Imax Corp (IMAX) 2016 Q4 法說會逐字稿

Good day and welcome to the IMAX fourth-quarter 2016 conference call.

(Operator Instructions)

As a reminder, today's conference is being recorded. At this time I would like to turn the conference over to Ms. Jessica Kourakos, Senior Vice President of Global Investor Relations. Please go ahead, ma'am.

Thank you. Good afternoon and thanks for joining us on today's fourth-quarter and full-year 2016 earnings conference call. Joining me today in our Los Angeles office is our CEO, Rich Gelfond, our CFO, Patrick McClymont, and our Head of Entertainment, Greg Foster, who will each have prepared remarks and will be available for Q&A. Also joining us is Rob Lister, Chief Legal Officer and Head of Business Development.

Today's conference call is being webcast in its entirety on our website. A replay of the webcast will be made available shortly after the call. In addition, the full text of our fourth-quarter and full-year release and the slide presentation accompanying today's call have been posted on the investor relations section of our website.

We also provide quarter-to-date box office results on the IMAX investor relations website every Friday, with a one-week lag. We also have one investor relations Twitter account using the handle IMAX underscore investors that includes this box office disclosure as well as other items that may be of interest to the investor community.

Finally, I would like to remind you the following information regarding forward-looking statements. Our comments and answers to your questions on this call, as well as the accompanying slide deck, 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 net income, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this afternoon's press release. With that, let me now turn the call over to Rich Gelfond.

Thanks, Jess, and thank you all for joining us today. 2016 was an impressive year on several fronts. I would like to start out by highlighting some of our key accomplishments before getting into more detail on signings, installations, box office and ultimately new initiatives.

Looking first at the core business, in 2016 we signed agreements for a record 319 new theaters across 28 countries, which highlights strengthening demand for IMAX theaters around the world. As a result of heightened signings activity, we significantly increased our installation pace throughout the year, adding 166 new theaters to the network and bringing our global network to more than 1,200 installed screens, with an additional 498 in backlog.

As we look to 2017 and beyond, we believe our robust theater network is very well-positioned to take advantage of the promising slates ahead for us and with exciting multi-picture deals, such as the one we announced yesterday with Disney, which encapsulates films across Lucasfilm, Pixar, and Marvel, we should have a long, diverse pipeline of exciting films for years to come.

Greg will go into specifics, but the Disney deal includes a large number of big titles such as Star Wars: The Last Jedi, Black Panther, and Incredibles 2. And given that so many of our new theaters are joint revenue-sharing arrangements, we are better able to participate in any potential upside these exciting films can generate than ever before.

Rounding out our core business accomplishments last year, IMAX China completed the initial phase of its China film fund, which currently has over $100 million available for investment and of the significant cash flow our core business generated this year, we returned $117 million of capital to shareholders in the form of share buybacks.

On the new business front, which consist primarily of our original content and virtual reality initiatives, we announced a strategic partnership with Marvel and ABC where we will not only have eventisize the two pilot episodes of Inhumans television series exclusively in IMAX theatres worldwide in early September, but we will also benefit from selling the first run and potentially ongoing syndication rights to the show on a global basis.

I will offer up more details on this initiative in a few moments, but suffice it to say that we view our equity participation in the overall television series as well as the launch -- as the launch of a new business initiative that could provide meaningful upside down the road, as we not only benefit economically from the box office proceeds but also from the ongoing licensing fees generated by broadcast, SVOD and potential global syndication windows for what we hope to be many years to come.

With regards to virtual reality, we officially launched our flagship IMAX VR Center in Los Angeles on January 6. After we reviewed the market landscape and started to model out what the VR business could mean to us, we've come to believe there is a significant opportunity in eventisizing VR in a similar way to how IMAX is known to eventisize movies. And we think allowing consumers to experience the very best of VR without having to invest thousands of dollars on in-home VR technology is a great way to kick start the industry.

While still very early, we believe this approach to the market is already beginning to be proven out in the marketplace. So far, our LA location has exceeded 7,000 attendees in its first six weeks of operation and sales and occupancy figures are trending ahead of our expectations.

We are also seeing strong momentum in building out our content and distribution partnerships. Last week we announced important content partnerships with Ubisoft and Skydance to release five exciting experience and games in our centers. On the hardware side, we have already partnered with HTC, Google, and Acer.

We have also announced that we are planning on opening four additional pilot locations to be the ones that were announced -- in addition to the ones that were announced in Los Angeles and Manchester, England, for a total of six. We expect that all, if not most, to be open -- most if not all to be open by the middle of the year.

To further the development of new VR content, we also completed the initial phase of our $50 million VR fund, with several strategic investors including China Media Capital, CAA and WPP and look forward to commencing content deals with a number of promising VR companies over the coming months. As we look at our investments and original content and VR, we have structured them to be relatively low risk, high potential return opportunities.

If successful, these new initiatives have the ability to strengthen the IMAX core theater business over time as well. We will touch on these in more detail shortly, but suffice it to say, I am very encouraged by the strategic achievements that the Company has executed against this year and look forward to what they can mean for us over the long-term.

