IMAX Corporation (IMAX) Earnings Call Transcript & Summary

All right. We'll get started with Rich Gelfond, the CEO of IMAX Corporation. And it's really great to have you back with us.

So Rich, you've managed your business extremely well throughout all the turbulence since 2020, and it's been a hells ride. What does the market not understand about IMAX?

A lot, but I'll make it brief. Because we show movies around the world in theaters, the market somehow thinks we're an exhibitor, but we have less in common with exhibition than almost any industry. I know IMAX has a very strong balance sheet, no net debt. IMAX licenses technology to theaters. We also license movies from studios, and our model is based on license revenue almost completely. We're almost like a technology software company because these theaters in the world, we also have a -- we maintain every year. So when we turn on the key we have $65 million in revenue, which is just recurring every year. We're growing at a very rapid rate. Our box office this year, we've guided to the same level as 2019, which is about $1.1 billion. And first quarter was our best first quarter ever. Third quarter will be our best third quarter ever, will probably be around $900 million of that $1.1 billion by the end of the third quarter. And most importantly, we don't sell popcorn.

Okay. So with your Oppenheimer release, your opening weekend delivered 20% of the film's global debut. On a relatively small number of screens. It's a really small percentage, right? And...

0.001%.

Right. Really small. So I mean your way, way, way over deliver. And you've maintained that share with incredibly strong demand in the 70-millimeter film locations. What is it about the IMAX experience that allows you to outperform so significantly?

So I think it's a few things. First of all, I think it's the experience itself, and it's -- I don't want to spend too much time on this. But it's a complicated technology system. And many people join, and I always say to them on the first day, you think IMAX is like a gimmick, like you have a well-known brand and you put it up there and people come, but we have proprietary technology that captures the image. If it's not an image capture, which Oppenheimer was, if it's not filmed with our cameras, let's say it's Indiana Jones. We have proprietary algorithms that convert it into an IMAX image. Then when it's shown in theaters, and we're in 90 countries, and we have 1,700 theaters in the world, every one of those is monitored in real time, 24/7. So if the volume is in Singapore off, we call the theater and we tell them to fix it or there's a problem with the screen image. So that's why they pay the maintenance recurring fees that we get. And then at the other end of it, on the projection systems are also proprietary patented, and it's -- so it provides fundamentally the best really -- this reality. And then there's the brand for a company with $1 billion in market cap, I don't know another company certainly in the entertainment industry that has that kind of brand recognition. And I think that partly comes from the talent, whether it's the directors or whether it's the stars so embracing. And I think they say to consumers that, that's the way I want to see it, and you provide a better experience with a great brand. You have a pretty good business.

Yes. Obviously, consumers opt for the premium experience. So how should we think about the runway for you to continue to gain share not only in the U.S., but rest of world?

So our market share in the U.S. is up 50% from pre-pandemic. Our market share in the rest of the world -- in the whole world is up about 40% since pre-pandemic. Our network, as I said, is 1,700 theaters. We have 500 theaters in backlog, which means those will be installed over the next several years. This year, we signed, so far, 87 new theaters, which is about double what we did last year. And it's somewhat of a complicated model, but when you cut through it all, in addition to the recurring revenues that we have, we get pretty much 18% of box office on a global basis. So Oppenheimer has done close to $180 million in IMAX so far. So what -- I'll be lazy and I'll say, 20%. So you just take $36 million, and that goes into our gross margin. And we didn't make the movie. We didn't market the movie. We invested something in putting the network together. And as I said, we get paid for maintenance. But every theater that we open in the world, so those 500 sitting in backlog today, when they open -- again, I'll do made up math, but if the 500 theaters do $1 million a theater in PSAs, you take that number and you multiply by 18%, and you have incremental revenues that you're adding. And then the second part of the question would be our penetration on a global basis. So we're about 50% penetrated for our total addressable market. We've said that we have 3,300 potential zones that we can go into. But we did that study pre pandemic. And just to give you a context, in China, we originally said that we could go into 90 theaters in China. That was our original TAM. And we have 800 theaters open today and 200 in backlog. So we haven't revisited that in a number of years. So we have a very long runway to go.

