator in the early days, every new subscriber, or in our case a new IMAX theatre that opens, comes with an attractive margin profile, as our costs to DMR a title are relatively fixed.

And with that, I'll turn it back to Rich for closing remarks.

Thanks, Joe.

We're very excited about our third-quarter results. This is a quarter where we had only one blockbuster film and an average number of sales-type lease installs. Yet our financial performance exceeded our expectations as well as the Street's expectations. It proved out the power of our model and we expect our business momentum to continue into the fourth quarter and 2011.

With that, let's open it up to questions.

James Marsh; Piper Jaffray.

Couple questions here. Joe, as we've kind of gone through that film revenue, looked like it was very strong. Seemed like the big delta was distribution and I was hoping you could elaborate a little more on that, maybe how the margins might look there over time. Seemed like a lot of it was Hubbell in the quarter and I just wanted to get a sense do you think this is kind of a one-time event related to the quality of Hubbell? Or is this something you think you can replicate going forward as the network increases?

Well, also included in that, James, was the licensing of some 3D titles, a couple of titles in particular. And I would hope that as we move forward we may be able to take advantage of opportunities like that periodically.

Okay. And then, I had a question for Rich related to China. I was hoping you could just give us kind of an update on what's going on there. Obviously, you mentioned Flying Tigers. Is that a movie that's going to be DMR locally, so it'll be at the 15% rate in China? And if that's the case, do you think this is going to be a movie that plays well in the US? Obviously it crosses over with a Chinese/US theme.

James, I don't want to specifically deal with the contract. But it will be DMR'd locally, so it will be Rave Center for local movies, not Rave Center for imported movies. And because of our growth there and because of how well we're doing on a per-screen basis, I would be surprised if that was the only film we're doing in 2011. And we're actually talking about some other titles over there and we'll see if they come to fruition.

And maybe just one last [call] for Joe regarding digital upgrades. Joe, we're having some difficulty kind of modeling those. Seems like they're up double digit some quarters, down low single digit the next. What's the best way to think about kind of modeling the pace of those installs going forward, in your mind?

James, in your modeling, I would view those as somewhat margin neutral in terms of absolute dollars. I mean, we're basically selling them fairly close to cost in many cases.

Okay. Thanks.

James, on the other hand, they get modeled that way, but remember when a theatre converts it can play a lot more films, because digital will now allow two-week runs like we're doing right now with Paranormal Activity 2. So they're revenue neutral in the short run, but in the long run they contribute.

Okay, great. Thanks very much.

Richard Ingrassia; Roth Capital Partners.

Rich, or maybe Joe, can you put a dollar figure on the investment in technology enhancements and ancillary business opportunities, if you will, the 3D network, portables and so -- how much has been spent so far this year? And how much, maybe a range if you will, between now and the end of next year?

What I think we can comment on right now, Rich, is what we've invested in through the end of the quarter. It's roughly $2.2 million in the aggregate, between the channel and the LLE investment that we've announced.

And Rich, just to give you a little color, I would think that next year -- we're actually right in the process of going through our R&D budget. And as I said in my comments, I'd like to reinvest more of our money in our own R&D, as well as in other things. I think there's a lot of opportunities, whether it's live events in IMAX or different businesses that are sort of no-brainers for us in terms of ways maybe we should go, things like enhancing the portable which we've rolled out, as well as just next generation things like Laser Light Engine. So I think you should see next year that number going up a little, not a lot. But it'll go up somewhat.

Okay. But not a big number in any case.

No.

Rich, given your recent meetings in LA, would you say there's any pressure whatsoever on the share of IMAX box office you receive from distributors? Or, I mean, given the competition between the studios for an IMAX release, could we actually see that average start to move higher next year?

Your first question, Rich, I'm not -- I met I think with either directors or executives from probably four or five studios and I saw ab- -- the question of the fee wasn't -- did not come up once. In terms of it going up, I don't -- that's not really our plan, Rich. The plan is really, to the extent that people want to be in the IMAX window, to try and get them to differentiated content, which we talked about, differentiated marketing. As I mentioned in my remarks we're pretty pleased that DreamWorks is doing more than they've done before for Megamind for us. And I think TRON Night, which I talked about. Hollywood is the kind of place where there's sort of a -- there are rules. And I think just like I don't expect them to come back to us and try and cut the fee, we're certainly not going to go to them and try and raise the fee. I think there's precedent and a lot gets done under precedent.

