IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Okay. All right. Great. Let's get started. We're very happy to have back at the conference Rich Gelfond, CEO of IMAX Corporation. Rich, thanks so much for being here.

Thanks, David, for inviting us.

Cool. Well, why don't we get started with the slate. May started off strong with Doctor Strange. Now this weekend, you have Top Gun: Maverick, which was filmed for IMAX and has received phenomenal reviews. And then following that, you have Jurassic World, and then you've got Lightyear to round out Q2. So how are you thinking about this string of films and their success in the context of sort of reestablishing that moviegoing momentum?

So on our last quarterly earnings call, what I said was that coming up starting now is really like the murderers' row of films. And I do think when you look at the slate right now, Doctor Strange has done $800 million so far. In IMAX, we've done around $55 million so far for that movie. As you said, I couldn't be more excited about Top Gun right now. I had the privilege of seeing it 1.5 years ago. And we made special IMAX cameras with Tom and Paramount that go in the nose cone of the F-18, and every aerial sequence was shot in IMAX. So I think people are going to freak out when they see what this film looks like. And Jurassic World, I spent some time with the Director, Colin Trevorrow. And without giving away too much, it's kind of like Spider-Man where they brought back all the former heroes of Jurassic World. And then Lightyear, I saw some of that at CinemaCon. And then obviously, after that, you go into Thor and Nope and the year fills out even on stronger notes. So very excited. I think to the extent there's a reopening trade, it hasn't happened in the cinema sector yet. We're trading at a lower price than we have in years but for the heart of the pandemic. And I think these -- the results kind of speak for themselves, and I'm really very optimistic right now.

Got it. And can you maybe discuss the importance of Top Gun and sort of drawing in the older audiences, which has been a slower demo to come back. But you and I were talking about it before. There's a younger appeal here, too.

Yes. So I think the narrative is a little overplayed about older people not coming back. Because if you look at Bond, it did, I think, $750 million, $800 million, I think. The media loves to find a narrative while the movies have been Batman and Doctor Strange and not older demographic movies. So I think there's very little question in my mind that -- certainly, that the demographic is going to come back for -- the older demographic. I think Paramount has done a very good job in trying to appeal to younger audiences. And I think that's one reason the IMAX release has been part of a centerpiece of the way they've marketed it because I think our audience is fan boy, fan girl audience that's younger. I told you briefly a little story of my 24-year-old stepson. When I saw the movie, I said this is the most incredible thing, and as a matter of fact, I could read it right now. He went last night in L.A. to one of the Tuesday screenings, and he goes, "I thought you overhyped this and everyone overhyped it, but I think it's better than I expected." So I think the word of mouth is going to get out there and it's going to bleed into those audiences.

Got it. And you touched upon the slate a little bit for the rest of the year. I just want to ask -- I know there's a bit of a dip in kind of the late summer, early fall, but you do finish really strong with Black Panther and Avatar. Any kind of concern the industry loses some of that momentum? And then I know it's really early, but any view into kind of early 2023, what you'll have to kind of build off that Avatar momentum?

Yes. I don't think you can look at a company or a slate over a month-to-month basis. And if the pandemic taught us anything, remember, one of the narratives, David, was will people ever go back to movies or they're going to stream on their couches the rest of their lives. Well, I guess, the people who thought the movies were dead were a little premature about that, and they went back. So August and September are a little slower. But even in -- going into August, you have Nope, the Jordan Peele movie filmed with IMAX cameras. You have Bullet Train with Brad Pitt. There's the re-release of Avatar 1. And for those who forget, IMAX did $250 million on less than 300 screens, and we now have 1,800 screens in the world. And I'm sure we'll get into it a little bit more later but Avatar is incredible, so much so that we haven't even booked any films through Martin Luther King weekend because we think it's going to play that long. And then in terms of next year, you have Tom Cruise back in Mission: Impossible 7. You've got Aquaman. You have Guardians of the Galaxy 3. You have other Marvel movies going on there, some DC Comics movies. I think it's going to be a very strong year for us again.

Got it. Macro and economic risks have been a big topic at this conference so far. I was wondering if you could give us your take on the U.S. consumer. And the backdrop here is you have rising inflation, but at the same time, you have what appears to be a higher appetite for luxury and premium experiences, at least as it relates to content.

