IMAX Corporation
Q4 2021 Earnings Call Transcript

Published: 23 Feb 2022

[Operator:]

Good day, and welcome to the IMAX Corporation Full Year 2021 Earnings Conference Call. Today’s conference is being recorded. At this time, I’d now like to turn the conference over to Mr. Brett Harriss. Please go ahead, sir.

[Brett Harriss:]

Thank you, Operator. Good afternoon everyone and thank you for joining us on today's fourth quarter and full-year earnings conference call. On the call today to review the financial results are Rich Gelfond, Chief Executive Officer; and Joe Sparacio, our Interim Chief Financial Officer. Megan Colligan, President, IMAX Entertainment; and Rob Lister, Chief Legal Officer, are also joining us today. 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 earnings press release and the slide presentation have been posted on the Investor Relations section of our website. At the conclusion of this call, our historical Excel model will be posted to the website as well. I'd like to remind you of the following information regarding forward-looking statements. Today's call as well as the accompanying slide deck may include statements that are forward-looking in that they pertain to future results or outcomes. These forward-looking statements are subject to risks and uncertainties that could cause actual future results or occurrences to differ. Please refer to our SEC filings for a more detailed discussion of some of the factors that could affect our future results and outcomes. Any forward-looking statements that we make on this call are based on assumptions as of today, and we undertake no obligation to update these statements as a result of new information, future events or otherwise. During today's call, references may be made to certain non-GAAP financial measures. Discussion of management's use of these measures and the definition of these measures as well as a reconciliation to non-GAAP financial measures, including adjusted net loss, adjusted EPS and adjusted EBITDA as defined by our credit facility, are contained in this morning's – afternoon’s press release and in our earnings materials, which are available on the Investor Relations page on our website at imax.com. With that, let me now turn the call over to Mr. Richard Gelfond. Rich?

[Rich Gelfond:]

Thanks, Brett and good afternoon, everyone. Thank you for joining us today. In the world of entertainment, differentiation has always been the calling card of IMAX. We command powerful global reach and a unique end-to-end technology. We empower visionary creators with proprietary cameras and image enhancement, and we create global events around the world-class content with unmatched clarity and sound, scope, and scale. Our runaway performance in the fourth quarter and the way we outpaced the global film in industry and drove profitability for full-year 2021 drives that differentiation home. IMAX is a premier global technology platform for entertainment and events. We are not an exhibitor. We have never been one and will never be one. And with our industry leading momentum, we are taking the next evolutionary step for our business. IMAX 1.0 was about creating a premier showcase for groundbreaking documentary filmmaking in institutions, such as museums and science centers. We dramatically expanded our scope with IMAX 2.0, bringing the biggest blockbusters to audiences worldwide. With IMAX 3.0, we are pushing further into our future, growing beyond blockbusters to include unique events and experiences globally. By putting our technology in the hands of an expanding set of creative and platform partners and becoming a destination for fandom of all kinds. Just look of some of what we did in the fourth quarter alone. IMAX was the tip of the spear in the record breaking release of Spider-Man

[Joe Sparacio:]

Thanks, Rich, and good afternoon, everyone. We believe our strong fourth quarter serves as a preview of what is to come in 2022, as IMAX brings to market a historically strong slate of Hollywood franchise titles, an expected record number of titles with IMAX DNA, a diverse and growing offering of local language films and a new innovative content experience in IMAX and in the home through IMAX enhanced. Throughout 2021, IMAX benefited from industry leading momentum and sustained market share gains. Unlike some entertainment companies, we generate positive and increasing adjusted EBITDA every quarter this year ending the full year with $68.6 million of adjusted EBITDA. This momentum accelerated dramatically in the fourth quarter with the full return of Hollywood releases. As Rich mentioned, our global box office of 277.5 million was among our best of all time eclipsing our pre pandemic 2019 fourth quarter results by 15% and representing our sixth highest grossing quarter of all time. This included our best of October that it exceeded the previous record by approximately 50%. More impressively, our global box office strength was broad based generating across our global network and a variety of titles, genres and events. In Q4 five films exceeded 25 million, including the sixth highest-grossing movie of all time, Spider-Man

[Operator:]

Thank you. And I would now like to turn the call over to Mr. Richard Gelfond for some final comments before we go to Q&A.