Looking at 2016 in a bit more detail, on the network side of things, as I mentioned earlier, we signed agreements for a record 319 new theaters in 2016, bringing our year-end backlog to 498 screens. I would also like to point out that the large majority of our signings activity last year came from existing partners who see firsthand the strategic and financial benefits of having IMAX theaters in the network and are looking to bring those benefits to more locations. Moreover, as part of our recent 11-theater deal with Regal, we extended our contract terms by two years in all of their theaters, which means our first contract renewals with any exhibitor do not begin until 2021.

On the installations front, we added 166 new screens in 2016, which is significantly more than we had originally anticipated headed into the year and well above our typical annual installations level of 115 to 120 theaters. We believe the increased pace of installs was at least partially the result of exhibitors' desire to get theaters up and running ahead of the promising 2017 and 2018 film slates.

I would also like to point out that our network is skewing more and more to JVs and as a result, our core business is increasingly tied to box office. While we benefit from increasing the recurring and high-margin box office dollars, do keep in mind that box office for any one particular film is difficult to predict in the short run, but over the long run, the portfolio of films we release is very predictable.

On the topic of box office, I would like to provide a brief synopsis before turning it over to Greg. In 2016, we delivered global box of $966 million, which resulted in a global per-screen average of roughly $1 million. Domestically, we delivered a PSA of $935,000 and internationally, ex China, delivered a PSA of over $1 million. We saw significant PSA growth in some select international markets, namely Japan and India, which happen to be two countries with strong growth potential.

As many of you know, China's PSAs were disappointing last year and were the biggest contributor to our weaker overall box office this year. Given its importance, I would like to take a few moments to give you an update on what we are seeing in China.

Our PSA in China was $932,000 in 2016, down versus historical levels, particularly compared to 2015, which was a very strong year. With that said, I think it's important to understand several factors; Our PSA for the first half of 2016 was $551,000, in line with the averages we saw in 2012, 2013 and 2014, and of course 2015 was higher, but in the second half we saw stronger headwinds, largely the result of a relatively weak slate.

Moreover, China's saw ticket prices decline 5% to 10% as a result of the weaker slate and dynamic ticket pricing in the market, which means that stronger films have higher versus and weaker films have lower prices. This helps us incrementally when the slate is strong and hurts us incrementally when the slate is weak.

In addition, the RMB declined roughly 7% year on year, which obviously hurt us when we translate it to US dollars, so if we're on a constant currency basis, the year over year comparison would have been 7% higher in China. Lastly, I think it's important to note that new theaters typically have a seasoning period, where it takes almost two years for them to hit their stride and so while our installation pacing in China has been increasingly strong, we have yet to see the full benefit of those theaters operationally.

That said, in spite of these challenges, we ended the year with some really good momentum. We saw IMAX indexing on Doctor Strange, Fantastic Beasts and Great wall with index at 15%, 14%, 10%, respectively, and that momentum is continuing into 2017, where we delivered record performance on Journey to the West 2, which had the biggest three-day opening ever for a Chinese film in IMAX. I would also like to highlight xXx: Return of Xander Cage is doing quite well for us in China, too, and the excitement around Vin Diesel should continue as we get closer to the opening of the next installment of Fast and Furious later this year.

As we look forward to 2017, our slate is comprised of more established movie franchises that have significant followings in China. As I just mentioned, we have Fast 8, as well as Transformers 5, both of which are sequels to two of our biggest films ever in that market and that's just a taste of what's to come. With that, I will turn over to Greg to provide more detail on the film side of things.

Thanks, Rich. We certainly feel like we have a lot to look forward in the year ahead, but before going forward, let me take a quick look back at 2016. While last year got off to a great start with the sustaining power of Star Wars: The Force Awakens and the release of Dead Pool, a couple of things hurt us in particular that should be noted.

For the last several years, we have intentionally minimized our exposure to family 3-D titles. Last year that meant Finding Dori and Secret Life of Pets. As you can see from their performance in 2016, these titles are clearly doing extremely well and have even broader appeal than expected. As a result, we are now much more open to featuring select family titles in our global network and have implemented that strategy with Lego Batman in February and of course Beauty and the Beast, which we are releasing next month and is already seeing extremely encouraging presales activity.

And as Rich mentioned earlier, our recently announced Disney deal is a perfect example of the expanse of content that will hit IMAX screens over the next several years. First off, we will of course have Star Wars Episode VIII, now officially called The Last Jedi, which we announced yesterday will feature select scenes filmed with IMAX cameras.

In addition to The Last Jedi and the next two Star Wars titles, Han Solo and Episode IX, the deal also includes Marvel titles, Marvel Studios titles, such as Antman and The Wasp, Black Panther and the next two Avengers films from the Russo Brothers, as well as Pixar and Disney's live-action and animation titles. All in all, we couldn't be happier or more excited with this new deal and look forward to continuing our collaboration with our close friends and partners at Disney and all of their all-star film makers.

