Imax Corp (IMAX) 2015 Q1 法說會逐字稿

Good day, and welcome to the IMAX Corporation first-quarter 2015 earnings conference call. All participants are currently in a listen-only mode.

(Operator Instructions)

Today's conference is being recorded. At this time, I would like to turn the conference over to Ms. Teri Loxam. Please go ahead.

Thanks, Michelle.

Good morning, and thanks for joining us on today's first quarter 2015 earnings conference call. Joining me today is our CEO, Rich Gelfond, and our CFO, Joe Sparacio, who will have prepared remarks. Also with us today is Greg Foster, our Head of Entertainment, and Rob Lister, Chief Legal Officer and Head of Business Development.

I would like to remind you the following information regarding forward-looking statements. Our comments and answers to your questions on this call may include statements that are forward-looking in that they pertain to future results 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 definitions of these measures as well as reconciliation to adjusted EPS and adjusted EBITDA as defined by our credit facility are contained in this morning's press release. The full text of our first quarter earnings release along with supporting financial tables are available on our website, IMAX.com. Today's conference call is being webcast in its entirety on our website.

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

Thanks, Teri.

We're only a few months into the year, but so far we like what we see. From the pace of our installations, to the demand for new IMAX theaters globally, from our performance in new markets, to our laser roll-out, and especially to our robust film performance, we are off to encouraging start. IMAX's position in the entertainment ecosystem continues to strengthen, and we are well-positioned to take advantage of promising film slates in 2015 and the years to come.

Our continued progress in expanding our theater network, coupled with our strong film performance during the quarter, resulted in Q1 revenue growth of almost 30% compared to last year, as well as a 300-basis point expansion gross margins, and over 50% growth in adjusted net income after non-controlling interest during the same period. Looking at our film performance in more detail, we generated $166 million in global IMAX box office in the first quarter, up 20% from Q1 2014. Also, $107 million, or almost two-thirds of the box office this quarter, came from international markets, a trend we expect to continue as we further build out our international footprint.

The reported numbers reflect our strong domestic box office, which was up 25% from the first quarter of last year. However, because of the strong US dollar, our reported global box office does not entirely reflect the state of our business globally. We estimate that on a constant currency basis, our global box office would have been up almost 30% this quarter compared to the first quarter last year.

We believe that our first quarter box office performance was driven by content offerings that were broader than a regular fanboy titles and demonstrate increasing programming flexibility. For example, we released Clint Eastwood's American Sniper, a blockbuster surprise in January, as well as a wide variety of movies including Focus, Chappie, 50 Shades of Gray, and Cinderella, as well as the release of HBO's Game of Thrones, in select theaters domestically. Our programming flexibility was further evidenced by our leveraging positive tracking data to sign onto American Sniper and 50 Shades of Grey just a week or two before their respective releases.

Also, at several points during the quarter, we were playing multiple films across our domestic network, either splitting screen time or splitting the network, both of which are big evolutions for our market. We believe these efforts to be nimble, and to broaden our content offerings, will help maximize our box office during shoulder periods, where times when blockbusters are typically not released, while also exposing new audiences to the IMAX experience and potentially diversifying our base of loyal fans. In contrast, at times of the year when tent pole titles are scheduled for release, such as in Q2 and Q4 this year, we will continue to follow our more traditional schedule, playing them exclusively for two or three weeks.

We kicked off the start of the blockbuster season at the beginning of April, with Furious 7, which has generated almost $80 million in global IMAX box office so far. Over $30 million has been generated by China alone, where Furious 7 had the highest opening day in IMAX history, with a first-day total of $5 million, and is well on its way to being one of the highest grossing films IMAX has ever had in China. Importantly, the global premiere of Furious 7 was held at the IMAX TCL Theatre in Hollywood, featuring our new IMAX laser projection system, the first in the US market.

The IMAX laser is capable of projecting a digital image with maximum sharpness and perceived resolution beyond 4K, even when sitting in close proximity to a 100-foot screen. The systems attributes include tremendous 3D brightness and substantially greater contrast, which combined with our unique optical design, has created not only unprecedented clarity and detail, but also an expanded color gamut allowing filmmakers to present more vivid and exotic colors than ever before. The system includes a new 12-channel audio system, which delivers an even more immersive IMAX experience.

However, movies are not about technology specs, but instead about how filmmakers and audiences perceive them and embrace them. On that basis, we think IMAX laser has delivered. We see our new laser technology as a giant leap forward in the quality of cinematic presentation, and believe it further cements IMAX's position as a leader of providing the most differentiated premium moviegoing experience to customers around the world. Many exhibitors have recently seen the IMAX laser system, and reactions have been extremely positive.

The 2015 film slate continues this weekend with the much-anticipated domestic release of Avengers 2. The film opened in about 30 international territories starting on April 22, with an impressive opening IMAX per screen average of more than $60,000 for that opening weekend. Avengers 2 opened to many records across the IMAX network including robust opening weekend PSAs of $113,000 in Hong Kong, $107,000 in Korea, $81,000 in the Philippines, $70,000 in the UK, and many others.