[Rich Gelfond:]

Thank you, operator. Just to add, last night, we presented another concert with Kanye West, which was our most successful live event yet broadcast from Miami to 60 IMAX theaters nationwide with a remarkable 48 sellouts. That’s almost 20,000 fans. Again, our virtual Madison Square Garden who purchased tickets for an event that was announced a little over 48 hours prior to show time. Given the success of our first concert, it’s not surprising that Kanye came back to IMAX so quickly. We are excited that it recognizes the unique value of our technology and brand and can bring premier live events to life. So yet another excellent proof of concept of our strategy. And with that, I’ll turn it back to you operator for Q&A.

[Operator:]

Thank you. And we will go to our first question from Eric Handler of MKM Partners.

[Eric Handler:]

Thank you for asking the question. Good afternoon. Rich, if I could dig in a little bit on the live events, in terms of how many events do you think you could ultimately marketing, give people more than 48-hour notice? Maybe you talk about the TAM and sort of the profit level of these events?

[Rich Gelfond:]

Thanks, Eric. So as you know, the forecast for kind of the experiential economy and the growth rates are extremely high. So over the next five years as we look out on it, we think there’s a very large addressable market. IMAX right now only has 79 theaters wired, but the ideas to be aggressive and wiring it. And I think when you to the longer-term economics of it as we said, in the script, it’s like a Madison Square Garden now. But as you go to 200, 300, 500 theaters and you model it out globally, we think over time it could be a significant revenue and earnings contributor. In terms of the number of events, right now, we’re somewhere between putting together a comprehensive slate and testing different ideas. So as you know, we’ve done mostly music, we’ve done some sports things. I think you’ll see us do comedy. We’re talking to certain people about whether we could put together a slate deal. And I think in our minds for now, we’re thinking about in the short run doing sort of a major event once a quarter, at least, and then doing smaller events throughout the quarter. In terms of price point for this Kanye concert last night, the most expensive tickets were around $30 and the other tickets were priced more in line with typical IMAX. So I think we’re also going to experiment with price. So try and learn about the elasticity. But I think there’s a very large market out there. I think our technology is really unique and over time, I think it could be a significant contributor to our company.

[Eric Handler:]

Great. That’s helpful. And just speaking a little bit more on your install expectations, I know you said 2021. But when you think about a normal like here pre pandemic, you were looking at around 130 installs, 2021 and 130 normalized, where do you think you might fall there?

[Rich Gelfond:]

Eric, we remain optimistic about the trajectory of the installs. Especially given the recent momentum we’ve seen at the box office, our market share growth and the upcoming slate. As I mentioned on the call, we expect installs increase over 2021 levels. But not likely reach 2019 levels, as you know, installs are back half loaded and we will have more color on that as the year unfolds, with the fantastic Q2 slate and the prospects for Avatar later this year could be a catalyst for an installation growth. And we’ll give you more color on that as the year progresses.

[Eric Handler:]

Fair enough. Thank you very much.

[Operator:]

And we’ll go next to Steven Cahall.

[Rich Gelfond:]

Thanks operator. Next question please.

[Operator:]

We’ll go next to Steven Cahall of Wells Fargo.

[Steven Cahall:]

Thanks. Maybe first to follow up on the installations question, just wondering if you could speak to some of those regional dynamics, are you seeing that stronger in China or led by the U.S., or kind of a combination of both, and as you get to that install level between 2021 and 2019, how do we think about the gross margin in the technology sales and maintenance business? Is there anything that would make that margin improve over prior years or is it pretty consistent? Then I’ve got a quick follow up on the technology business.

[Rich Gelfond:]

So I’m going to answer the first part of the first question. And then Joe will answer the second part. We are incredibly focused as an organization on getting our network growth back to pre pandemic levels. And over the last quarter or so, we’ve been engaging with our clients in a very detailed worldwide basis to confirm the backlog and to try and get specific dates and ensure we get as many installs as we can as soon as possible. And we made a lot of progress in firming those up, and again, it remains a priority of ours, and Joe, why don’t you continue on that answer.

