IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Got it. I want to talk a little bit more about local content. So during the pandemic, out of necessity, I think you shifted into local films because Hollywood was -- production was disrupted or films were going to streaming. Coming out of the pandemic, though, local has a significantly greater presence under screen than prior. So what are the key advantages for you and your exhibition partners in balancing that mix of content?

So there have been kind of 3 phases of local content. The first one was the pre-pandemic, we kind of just dabbled and in places like China, where we had a pretty decent footprint. We've made local language films. We worked with studios, directors to either film with IMAX or to convert to IMAX. And it was a pretty decent business. And as a matter of fact, in China, in 2020 and '21, the largest box office films in the world were 2 out of China, The 800 and The Battle at Lake Changjin, and they were both filmed with IMAX cameras. And they -- I mean, they did high hundreds of millions, like $700 million, $800 million, but almost all of that was in China. Phase 2 was we kind of broadened that effort. So now we're -- to give you a sense in India, I think something like 3% of our revenues were Indian films in 2019. And I think in '22, it was around 20% of our revenues and in the first quarter of this year, 1/3 of IMAX's global revenues were from foreign content. But now we're in kind of Phase 3 of foreign content, which is really interesting to me and for the future. And I think we're ahead of the studios on this, and I think you'll see this follow suit, which is local language films doing well outside of their local territory. So a film called Pathaan in India, we did way more outside India in IMAX than we did in India. And we did it in Scandinavia. We did it in Europe. We did it in the United States, even a local Chinese film like Wandering Earth that came to the U.S., we did 30% of the U.S. box office because we -- we were associated with.

I was going to say the studios are relying on you to signal, right?

The Chinese studios in that case or the Indian studios. And right now, we have a French blockbuster called The 3 Musketeers, that's playing. We even did a film in Indonesia that came out recently. And I think one of the things investors and even analysts, and you may totally get this, David, I don't know. But they say like after our first quarter, they said, well, IMAX did great, but there was Avatar, there were other blockbusters, but 1/3 of our revenues were from local language films in the first quarter. So also people look at it and they go, well, this is a week -- weekend for whatever reason, and they say, but they don't know that it could be over half our revenue that weekend is coming from films they've never heard of. Now the good news is every week, we post our results online. So they know there's no surprise at the end of the quarter where it came from, but I think it's a hard thing to model because -- and then the last point I'll make on this is I think it's part of a global trend. So look at Netflix and look at how successful they've been with foreign language films, particularly Korean films. So I think in the movie side of the business, we're on the cutting edge of this. But really, no one other than Netflix is really early on and seeing what that trend is.

Yes. I wonder if you could talk a little bit about the sourcing of local content because I remember when you first started carrying local language in your China -- in China, right, there was a challenge, at least initially in figuring out which films are going to be successful, took some time, you had to integrate with local filmmakers there. Are you -- is there a similar process now kind of going on with other regions?

So yes, let me start with China. So we have a new CEO in China named Daniel Manwaring, and Daniel who ran CAA's Motion Picture Finance Group for over a decade and very well connected. So in addition to knowing the studios and the filmmakers, we've actually hired someone whose expertise is really finding those and reaching out. We also, because we built such deep relationships there with the student -- I mean, they'll call us and say, 2 years from now, we're doing this, and we need you to be part of it. So that -- you're right, that's the place when it started, but we're kind of using a similar model elsewhere in the world. So India is a very good example. So I think last -- it's either last year or this year, we'll do around 15, 20 films in India. And we have -- in our headquarters in L.A., our film headquarters, we have a team that sources them, and we have relationships with the directors and producers and the studios. So we have that way in. But we also have partners on the ground in those countries, so we have theaters there. So we also talk to our theater owners there, and we reach out and we say what films would you like to play in that market. And that's particularly effective because of the way the schedule works. So for example, in North America, February is not a very good month for a variety of reasons. But in China, it's Chinese New Year, and we did $100 million in box office in China in the first quarter because it was Chinese New Year and we picked the right films over there. So the globalization also makes us not only more immune into Hollywood, but it makes it much more less cyclical. So you can fill in your gaps at that time. But also, we're taking a lot of other steps, which we haven't talked that much about, but we should talk about them a little bit, now. So in the big local markets like China, like India and starting in Japan, we're doing -- we put our DMR process which is the one that converts the films to IMAX films in the cloud. And we've partnered with local post-production partners. So for example, in India, we used to have to -- if there was a film being released, we needed to send the film to L.A. We needed them to put our magic process around it. Then we needed to send it back to India. We needed to work with the filmmaker in India. He'd have comments. It would come back to L.A. So doing local language films is more complicated. Now in India, we have a partner which not only can do it, it's a very sophisticated company using our DMR in the cloud, can DMR it quickly. So you don't have to get delivery a lot in advance and can do it just as well as they could do it in L.A. But as a side benefit, it won't surprise you, it's a lot cheaper to do it there. But I think the last point I should make is maybe the most important one, which is that Japanese anime is really on a breakout. And Japanese anime, so there were 2 films, 1 called Suzume and one...