These results are even more impressive when you consider the currency devaluations in many international markets. To date, Avengers 2 has already generated over $13 million in IMAX box office with a domestic market set to open this weekend, and the China market set to open on May 12. We also have Tomorrowland and Jurassic World to round out the second quarter. In addition, later in the year, we have titles such as Marvel's Ant-Man, Mission Impossible 5, Bob Zemeckis' much talked about The Walk, the new James Bond film, Spectre, the final installment of the Hunger Games series, Mocking Jay Part 2, and of course Star Wars: The Force Awakens, not to mention a number of other promising movies.

We have also already locked in many blockbuster titles for 2016, 2017, and beyond through our recently announced long-term film agreements with Disney and Warner Brothers, in addition to our existing long-term film deals already in place with Universal, Paramount, and Lions Gate. Also of significance, we recently signed an agreement with ARRI Group, the world's largest manufacturer of motion picture cameras to co-develop a 2D digital camera to support Hollywood filmmakers creating blockbusters in the IMAX format.

The Mantis shoot with the IMAX cameras has never been higher. As part of our end-to-end strategy, this new 2D digital camera will provide the opportunity for additional A-list filmmakers to take advantage of the differentiated IMAX experience and bring tent pole titles to audiences in the way they were envisioned. Already, the Russo brothers have announced they will film part of their next Captain America series with the IMAX ARRI camera.

We believe the differentiated IMAX format coupled with highly anticipated film slates for the next several years is driving significant demand for new IMAX theaters around the world. In the first quarter, we signed agreements for 21 theaters, and we installed 13 theater systems, more than anticipated, due, we believe, to theater operators seeing to have their IMAX theaters installed before the release of Furious 7.

As we look at the market growth, we have seen a number of recent important developments. For instance, our new theater in downtown Tokyo, which is our first theater in Tokyo, by the way, with Toho, Japan's largest exhibitor and also a film distributor, recently opened with a commendation of Furious 7 and a local Japanese title, Dragon Ball Z 2. In its opening weekend, the Toho theater impressively generated almost $100,000 in IMAX box office, and its performance has continued with strong numbers since. Japan is the third largest box office market in the world, so we are excited by the successful opening, which we believe can be an important catalyst for IMAX for the Japanese market.

Similarly, last weekend we opened our first commercial theater with Vue in Denmark, marking our first theater in Scandinavia, which launched with Avengers 2, and generated an enormous $175,000 in IMAX box office for the extended weekend. Successful openings such as these are important because, as we know from history, when theaters start out strongly, that bodes well not just for the theaters themselves, but for further expansion in the territory.

In terms of other markets, we have been making good progress in the Middle East, a market where we currently have seven theaters open, and are generating per screen averages that are well above our international average. You may have seen our announcements a couple of days ago for three new theaters in the Mid East, with a prominent exhibitor, VOX.

We also have a new two-theater deal signed with a different exhibitor in the Middle East that we'll be announcing shortly, which altogether will bring our Middle East network install plus backlog to 18 theaters. We are also seeing additional interest in Europe, including more in Scandinavia as well as Southeast Asia, China, Latin America, and many other territories.

In the first quarter, we also moved into our new offices in the Playa Vista section of Los Angeles. Our facility, which we built from scratch, truly represents the evolution of our Company. This facility was customized to our needs in terms of space, and we have evolved from a film base, to a digital business, and puts us in the neighborhood known as Silicon Beach, with tech innovators including Google, YouTube, Snapchat, and Electronic Arts. In addition to being better suited to our business needs, building a new facility allows us to recognize lower operating costs going forward while retaining the upside of ownership.

To close, the first quarter had significant accomplishments and fueled great momentum upon which we hope to continue to build throughout the year. We believe we are firing on all cylinders, and we look forward to audiences continuing to get off the couch and get into IMAX theaters, to experience this year's anticipated blockbuster films in the ways filmmakers intended them to be seen, in the most immersive format available.

With that, I turn it over to Joe.

Thanks, Rich.

Let's begin with our film performance. As Rich mentioned, we generated $165.6 million in global box office in the first quarter, which was 19.6% higher than Q1 of last year. Thirty-six percent of box office or $59.1 million, was generated domestically in the quarter, while 64% or $106.5 million, was generated in international markets.

We released 13 new titles globally in the first quarter, with 9 of them playing in the domestic market, including the break-out hit, American Sniper, which contributed $23 million of IMAX domestic box office in Q1. We also had a number of carryover titles that we played in various markets throughout the world in the first quarter, including The Hobbit: Battle of the Five Armies, which was newly released in China in Q1, and also carried over from December for a couple of weeks in many markets.

Our global PSA was $203,000 in Q1, compared to $197,000 in Q1 of 2014. The domestic PSA for the quarter was $157,000, and the international PSA was $242,000. However, recall what Rich said about foreign exchange impact on box office this quarter. On a constant currency basis, with the first quarter last year, our international PSA would have been roughly $30,000 higher, or around $270,000.