[Joe Sparacio:]

Yes, I mean, in terms of sale installs, we would expect consistent margins in that business. However, as Rich mentioned in his comments, we recently released the XT system, which has a lower cost of goods, so we should realize improve margins as that gets rolled out.

[Steven Cahall:]

Great. And then kind of a similar question on the technology business with kind of a record slate this year for IMAX DNA, does that have any impact on gross margin at the technology business? I mean, I know that when you do higher split of the box office, that’s how basically going to drive higher margin, but just wondering how we should think about the IMAX DNA as kind of a leading indicator of future earnings.

[Rich Gelfond:]

Well, we found is that films that have IMAX DNA generally over index, what they would typically do. And as you know, there’s significant amount of operating leverage in that business. So, every incremental dollar that you can generate over and above the norm is going to drop to the bottom line. So, it definitely has improved the profile of that business.

[Steven Cahall:]

Great. Thank you.

[Operator:]

We will go next to Mike Hickey of The Benchmark Company.

[Mike Hickey:]

Hey, Rich, Joe, Brett, congrats guys on the quarter and the year. Really encouraging performance held bounce back. A couple questions on the – I guess the two initiatives IMAX to enhance in your life and interact then, I mean, is one bigger than the other Rich or I guess the path to monetization here maybe for your lives event to sort of curious how you look at those two and if there’s any incremental extents going towards sort of developing those two new verticals for you? And then I guess the second question would be, the live interactive advance, is this sort of like fathom, Rich, is this sort of like what your exhibitor partners are doing and have done for a while. It’s just going to be sort of exclusive to your network. And I guess also now that you expand your relationship with all these great partners, if there’s any ancillary benefits in terms of marketing or margin. Thanks guys.

[Rich Gelfond:]

So, the one I’d like to answer first is about fathom. So we’re nothing like fathom. What fathom does is take preexisting content. And they put it through kind of a conventional distribution system. IMAX is a high end complete ecosystem that intends to replicate the cinematic effect that IMAX has today in the live space. So we capture images with IMAX cameras. We translate them with proprietary IMAX technology, and then we have special pipes that go into the theaters that create the highest experience possible. So we’re not interested in playing conventional off the shelf technology. What we are doing is creating special events for IMAX audiences. So think about what the IMAX film business is, where studios seek us out and filmmakers and talent, because we provide these unique global events. That’s the analogy you should think about. And we are going to do large events. I mean, already what the two Kanye’s with no disrespect to fathom, I can’t think of an event that they put together on that kind of scale, and certainly with not – with that kind of technology. And again if you go on our website and you look at the clip we put up, you’ll see people dancing in the theaters, shining lights, yelling, it’s a real interactive experience in certain respects better than being at the concert. In terms of which has more potential live or enhance, I hate to choose between our children. That’s generally not a good place to be. But I do think given the growth in experiential entertainment as a mark, that live has larger potential over the next number of years. Now, with enhanced, as you know, we went on Disney+ and I talked a little about this during my comments, but on the market research, we’ve done was extraordinarily positive and things like churn and with retention rates and willingness to pay a premium, we’re really very promising. And we’ve had other inquiries and we’re working on those and we’ve got more CE partners there. I’m optimistic about that also. In terms of marketing, do you want to take that Megan, how it’s going to affect the brand and the marketing overall?

[Megan Colligan:]

Sure. I mean, I think what we’re talking about really fundamentally is creating tools that are end-to-end solutions for creators. It’s what we fundamentally have always done. When we’re talking about blockbuster films, we’re giving filmmakers proprietary tools that create the best films that they can possibly make. And now that we’re expanding into the live space, we’re working with an expanded suite of creators and we’re working with an expanded list of partners, whether we’re talking about in some cases, streamers, and in some cases we’re talking about tech companies that are doing gaming, we’re talking about music companies, we’re talking about an enhanced group of content providers, but we’re giving them the opportunity to work with the highest level of creator tools. And on the backend, when you’re talking about enhanced, you’re talking about a solution for an ancillary home for these materials where the very best way for these – for this content to live ultimately is in an enhanced way in streaming or on VOD with a proprietary technology that gives you an exceptional way to experience it. So ultimately what we do as service fans with excellent technology and that's what we're doing, extending that brand recognition throughout an ecosystem.