Looking more specifically at 2017 for a moment, as I have mentioned in the past, on paper it looks like there should be a blockbuster title virtually every month of the year. If 2016 was about doubles, we think 2017 is about home runs. Even better, an increasing number of these films, in fact more than twice as many as last year, will include special footage optimized for IMAX theaters. This is important for us because as many of you know, we tend to over index on films that leverage our technology, generally increasing our box office share by an average of 15% to 20%.

Now looking at 2017 in more detail, here are some key pillar titles which we are part of. March is the month where the box office should kick into high gear, starting with Marvel's Logan from 20th Century Fox, which is the last installment of the Hugh Jackman Wolverine franchise and is not only tracking well but also has a 96% Rotten Tomato score, and that's with significant reviews. Then we had Disney's live-action version of Beauty and the Beast, which has an expanded aspect ratio for IMAX theatres. We will feature Beauty and the Beast for full two weeks in our network.

In April, we will see the next Fast and Furious installment, The Fate of the Furious, and as you know, the last one did roughly $90 million in IMAX box office and broke numerous records for us, particularly in China. In May, we kick up the summer with the highly anticipated Guardians of the Galaxy 2 which, according to the Hollywood Reporter article, is the highest scoring Marvel Studios film with test screen audience results. I'd also like to point out that a significant portion of the film will have an expanded aspect ratio for IMAX.

In June we have DC and Warner Bros. Wonder Woman and then Paramount's Transformers, in which Michael Bay is making IMAX cameras an important part of the design of the film. For those of you who followed the Super Bowl, the Transformers 5 trailer featured during the game looked great and has received a very favorable reaction.

In July, we will have Spider-Man: Homecoming, produced by Marvel Studios, and then Christopher Nolan's new film Dunkirk, which is almost entirely filled with IMAX film cameras. Chris is a charter member of the IMAX family and we can't wait for everyone to see his next movie in our screens. In September, we will feature Marvel's Inhumans which, as Rich just mentioned, is part of a larger television deal we have with Marvel and ABC and will be entirely filmed using IMAX cameras.

Between November and December, we have next Thor, the first Justice League film and, of course, Star Wars: The Last Jedi, which will also feature our cameras. And I forgot to mention Blade Runner 2049 in October, which we're also very excited about. That franchise title momentum continues into 2018 and beyond with titles including Marvel's Black Panther, Steven Spielberg's Ready Player One, as I mentioned, the Avengers movies, Han Solo, Incredibles 2, Jurassic World 2 and DC's Aquaman, which is being directed by James Wan, who also directed Furious 7.

With that, Rich, I will turn it back over to you.

Thanks, Greg. As I often say, signings lead to installs and installs lead to revenues and are typically the best indicators for the health of our core business. With that in mind, we believe our future looks very bright. As many of you know, box office is cyclical; however, we are optimistic that the promising 2017 film slate will bring us back into an upcycle. And with a much larger network today than we had at this time last year, comprised of a higher mix of revenue sharing theaters, we believe we have the foundation in place for a promising year.

Moving on to some of our new initiatives, we made significant progress on two fronts. The first is our new content initiative and the second is our virtual reality business. On the content side, as I mentioned earlier, we entered into a groundbreaking partnership with Marvel and ABC to launch Inhumans franchise on our global IMAX theater network. The two-episode pilot will be made into a roughly 75-minute experience and will be filmed entirely using IMAX cameras.

We expect to launch it exclusively in IMAX theaters on a global basis in early September. The first season has already been picked up by ABC domestically for the Fall 2017 season and hopefully that soon thereafter will be sold for global syndication, SVOD and other syndication windows as they emerge.

This is a meaningful deal for both of us in the television industry, as it will be the first television show to be launched via a global theater network. This not only provides a very unique way to experience the launch of a Marvel franchise, but also facilitates swift global awareness of the television series, given our global distribution network, which will hopefully enable quicker and more profitable international syndication.

When you consider that over 500 scripted original shows released in 2016 alone, studios are looking for new ways to differentiate their content, especially among global SVOD and syndication buyers. By having an IMAX release window to launch content globally, this strategy could become increasingly attractive to content creators. We are optimistic that this content initiative will help diversify our business, provide a new revenue stream for us and potentially offset some of the cyclicality in box office. Also this release in IMAX is exclusive to IMAX, so it adds another reason for people to be in the IMAX business and expand our network.

The other area where I'm spending a lot of my time, besides the core business, is on VR. As I mentioned earlier, we've view virtual reality as a natural extension of IMAX, given our loyal base of fanboys and our association with immersive entertaining experiences. As many of you know, we launched our first location early this year and has been met with strong enthusiasm from customers and partners alike. We don't have much to share in the way of economics at this point; however, the prices of our experiences are roughly $1 per minute and most of our experiences last 10 to 15 minutes apiece.

The centers themselves cost roughly $250,000 to $400,000 to create and while it's too early to talk specifics right now, we are very encouraged by the early reactions to the site, with the overall attendance and occupancy rates coming well ahead of our internal expectations. We hope to present more information at our upcoming Investor Day, which we are planning for May 11 at our Los Angeles headquarters. As an added incentive to attend, we will bring everyone to the IMAX VR center as part of the event and share more details about our rollout. We look forward to seeing many of you there.