Looking at China in more detail for the first time ever, our box office in China, which was $62.9 million, exceeded that of the domestic market. The PSA in China in the first quarter was $295,000. In addition to the final installment of The Hobbit, which was by far our largest box office contributor in China in Q1, we also played 10 new titles in the quarter, including the local language titles, Dragon Blade and Wolf Totem, both of which performed very well in IMAX.

In terms of network growth, we installed 13 theaters in the first quarter, 11 new theaters and 2 upgrades, 1 of which was the laser upgrade at the TCL Chinese Theatre in Hollywood. Five of the new installs were sales type installations, and six were JVs, of which five were hybrid JVs. This brings our total commercial network to 820 theaters, of which 457 are JVs. For Q2, we anticipate installing around 28 to 30 new theaters with about 9 of them currently expected to be sales type, and about 19 to 21 JVs of which we expect about 8 to be hybrid JVs.

For the full year, we continue to expect to install a similar number of theaters as last year, and we currently anticipate about 40% will be sales type and around 60% JVs, including about 25 hybrid JVs. In terms of cadence, we originally expected about 50% of the installs for the year to be in the fourth quarter; however, there is a potential for some of the JVs to pull forward into Q3. We will provide more information on the Q3 and Q4 installations on the July earnings call when we have more definitive information.

In addition, we now anticipate having around 20 to 25 laser systems installed by the end of the year, the vast majority of which are laser upgrades. In regards to signing activity, we signed deals for 21 theaters in the first quarter, resulting in a backlog of 403 theaters at quarter end, with 378 new theaters and 25 upgrades. About 85% of our backlog represents contracts for theaters in international markets.

Moving to the P&L, total revenues for the quarter came in at $62.2 million, up 29% over last year. This sizable increase in revenues was predominantly driven by our continued network growth, stronger box office, along with two additional sales type leasing installations and four additional hybrid installations in the first quarter, versus the same period last year. Total gross margin in Q1 was 57.8%, up 300 basis points compared to Q1 of 2014, despite having four additional JV hybrids and the foreign exchange headwinds in the most recent quarter.

Revenue from sales type installations for the quarter was $8.6 million, compared to last year's $4.5 million, reflecting the installation of 5 full new sales type leases installations compared to 3 installations in the same period last year. The Company also installed 2 system upgrades in the first quarter, 1 of which was the laser upgrade at the TCL Chinese Theater. This is compared to 2 upgrades installed in Q1 of 2014.

Moving along, strong film performance resulted in JV and DMR revenues of $15.9 million and $17.7 million, respectively. The JV gross margin of 66.9% included the aforementioned hybrid JVs. If you back out the hybrids, the JV gross margin was 73.2% in Q1, as compared to 68.9%, in Q1 last year, an improvement of 430 basis points.

On the DMR side, gross margins were up almost 200 basis points, to 74.8% in the quarter, from 72.9% in Q1 last year. This increase was driven by a combination of strong box office, while containing DMR cost of goods. In the first quarter, DMR costs were $4.4 million, compared to $4.1 million in Q1 last year. We continue to expect annual DMR cost of goods to be at the lower end of the $20 million to $30 million range. DMR revenue as a percentage of total box office was 10.7% this quarter, which is lower than the 11% we saw in Q1 last year and reflects the significantly higher mix of China box office this quarter, as compared to last year.

In regards to operating expenses, SG&A, excluding stock-based compensation, came in at $22.8 million, compared to $18.1 million on the same basis last year. The increase was partially driven by FX exposure, primarily to the Canadian dollar, which resulted in a $900,000 increase in SG&A this quarter, compared to the same period last year. There will also higher staff costs, some additional marketing expenses, higher incidental facility costs compared to last year, due to the move to our new Playa Vista office. Stock-based compensation for the quarter was $5.6 million, and we expect roughly $20 million in stock-based comp for the full year.

Moving on to R&D, our expenses for the quarter came in at $4.5 million, compared to $3.6 million, in Q1 last year, which reflects higher costs associated with the tail end of our laser development. We continue to expect our total operating expenses as defined by SG&A, excluding stock-based comp, plus R&D, to grow approximately 5% to 8% [over] last year. For your reference, last year's total operating expenses under the same definition was $94.3 million. We would anticipate our total SG&A, ex stock comp, plus R&D for this year to be in the range of $99 million to $102 million.

Our total tax rate for the quarter came in at 26%, and we continue to expect our full year 2015 tax rate to come in at about 26%, with about $15 million to $18 million of cash taxes. Adjusted EBITDA for the first quarter was $16 million, representing a 27% increase over last year. Remember, this quarter's EBITDA reflects our Chinese investors' full 20% minority interest as of early February, when we close the second tranche of the investment. The minority interest reduced adjusted EBITDA by $1.9 million this quarter.

Note that we had no minority interest expense in the first quarter of 2014, as the China transaction occurred in Q2 last year. If we exclude minority interest, our EBITDA grew by over 40% this quarter over Q1 of 2014. We continue to expect the full year minority interest from the China transaction to reduce EBITDA by about $10 million to $11 million in the aggregate. On the P&L side, minority interest was $1.1 million in the first quarter, and we expect year end minority interest impact for the P&L to total around $6 million to $7 million.