Got it. Okay, last question -- then you've made some public comments already about Harry Potter 7, but I'd like to just touch on that quickly and then Warner Brothers decision not to release Part 1 in 3D. Do you think it says anything about standard digital 3D versus IMAX 3D, or is this really just they didn't have the time to invest? And obviously it's a cheaper ticket across the board, but does 3D make as big a difference on a -- proportionately to your box office as it does to the box office as a whole for the movie or, for example, a company like RealD?

3D does not have the same impact on us as a company that's solely focused in the 3D business. For example, we were going through yesterday looking at Harry Potter. And a lot of the midnight shows that already sold out around the country and you're talking about a film that is I guess over a month away at this point. So the demand was very strong.

In 3D, obviously we believe we're the best experience in a world that has good, better, best. And we think we perform well under that model. And as you know, I think historically we've done anywhere from three to five times per screen what 3D digital screens have done.

However, as I said during the speech, we're in both the 2D and 3D worlds. And if you look at Inception, we did way north of 10% in terms of our percentage of the box office. And our prices are pretty similar for 2D or 3D. So using kind of a glib commercial line, we don't really care if it's in 2D or 3D, as long as it's in IMAX. And that's certainly been our experience. So there's no question that that decision has much less negative impact on us than it does on a company that's solely focused on 3D. One could argue, although I don't want to take it too far, that we're the only premium differentiated way to see it when it's in 2D.

In terms of Warner's decision not to do it in 3D, as you alluded to, Rich, we have a very good relationship with Warner, particularly on the Harry Potter franchise. And I'm completely convinced that it was because the time was short and production issues and for no other reason.

Okay. Thanks again.

Jeff Blaeser; Morgan Joseph.

Can you tell us, how many upgrade potentials do you have going forward?

I mean, I think that that pool is starting to wane a bit. Right now we're targeting 25 additional units next year. That's a preliminary estimate. But that population is starting to wane over time. And there's been significant upgrade activity this year. Right now our targets are that by the end of the year we will have upgraded in 2010 approximately 30 units. So I think we'll be pretty far along by the end of next year.

Okay. Then how should we look at -- when you mentioned Harry Potter 350 theatres versus maybe a less popular title that has less. Legends was 250. Obviously you're going to add some pretty aggressively in between that. Is that primarily the upgrades that aren't digital you're just not sending out? You're just not sending out -- how should we look at a low end and a high end versus the current installed base in terms of showing the films?

Some are upgrades, but we're opening at the pace of about four a week right now, before Megamind and Harry Potter. So the network is growing quite rapidly at the present time. One of the big differences you'll see in number of screens that a film is released on actually relates to the time it's out there. So take a film like Paranormal 2, which is out right now. That was a digital-only release because it was only a two-week run. So the studios and we didn't really feel an investment in prints over such a short run made sense. Harry Potter is a longer run and more of a franchise property, so we'll open on a greater percentage of our network.

Okay. And then you also mentioned international is obvious- -- is doing quite well, averaging a little bit more. Do you expect that $1.2 million -- I know it's kind of like just a number, a historical number -- to increase? Because it seems like the backlog's getting more internationally weighted than domestic. Is that the trend you expect going forward?

I'd say, Jeff, it's a trend we hope for going forward. In terms of predicting, the bad news is the movie industry is very difficult to predict how particular titles will do. The good news is as we go to a portfolio theory, this year we have around 14 movies in North America. Some will do better; some will do worse, and when you put them all together -- if you look back two years, that's what we averaged, around $1.2 million. If you look at that this year, we'll average significantly more than that, but that includes Avatar, which is certainly somewhat of an outlier.

However, if you put some movie in there, not Avatar, but a regular performing movie, we would have done better than we would have done last year on average. So I leave the modeling to folks like you who are better at it than we are. But certainly we have a lot of faith in our film slate and we think our brand is getting marketed well and our growth in the international network, we hope that leads to increases.