So how do you think about the positioning of IMAX in the overall landscape in a post-COVID world where demand for premium is so great?

Yes. I mean, I think that's a really important observation. You look at the Taylor Swift concert doing $1 billion or more. You look at sports going premium. People really want experiences, and it's reflected in our market share. And so that, I think, is one of the tailwinds we have going for us. I think another major tailwind we have is blockbusterization. And that's -- we do blockbusters. We don't do small movies by and large. The small movies have gone streaming, theatrical has generally benefited more and more blockbusters. And we become somewhat of a curator for global blockbusters because the studios really can't coordinate with each other in terms of when the slots are and when the good films are, but people come to IMAX to -- they'll say, does July 4th work? And we say, we can't. We have another film coming out then. So with pretty much every studio, we've people clear with us before they date their movies. And then I have to expand that and say that's not just in North America, that's very much on a global basis. So this year, we set a record for local language content. So we'll have about 50 local language films. And we're about to cross $200 million in local language content. And what's been interesting to me about this -- and by the way, in the year -- before the pandemic, we had very little local language content, way less than half of that. So it's growing very rapidly. But what's really surprised me is the local language content isn't only playing in its local territory. So Japanese anime is a perfect example where we we've done a higher box office in China and in Korea in some cases than we did in Japan with anime. And there's a Miyazaki film that The Boy and the Heron that we did 16% of the box office in Japan, and it opens in the U.S. in December. And people look at us, it goes back to the misunderstood first question, Jessica, and they say, well, this weekend, Haunting in Venice is opening, and that's not a good movie. So maybe we should sell IMAX stock. But we still did $5 million at Oppenheimer in the last weekend, which is, what, 7 weeks after it opened. And Warner Bros. is rereleasing Barbie and Greta Gerwig is doing new footage just for IMAX, and it's coming out the 22nd. And we did a concert film 2 nights ago with the Talking Heads, which is our biggest kind of alternative content release ever. And Wednesday -- Tuesday -- last Tuesday or Wednesday, we opened an Indian film called Jawan, which was our second highest weekend ever in India, $2.5 million. So we're just such a different animal. And again, I said, it's somewhat complicated to follow, although we post these results every week. So -- but you just have to get through it that there's recurring revenue, and then there's 18% of worldwide box office. And then you take out the costs, which are fairly constant, and you get to a gross margin number. And I was saying at an earlier meeting that in 2019, our EBITDA was about $150 million, and we had about 65 million shares outstanding. We've had a lot of cash flow the last number of years. We've shrunk our outstanding share number to about 54 million right now. Box office is going to be in the same range. And you look at the multiple that we're trading at, it's ridiculous. So there's a lot of growth potential.

All right. One of your major initiatives has been to leave IMAX's DNA into films. How do movies filmed with IMAX cameras typically perform in your theaters versus films not captured with your technology? Like what's the typical uplift that you would see from IMAX DNA?

It's probably 20% of the gross box office. So using a simple example would be if we took a film and we converted it using our algorithms, we do 10% of the U.S. box office on 1% of the screens. But if we use IMAX DNA and the movie filmed with the cameras, and maybe a little bit more than 20%, maybe it'll be 12% to 15%. As I said before, we've done 30% of Oppenheimer in the U.S. on 1% of the screens. Dune, we did 22% of the movie globally. That was shot for IMAX, and Denis Villeneuve for that movie shot 40% of it for IMAX with IMAX cameras. For Dune 2, he shot 100% of it with IMAX cameras. And it has a lot to do, though, with how the filmmaker markets. And it's not just the technical part of filming it, but obviously, the most recent example is Chris Nolan because he goes everywhere and he says, you've got to see this in IMAX. I mean it would be for you, Jessica, like someone in finance running all over and saying, you've got to go to Bank of America, you can't go anywhere else. So it's not just the technology, it's the -- and it's kind of like the filmmakers are like artists. And as I explained earlier in the conversation, it's real. It's not just some brand gimmick. So Nolan wants people to see in an IMAX because they'll like it better. We've done a lot of testing and people watching the same movie in IMAX or not in IMAX, say it's a better movie. And in fact, it is because it looks better, it sounds a lot better.