Demon Slayer.

No, no. Slam Dunk.

Okay.

Which did more business in China than they did in Japan for us in IMAX. And there -- and Suzume also did business in the U.S. and elsewhere and anime is just for some reason, there's really a strong brand affiliation between IMAX and between anime. So Anime is really working on a global basis. And I think that's driving a lot of our foreign language growth.

Got it. You talked about the balance, but I'll push on the Hollywood side, and I know I've asked you this question a bunch, but. So the Hollywood title started securing China release dates again. You could say the early performance was mixed more recently. I think it's been better with Fast X. But interested to kind of get your view of the local taste in that market. Have they shifted at all during COVID? Or was that maybe early Marvel performance an anomaly?

So. I'll answer your overall question, but I don't think you could say the only performance was mixed because Avatar came out. If you remember, the country was shut down and then it opened the day Avatar opened. And in IMAX, we did about $55 million in China when it was still in the middle of the COVID pandemic. So I think for the right movie, people will obviously come out, and that's part of our first quarter where we did $100 million in Chinese box office, which I think -- I'm looking at Natasha -- that was our best first quarter ever in China. So I think, yes, then some of the Marvel movies didn't perform, but I think the narrative is a little overstated when you're in early May, you just had your best first quarter ever...

Fair enough. Yes.

That's a little bit of a stretch. And you're right, Fast, we did 11% of the box office on 1% of the screens last weekend. So I know there is a narrative. But I think the more important narrative is China is still in a recovery phase. Our China office told me, and I did not know this, that the Fast performance was even more remarkable because there's a COVID mini outbreak again in China, which not surprisingly is not on the front page of every newspaper in China. It's not like it was, and it's not lethal, it's kind of like in the U.S. but you don't like come out of it and then you come out of it tomorrow. It takes a little time to normalize. And I think we're in the process of normalizing. And again, because of our relationships with the local content filmmakers is because our new CEO in China is very well connected because of big movies coming like Mission that I think will do extremely well in China. And I should point out that I've been doing this at IMAX for 29 years. And I've never seen China let as many movies in as early as they have this year. So every movie we have through June and into early July, has gotten approval. So we're talking about Flash. We're talking about Indiana Jones, Little Mermaid. I don't know if Mission has been submitted yet, but I know they're expecting that to get in. And -- but they used to be let in at the last minute, like they played little games because they wanted less marketing time. But now the Chinese are much more interested in getting their domestic economy rolling and getting people back going to malls rather they are and are they doing 50% market share or 53% market share. So they really opened the doors in China right now with time to market. So again, the way I recap it, David, is I don't think it's going to be back to normal because it's not a light switch. It's a faucet, but I think it's headed in that direction at a fairly rapid pace.

Okay. I want to make sure we ask -- we get the SSIMWAVE. So you've held that asset for around 6 months now. I guess how are you thinking about what needs to be done in terms of building up the product before you can bring a more expansive offering to the market?