Okay. Great. And just one last question on the distribution side. Are the commercial theatres starting to show more of the Under the Seas and the Hubbles? Is that growing in popularity?

Yes, it is. I mean, I don't want you to change your earnings estimates materially based on that. But they are gaining a little bit more traction, yes.

Okay, great. I'll keep it constant. I won't change it. Thank you.

Marla Backer; Hudson Square.

I have a couple of questions. First, with the Regal and the Rave deal, it's great that the economic model that changed over this past couple of years of the economic model now enables IMAX in some mid-sized markets like Charlotte and Atlanta. And obviously that will add dollars and absolute box office growth. But how should we think about the average box office growth per screen going forward as mid-sized markets grow as part of the IMAX overall network?

In a sense though, Marla, that's a little bit the other side of what Jeff was saying. So our place of great growth going forward is international markets. You look at big cities like Paris, where we just opened our first theatre, or Rome, where we don't have a theatre yet, or Tokyo, where we have one theatre in the suburbs. And Hong Kong we just opened and it's one of the most successful theatres in the world. So I think as you see us open in some of the international cities that would skew towards the upside.

And as we go in some of the more middle market cities in the US, that would tend to be towards the downside. Although there's a client ours called Zyacorp that has two theatres. One is in Saco, Maine and the other is [Hook], New Hampshire. And I think those theatres are doing numbers consistent with our averages for larger cities. So I think in the worst case they balance out and maybe in the best case, for reasons I talked with Jeff about before about the growth of the brand and more titles, we could see some upside.

On the slate, you added Paranormal Activity pretty much at the last minute and I viewed that as essentially found money. How quickly at this point, in the DMR process, how quickly can you turn around a project to get it on the slate? And when you are mapping out your slate, like you said that you have the 2011 slate pretty much all planned, just haven't announced it all. When you're mapping this slate out, do you put any titles on a waiting list in case you want to make an insertion at some point later on in the year?

So, Marla, we could add a title probably in a couple weeks. That's what it would take us to do it. And I think you should think of it in two different ways. One is kind of the blockbuster tent pole times of the year, Christmas, Thanksgiving, Memorial Day, July 4th. I don't think we would ever think of putting in a last minute fill-in then. Our slates are pretty locked then. I think the terms of last minute would apply more to the September/October period or the January/February kind of period if something doesn't seem to be playing through.

And in terms of waiting lists, I don't think it's that formal. I think we've been having so many discussions now about films about films that we really can't do just because our schedule is filled. But I think we're always in constant dialogue with the different studios, so we know what's out there and I think you can put things quickly together. In fact, there are other alternatives to Paranormal that we could have done in this period and we decided not to do, for one reason or another. So it wasn't like just this was just the only choice.

Thank you.

Mark Argento; Craig-Hallum Capital.

When you think about international, given the amount of growth you have over there, when you think about some of the Russian and Chinese markets that you're going to be operating in, how do you think about the mix of content, local versus, say -- how much of the content can you repurpose from the States and bring it over, versus the local or having more localized content as those markets develop?

I think you really have to think about it, Mark, on a country-by-country basis. So a place like Russia has a great appetite for Western-type films. And as we said during the script, it's -- we believe it may be our highest box office per screen in the world. And especially 3D -- they have a great appetite for 3D in Russia. So a country like that, even though you have a big growth I don't think in the short run it's really necessary to supplement it with local content.

A country like China where there's obviously import restrictions on foreign films, as well as something you'll find very interesting. The big movie-going times of the year, in China are February, around the Chinese New Year, and October, around Golden Week. And that happens to be the slowest times in the US. So even if you put the quota aside, the ability to release blockbuster movies in those periods of time can really supplement your film slate in a very interesting way.

The obvious venture we haven't talked that much about is India, which has a high viewership of local produced Bollywood films. And we're taking a strategic approach to India, which is looking at when and how is the right place to enter. But that could be another country where doing local content would make sense as long as you have enough theatres to support it. But the bottom line is, it's really a country-by-country analysis.