Our continued developments on our home initiative with our JV partner, TCL, resulted in an expense of $400,000 this quarter. At this time, we expect roughly $2.5 million of expense for the full year associated with our TCL joint venture. With regards to cash flow, we generated $6.1 million in operating cash flow, which was somewhat impacted by a build-out of inventory of $8.6 million, which included laser.

In addition, we completed the construction of our Playa Vista facility, in which we invested $16.6 million in the first quarter, with roughly $11.4 million of that financed through our construction loan. Offsetting this was the $40 million of cash that came in from our Chinese investors in February, at the close of the second tranche of their investment. All in, we generated $33.8 million of cash in the first quarter, resulting in a total cash balance of $140.3 million at the end of March.

Overall, 2015 is off to a great start, and we are excited for what the future holds. With that, I will turn it over to the operator for Q&A.

(Operator Instructions)

Eric Handler, MKM Partners.

Thanks for taking my question. Rich, two questions for you, first, the IPO of Wanda Cinemas in China has just been a phenomenal success. The stock has just skyrocketed since the IPO. I'm just curious, in terms of the possibility of you listing in Hong Kong for IMAX China, what boxes do you guys need to check, in order to start the process rolling there? And, how -- for lack of a better word, how big of a bottleneck is just the uncertainty with the government giving you the go-ahead? And then, secondly, in terms of your deal activity, where are you seeing the most activity right now internationally?

On your first question, Eric, as you know, we brought in minority investors last year that owned 20% of IMAX China, and part of our long-term plan in China has always been to find liquidity for them, through a variety of alternatives, including the possibility of a public offering. We have been exploring that possibility. In terms of -- and we have -- we can't comment on the timing or the specifics of it, many of which are beyond our control.

The only things I can add are, in terms of boxes to check, on their regulatory processes that are completely beyond our control, and we can't predict where they go. However, the government approval has nothing to do with the Hong Kong Stock Exchange. In terms of deal activity, as I said during my comments, it is pretty strong. There is a lot going on in Japan following up on the Toho opening in Europe. We have had a lot of signings during the quarter, and we think there is a lot of promise as we went through the numbers on Avengers. The territory is performing extremely well, especially in Scandinavia.

I hesitate to say this -- and, internally, we kind of laugh about it -- but Russia and the CIS still remains a good territory for us. There is an awful lot of activity going on. You have seen a number of announcements in China during the first quarter. I think deal activity there is pretty good. About the only place I would say that has slowed down a little bit is probably Brazil and Latin America because of the strength of the dollar there. I still think those will be terrific markets for us, but I'm not sure they will be the next quarter.

Thanks a lot, Rich.

Townsend Buckles, JPMorgan.

Thanks. Rich, coming out of CinemaCon last week, and your own gathering of exhibitor partners earlier this month, can you talk about the sentiment toward IMAX as it fits in with the expanding number of other premium offerings that theaters are looking at, whether it's recliners, moving seats, or some other companies like Dolby trying to follow your model of working with studios and filmmakers? You clearly had a great start to the summer with Furious and Avengers, which has to help stand out from the fray, and you touched on those in remarks. Would you say, back to your signing activity, whether it has been a pick-up from a tougher stretch last year, and could we see an acceleration in signings ahead?

This is the second year in a row, Townsend, that we did a private event before CinemaCon. We invited, I don't know, something like 35 of the largest exhibitors in the world, [the] CEO conference. We put them together with different industry leaders, whether it is studio leaders or other industry leaders, and we spent a weekend with them, actually, not so much discussing IMAX, but discussing the future of the industry, things like alternative content, things like the future of the blockbuster. It has really become a very interesting, important forum for us because, not only are the topics interesting and not only do we learn a lot from each other, but we spend a lot of time networking with our top clients around the world. And they spend time networking with each other.

So, that would be the place where I got more feedback, because CinemaCon tends to be a broader forum, where you just get half-hour meetings with senior executives of exhibition. You don't really get to sit down and have long chats. And I would say, the feedback that I got, both there and afterwards, was extremely positive towards IMAX. I think the exhibitors understand quite clearly that IMAX is the top of the food chain and IMAX is an end-to-end offering.

There was a lot of buzz about our laser because some had seen it before. Some had seen it afterwards. I guess I would say, I thought we were in as good a place as we have ever been with the exhibitors. By the time we got to CinemaCon -- our event was in San Francisco over the weekend, and then, on Monday, we got to Las Vegas -- by then word had spread about a lot of things that we were talking. So, people who weren't able to attend our event also had very positive things to say, pretty much on a global basis.