Well -- so let's start with the empirical data we have so far, which is IMAX' percentage of market share in the U.S. and globally has gone up significantly. I don't remember the exact number, but it's about a 30% increase in market share from where we are pre pandemic. So I think the appetite is there. As you said premium, I think people having lived on their couches are kind of saying $5 more to have something really special and really different is worth paying for. Also, if you look historically, there have been 7 recessions since 1980. And in every one of those years, the box office has grown. So it's a pretty resilient business. The cost is such that people might not go on vacation or they might not go to a restaurant, but it's still very affordable kind of entertainment. And then the other part about macro issues going on now is your ability to raise prices. And IMAX has always charged a premium price, and our model has done well under that environment. And last night was preview screenings, as I said, for Top Gun. And in Lincoln Square in New York, it was $30 a ticket, which sounds crazy but it sold out at the theater. So I think in terms of the macro factors, we're pretty well positioned.

That used to be my theater so I'm familiar with it. You touched upon this a little bit before, but when it was released in 2009, as you said, the Avatar -- first Avatar film performed exceptionally well on what was a smaller circuit, but it served as a real catalyst for install and signings. And I'm just wondering how you're kind of viewing the sequel in that context. Do you think it can kind of similarly reaccelerate builds or pipelines or signings?

Yes. So we actually coined a term at IMAX internally. We called it the Avatar effect. So to give you just a few small data points, we had a 5-theater deal with Wanda before Avatar opened and we put in 3 of the theaters. And within a year, we had a deal for over 100 theaters, and I think now we have, I don't know, 400 theaters in China with Wanda. Everything changed at our company when Avatar 1 was released. I mean there were 6-hour lines for tickets. They're being scalped at $100 apiece. We had to hire more people. It was a frenzy. So Avatar 2 coming in -- and there's been a teaser trailer. I don't know if you had a chance to see it or not yet. But the effects are actually much better than they were at that time. So this time, we're trying to anticipate a lot of that happening. So we put together a task force at IMAX which is it -- goes through every area of the company. So if the Avatar effect happens again, what's our inventory situation? How can we build out installs quicker? What's our accounting department look like? Because, literally, it was so unanticipated. We've also taken that externally. So we've been in meetings with Disney over the last couple of months over how to market it. And they obviously understand the importance of IMAX in that release. And I think we've -- we're ahead of the curve this time. One of my favorite observations about the next Avatar is Disney has 4 of them. And as you know, they have billions of dollars invested, and they're a pretty sophisticated marketing company. And everything I've heard about the film is extremely positive. If there's one thing I would bet on, it's The Walt Disney Company's ability to properly market and roll that out. Now back to the specific question, I would be very surprised if there wasn't an Avatar effect again. With some of the people last time, by opening before Avatar, they paid back the cost of the IMAX theater in a fraction of the time that they would have if they waited. And I'd have to say, in some ways, it started a little because I think with -- as you mentioned in your first question. But with Doctor Strange and now Top Gun and Jurassic World, we definitely started to see an uptick in signings activity anyway, and there's just definitely more going on. It's been a long walk across the desert, but we're on the other side of it right now.

Got it. And Avatar did, for a period of time, get Hollywood very excited on the concept of 3D. Clearly, that kind of dissipated over time. I think the sequel will come out in 2D and 3D. But like let's assume there's some kind of renaissance on 3D. How do you -- or how is IMAX positioned to kind of capitalize on that?

Well, first, just before I answer that because -- well, I'll give you the answer which is we're really positioned to capitalize on it because, obviously, IMAX 3D was a phenomenon after that movie. And most people don't remember, but I think it was Alice in Wonderland or Charlie and the Chocolate Factory, my memory is gone after 13 years on that, but the films that followed it also over-indexed wildly in IMAX because of the 3D. So what I think is going to happen this time, as you've said, it's going to be released in both. I think some countries that are very 3D-friendly, like China, some parts of -- some other Southeast Asian countries, Korea, I think they'll lean more into the 3D. And I think whether it leads to a renaissance will depend on customer reaction. So I think if consumers say, "Wow, this is fantastic. We want more of it," we're very much in a position to lean into it. And as I mentioned, we have this internal task force. And other parts of it I didn't say are we want to make sure the technology is perfect if we want to pivot to 3D. I think you'll see us in countries like the United States experiment a little bit. So some theaters will be 3D, some will be 2D. We'll have some 3D shows. And then we'll follow the audience on it. If you remember, which I'm sure you do, part of the demise of 3D the last time was Avatar was phenomenal but other movies weren't shot in 3D and they used different kind of post-production techniques but they just didn't work and didn't look...

It wasn't in the DNA.

So we're going to be open-minded about it and say if it works, we're going to pounce on it and we'll benefit. And if the consumer doesn't react that strongly, we won't pounce as much. But the final point is what I said before. We know that there are 3 more coming out after this of similar budget and similar quality. So although I said as a businessman I'm going to let the consumer decide, I think there is some not insignificant chance that there is a renaissance for the right kind of movies.