Got you. I know in an earlier question you alluded to kind of a local market DMR fees versus, I would assume, traditional DMR fees. With the DMR fees on a local basis does it cost less to do it locally? Or is that the responsibility of the local market content owner?

I think the question was more on the revenue side, Mark, than on the cost side. In China there's a very complicated distribution system. So we tend to get half of the DMR fee we get in other countries for films we import from the United States. But if you do it locally you can get your full DMR fee, just because of the way the studios get paid. China's fairly unique and pretty much every other country it's constant. So it's really not on the cost structure.

Got you. Then last question, referring to the slides that you guys put out for the call, slide 6, you guys walked through the different math behind the incremental feeders. And just wanted to get a little bit more color on -- if I'm looking at this correctly it looks like your assumption is the incremental margins on this business, assuming kind of a 20% of JV revenue, or of gross box office turns into JV revenue on JV screens, and the 12.5% on the JV side. It looks like you're assuming basically 100% incremental profit margins on these businesses. Is that -- do you think that's realistic, the incremental margins are truly 100%? Or do you think that there's some other costs, such as some of the local content like we talked about that we should probably factor in over time?

The only thing, Mark, on the slide, I mean, the top section is an EBITDA calculation, so it's more cash flow geared. The only cost that would go against that would be the depreciation costs for the JV units, which is roughly in today's date, $45,000 a unit. But that's really it.

Got you. Great. Thanks, guys.

Martin Pyykkonen; Wedge Partners.

Very nice quarter on the growth and so forth. Couple questions. On China and Russia in particular, can you talk about what average ticket prices at the box are trending right now and, maybe more importantly, where they've come from over the last year when you had a much smaller footprint, where you think they might be going? Just curious how much the ticket price is playing there.

Martin, you have to really separate it into the conventional market and the IMAX market. So in the conventional market in China it's around $4. It's higher than that in the big cities, though, like Beijing and Shanghai. But in IMAX we averaged about $12 for Inception and about $16 for Avatar. So that's actually one of the appeals is that IMAX is an affordable luxury. So you have a higher income level, but your income level isn't such that you're going to go buy a Ferrari. But for a couple extra bucks to go see it at am IMAX, it really differentiates you from your neighbor if you happen to be rising with the economic tide there.

In Russia, the ticket prices are kind of crazy. They average in some cases more than North America and I'd use something consistent -- I don't know what they are in 35-millimeter theatres, but the IMAX ticket prices are very similar to what they are in North America.

And then just going forward, without putting a specific number to it, do you think there's upside to that in these markets, where your footprint's getting bigger, just kind of the viral effect as more people get to see an IMAX film, that you've got more ticket price leverage there?

Again, I think it depends on the market. And I think it also -- three things -- the market; obviously the economy; and the third thing would be the timeframe you're talking about. If you talk about a five-year timeframe, yes, I do think there's upside. In this economic environment, that wouldn't be the bet I would make. I don't think there's a lot of downside. But I think it's found a level people are comfortable with.

Thanks on that. And then, going forward, looking forward at the end of next year, we can probably triangulate around this, but can you just kind of summarize based on your backlog, nothing more than existing backlog, how many total systems you would have by year end 2011? What number of those or percent would be JVs and what number or percent would be digital?

If you look, Martin, at page 5 of the slide presentation, the estimate would be roughly 206 to 213 JV units at the end of next year and 238 to 248 of sales-type leases. The aggregate commercial footprint would be in the neighborhood of the mid-40's to roughly 460.

Okay. And would -- considering the upgrades and what's new going in, would you be vast majority digital by that time or what kind of range would you be?

I would -- those units that where we can upgrade to digital, I think you'll see a large chunk of them upgraded by the end of next year. You're still going to have the bigger GT units that we don't have a solution for today. So those will continue to be in operation. Generally those are our least problematic units anyway. They generally are high grossing units that we get prints for.

Right. Okay, and then last question -- I don't know if this is in the slides [because] I don't have access to it right now, but as you look towards 2012, just based again on existing backlog, you've talked about 2011 screen capacity, network growth being up about 40%. How much is left for 2012 installation out of, again, just what you've signed to date in backlog existing?