So, without naming names, if you look at people that weren't in our business -- and I gave two examples, but they're important ones -- the Vue is one of the largest exhibitors in the world and in Europe, and Toho is one of the largest exhibitors in Japan, and one of the biggest content creators in Japan. Those would be really good examples. It's not just people who were in our business before, but it's people who have never been in our business getting in our business. Obviously, you have detractors, and you have competitors. It wouldn't be a capitalist world if you didn't. But I think, overall, the tone and the mood, and understanding our positioning and where we are in the ecosystem, and what we have accomplished, and what we can add to their chains, was as good as I have ever seen.

Great. Makes sense. Maybe for Greg, on the Hollywood numbers in China so strong, do you expect they will take measures to cool that down a little bit through either blackout or double dating of films? Are there attractive local titles you can play this summer? And, just in general, out of CinemaCon, where you are seeing the most enthusiasm in the slate. And, conversely, you don't need to name names, but anything not quite seeing the tracking that may lead to some shuffling or editions in the slate? Thanks.

First, on the China front, we only know about a month in advance. And, for the titles that we have a month in advance, things are looking good. We know that July tends to have a blackout period. As you know, Anthony Vogels, who runs our international language titles, is all over China in terms of making sure that we have a great complement of Hollywood films, obviously working with the rest of our team in China that has a great eye for the local language films. So, whenever there is a switch into Mandarin language titles, we are covered. It is too early to tell exactly what the China film import/export position is going to be. But, one way or the other, we will be covered.

As it relates to CinemaCon, what I think was most interesting about CinemaCon is, of course, the big titles that we all expect were terrific and looked great, obviously Star Wars and the titles that we all know about. But there were a bunch of, what I will call, sleeper titles, as you pointed out, that came out of nowhere, at least for some people. And I think we are very, very well perceived. Obviously, Tom Cruise showing up and showing what he did on Mission Impossible 5, everyone loved that, and that was incredible.

I think The Walk, which Rich has talked a little bit about in the past, definitely shined a bit. That is the Bob Zemeckis movie that I think people are very excited about. Everest, also -- which is also a fall title, I think made quite a strong impression. A title that isn't an IMAX title, but I can tell you that everybody went crazy over, was the sequel to the Vacation movie, which is coming out in the end of July. Again, it is not an IMAX title, but I don't think that really matters (laughter). I would bet on that one. That looked really, really fun.

So, there was a lot of great product in CinemaCon, and I think it bodes very well for what is a trend in the business, which is a lack of seasonality in our industry. It used to be you had five pockets in the year. It doesn't feel like that is the case anymore. It feels like movies play 12 months a year. The American Snipers of the world, the Furious 7 doing what it did in April, and now these great titles in September and October, I think suggest that 2015 is as smooth a year, without the lumps of certain pockets, that we've ever had.

Good to hear it. If any of the bigger titles don't quite hit, do you expect to put in others? Do you have some others in the wings? Will you remain committed on that two or three weeks?

As I have noted, our pillar titles are our pillar titles, and we feel very good about them. But, at other periods of the time, we always have options because of our international business. We go in hoping that we're going to stick with everything that we have committed to. But if something changes and something doesn't work, as we have shown in the past, we are able to adjust accordingly. Our strong preference is to keep the path that we currently have.

Thank you.

Steven Frankel, Dougherty.

Good morning. The last couple of years, you talked about the notion of exclusive IMAX release windows. It looks like this year and next year are so chock full of big-tent poles that maybe that is not a possibility. Or, do you think there still are some films coming up where you might be able to do that? If you can't do that, what else can you do to differentiate your experience versus the experience in a PLF or a traditional theater?

First of all, the experience itself, one of the benefits that I have is, I am able to spend a lot of time with filmmakers. When I have watched, over the course of the last two or three months, really important filmmakers watch our laser system. In the back of my head, the first thing that I have been thinking about is exclusivities, because I can see their eyes light up.

We can't declare exclusivities until the actual movies are finished. Because you wouldn't really want to have an exclusive window on a movie if the word of mouth on the movie wasn't going to be incredible. So, just because you may not have heard something yet, don't take that as any sign. I think it is likely. I'm not going to promise it, but it is likely that you will be seeing some over the course of the next 12 to 18 months.

As it relates to the differentiation, you really think about it, Steve, in the last six months, between the ARRI camera; between the laser system; and between the immersive 12.0 sound system, not to mention the slate, and then not to mention also the increase in the theater count -- particularly in the markets, as Rich pointed out, that hadn't been IMAX markets -- we fortified our chain in a way that we never have before. So, the differentiation is as strong in IMAX as it has ever been. We've really hunkered down as a Company to make sure that everyone knows, as an end-to-end solution, we start in the very beginning of the chain, and we work our way all the way through.

I think that we have shown our partners that, when they get into the IMAX business, it is not just putting a DCP in a theater 24 hours before the movie comes out. We're a part of these movies from the very beginning to the very end of the process. That includes our new marketing campaign. That includes so many different things.

Great job with the directors that are household names today, but what are you doing to make sure that (technical difficulty) the next generation of directors comes up into the system, that they are equally aware and into the IMAX experience?