I hope you agree there are a lot of exciting things going on at IMAX. The network is growing at the fastest pace we have seen in many years, signings activity continues to be robust, we're entering 24 months filled with potential blockbusters and we have launched two very exciting new ventures in content and virtual reality.

When it comes to the core business, we fully appreciate the importance of operating leverage and remain focused on cost control. When our new business initiatives move past their startup phase, we believe IMAX will emerge as a stronger company. We hope you can all see the potential value they provide and share our enthusiasm to bringing IMAX to the next level.

I'll now like to turn it over to our CFO, Patrick McClymont. Patrick?

Thank you, Rich, and good afternoon, everyone. As Rich discussed in his opening remarks, our core business continues to benefit from strong global demand for IMAX theaters. During the year, we installed a total of 166 new theaters, exceeding the midpoint of our original 2016 guidance by approximately 40%.

If you turn to slide 4 of our earnings presentation, you'll see the breakdown of our 166 new installs in 2016 by type. Additionally, we upgraded 16 existing theaters during the year primarily for our laser GT systems. I'd also like to point out that across our 1,100 screen commercial network, almost 60% of the screens are joint revenue-sharing arrangements, which allows us to increasingly participate in recurring box office economics.

From a geographical standpoint, China led the charge this year, with 116 new IMAX system installations. We also installed 43 new theaters in other international markets, in line with 2015. Regions producing notable signings and installations momentum include Continental Europe, Japan and India. Going forward, we believe the consolidation in the industry should increasingly play to our favor, given that our biggest global partners are the key consolidators in this space.

For example, Wanda Cinema acquired Hoyts in Australia and AMC acquired Carmike in the US, Odeon UCI in Continental Europe and most recently Nordic Cinema in Scandinavia, which includes some of the highest performing theaters in Western Europe. We look forward to working with these partners and others in our efforts to bring new IMAX theaters to more of their growing footprint around the world.

Now moving to our financial results, I'd like to begin by reiterating the importance of looking at our business on both a core and a new initiatives basis, a framework we discussed during the Q3 call. As a reminder, our core business consists of our network business, which includes all box office sharing revenue from exhibitors and studio partners, theater sales and maintenance, as well as other businesses like distribution and post-production.

New initiatives primarily consist of performance from our original content strategy, virtual reality startup, TCL/Home and IMAXShift businesses. As many of these new initiatives are still in the seating phase, it's important to provide investors with visibility into the fundamental economics of our core business, which drive the economics of our consolidated results.

Using this framework, let's start off by reviewing some of the key results and highlights within our core business for the fourth quarter and full year of 2016. Our core business JV and DMR revenues came in at $24.5 million and $27.6 million for the fourth quarter and generated margins of 61.8% and 60.8%, respectively.

For the full year, JV and DMR revenues were $91.4 million and $106.4 million and generated margins of 65.4% and 65%, respectively. Results reflected weaker box office, higher DMR costs, increased depreciation as we grow the network and FX headwinds.

To quantify the FX exposure, in 2016 our international box office was down roughly $26 million, or 4%, as a result of currency devaluation, primarily from the Chinese RMB, British pound and euro. Much of the box office decline last year came from China, which faced several headwinds, as Rich laid out earlier.

Our strong installations performance of JV theaters yielded higher upfront marketing and launch costs, which are generally in the neighborhood of $50,000 to $60,000 per theater. We incur this expense on installation regardless of whether a theater is installed at the beginning or the end of the year and given our installations tend to be back-end weighted, we are recognizing upfront marketing and launch costs without the benefit of the theater having time to generate meaningful box office revenue.

To quantify this issue, we incurred $4 million of these launch costs in 2016, or $0.04 on a per-share basis. As these JVs move into the subsequent year of operation, they will produce a full year of revenue with just the ongoing depreciation expense.

Before moving on to operating expenses, it is worth noting that we incurred an asset impairment charge of $1.8 million in the fourth quarter and $3 million for the year related to our film distribution business, given a more conservative view of expected future profitability of certain documentary titles. This impairment was included in cost of goods and impacted core gross margins by approximately 80 basis points for the year.

Fourth-quarter and full-year 2016 core operating expenses, which is R&D and SG&A excluding stock-based comp, was $27 million and $104 million, respectively. The primary driver of R&D in 2016, core R&D, was the strategic decision to accelerate the development of our commercial laser product.

As you can see on slide 6 and 7, our core business continues to produce healthy profits even in the face of a weaker box office. Adjusted core EBITDA for Q4 and full year was $45.1 million and $152 million, bringing EBITDA margins to 42.2% and 40.4%, respectively. Core adjusted EPS was $0.30 and $1.02 for Q4 and the full year of 2016.