Well, if we're at 257 in backlog and you back 20 out for upgrades, leaves you with 237. So 80 of that gets burned out next year, roughly, the midpoint that Rich quoted earlier. So that leaves the remaining population and that will unwind itself over the next couple of years. Now, don't forget, Martin, that we still have a quarter to go this year and moving into next year hopefully we continue to backfill the backlog.

I'll give you the one word answer Martin, plenty.

Yes, I got that one. And then, just the last question, on international, I mean, obviously China, Russia has been a great success. New deals. You've got a strong presence in Japan. What about other parts of the world? Where should we expect to start seeing deals over the next several months? And I'm thinking more deeper into other parts of Europe. You mentioned something like there's nothing in Rome, Latin America. Even if it's qualitative, where you might be going next.

Yes, those are actually two of the areas I was going to mention. One is in Latin America we kind of have a master agreement with a partner there who's rolling them out. And he's had quite a bit of success, particularly recently, with local partners there. And I think you'll see some -- a number of openings coming from that area next year.

Europe itself we just really started to seed it in the last couple of years. We opened our first joint venture in Holland and now we have four there. We just opened our first five in France and they're performing pretty well. Let's see how they do there. An important point is we had no theatres in Germany and we just signed our first theatre deal in Germany. And the way that works is if it hits certain benchmarks the deal expands to more theatres. But I think more importantly, based on our experience, if it works not only that exhibitor but others will be interested in coming into the market. I was in Europe a couple weeks ago, had a bunch of meetings in Italy. I'm optimistic that we'll find the right partner there and get that going. So I think there's a lot of promise in Western Europe as well.

Okay, great. Thanks a lot.

Jim Boyle; Gilford.

In five years, what percentage of revenue do you think international might even comprise if you continue finding good partners?

I mean, if you look at our sort of market potential, right, we say North America's about 400 of 1,250 zones. So when you build out the whole world and if the theatres perform at a comparable basis around the world, you would expect two thirds of your revenue to come internationally. Now, we won't have the world built out in five years and obviously there will be variances in performance, so it's very difficult to predict. But certainly the majority of the theatres will be outside of North America.

Okay. And is there anything that could really impact or slow your installation pace besides a North American and/or global economic downturn in the next couple of years?

Well, I mean, I don't even think a downturn would have that much of an impact. And if you look back at the last two years, pretty bad downturn; it didn't have that much impact. Mostly because, remember, we're putting up most of the capital on the revenue sharing deals. And on the sales-type lease deals we've been paid in advance on those. So the economic conditions have not had a marked factor and I don't see them having it.

And slowing down the installation pace, I mean, I guess there could be a slate of horrible movies that comes out so exhibitors just stop building screens or stop installing, but it's really hard to see. And that's why the guidance we gave today was only related to those out of signed backlog. I think where you'd more likely see the impact would be in signing installs rather than in the backlog. I think those are pretty solid.

And then, flipping that question on its head, in your guesstimates, what sort of capacity or pace could you push in the out years, in let's say 2012 and beyond, versus let's say the 80 that you're looking at roughly for 2011?

Again, that's not a prediction I'm prepared to make at the moment. And from a capacity point of view, as I mentioned, we're putting our four a week, so -- today -- so we could install, if we had the contracts and the locations, a couple hundred a year and maybe more than that. So the question is just what's the market interest and what's the roll out schedule. But there's no real constraint on us in rolling them out.

Okay. Thank you.

Steven Frankel; Dougherty & Co.

Most of my questions have been answered, but wondering if you might talk in general, as you had the discussions with Regal and AMC about expanding the JVs, are they targeting incremental geographies or kind of backfilling some of the larger zones with a second screen, with those new screens?

They're largely targeting new places. I think some of the locations are looking at existing zones. That's a place, as you know, Steve, well, that we would encourage them to go more. And we're certainly talking about it. But most of the roll outs are new locations -- new zones.

Okay. And could you give us any more details on how you might test this portable theatre you just took possession of?