So who actually makes the decision to use IMAX cameras? Is it the studio, the management? Is it the director? Like who actually -- and how much can you influence that choice?

So it's either or both. Some studios, which we have really good relationships with like Warner Bros. and Disney, they would say, hey, this is the kind of movie that we think you should film with IMAX cameras, that's a common way it happens. But if you're a well-known creative director or producer. So that happens. So for Creed, Michael B. Jordan said I want to shoot with IMAX cameras or for Bond, Cary Fukunaga said I want to shoot with IMAX cameras. And of course, Chris Nolan is very kind of addicted to it. By the way, Cary Fukunaga after he saw the result, he said, it feels like I've been flying economy my whole life, I could get used to this. So there's a lot of repeat. People use it. And we're hoping, like I said a few minutes ago, Barbie, Greta's going to -- is working with us on the new footage. So that's an example of someone new to it. And since you cover the studios and understand them well, when something works, the studios want more of it. So 1 tornado movie, we need 3 tornado movies. So since Oppenheimer was filmed with IMAX cameras, and it's done so well, recently, a lot of people are calling and saying, how do I get my movie filmed with IMAX cameras? So I think that's a good short-term incentive for that.

Right. So just when the box office seems to like really be taking off really come back post pandemic, the strike shut down production. So can you talk to us a bit like how deeply will this impact your business? We see movies being pushed back. What is the -- what do you think the impact will be?

So I mean, nobody is happy about this. Let's just start there. After the years of pandemic and doing really well. And Barbenheimer and the momentum that that's built. It's obviously disappointing in a small way that actors can't promote their movies and writers and things like that. For IMAX, we're incredibly nimble. So if you look at our releases over the next month or 2, we're doing Killers of the Flower Moon from Apple, which -- there was no Apple releases in our budget this year. There's Napoleon from Apple. There's Barbie, which just came in. There's the Taylor Swift concert, which just came in. There's 5 or 6 international films that just came in. So we have -- we're not like an exhibitor that has to fill 24 screens. I just need one good property, and it works for us. So my understanding is that everything that's on our slate for the rest of the year, that is going to move, has been moved. So I think the slate has kind of locked for the rest of the year, at least for our content. And there's a little bit of a silver lining to it. So we were scheduled to play Dune, but we -- which meant we couldn't play the Marvels from Disney, and it meant we couldn't play Hunger Games from Lionsgate. And it meant we had to give some of the Apple movies a shorter run. But with Dune moving, we have a good movie -- a very good movie on the slate for March of next year, and we can play those other movies. So that mitigates it. Now for next year, I think most of the first half of next year is kind of locked and I think some of the movies in the second half. So I think if the strike were to be settled over the next several months, it wouldn't have a big negative impact. And we're trying to lock down more live events, more foreign content. But I think if the strike drags on into the new year, we're going to be impacted by it just like other people.

Well, obviously, it affects everyone, but you just mentioned a few things. So you mentioned the Taylor Swift like that was -- came out of nowhere, right, almost -- you said something about Talking Heads earlier, which I saw the reviews the -- it was like -- it seems like it was insanity in Toronto, like just people trying to get in and the audience reaction. So could you talk about other kinds of content like local language is one thing you said. But what else can you bring in that like we're not thinking about?

So we wired 250 of our theaters to be able to do live content, which includes -- it could be films. So Stop Making Sense was a Jonathan Demme concert film that he did 40 years ago, but we used our technology to make it look great. And then the band got together for the first time in 20 years to do a live Q&A. And it wasn't just Toronto, we streamed it to about 200 theaters globally. And I was in Toronto, I mean, it was crazy. People were standing up and screaming. And my wife was dancing in the aisles at it. I mean...

The reviews were insane.

Well, the experience...

Must have been amazing.