Turning to new initiatives, the negligible amount of revenue and cost of goods sold in Q4 and full year 2016 came primarily from our Shift studio, which was only operational for part of 2016 as well as some VR costs. Total OpEx from new initiatives was $1.7 million and $6.5 million for Q4 and FY16, respectively, and came in a bit lower than expected. The biggest expenditure was in R&D for development of Home Theater's digital distribution system, which we will also use to distribute content in the core business.

Our consolidated results include minority interest in IMAX China. Please note that Q4 was the first quarter in which we had a true apples-to-apples comparison for this metric, as our ownership of IMAX China was reduced approximately 68% after the IPO in October of 2015. Operating expenses of $110.5 million on a consolidated basis were within the guidance level set on our Q3 earnings call and grew by 4% versus last year.

Net income reflects a Q4 and full-year tax rate of 35.5% and 28%, respectively. The higher-than-anticipated tax rate was primarily due to weaker box office revenue in lower tax jurisdiction such as China, as well as some one-time tax expenses. Consolidated adjusted EBITDA was $36.9 million and $121.9 million Q4 and 2016, respectively.

Now turning to the balance sheet, we ended the year with $205 million of cash on hand. Throughout 2016, we demonstrated our ongoing commitment to both strategically investing in our business through a number of new initiatives while also remaining focused on returning significant value to shareholders. During the year we invested $116.5 million, repurchasing over 3.8 million shares under our buyback program, which leaves us roughly $45 million left under our current $200 million program.

That concludes our fourth-quarter and full-year 2016 results. Next, I would like to go for our financial outlook for 2017. We expect to install approximately 150 to 155 new theater systems in 2017, which is roughly in line with the elevated levels of installations we delivered in 2016. Of the new installs, we expect approximately 50 to be STLs, 78 JVs and 25 hybrid. With regards to timing, we expect to install roughly 10 theaters in Q1, of which we anticipate three STLs, seven JVs and one hybrid JV.

Moving to costs, we estimate DMR cost in the line -- in the range of $40 million to $41 million in 2017. Core operating expense is expected to grow mid-single digit on a percentage basis in 2017. Total operating expense, including new initiatives, is expected to grow 10% in 2017. Partially offsetting this OpEx growth are $3.5 million to $4 million in development credits that will hit the P&L above gross margin.

As I mentioned previously, our new businesses remain in early investment stage. These initiatives reflect a number of promising opportunities such as VR and content, as well as some earlier initiatives that are still under evaluation. We project the OpEx investment in new initiatives will be in the $16 million to $18 million range in 2017. We expect the majority of this investment to be in VR and Home, with a lesser expense coming from our Marvel deal.

To add some additional color to the $16 million to $18 million range, roughly $5 million of that investment is related to our Home initiative. This is business produces robust signings activity; however, the installation activity is lower than anticipated. Along with our JV partner TCL, we're actively considering bringing in new third-party capital to finance Home's ongoing ramp up.

With respect to VR, most of the incremental investment relates to opening five additional VR centers, as well as the investment in our cinema grade VR camera and ongoing partnership with Google. These investments allow us to increasingly leverage our relationships with filmmakers, exhibitors and studios and should help drive our VR business to the next level.

With respect to the Marvel deal, we expect to see our portion of revenues from Marvel's Inhumans box office and licensing fees to impact new initiative revenue in Q3 and Q4. Production and marketing costs will primarily hit in Q2 and Q3 new initiatives cost of goods sold. The revenue and cost of goods sold from this initiatives will hit the distribution line on the P&L.

In summary, we expect a modest loss this year as is typical in television. Assuming additional seasons of Inhumans, the economics get Increasingly attractive. All and all, we will remain disciplined in our approach to new business expenses. We believe these businesses have the potential to provide us with substantial returns and provide IMAX with alternative revenue streams not tied to box office.

Wrapping up the 2017 outlook, we currently anticipate full year of 2017 stock compensation expense of approximately $26 million, down from $30.5 million in 2016. Lastly, the effective tax rate is projected to be in the 23% to 24% range. A full breakdown of core and new initiative cost guidance will be posted on our investor relations website at the conclusion of this call.

Next, I'd like to briefly touch on some recent changes to our communication with investors, as well as other enhancements still to come in 2017. In the third quarter, we implemented weekly box office disclosure on our IR website. This appears to be a welcome addition by the investment community and as such, we will continue to provide these updates. Please note that our Twitter feed, Twitter handle is IMAX underscore investors, and website will become increasingly important tools for us in 2017 and we may make additional material disclosures through these platforms in the future. We encourage everyone to check out both as they offer useful material as you analyze our Company.

I would also like to mention the beginning next quarter, we will be implementing a new recording structure that will recast certain line items in the segment breakout in our MD&A and how we present our results to you on these calls. Please note that we are solely reclassifying some of our line items and there is no change to the Company's operating segment.

The biggest change is that upfront revenue recognized in hybrid sales will now be included in the system sales line as opposed to the joint venture set -- the joint venture line. These segments will become part of our theater sales and maintenance business. We believe this will be a lot more straightforward, given this upfront revenue in no way correlated to box office.