Part of that is our new building, by the way, and also our TCL Chinese Theatre. We have created a filmmaker symposium that we do two or three times a year. We are doing it with CA, the agency that we work with. Phil Groves, who runs our distribution business, has played a big part in it. In that process, we've met with young filmmakers, like Chris McQuarrie, who by the way is the director of Mission Impossible 5. We have had conversations, for instance, with James Wan, who is the director of Furious 7, who became a big supporter of IMAX.

We have our USC Theatre at the USC Film School, that has also been an incubator for cultivating new talent. Again, we are not doing this by throwing things against the wall and seeing if they stick. We have a really good system in place to nurture and grow young talent with the IMAX DNA, to be able to get them to use our tools to start making movies in the studio system.

Okay. You used to talk a lot about the performance of small markets like Sparks, Nevada. Now that those smaller theaters have been around for a while, have the PSAs held up?

Yes. They are. Sparks, Nevada, it wouldn't be an earnings quarterly call if I did not talk about Sparks, Nevada (laughter).

You're welcome.

Sparks, Nevada, continues to be a very high-performing theater. It is a competitive zone. They are getting all of the product. Galaxy, which is a company that we are doing more with, has had a great run there. And there is a series of other smaller markets that have come in as a result of the success of that market. It just shows, when you put a quality theater in an underserved market, people will come and enjoy it, and Sparks remains a fantastic example.

Bill Warren in Wichita, Kansas -- and Moore, Oklahoma, there's another guy who does that -- and then, some of the markets that we've gone into -- in parts of Europe, for instance -- that have not traditionally been IMAX markets. The fact, again, that we did $175,000 in Denmark on the opening weekend is just absolutely phenomenal. I think there are more of those. We are not building our business on those small theaters or the small markets, but when we find the right partner, and we find the right market, we obviously go for it. And it is, more often than not, working.

All right. Thank you.

Eric Wold, B Riley.

Good morning. A question for Rich, and then one for Greg. First, Rich, on China, as you look at the opportunity there, obviously you talked about it on the last call, the installs now and the backlog already exceed the 400 locations you previously thought was the market for IMAX there. I'm sure you update that on Investor Day coming up. Are you seeing more demand coming in from tier 2 and tier 3 cities, in a region? And maybe get a sense of what percentage of your theaters right now are in those two tiers, and how do the results compare to what you see in the tier 1 locations?

Eric, I don't have it broken out by that, but I can tell you that, last year, we grew our network by about 40% in China, and our PSAs were constant. As you know, from what we reported this morning, the PSAs are still remaining relatively constant, and as you know from reading the box office results. I know that was part of some doubt [as thesis] at some point that as we expanded into different markets that the PSAs would drop. We really haven't seen that.

In terms of your question about the data slicing and dicing, and what is it, we haven't done it that way. I will tell you one of the reasons. In some of the larger cities like Beijing or Shanghai, you might have a dozen theaters or even more. Obviously those cities that have higher populations have more theaters in them, so there's more internal competition. In general, we have not seen a degradation or a pattern related to the tier of the city and the box office.

Perfect. Then, Greg, in the last call, you commented that you had content confirmed this year for 51 and 52 weeks. I want to make sure you got that last week filled in. I know it is early looking at next year. You've been signing a bunch of long-term deals with Warner and Disney and others. Can you give us a sense of, right now, the announced or unannounced visibility into next year's slate, and how much flexibility you leave for yourself with that slate?

As it relates to the September 11 weekend, we have got two options. We just haven't decided which one we're going to take. We are spoken for, for the year. We're mostly spoken for, for 2016, with the understanding that there is always juggling. We saw a couple weeks ago, that we had Pan coming out in July, and that movie has now moved to October. So, there are always adjustments that are made. We always make sure that we have the flexibility when an adjustment is made, to be able to move something up or move something in. We have a lot of things.

I am, as I have said to you before, genetically predisposed to worrying, and I will continue to worry. But one thing that I am not particularly worried about is that we're going to have enough films. The quality of the films is always the thing that is out of our control. We'd like to think that we do our homework and our diligence enough to make sure that we are picking the highest quality movies, but it is the movie business. Having enough movies does not look like that is going to be an issue for the next couple of years.

Perfect. Thank you both.

James Marsh, Piper Jaffray.

Thank you. Two quick questions here, first to follow-up on a potential IMAX China IPO, I realize you are limited to what you can talk about here. I just really wanted to understand how the mechanics of this are expected to work, if it is a IPO. Is it as simple as the China screen performance just moves out of consolidated results, and then, instead, you have an investment in a separate entity that is going to be publicly traded? Or do you guys expect to continue to be able to consolidate that?

And then the second question relates to your institutional theaters. I just noticed that the count went from 115 down to 105 year over year, down about 9%. I'm trying to figure out, are these actually closures? Are these moving to commercial entities rather than institutional? Thanks.

On your first question, James, I really can't comment on the mechanics of something like that. It really wouldn't be appropriate at this time to go into it in any more detail than I did. The second thing, in terms of the institutional theaters, we had a problem in our institutional network, which was twofold. One, it was filmed based, not dissimilar than the commercial network. so, you could only play very few films, and you had to play them for a very long period of time. A lot of institutions really didn't have a model that worked, and that is why we put a lot of money -- one of the main reasons -- I shouldn't say main, one of the reasons we put money into our laser development was so that we could transition these institutions from film based to digital based.