[Mike Hickey:]

Thanks guys.

[Brett Harriss:]

Thank you.

[Operator:]

And thank you. We'll move to our next question from Chad Beynon of Macquarie.

[Chad Beynon:]

Hi, good afternoon. Nice results. And thanks for taking my question. Regarding China, we can obviously see the Q4 results in your press release the China's New Year results, but can you provide a little bit more color just in terms of where the market is understanding that it's a very large market with different things going on, obviously in the U.S. indoor mask mandates are being lifted, is China close to that? And what did you see after Chinese New Year? Was it kind of a return to prior restrictions or has that been relatively eased? Thanks.

[Rich Gelfond:]

So as you know, China as a country that has more tightly managed COVID than any other one in the world, in terms of contact tracing, in terms of lack of ability to travel outside the country. And I don't have a great visibility into that. But I can tell you, that for the last two years China's been the biggest box office in the world. And for the right movies, Chinese audiences really want to come out. And also for the second year in a row, the biggest movie of Chinese New Year's was filmed with IMAX cameras. This year, the big movie The Battle at Lake Changjin II indexed about 6% with IMAX, which was higher than our historic indexing. So I think like other places in the world, people are showing a demand for IMAX. In terms of the film slate for the year, there's a lot of local language films that we're very involved in and including using our cameras including Mozart from Space. But the other question is how many Hollywood movies get in. And again, we don't know the answer to that, but recently there have been some optimistic signs Batman – the Batman, which is a highly anticipated movie that we've seen, and we are really enthusiastic asked about, got in about a month in advance. So there's time to market it right, and time to do other things. But I think in China, the issue is less a mask wearing thing, because people are used to wearing masks and they're used to the contact tracing and more of the quality of movies that come out. And as I say, some encouraging signs on the Hollywood side, and there's a pretty decent slate of local language films.

[Chad Beynon:]

Thanks, Rich. And then Joe, just a modeling question regarding the $6.3 million of recognized deferred maintenance in the quarter, is there still deferred maintenance opportunities that could fall into the first half from a recognition standpoint? And then just any other color in terms of if the maintenance stream should start to be a little bit more normalized here? Thanks.

[Joe Sparacio:]

Yeah, I think we're at the point where the maintenance stream after this quarter will be normalized. And if you look at the numbers and the breakout, only $2.5 million was out of the year, meaning it related back to 2020. So if you take $3.8 million of the number and add it, that gives you a normalized year for 2021 as well, saw some of the discounts we gave earlier in the year. But I think as of this point, we are on a normalized level.

[Chad Beynon:]

Perfect. Thank you very much. Appreciate it.

[Operator:]

And we'll go to our next question from Mike Ng of Goldman Sachs.

[Mike Ng:]

Hey, good afternoon. Thank you very much for the question. I just had one on, installs, could you talk a little bit about the nature of the installations in the quarter? What geographies were they primarily in? And would you just talk a little bit more about the footnote about theater system relocations, what would drive that from an exhibitor standpoint and what happens from an economic standpoint when that occurs? Thank you.

[Joe Sparacio:]

Yeah, I mean, in the quarter, a big chunk of the installs were in China. I don't have the exact breakout with me right here. And in terms of the relocations, what you have in many cases is an upgrade of an existing system and then movement of a system to a new location. So ultimately it's a net add for the company. In those cases, in many cases, we earn a very nice margin from those relocations.

[Mike Ng:]

Great. Thank you, Joe. And also I was wondering if I could ask about the programming slate for the first half of the year. Would you mind just running through some of the key films and maybe you talk about some of the films that you're particularly excited about. Thank you.