We also plan on simplifying the disclosures to enable you to see a clear correlation between box office and actual IMAX revenue. We will be combining our joint venture revenue line with our DMR revenue line, which will provide a clear picture into our straight box office sharing revenue.

These two items will comprise our newly created network business. Our hope is that you will find this significantly more straightforward versus how it is laid out today. The change of reporting structure will likely go into effect during Q1 and coinciding with the reorganized financials, we will provide a historical model on our website prior to the Q1 earnings call.

Before I turn it over to Q&A, I would like to provide a brief update on my initial impressions during my first six months at IMAX. First and foremost, the entrepreneurial spirit and dedication by the team to making IMAX successful impresses me each day. I really appreciated this during my ramp-up phase as I work with the various business units to ensure we are doing the best we can from a finance perspective to enable their success.

There have been no surprises for me in the core business side. It's a model that produces a lot of cash and the cash flow will grow with the network. Clearly, there is a lot of runway on that opportunity going forward. On the new initiative side, our partnership with Marvel and our VR business has picked up real momentum since I arrived, so I've seen firsthand how these are on strategy and have real potential as differentiated business lines. Although Home and Shift predate me, I'm directly involved with both businesses and I'm working with their leadership to ensure we are disciplined as we see if these businesses can establish momentum.

I believe, along with Rich and Greg, there are tremendous opportunities to both expand the core business while also expanding into new, exciting areas. My goal as CFO is provide the team with the resources to pursue growth while also ensuring we are disciplined as we use our capital and we continue to focus our efforts on effective cost controls and efficiency generation. It is a fascinating time to be a IMAX, with many opportunities to pursue.

At this time, we'd like to turn the call over to the operator for Q&A.

(Operator Instructions)

Stan Meyers, Piper Jaffray.

Rich, I wanted to congratulate you on your new three-year deal with Disney earlier this week; no doubt a great partner to have. I guess two areas I wanted to focus a bit more and get some clarity. First on the camera use, I was wondering if Disney increased its commitment to use IMAX cameras in future films relative to what you guys have disclosed previously?

Second, in the press release I believe you mentioned that, under the new agreement, both companies will work together to create more marketing materials. Was this sort of implying increased marketing dollar commitment from IMAX and potential pressure on the DMR margins going forward? Just wanted to see if you had any more details around that. Thanks.

Stan, this is Greg and I will take that. First of all on the camera side, it's definitely become a more strategic initiative for us. But with that said, we are very careful not to announce anything until we actually know how the movie is being edited. You will notice that Star Wars: The Last Jedi was probably filming 1.5 years ago and we didn't announce the camera use until this week. So yes, cameras are an important part. We have announced the Marvel side with Avengers, and Marvel has been -- Marvel Studios -- an incredible partner in terms of using our cameras.

Inhumans, as we've announced, on the television side, is using our cameras. So we do plan on that being a broader initiative of ours.

As for the marketing side, we have always tried to have increased and enhanced exclusive marketing and we will be having more, but because of the framework of the Disney relationship, it will be the same economics as we have already had. We're going to devote a little bit more money into social media, kind of a pool between the two companies, but I would not in any way call it material that it's going to change our DMR margins or economics in a significant way at all. It's also about investing back into the product, and Disney and Marvel in particular are on an incredible roll, and that's exactly where we would like to invest.

Thanks.

Eric Handler, MKM Partners.

Two questions: First, Patrick, I appreciate the help in laying out some of the expenses in 2017 from the new initiatives. Wondered if you could give us some detail in how we might think of revenues, or at least if not revenues, EBITDA line. Is it a break-even year, is it a headwind of $20 million, $10 million, just so we could grasp what would be considered a range that you would consider successful or disappointing or break it out some way that we could figure out how to track this.

Sure, that's a good question. That's what we were trying to accomplish on the call, so I will try to clarify. The $16 million to $18 million we talked about as an operating expense investment, that's best described as the net number.

Okay.

We expect there will be some modest revenues, but we're still very much in investment phase in these initiatives. And so when you look at it as a net number, it's that $16 million to $18 million is what we're currently estimating.

Okay, great. I appreciate the clarification there. I am a little slow sometimes. Secondly, for Rich, a couple months ago you guys put out a press release saying that you've reseated the AMC theater on Broadway and 68th, or AMC reseated it for the IMAX screen. I happened to notice that there was also a very nice recliner or rocker reseating done in your New Rochelle IMAX screen as well.

How many screens have actually been reseated with these nice leather recliners -- very comfortable, by the way. How many of your facilities do you expect to reseat over the next year or two? Has there been any positive impact from those reseats?

Eric, as you correctly stated, it's the exhibitor that does the reseating, not us. I think we have about 25 reseated so far. Again, we don't have a layout, a plan from each of the exhibitors but I would just guess that at least that number will probably be done again this year.

There's different kinds of reseating. There's recliners or there's rockers you enjoyed in Lincoln Square and in New Rochelle. The data -- it's early, but the data on the rockers is pretty positive. It looks like there's been an uptick. The data on the recliners is a little more controversial, because as you know, we do so well on the opening weekends that the seating capacity, which you lose by going to recliners, offsets your ability to capture that amount of people.