The experience was insane. And I'm really hoping that having just done it 2 nights ago, I was thinking not to downplay how good the theatrical experience is going to be in movie theaters. But why would you see this on a small screen if you could see it like it looks like you're at the concert. And by the way, we remastered the sound in it. So in the New York Times article, I don't know if any of you saw it, but they -- usually the New York Times, you can't tell if they hate something or like it. But this article, they called it the best concert film of all time. But they said the sound was better than the sound was seeing the Talking Heads live because the technology has changed and you can remaster it. We've done some tests with the NHL. We've done some tests with Major League Soccer. So I think live content is an interesting possibility.

Because we just had Michael Rapino from Live Nation and the whole experiential economy, it just seems like such a growth area and an interesting -- possibly interesting for you guys. But anyway, IMAX typically plans -- you plan each year to optimize the slate. How is your planning process changing given the uncertainty in the industry given the strikes?

Well, as I said before, there were 4 or 5 movies we didn't plan on having in September, October that we have. So we're kind of agile and informal, but when you look into next year for the first number of months, what part of it is we're global. So in February it's Chinese New Year. And this year, we had the best Chinese New Year ever. And by the way, I don't know if you were going to get into China, but I should mention that the Chinese box office, if I took a poll and I asked you all what percentage of China is it at versus 2019? I'm sure people would guess 50%, 30%. In fact, it's 95% of 2019. So the Chinese box office isn't doing well with Hollywood films, but it's doing really well with films. And by the way, IMAX in China, we get a much higher take of the box office when it's a Chinese local language than when it's a Hollywood film. So there's just -- so backing up to your question so we could plan our Chinese slate for next year. We can plan our Indian slate for next year. We could plan a lot of our global slate. And then the first 6 months, I think we could lock down pretty tight. I don't think a lot of that's going to move. In the second half of the year, it's going to be a little bit challenging. But you know there are Marvel movies in the mix, there are DC movies in the mix for next year. Mission is coming out. Again, I'm not sure what the date will be. Mission 8 next year. There's a lot of good content out there.

Right. So we'll get to China in a second. But one of the concerns about these strikes is that everybody will reevaluate how much they're spending. It's sort of -- at least from a television side unsustainable, like just because of competition. And everybody is maybe stepping back a little bit, does this affect the film? Do you think like when we get out of this strike, will it affect kind of the cadence of films and how much companies are spending?

Again, I don't want to just talk my book, but I think if there's been one lesson out of the last couple of years, it's that you have to spend money on content to achieve results. And I think the Netflix model, which looks so attractive at some point, quantity, lots of movies. And for Netflix was really smart. They didn't have a lot of original IP. But I think the studios learned the hard way that just throwing things up on streaming services didn't work, and the quality of the content mattered a lot. And Warner Bros. Discovery and Zaslav have clearly articulated a focus on content as using that as a driver for the whole business. And I think Iger has said that since his return...

Bob Iger absolutely said, less quantity, more quality.

And I think again, IMAX is the ultimate in quality. That's what we do. And I think it also enables us -- if you look at in 2019, there were 9 movies over $1 billion. This year, there are 2. And our box office is anticipated to be in the same range. And I think that's because of people seeking premium, people seeking blockbusters. And I think you just have to be flexible. Remember, when I was growing up, Westerns were the big thing or I used to watch with my father World War 2 movies. But every kind of genre has a cycle, and it cycles away. And I'm sure the Marvels will still do very well. It might not do the same number it would have done 3 years ago. But I think the industry always transitions. And I think as long as the studios commit to quality and putting the money in, that's what's going to drive them because how are they going to separate, especially going back to Netflix, which has so many more subscribers and is making so many more movies. I mean, how do you compete with them? From my point of view, I think the way you do it is IP and blockbusters at high quality and spending money. So long way of saying, I don't think that scenario is going to play out.

And one other thing and then we'll get to China, but the -- what worked for a few years, several years with the superhero movies, we just talked about with Tony Vinciquerra. And then just feels a little like consumers fatigue. And we saw that with Barbenheimer, like it was just -- like really original IP resonated incredibly well. How does it affect you? Does that affect you like, is it you nervous about that? Or is this maybe a different opportunity?