Got it. I want to shift to China. It looks like Shanghai is potentially headed for reopening in the next couple of weeks, as you kind of alluded to in your earnings call. Can you update us on where you are in terms of your footprint that's operational in the region and kind of what you're hearing from your team on the ground?

So China has been reopening pretty quickly in ways that haven't been reported widely. But I think around 2 months ago, about 50% of our theaters were open in China. And then on our earnings call, and I guess that was late February, it was about 70%, and now it's about 83% open. And different areas of Shanghai are starting to open right now. I think the most important thing is kind of the signal we all got from the Chinese government. So they just dated Jurassic World for June 10 in China. So that's day and date with the rest of the world. And there had been a hiatus of dating movies because I think they just didn't want to build people's expectations. So I think that's the first thing that tells you that they think it's going to be pretty much open by then. And then the other thing would be there's a big domestic film in China that we're involved with, which is called Mozart in Space (sic) [ Mozart in Outer Space ], which is a big local blockbuster. And that just got dated for July 15. And then there are a number of other films, local ones, being dated. So I think all indications are that they believe they'll be coming out of it pretty much by then.

And can you remind us, the last time there were significant lockdowns, kind of how moviegoers came back?

Yes. I mean China was the #1 box office in the world. And I'm trying to remember my years '20 and '21, I think. They came back in large numbers, and they disproportionately came back to IMAX. So before, I talked about market share with you. So there are 2 general indicia we like to look at. One is indexing, which is a percentage of the movie we do. And then the other is market share, which is a percentage of the box office for the country we do. And once it reopened, both those statistics were a lot higher. So for movies like Wandering Earth and Detective Chinatown 3, they both became the biggest movies in the world for the year. And most of the box office was in China, and they were filmed with IMAX cameras. So we snap back really quickly. And in terms of market share, pre pandemic, our market share in China, again, I could be off by a little, but was around 3%. And it went to like 4.5% per pandemic -- after the pandemic. So that was like a 50% increase in market share. So movies in general came back quickly, and we came back stronger than movies in general.

Got it. You noted Jurassic World getting dated in the country, but we've observed a little bit China as a little -- somewhat more restrictive as of late. We had some nondomestic films that are allowed in the market, particularly Marvel, right? And we saw this with IMAX movies, most recently with Doctor Strange. And I guess given, obviously, Marvel's clear success at the box office, can you kind of discuss the impact some of these restrictions have had on you and how you see this dynamic playing out?

Well, first of all, at the same time that dynamic has happened, we pivoted and done much more local language films. So last year, we did $180 million in local language Chinese films in China. So to the extent there are gaps in the schedule, we fill them very nicely with local language, which, by the way, also suits the market dynamic which is moving a little bit more towards local language films and away from Hollywood films. And we've helped that effort by filming a lot of movies with IMAX cameras in China. So years ago, all of the films would have been made with 35-millimeter cameras or digital cameras, and we would have used our technology to up-res them. But now we're very much a part of the local market in China. By the way, it's the same thing in Japan. We've been extremely successful with Japanese movies. And I'll get back to the question, but the broader point is I think if you're an investor in the U.S., you tend to look at the U.S. domestic as the world box office even though it's only about 1/3 of IMAX' box office. And you look at Hollywood releases as the world of releases, but in fact, local language -- we're a really global company, so whatever the policies are, they have less impact on them than I think U.S. investors think about. On the question of what happens with them, I think 2021 was a really funky year in letting films in, and that was partly because the Chinese had their own backlog of unreleased films. So they weren't going to let in a lot of Marvel films and other films when they had their own films which couldn't get screen time. A second thing was, I think, the largely failed PVOD experience, where pristine copies were released on the Internet day and date globally. China is a high piracy territory, as you know, so people weren't buying these things on PVOD. They were just getting them for free off torrent websites. So I think the Chinese government kind of said -- and by the way, they make money on film releases in theaters, not on ripped off torrent sites. So the Chinese government kind of said, "Well, really, are we going to let these movies in when they're not going to do any business theatrically?" So that was a pretty big factor. And as you know, blockbusters are virtually universally now on a 45-day window. So that issue has gone away. And then if you look at their behavior this year, they let Batman in, they let Fantastic Beasts in, they let Ambulance in, they let Jurassic World in. And so I think some of the issues we saw in 2020 were unique to pandemic times. With that said, I do think that because of broader global issues between the West and China, the films are subject to somewhat greater scrutiny. And I think at the same time, the studios are under a little bit more pressure not to be too "accommodating." Because I think there was backlash against the studios. I'm sure you read a lot of the press about are they making the films for China or are they making them for the world. So summing up that somewhat long-winded answer would be I think that there'll be less of those kind of movies let in. I think the local language will fill the bucket for us. But since we're in the blockbuster business, I think there'll be enough of them, and there's been enough change where it's going to be fine for us.

