IMAX Corporation
Q3 2007 Earnings Call Transcript

Published: 9 Nov 2007

[Operator:]

Welcome to the IMAX quarterly earnings conference call. Today's call is being recorded. At this time, I would like to turn theconference over to Mr. Brad Wechsler.

[Brad Wechsler:]

Thank you very much, operator. Good morning, everybody and thanks forjoining us today on our conference call. Joining me as usual is my partner, co-Chairmanand co-CEO, Rich Gelfond. Also with usare our CFO, Joe Sparacio and General Counsel, Rob Lister. Before we begin, let me remind you of the followinginformation regarding forward-looking statements. Our comments and answers toyour questions on this call may include statements that are forward-looking inthat they pertain to future results or occurrences. Actual future results oroccurrences may differ materially from these forward-looking statements. Pleaserefer to our SEC filings for a more detailed discussion of some of the factorsthat could affect our future results and occurrences, including the 10-K(a) and10-Q(a) we filed on Tuesday and the 10-Q we will be filing later today. During today's call, references will be made to certainnon-GAAP financial measures as defined by Regulation G of the Securities andExchange Commission. A discussion ofmanagement’s views of these measures and reconciliations to GAAP measures arecontained in the company's earnings release and our 10-K(a) for fiscal 2006, aswell as our 10-Q for the third quarter of fiscal 2007, which as I said, will befiled later today. The full text of the earnings release, along with supportingfinancial tables, is available on our website, www.imax.com. Today's conference call is being webcast inits entirety on our website. I would like to begin by discussing where IMAX stands todayfrom a strategic point of view and where we go from here, particularly withrespect to our pending transition to digital. Over the last decade, IMAX hasrecognized and discussed the benefits of transitioning from a film-based systemto a digital format. We have had some false starts, as well as promisingbreakthroughs. Several weeks ago, we announced a seminal event

[Rich Gelfond:]

Thanks, Brad. Webelieve that the beginning of our digital rollout will usher in the beginningof the end of our difficult financial transition period. The last year and thenext few quarters have been and will be negatively impacted in part by issuesarising out of the digital transition from increased R&D to delayedinstallations to our inability to recognize revenue on systems where we providea digital upgrade. When we move into our full rollout of digital systems in thethird and fourth quarters of 2008, we should see a marked improvement infinancial performance. The indices which will be the key drivers in creatingearnings in our digital environment include film slate, film performance,signings, JV signings and theater performance. Let's start with a look at our film slate. Next week, we are excited torelease Beowulf in IMAX 3D. This film looks amazing and is visuallystunning as a result of the next generation of the Polar Express-type CGI technology used by Robert Zemeckis. Thejunket press screenings were held exclusively in IMAX 3D -- that means not in 35 millimeter and not indigital 3D --and generated enthusiasticreactions. As we indicated on our lastcall, this is the first time a film will be released simultaneously in IMAX 3D,as well as conventional theater digital 3D. We welcome the opportunity to compare the per-screen box office of thetwo and believe the pricing in box office numbers will bear out that the IMAXexperience delivers the best, most differentiated, movie-going experience incinema. After Beowulf, wewill release I Am Legend with WarnerBrothers Pictures on December 14. Thishighly anticipated film stars Will Smith as a brilliant scientist who is thelast human survivor of a virus that has wiped out all but the mutant victims ofthe plague. He must race against time to find a way to reverse the effects ofthe virus, using his own immune blood. We think that this compelling science fiction story and action-packedadventure will play particularly well on IMAX screens and draw the coveted techsavvy demographic group. Looking ahead to our 2008 film slate, we announced last weekthat we would be partnering with Paramount Pictures to release The Spiderwick Chronicles, a fantasyadventure based on the best-selling series of books. The film is slated forrelease on February 15 and marks the fourth film agreement between IMAX and Paramountin the past five months. We believe Paramount'scontinuing enthusiasm for IMAX reflects our growing appeal as a distributionplatform and are excited to reach millions of Spiderwick fans with the unique IMAX experience. We also set a new release date for the Rolling Stonesconcert film, Shine A Light, which isdirected by Academy Award-winning director, Martin Scorsese. This film is now slated to follow Spiderwick with a release date of April 4, 2008. This means we alreadyhave four films in place for our 2008 slate and we have identified and areactively negotiating films for the remaining slots of the year. Turning now to our next important metric for measuring ourgrowth, film performance. Our trailing12-month DMR box office for all domestic theaters was $105.9 million from 125theaters as of the end of the third quarter, compared to $65.1 million from 109theaters at 3Q06, a 63% increase in DMR box office on only a 15% increase intheaters showing DMR domestically. On a same-store basis, which might be a more interestingcomparison, which tracks only those theaters showing DMR films that were openeda year ago and therefore strips out the growth of the network, gross box officeincreased 60% to $1.3 million in revenues per screen. We think this trulyreflects moviegoers' growing appetite for the unique and immersive experienceIMAX provides. Brad already touched on the impact that our pending digitalrollout is having on our overall signings, so I would like to take it to thenext metric and review our progress on joint ventures. As we've statedpreviously, we believe our transition to digital helps our joint ventureinitiative as it stimulates interest in IMAX that in turn will enable us toexpand the network more quickly. As a reminder, we continue to believe that by significantlylowering the capital cost to exhibitors by contributing the system, with theexhibitor putting up retrofit costs, we can expand the network more rapidly andreceive a more significant part of the IMAX box office from the theaters, aswell as a continuing piece of the IMAX film revenue from the studio. We currently have nine JVs installed

[Operator:]

(Operator Instructions) Your first question comes from RichIngrassia - Roth Capital Partners.