So SSIMWAVE is a business I'm extremely excited about. And for those of you who aren't familiar, I'll just digress for a minute, which is, as you said 6 months ago, it's a tech company that's based in Waterloo, Ontario, not far from our Canadian headquarters in Mississauga. And they have lots of technology, but their primary technology takes content, mostly streaming content, but it could also be broadcast content and figures out how to optimize it to put it through the pipes, putting it in Gelfond moron language rather than technical language. So if you're watching the news on this device, you can compress the hell out of the image and so if you're Disney+ or Comcast or whoever you are. And by compressing the image, you can save a lot of money putting it through the pipes. On the other hand, if you are watching one of the Chris Nolan movies on a 100-inch television, if you compress it too much, it will look not -- it look terrible. So what SSIMWAVE's technology does, it's backed by a lot of AI intelligence. It maps the human view of perception and it looks at what device every viewer is watching. It looks at what the content is and it optimizes how much you can compress it. And there have been some early tests done and by numerous people that show probably today, streamers could save in the neighborhood of about 20% of their streaming costs and again, the physical cost of streaming. And that's a very significant number. I mean, it's hundreds of millions of dollars that are being streamed. So we -- that's one of the primary reasons we bought the company. Before we launch that product broadly, we -- there are some organizational changes we needed to make. So we hired a Chief Revenue Officer. We have a new management team in place and we kind of soft launched it at NAB like about 3 weeks ago. And we got a really good response, a meaningful number of leads. What -- again, it's only been a little while, but the leads we've had have been testing it out and the tests have gone fairly well on it. And I'm incredibly optimistic adding NAB in our category, we submitted some of our products and SSIMWAVE's, one of its products won the best product at NAB. So again, could I give you a model, if you ask me in general, I think, it's not going to have a big financial impact in '23. But I expect at some point in '24, it's going to have a meaningful financial impact. And it's a SaaS business model. So it's a very high-margin business, and we're in the process of launching it, and we're excited about it.

With streaming is the end customer, is there any tie-in with IMAX Enhanced?

There is. And I think that we're working on how to integrate that. And again, for those of you who don't know, IMAX Enhanced is a product that goes on large television sets and it creates the IMAX aspect ratio. So the most well-known arrangement we have out there, today is for all Disney Marvel titles, for the last, I don't know, 5 years or something like that, plus the new ones. If you go on Disney+, the default is IMAX Enhanced and it says IMAX Enhanced on the television set in Disney even runs commercials, saying coming soon in IMAX Enhanced. So obviously, because the -- and by the way, Disney+ is also a client of SSIMWAVE, as are companies like Comcast, and Paramount+ and HBO and a lot of them. So it's the same client base. But all of that is based really on a bigger vision, which is IMAX. I think we've done a really good job at penetrating the out-of-home market. And I think we have a long way to go in that market. But the brand is so strong. We're trying to figure out ways to broaden it in the home and both Enhanced and SSIMWAVE are ways to do that.

Okay. We have about a minute left. Let me just get one in on capital allocation. So you've been, what I would term an opportunistic repurchaser of your stock over the past couple of years, especially when you look at the average buyback price to where it is now. Maybe just refresh on how you're thinking about that relative to some of the initiatives you just spoke about?

Almost all of these initiatives are low -- have low capital expenditures. And for example, SSIMWAVE, as I said, it's a SaaS model. So you have to invest a little. But once you get it out there, cost of goods sold is just small fraction of what the cost of the product is. So we're thinking about buybacks in the same way, I think we've always thought about them is to be opportunistic. And we -- over the years, we bought in stock at higher prices than it is today. We brought in stock at lower prices than it is today. I forget, over the last year, we bought in like 9% of our stock. And if you look at -- if we return to pre-pandemic levels, even without multiple expansion, I mean, the stock price compared to where it is today, where it's been historically is kind of embarrassingly low. So we'll remain opportunistic. We'll see how our company looks. We'll see what our cash balances are. We'll see what the stock price is and then we'll make opportunistic investments if it makes sense.

Got it. Okay. Rich, thanks so much for being here.

Right down to 0 seconds, David. Perfect. Thanks.

Thanks, Rich.