[Megan Colligan:]

Sure. There's – you know, this slate is filled with some exceptional movies. We have a number of movies that were shot with our cameras, which include three Marvel movies, including Doctor Strange and so which we are in the first half of the movie – first half of the year, we have Top Gun, which is in the first half of the year. We have buzz Lightyear, which has 1

[Joe Sparacio:]

We have Jurassic World, Batman …

[Megan Colligan:]

Batman, which we know is on tracking and is looking to be a rather large movie is coming out with exclusive IMAX shows on Tuesday, March 1st and is expected to be a very big movie, has three weeks of IMAX. We have Fantastic Beasts, which we're very excited about from Warners. It's a really strong slate throughout the year and there's basically once you get into March there's a very consistent play of films, a slate of films that doesn't really let up throughout the year. Nope, also is in July, which is, I guess the midpoint of the year shot with IMAX film cameras from Jordan Peele. There's a really great slate of movies.

[Mike Ng:]

Great. Thank you very much.

[Operator:]

And we'll move to our next question from Steven Frankel of Colliers.

[Steven Frankel:]

Good afternoon. I'm going to go back to this notion of acceleration in the install rate. How much of that is coming from things that are already in the backlog and your firming up dates versus the notion that we talked about a couple of quarters ago that given this film slate, you might see exhibitors kind of have a rush to get the more IMAX screened up ahead of what's going to be a obviously at the box office, especially in the back half.

[Rich Gelfond:]

Well, those are really, both the answers to the questions. I mean, we're seeing an acceleration in the backlog, I think partly because the film slate is so good this year. If you're asking is it coming from signings and new installs? I mean, it's a little early for that, given that the Omicron in LA we're still wearing masks here. But the level of our business activity in terms of new signings has certainly picked up in light of the film slate. And I think you will see some sign in installs take place this year, so you'll see both.

[Steven Frankel:]

Okay, great. And then on the building out the live network is that a material amount of CapEx that we would see over the next couple years as you scale that out and are the economics to you any materially different on a live event versus the typical blockbuster?

[Rich Gelfond:]

No, it's not a material amount of CapEx. You won't see a big spike because of that. And the second part of your question, the economics are different than a blockbuster, but on a project-by-project basis, they may be better or they may be worse. So if we're just doing a distribution kind of thing, I think that will be similar to what you've seen in a blockbuster. But where we're helping on the production end, where renting cameras, where we're involved in the design of it, I think you'll see better economics.

[Steven Frankel:]

And is there a second revenue stream akin to DMR on something where you're involved like that?

[Rich Gelfond:]

Yeah, I mean, there could be for sure. I mean there's another part of the model we did a – we did Macbeth with A24 and Apple, and that was a four-wall deal where they pay to rent all our theaters. And we expect to be doing more of that too. It'll vary from project to project, but we'll budget everything to be profitable. The one thing you have to realize is we have 79 theaters right now. So on a pro form basis it'll become more and more profitable as we build out the connected network and we're going to try and do that as rapidly as possible.

[Joe Sparacio:]

Steve, a perfect example is The Beatles where we had – we did a live performance, it generated $400,000 to $500,000 for that one night. And then we took that and we showed it in IMAX theaters, 400 of them in special screenings. And we earned $2 million of incremental box office from those screenings on otherwise, dead time at the theater level.

[Steven Frankel:]

That's great. Thank you.

[Operator:]

And with no other questions in the queue, I would now like to turn the call back over to Richard Gelfond for any additional or closing remarks.

[Rich Gelfond:]

Thank you operator. I'd just like to say that the whole IMAX organization couldn't be more excited about where we've been coming from recently and where we're headed. The fourth quarter was one of our best quarters in the history of IMAX. When you look at where consensus was not only now, but a month ago, we just blew it away at almost every matrix along the way. So our financial performance, our balance sheet is incredibly strong. We have virtually no debt and over $500 million in liquidity. And in the last month and a half we've done live activations with Steven Spielberg, The Beatles, Kanye West, Apple, Amazon. It's just an incredible period of time in IMAX. And we look forward to getting back to you with updates on all of these things and thank you for joining us.

[Operator:]

And so ladies and gentlemen, this concludes today's call, thank you for your participation. You may now disconnect.