[Brad Wechsler:]

Rich, we can't hear you.

[Operator:]

Mr. Ingrassia, is your line on mute, sir? We will go to the next question.

[Brad Wechsler:]

Operator?

[Operator:]

Hi, sir.

[Brad Wechsler:]

We can't hear anything. Are you putting through the questions?

[Operator:]

Your next question comes from Eric Wold –Merriman Curhan Ford. Mr. Wold, please go ahead.

[Eric Wold –Merriman Curhan Ford:]

You gave the amount you are spending this year on legal andaccounting fees of $12 million and $8 million on R&D. What should we think about into '08? How muchof that legal and accounting fee won't be there next year? How much do you think is centered just purelyon this year to get the filings up to speed and all that? How much digitalspend would be left for 2008?

[Brad Wechsler:]

Eric, let me answer that a little differently, because Ithink you are asking obviously a very important question. Before we had our regulatory issues andbefore we were doing our digital R&D, I think you might see legal andprofessional fees, legal and accounting/professional fees, in the $3 million to$4 million range. I think you would also see a run rate of R&D of $3.5million. Now '08 is a hybrid year, meaning we are still going to bespending some money on R&D development certainly through the early parts ofnext year and we are also going to be continuing with the regulatoryinquiries. I think our expectationobviously is that we hit the high points in this previous year and it startstailing down, and we hit hopefully a normalized run rate towards the end ofnext year. So that is not quantifying the answer for '08, but it justmeans I think you have seen the peak in '07 and I gave you some sense of whatthe normal run rate is.

[Eric Wold –Merriman Curhan Ford:]

I gather, obviously, that with the digital install coming orthe digital projector available around the middle of the year, obviously as youtalked about, you are probably not going to see a lot of installs in the firsthalf of the year. People wait andobviously for your sense, it's probably not worth installing something you aregoing to upgrade anyway in a few months. Knowing that, you are probably going to see a prettyback-weighted year for installs into '08. What is your capacity to get those installs done? What are your thoughts on if you do getalmost all the installs kind of pushed into the last two quarters, howdifficult will that be to get complete?

[Rich Gelfond:]

Eric, our technology group has said that they could installas much as demand requires in the second half of the year. With that said, we are in the process of quantifyingthat and weaning it down, but it does not appear that the supply chain shouldbe an obstacle.

[Eric Wold –Merriman Curhan Ford:]

Is it safe then to assume there should fairly minimal, ifany, installs in the first half?

[Brad Wechsler:]

Yes, it is going to be small, but I think the “if any” iswrong. I mean there should definitely be installs in the first half and theseare obviously film-based systems, some of which we will have an obligation toupgrade, some of which frankly we won't have an obligation to upgrade. Some will be domestic and a bunch will beinternational.

[Eric Wold –Merriman Curhan Ford:]

In that backlog number you gave out, what is the number thatare scheduled to be installed during the fourth quarter, including the two thatwere moved?

[Brad Wechsler:]

The fourth quarter of this year?

[Eric Wold –Merriman Curhan Ford:]

Correct. Currentquarter.

[Rich Gelfond:]

I think it is about seven, Eric.

[Eric Wold –Merriman Curhan Ford:]

Including those two?

[Brad Wechsler:]

Including the two that slipped.

[Rich Gelfond:]

Yes.

[Operator:]

(Operator Instructions) There are no questions at this time.

[Brad Wechsler:]

Why don't Rich and I just make a couple of closing remarks? Mine are unbelievably simple and it's afunction of one of the things that we emphasized in the speech and it isactually a function of one of the questions that we got. When we look forward, obviously Rich and I are veryenthusiastic about the effects on our business with the transition to digitalin and of itself, and also, I think we are very bullish on joint ventures andwhat they can do for us in terms of deployment of capital and return oninvestment. On the other side, we see significant decreases in cashexpenditures and P&L expenditures with respect to SG&A and R&D andall of this really should begin to coalesce into our financials towards thesecond half of next year. But basically, the financials at IMAX tend to lag andI think what Rich and I are seeing on the ground on an operating basis ispretty positive with respect to our business. Rich, your comments?

[Rich Gelfond:]

It is consistent, Brad. The only thing I would like to add is that at various times in abusiness' history, things look better on the inside or worse on the inside thanthey look on the outside. At the moment,there is somewhat of a disconnect between the level of business activity bothfrom studios and exhibitors and as we are talking about the performance of thetheaters, same-store sales up 60% versus what our reported financials are; andas Brad said, there is a lag between our business activity and what getsreported. I guess I would just like to convey a personal view, whichBrad shares, is that right now things under the hood and inside the car look alot better than they do looking at the car from the outside. We are confident that over time, particularlywith the launch of digital, things will look as good on the outside as they nowdo on the inside. With that, we would like to thank you for joining us.