We just launched that product, as you know, a few months ago, and we have been showing it to the institutions. We have something called an institutional CEO Council, where we meet with the CEOs of a lot of the institutions to educate them on that transition.

The second thing would be, we raised our documentary film fund so we could make more of an effort in terms of creating content for the institutions to show. But, there has been a gap period where they didn't have a digital solution, so they couldn't play a lot of movies and there wasn't a lot of content. And that downtick in the number of theaters is what you are seeing because there was a gap there. Right now, where we have launched the laser, and we've launched the film fund, we are hoping to address that going forward.

Okay. Great. Thanks very much.

Kevin Lee, Stifel.

Good morning, and thank you for taking my question. Just a quick one on the system sale install/upgrade front, if we assume that system sale installs ran at the traditional $1.2 million to $1.3 million ASP in the quarter, that would imply that the upgrades were around the $1 million range, which is higher than, call it, the $400,000 that you've roughly guided to. Is that because one of the upgrades in the quarter was a laser theater? Are you able to provide any additional details around the economics of laser? Thank you.

I am going to just transition from the question James asked. I want to add something. Then I will answer the first part, and Joe will answer the second part. I should mention on the institutional front, between yesterday and tomorrow, we are opening our first laser institutionals. The Pacific Science Center opened yesterday, and the Smithsonian -- one of three contracted for it -- is opening tomorrow. That is the beginning of the evolution. I omitted that from my answer.

In terms of margin on laser, it is a very difficult question to answer, and I don't want to be evasive about it. It is completely the truth, which is that, laser itself, again, our system, is a new product in the market. And it has a cost curve which you would expect for any new product, which is that it is expensive now.

As it rolls out, not only in theatrical uses, but medical uses and other uses, we expect the cost curve to come down. So, if you ask us what are margin was, it's going to vary. We have a backlog of about 70 of them. I really don't know exactly what the margin is going to be over time, although we have forecasts based on what we think the likely laser roll-out is going to be.

The second variable that makes it difficult to pin down is the fact that the cost of laser varies on the size of the screen. If it is a 100-foot screen versus a 70-foot screen, it needs more lasers, and it costs more. It is not really susceptible to a simple answer, other than I can tell you that the way we have modeled out, we hope to drive margins in laser under a larger deployment scheme to similar to where they are for our digital product. We are not there right now. Joe, do you want to answer the rest of this question?

In terms of the average sale price per unit in the quarter, it was $1.3 million. And the laser upgrade, again, the deals are going to vary. This particular quarter, it happened to be a unit that has some margin associated with it. As Rich said, that's going to vary, depending on the location and the install.

All right. Thank you very much.

Aravinda Galappatthige, Canaccord Genuity.

Good morning. Thanks for taking my questions. Rich, you have about $140 million in cash right now on the balance sheet, and I think about $124 million of net cash. I just want to get your thoughts on how you are thinking about M&A options. You talked about reinvesting back in the business. I want to get a sense of what the parameters are. How far would you go? Where would you go? Where would you not go? Just [point] your thoughts on that?

Aravinda, that is a really good question. I am going to give you a two-part answer. The first part is that we spend a lot of time thinking about it. I would say, at the moment, probably almost half my time is spent looking at options to answer that question. The answer to that question is that we're focused on original growth opportunities that we have been outlining and we have been investigating.

Then we are also investigating whether there are acquisition possibilities. We have certain internal criteria, which includes a minimum threshold on IRR, a certain size that would be significant enough to make a difference. But, one thing we are not going to do, and this is announce products or initiatives until we are fairly certain that we button down the parameters, and we have a high degree of comfort that they are going to work. To sum up the first part of my question, the answer is, yes. We're looking at all kinds of alternatives.

Then the second part is, in Investor Day, which are having in early June, we hope to be able to outline a more specific criteria for you, and maybe even more specific ideas for you laid out in detail. But I don't want to do it until they are further buttoned down.

Great. Thanks, Rich. And just a quick question for Joe, I think I missed the hybrid count in the JV installs on Q1. I'm wondering if you can give me that. Thank you.

There were five.

Thanks a lot.

Matthew Brooks, Macquarie.

Good morning, guys. I just want to (inaudible) a comment that whenever you can make some announcement about the potential (inaudible) here in Hong Kong, that would be very good. Because I know there's a lot of investors, that is the number one issue they have.

In a more general sense, I think laser is the key to your keeping that competitive advantage that you have. You can't discuss the cost curve, et cetera, but can you make any comments? Can you see any potential uptick in PSAs at some of those laser theaters? Do you have any data? You mentioned a lot of the tech specs, which sounds great, but do you have any data that indicates the consumer experience of the laser so far?