Got it. Maybe shifting gears a bit. You recently attended CinemaCon. Prior to that, you hosted your CEO Forum. I'm curious, based on the conversations you're having with studio partners, where do you think stand -- where do you think things stand with regards to windows? And how do you think studios are kind of viewing theatrical now in the context of streaming services, to the extent they have captive ones?

So for those who aren't aware, our CEO Forum is we bring the CEOs from all the major chains around the world, and in a typical year, it's around 80% of the box office. And it's all off the record. There's no press there. And we invite studio people there, streaming people there, directors there. And I would say the headline coming out -- I know it was said by a few people, but the head of one of the major studios said in this forum that they've come to the conclusion that a movie is much more valuable on streaming if it has an exclusive theatrical release. So I think I need to back up and say that more clearly, which is if you have a movie and you release it just on streaming, it does worse than if you give it a theatrical window and you have a premiere and you let the movie breathe and then you release it. And I don't know the exact numbers, but an example I would give you is Batman. If you compared Batman to Wonder Woman, which Warner released day and date on streaming, and you looked at its impact on subscriptions, cancellations, people signing up for one movie, Batman, which did $800 million at the box office, actually did more for the streaming service than Wonder Women did with an exclusive. So I think they all get that now. And I -- even though it was said by one studio publicly, I've heard that from multiple studios. So they've said like, "Why would I be an idiot and why would I devalue my IP by going straight to streaming?" And some of us had suspected that all along, but to be fair to the studios, they were operating in a pandemic and that mixed up the model in a lot of ways. So everybody was pretty much online with the 45-day theatrical window for -- at least for big movies and blockbuster movies. Also at our conference were several representatives from streamers, and they had said they're considering windows around their blockbuster streaming properties. So for example, I think I read in one of the trades that Netflix is talking about an interactive movie that would have some theatrical windows around it. And certainly, a number of people in exhibition have talked to Netflix about windows around it. So I think blockbuster movies, big movies, 45-day window, I think everybody is pretty much sold off on that. And I think people who have looked at the exhibition industry haven't really realized that there's an opportunity for more content coming out of the streaming world because even they get the joke that the property becomes more valuable with a premiere, more marketing around it and a theatrical window.

Yes, to make some money too to defray the cost.

By the way, I grew up in that environment, David, where money mattered. But the last couple of years, I was hearing that the model of selling something one time on a streaming service was a lot better than getting box office ancillaries, merchandise and then selling it to a streamer. So thank you, you bring me back to my roots when making money actually counted.

Happy to do it. What about PVOD, right? A few years ago, this was such a hot topic for the industry, and it seems like studios who took a shot at this during the pandemic moved on, maybe with the exception of one. Where do you think things stand with that?

I've said it publicly so I might as well get nailed for it again. I think PVOD is a failed experiment. I think -- again, I understand during the pandemic why they tried it. But putting pristine copies of a movie out on the Internet, where any -- I don't want to insult people younger than 12 years old, but any 12-year-old could figure out how to download it almost immediately. I never understood how that was a business model. You look at some of the most pirated movies of all time, and they were those movies that were released through PVOD. So I just don't think it worked. And by the way, if you want to be really bullish on IMAX and even bullish on the exhibition sector, which are different things because, as you know, we're a technology provider, we're global, we do local language, different model. But all of that is one of the overhangs on this whole industry for years, was that eventually, it was going to go away because everything was going to be streaming and everything was going to be PVOD and that was going to be the future. And I think that hurt the multiples across the board. Well, guess what? In the worst stress test in the history of mankind, you're locked in your living room, the only way you could see movies is on your television set, you can't go with your friends, the PVOD strategy and the day-and-date strategy did not work. So I keep waiting for people to say the existential threat is gone because I can't -- well, I shouldn't say this because in a world where following pandemics, there are wars and all. But I can't imagine a more advantageous time to try and put the whole theatrical experience out of business and it didn't work. So I think looking at it in retrospect, there is -- the existential threat is gone. And I think where we are now should be very good for out-of-home entertainment.

Got it. You've recently begun discussing your IMAX 3.0 strategy, which is about evolving your platform partially towards events and experiences, both in and out of the home. Can you discuss this a bit further, including IMAX Live and IMAX Enhanced?