I think based on the data today, it's quite encouraging. I think there's an opportunity for higher box office and I think hopefully we and the exhibitors will go in the direction of the rockers, which I think maximizes the returns.

Thank you. Appreciate it.

Steven Frankel, Dougherty.

Greg, maybe I'll start with you. Could you give us some color on the upcoming US/China trade negotiations and what the likely impact might be on the industry, and IMAX in particular?

I will give you that, at the moment, because I've spent a fair amount of time on it. The answer is, I feel fairly strongly that the impact on the US side, which includes us, will be positive. Remember, the WTO ruling was a number of years ago and the last go-around was a five-year term and this one is set to negotiate that term to get in compliance with the original WTO ruling.

My own opinion is the question is, how much better does it get for the studios and does it get for IMAX? Unfortunately, I don't know the answer to that. But directionally, I think it's highly unlikely it will get worse, and much more likely that it will get better.

Do you think this is something that will come into play by the end of the year or we should think about the changes of impacting 2018 rather than 2017?

That one is harder to predict, because I know the negotiations haven't started yet. They're scheduled to start in February, but obviously that's not going to happen. So I just don't know.

Okay. Let me shift to Inhumans. A lot of TV productions these days play internationally on the same timetable they do in the US. You seem to imply that it sounded like Disney was going to do Inhumans US only in season one, and the syndication happens in season two, or did I just mishear you?

No, it's going to be syndicated before the opening of the IMAX release. It's just they're not going to go out and start syndicating it for a while now. But it's going to run internationally when it runs in the US.

Okay. Will it play in China, at least on the film side?

It's interesting; we hope so and we are working hard to make that happen. But in China there are very complex regulations about getting movies in and getting TV shows in and getting video content in and we are in the middle of navigating it. We are hopeful, but we can't predict.

Okay. Let me sneak one more in. You talked a lot about getting more IMAX DNA in the films. It does impact your market share, but it also seems to me like the average person still doesn't get it. How do you take advantage of what is a great experience and make sure that the incremental person who isn't a fanboy knows what's going on and goes to you rather than a PLF?

This is Greg. I think it's harder to do when you have fewer titles per year. So one of the strategic reasons why we have doubled the amount of films with specific IMAX DNA is to capitalize on exactly what you just said. We have to condition and keep repeating the process and make sure that movie goers know about it. And doing so with a concerted, strategic plan with our partners on the studio side and our partners on exhibition is exactly what we are going to do.

I think we've already started to do that. You have seen, Steve, that on movies like The Force Awakens and some of the Marvel movies, obviously Chris Nolan's movies and the Transformers movies, what happens to our indexing. And we see those results as well as the studios and exhibitors, and we're going to just keep pounding that and make sure that people know that when they come to an IMAX theater, they're getting an experience that they can't get anywhere else.

Okay, great. Thank you.

(Operator Instructions)

Jim Goss, Barrington Research.

I was wondering, related to some of the programming, you have gone back and forth with regard to kids programming, and I am wondering, what are the considerations that are going into such a decision, for either Greg or Rich. With the blockbusters, are the studios on board with letting you let your winners run and make that decision more of a game-time decision?

On the family-oriented movies, Jim, the ask-bid on the whole thing is, how are we going to do? There's no point in doing it just for the sake of doing it. What we have noticed is that when a movie does $200 million or $300 million at the box office, and while we probably will do a smaller percentage of that box office, I'd rather have 7% of $300 million than 15% of $50 million. That's really the question mark.

Obviously, we also want to be able to give an incremental advantage to the experience. If it's something that we -- whether it's through sound, whether it's through marketing, whether it's through the picture, we can't provide something that's additive, then we have to consider that. We think, for instance, with a movie like Beauty and the Beast, which has an expanded aspect ratio in IMAX and is a true blockbuster, that's a great title to be a part of.

The other question in terms of what happens with the length of play, it's -- we make commitments and we stick by our commitments. And as you know, we have only one screen in 99% of the complexes that IMAX exists. With that said, if there's a movie that just doesn't perform in any way whatsoever, in the spirit of partnership, we will go and talk to our exhibitor and our studio partners and usually the right things happen. But with that said, we do make commitments. We take those commitments very, very seriously and we will never turn our back on a commitment.

Thanks.

Eric Wold, B Riley.

I'll call this 1.5 questions. One real quick housekeeping/accounting: How many titles hit the DMR cost during the quarter, for this quarter and for the year ago? Then I have my main question after that.

The year was 51, I believe? 52.

I think he means for the quarter versus last year's quarter.

That I will have to come back on.

Okay. I guess the question, if you think about the VR centers, I know they're -- it's relatively early. You talked about $250,000 to $400,000 cost to get these open. As you think longer term, and assuming these five centers, or whatever the numbers end up being, end up doing well and you decide to move forward, beyond that, how should we think about that business model eventually morphing?