Sure. First thing is kind of a what I'll call a technical test. And we put it up in a field outside of Toronto and where we let it get rained on and the wind blow on it and all kinds of things like that and just went through some of the durability issues. And we've pretty much completed that. And now we're trying to find some business locations to put it where the economics are attractive to us and we could kind of test the business model side of it. And we literally have probably about a dozen conversations going on for places to test it out. And I wouldn't be surprised in the next couple months if you started to see it showing up in real places and the business model would start to be tested.

Okay. And how about an update on the digital cameras? When will those be deployed to bring content to the screen?

Well, they're al- -- we're actually using our IMAX digital camera today with a film called Born to be Wild, which we're shooting in Africa and South America and comes out next year. And it's working very well. In terms of the cameras used on commercial projects, you saw yesterday's LA Times article, which I referenced, so if you didn't you should look at it. People like Christopher Nolan are going to use IMAX cameras or other large format cameras to do special things for IMAX. And we're in discussions with other filmmakers on that as well.

I think people should be -- and I'm certainly less focused on is it our camera or is it a high resolution digital camera. Because filmmakers are, obviously, creative artists and just like a musician may have his own cello or violin, a filmmaker may have his own camera that he likes. So our camera is usable and available today. But I think you'll see a lot of filmmakers doing special things for IMAX with high resolution 2D or 3D cameras that aren't manufactured by us, but by others, which is fine with us, as long as the image looks great on the screen. Camera revenues is not a place where really to make a major financial difference.

Okay, great. Thank you.

Last question; Jim Goss; Barrington Research.

Earlier you mentioned that 14 was about the number of titles you have this year. Is that seeming to be a good working number? Or do you think that might vary and it's something you're still working on? And if you increased it, would the DMR costs start to become a factor that would offset having more titles?

And related to the flexibility of titles, Inception, as it aged, started to have a little lower take at your box office. Would you have moved that off sooner if something of promise had developed?

Okay. On your three things, number of films -- I think you'll see more films next year than the 14 that we see this year. And I think it's partly because in some slots there will be two blockbuster films that are very close together. So we're going to try as best as we can to accommodate as many films as we can. So I think you'll start to see some instances where maybe a film opens on all of the screens and then a week or two later it gives up some of those screens to accommodate another movie. So I think there will be more films, and particularly in some of the international markets as we talked about before.

In terms of DMR costs, there is some fixed cost that gets amortized over the film slate for the year, so if you do do more films your costs should come down. But I don't think that's a material number. It's mostly variable costs, such as labor that are involved. But it will come down to some extent.

And your third question about moving Inception -- it depends on the market and what the alternatives are. But that film wasn't only good from a financial point of view. It was very good from a branding point of view. And we frequently make decisions that are focused as much around the -- certainly more around the brand than they are on short-term financial results. So we were offered movies this year for slots that we could have done. We could have put them in for a week. We could have put them in for two weeks.

But we're really cognizant that over the long run IMAX needs to mean something. And it means [tenfold] films; it means an awe inspiring experience; it means mind blowing entertainment, the best film experience on earth. So not all films are conducive to IMAX. And particularly when films are conducive, like Inception, they do more for us than just add dollars. They add branding awareness.

So in China, for example, where we did $300,000 a screen, I mean, again, this isn't the kind of call to talk about that, but you can't just run the Company at one level, which is just for short-term profit and wringing it out every quarter. You've got to think strategic and you've got to think about where you're going to be in five years. And that's what we think about constantly and that's a really important thing to us. So, I think my answer would be, no, I wouldn't have moved Inception because I thought it was not only good for us financially, but really good for us brand-wise.

Which is a good place to kind of stop and thank you for being on the call. Obviously, as we said, we're very pleased by the quarter. I think the thing that makes us the most pleased about the quarter was it was kind of an ordinary quarter, as I said, going into my initial remarks. Meaning that there's no Avatar; it was just a quarter. I think the fact that the financial model worked the way it did was very encouraging to us and I think sets the table for us to grow the network into the future.

So, thank you very much.

Ladies and gentlemen, this does conclude the conference call for today and we appreciate your participation. You may now disconnect your lines and have a great rest of the day.