Sure. So IMAX is obviously a film experience. And the reason we call it 3.0 is originally, almost 30 years ago, I led a group that bought IMAX and took it private before we went public. We were a company that did documentaries and we were in science centers, and we changed the model. We went global. We did blockbuster films. We went -- we built -- we went into multiplexes. We went digital. We reinvented ourselves. So this isn't like -- when we talk about the future, we've done it. We know how to do it. So now we're saying why do we only have to do film experiences. And frankly, the pandemic taught us a lesson, maybe diversifying away from Hollywood isn't the worst thing in the world. And that's partly our local language strategy. But we've started to connect our theaters, and we now have about 75 of them connected. We're in the process of upping that pace and connecting more. And the thought is that we could do live events and charge a fair amount for doing it. So we've done 2 Kanye concerts. We've done Halsey. We've done some Q&A. So one of the best examples was we took the Disney+ footage that Peter Jackson had shot for The Beatles rooftop concert. And we did a live Q&A with Peter Jackson from his country home in New Zealand on his iPad, where he said to questions, "That guy in the room with the yellow shirt," because it's 2-way. And we pretty much sold it out everywhere. We filmed it and we did about $3 million releasing it. This is on something that had been on Disney+ 4 months ago. So I think there is a very good market for it. I think we'll focus initially around music. But I think we'll do things like comedy, sports. This sounds weird, but maybe even iPod kinds of things -- podcasts because there's a live audience capability for that. And we're building it up. And when you do the math right now, it's 75 theaters. We're like one Madison Square Garden. But if you get to 500 theaters, we're many Madison Square Gardens. And you look at the models of people like Live Nation and also the multiples and the values and the growth rates related to that, we think putting ourselves in that space could be very good financially and operationally, and certainly, we have the brand to do it. And I guess one really important point is this isn't going to be like your father's kind of in-theater thing. So we're not televising fights on crappy TV streams. We're having -- the ones we've done, we've had Academy Award-nominated DPs. We shoot them with IMAX cameras. We put special bandwidth into the theaters, special technology. So if you saw the Kanye, once people go crazy, it's like almost better than being in a concert because every seat is a front row seat. And IMAX Enhanced is a technology where we take images on large televisions and we up-res them in a way and we put them in IMAX' aspect ratio. So we have a deal with Disney+, where for all of the big Marvel movies, over the last couple of years and the recent ones, you can watch them at home in an IMAX aspect ratio. So we're part of the whole conversation. So by way of example, for Eternals, it was filmed with IMAX cameras. It was released in IMAX theaters. Then it went on Disney+ in IMAX aspect ratio. And we didn't do a Q&A for that one. But for West Side Story, with Spielberg, we did do one. So we're putting ourselves across the whole chain, out of home, in home. And I think we can really help market around that.

I'm curious -- for IMAX Enhanced, right, when I open up Disney+ and go to the movies page, you have your own tab, right? And it's alphabetically listed. And I'm curious if you've spoken to Disney about this in terms of how much of having IMAX Enhanced has served as a signal for kind of people on Disney+ and say, "Oh, this type of movie, you should be watching. It's a better experience."

So we have had informal conversations, but 2 things. One is the default mechanism is the IMAX version on the Marvel movies.

I've noticed that, yes.

So you don't have to go set it up and do it, it goes there. And we did a study with a very reputable firm called MarketCast that did a lot of consumer research. And people said they would pay more for IMAX Enhanced, they'd be less likely to cancel the service, they'd be more likely to sign up. And I don't even want to give you the numbers because they were so like overwhelmingly pro IMAX, it looks like we paid for result, which we didn't. And obviously, we've shared that study with Disney and others, and it was quite promising.

Got it. And maybe just with IMAX Live, I'm curious how we should think about the content from a scheduling perspective and how you manage that with the studios. The Kanye concert, I think, was on like a Tuesday night, right? So should we expect something like that, where most of the live experiences, you're sort of booking midweek and you're driving that utilization? Tuesday is always known as the slowest movie day, right?

I think it will depend on the kind of content. So Jurassic World, we -- when that opens, we're doing a Q&A with the director and the cast in 75 IMAX theaters. So that's prime night opening premiere that's using IMAX Live as an adjunct to the premiere, and we're hoping to charge a higher ticket price for that because it's a unique experience. But a stand-alone music event, we'll look for definitely -- we're not going to open at the same day as Avatar, right? Or we're going to have to work around the schedule in terms of months. But you asked a question earlier about August and September being maybe a little bit slower. We haven't announced what they are yet, but we have a number of projects that we're hoping to release during that time period. It's not just days, it will be times of the year.

Got it. All right. Well, we're just about out of time. Rich, thanks so much for being here.

All right. Thank you, David. Appreciate it.