Is this something that would be more like a core JV where, if it's in a movie theater, that movie theater operator would contribute to the upfront cost? If there is a separate side door out to the shopping center, would the developer contribute to the cost? Is that something you think about longer term where someone would run with it either in that way or could it be even larger, where someone may take it as a franchising model, so to speak, and eat all the cost upfront and you basically participate more as a licensing revenue share on that front?

We're open long term, Eric. But judging by the first results which, again, are very good but early, I think this is a business at the moment we plan on participating on in a JV kind of way. I don't think if someone came to us today and said, I'd like to buy X territory, and by the way, people have in different forms. We've said no. I think this is an enormous opportunity for us. As it unfolds and we look at the amount of capital that's required and the IRRs and we'll be open to anything.

Fair enough. Thanks, Rich.

Eric, I found the answer to your question. For the quarter, we released nine films in 2016 versus seven in 2015, and for the year it was 51 films in 2016 versus 44 in 2015.

Alexia Quadrani, JPMorgan.

This is Julia Yue on for Alexia. As you mentioned, IMAX has had such strong installations and momentum over the past couple of years. At this point, how much visibility do you have into the 150 to 155 installation guidance that you gave for the year? Could this end up increasing a bit given how much the 2016 installation target moved up from the beginning to the end of the year?

The answer is yes. We try and give guidance to a number that we expect to achieve, and things happen during the year. I think we have built in for slippage, so if things move, or for more signings or not, and we base those on past years.

But our environment right now for new deals is surprisingly strong, even though we had such a strong signing year last year. I personally expected the pace to slow down a lot, and it's still a quite healthy pace right now. We are telling you what we think, but yes, it's possible.

Matthew Brooks, Macquarie.

Can you make a comment? Were the 7,000 people who attended paying customers, because you could already be annualizing $0.5 million in sales in winter? Can you say anything generally about what you are assuming in terms of revenues from these new initiatives in 2017?

More or less they are paying customers. There were some promotions that came in, so I don't want to mislead you. But more or less, they are paying customers.

In terms of revenues for this year, it's so early to try and predict that because it depends how many centers we open, what parts of the world they are. Can't do that, but as I said a couple times, it's extremely encouraging. I don't know how many of you got to see the press coming out of our press conference here in Los Angeles, but it's been really well received. We have taken about 100 exhibitors, real estate people, talent, through the thing and the reaction has been very, very positive.

Thank you.

Ben Mogil, Stifel.

One on the Inhumans deal as it relates to China: Does this end up being part of the existing film quotas? Does this get a carve-out, or because it's TV product, can it not play in the theaters there?

Those are all good questions, Ben, which I am not sure. As you know, we have quite a sophisticated management team in China that's been working to answer those questions. And in fact, Greg went over to Beijing for a few days to help them out. We've had meetings with the relevant government authorities and private enterprise and we're still sorting that out.

Okay. Fair enough. On the VR front, I know it's very early in terms of revenue models, but do you envision the revenue model to be more of a licensing model or more of a transactional one when you are all said and done?

I would like it to be transactional, because I think there's a huge opportunity there, but we will see. It depends how big and how fast the rollout is. People wanted to roll out a very large territory in very short order with a lot of money, I suppose we would consider it. But at the moment we are thinking of it more along the lines of our joint ventures.

Okay. Lastly, one for Patrick: The $4 million in launch costs for first-year JRSAs you mentioned for 2016, what was that number in 2015?

I will have to come back to you on that. I don't have it in front of me

Or maybe alternatively, is it a similar number for 2017 so that this is a wash from a net annual basis?

Say that again, Ben, I apologize.

Is the number you look at -- early days, obviously, but for 2017, a similar launch cost number so that in reality, the year-over-year change is negligible?

We've talked about what we think we will do in terms of installs this year. Any of those that are JV deals we're going to have this $50,000 to $60,000 so that tells you what we expect it to be for this year. But it could bounce around depending on the timing of those installs. Because of the ramp-up in 2016, it was obviously a bigger impact in 2016 versus 2015.

Got it. That's great. Thank you very much.

That concludes today's question-and-answer session. At this time, I will turn the conference back over to our speakers for any additional or closing remarks.

Thank you very much for joining us on the call today. Like you, we know 2016 was not the greatest box office year we've ever had. On the other hand, it may have been one of the greatest strategic years we ever had. We had our Board meeting today and what I said to my Board was, given the alternative, having a great box office year or a great strategic year, I will take the strategic year all the time, because we set the stage with the growth in the theater network and the growth in the backlog and the growth of the installs to really produce long-term, meaningful revenue growth.

Box office is a wonderful thing and it has ancillary benefits, such as getting more people in the IMAX business, but in the long term, box office within a range, and it's noise. In 2016, it was not such good noise; in 2015, it was wonderful noise. But one thing that's not noise is how we grow our network and how we expand our Business. You add to that the new businesses and the encouraging start we have gotten off to, I think we are in a pretty good place. All in all, I think 2016 was mostly a satisfying year. Thank you.

This concludes today's call. Thank you for your participation. You may now disconnect.