Two answers to you, one is that there will be an uptick in PSAs because of laser. In fact, there are theaters -- the most simple way to understand laser, and it applies to both parts of your question, is we can light screens up to 120 to 140 feet wide and we can light screens over 80 feet wide, using our laser -- stop, end of story. No one else in the world can light screens like that or has a product on the shelf that can do that -- stop, period. Forget any other aspect or attribute of laser. We can accomplish that.

A lot of the film-based theaters, such as James Marsh's question about the institutional theaters, they just can't put in a film system because it won't work. If you can put in a digital system that can show 40 films a year, that in a film world can show 5 films a year or 10 films a year, the PSAs are going to go up, so that is just a matter of simple math. In some of the situations, like Sony Lincoln Square and the Metreon in Universal, we had an interim solution where we put a digital projector on the screen which showed a smaller image. That was the case in the TCL. We weren't filling the whole screen.

Now that we are filling the whole screen, the image is even more overwhelming, and the quality is superior. Will that translate into PSAs? I think, even if you don't have golden eyes, I think it will because it is just a better experience. In terms of consumers, yes, the consumer will notice that there is a much larger image, and that it is brighter. Whether they will know the blacks are blacker, or whether they will know the contrast interframe is better, which means the blacks and the whites don't bleed together, I can't answer that question. Again, they will know they are having a terrific experience. I think they will know they are having the best experience available. I will tell you two constituencies who will notice, and one is filmmakers and one is studios. The fact of the matter is that they are the ones who are going to make the decision whether to remaster for our laser format.

People who have seen our laser system, the few we have up and running today, are incredibly impressed. They are remastering their movies for our laser system, which provides a really superior experience. One thing that is going to happen is because it is brighter than film and because there is more contrast, et cetera, I think the filmmakers, over time, are going to make films that capitalize on that experience. Back to the question someone asked Greg about IMAX DNA, and making a special experience, I think the filmmakers understanding that will create more special experiences and more place to go.

Without belaboring the point, the final point I want to make is the places the lasers are going are the TCL Chinese Theatre, they are going in Leicester Square, they're going in New York in Lincoln Square, they are going in the Smithsonian. They are going at the most high-profile locations in the world. So, in terms of brand glow and brand understanding, they are certainly going to add value there. Whether the consumer can tell that it looks better than 4K, I think that is a micro way of looking, and I'm not sure I can. But whether it helps the Company in a material way, I have no doubt that it will.

Michelle, I know we are running out of time here. Maybe we can just take one more quick one.

Mike Hickey, The Benchmark Company.

Guys, thanks for taking my question. Great quarter. Congratulations. I'm just curious, outside the quality of the film product this year, it seems like the pacing of films have been very complementary for presumed growth here. I'm curious why you think this is an all of a sudden an awakening from the studios within a very mature industry. It seems like a logical assumption. And then, if you suspect a continuation, if you will, of this more thoughtful pacing of films over future slates, or is it back to normal?

I don't really -- I can't articulate exactly what the reason is, other than it is very clear that something's taken place. I think what is taking place is that there are such huge investments made in these movies, that they are realizing that when they see a competitive film go out, they don't want to open up on top of it. Because it doesn't necessarily help their long-term viability. There is also, I think, a degree of IMAX in the middle of it because everyone is vying for our slots, particularly for the pillar titles. We have obviously noticed the spacing.

You can just look at the last couple of months where you see Furious 7, and then a month later is Avengers, and then a few weeks later is another title, and a few weeks later after that is another title. It is a very comfortable spacing. And that continues also into the seasonality factor where, all of the sudden, you have fairly big movies opening up in the fall, or opening up in January or February, which makes us a 12-month business. For whatever reason, that's what seems to be going on. I think it is just happening organically.

Thanks, Greg. One more quick one here, I'm just curious. I know you are limited on how much transparency you have into the release schedule of China. Perhaps, just generically, if you could speak to how you see Star Wars releasing in the region, the potential impact of the Chinese New Year and the blackout period that you, historically at least, had to work out in early 2016, that would be helpful. Thank you.

I think it's just premature to forecast, for 2016, how a release schedule is going to work. A lot of things can happen between now and 2016.

With that, I would just like to quickly sum it up. We came into 2015 with very positive, but I will underestimate the word, realistic, expectations. I think Q1 supported that view, from a financial point of view. So has the beginning of Q2 thus far.

With that said, and as happy as I am by all that stuff, I am most proud of the pieces that we put together for the long term during the quarter, first of all, on the successful openings, which I mentioned throughout the world, which should lead to theatre growth, and second of all, the laser performance and the laser premiere. I know it sounds easy, but it took us three years, and we spent about $60 million, and the projector has 6,000 parts in it. It worked flawlessly.

I think the growth in the strategic markets, because of our signings. And then, finally -- we glossed over and didn't spend a lot of time, but we signed almost 40 films, in the last several weeks, with Disney and Warner Brothers. These calls used to be a lot about, can you get the films? Can you keep your margins on the films? How do I know you can get the films? I think it's a testament to where our business has been that there were virtually no questions on the call about our ability to get films or keep our margins on the films.

I think the quarter really bodes well for the rest of the year, and thank you all for participating.

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