When I think of the IMAX audience, I think some part of it is fan boys. And maybe that will fade away if some of those things fade away. But I think a lot of it is cinemafiles, and I think it's people really want to see things the best way that they could possibly be displayed. And the crazy numbers when we did Oppenheimer, our ultimate for the year was $65 million, and we're about triple that right now. And some of the movies coming up like Scorsese and Ridley Scott, I mean those are really high-quality movies. So I think we stand a much better chance than anyone of filling in with that. And again, I think the fan boys and fan girls will go through a little of a transition. So maybe while superhero movies are going down, it hasn't been written about that much, but the anime trend is going very much the other way. And it's just crazy -- I don't know if you've gone in to look at the numbers on those things. But people -- it's a worldwide phenomenon on anime. And even Spiderverse this year, what Sony did was a version of anime would truly work. So I think you'll see the studios pivot in those ways to different genres. Now of course, original IP, like they don't have another Barbie. I don't think Hot Wheels is ready to exactly challenge them in box office in the next week. And I don't think a series of famous physicists is really going to be the next box office sensation. So I think you just have to be a little more creative and a little more innovative, but the studios have learned, I would hope that, that's the way to go.

Right. And just Tony Vinciquerra had definitely said anime, they're doing more in anime.

Well, Sony is the most staying on anime. And I think they own Crunchyrole, which distributes anime globally. They distribute for us a lot of things too.

Yes. Yes. So you talked about that a bit. So let's turn to China and there's like multiple aspects of this. So first, let's just in general, the -- just talk about the box office there. Obviously, as you said, there's like real demand for your technology and your offerings in the region, whether it's Hollywood movies or local language movies. But it's a complex market. And I think one that we've always found a little more difficult with the rules and regulations and who gets in, who doesn't. What is your view on how Hollywood films will do in that country over the next couple of years?

So a hard one to answer. But I think what's happened this year is kind of 3 things, I think: one, the economy is very challenged; two, people forget, but China didn't come out of the pandemic really until around January 1. I mean they were still had drones flying over. And they were stuck in their homes until January. And if you look at the way the world came out of the pandemic, everywhere in the world, it took time. It wasn't like turning on a light switch. And then I think years ago, they weren't as high-quality local language films. So I think Hollywood is a lot easier to just say it's either not much or this Hollywood film. But a lot of local language films in China like this year, we did $52 million at a film called Wandering Earth 2. And there's a film we just stopped playing called Creation of the Gods, a Chinese film that we did $35 million. Now Oppenheimer is probably going to do $60 million or something like that in the country overall, and we'll have a nice share of that. But I think it's going to take a while to transition back to normal. So is normal, the old normal where Marvel films did $150 million, $200 million? Or is it a new normal where because of the pandemic and because of higher quality films in China, the percentage of the box office is more local language? And if I had to guess, I would say it's going to be a little more than new normal and not the old normal. And you also have -- China is very complicated because as you know, there's tiers of cities. So I think in the top tier cities 1 and 2 that Hollywood content will continue to do really well. And I think in the bottom tier, lower demographic cities, local language content will gain market share. So -- but if you ask me my confidence on anything in China right now, I would say it's not the highest in the world.

But you did recently propose to take 100% ownership of IMAX China. So kind of give us your view of like why you're taking this strategic step? What does it allow you to do? What will it allow you to do that you couldn't do previously? And what is the financial impact?

So we spun off our -- we took an investor in our Chinese subsidiary, I don't know, like 10 years ago, I don't remember exactly when. And that investor needed to get out. So we went public in China with IMAX China. And there were a couple of reasons: one was to get that investor out; another one was to become more a part of the fabric of China at that time; and another reason was to raise capital. And at the time, I think we had less than 100 theaters. And now with backlog, we have 1,000 theaters. So a lot of those objectives were accomplished of raising the capital, getting rid of the investor. And the company in China still does quite well, even last year during the pandemic when the whole country was basically in quarantine, we had positive EBITDA and positive cash flow coming out. But as good as the company has done there, the stock just hasn't worked there. So it had been as high as I think, HKD60. And then it just traded in a run for the last couple of years around HKD5 some -- most recently, something like that. So it just didn't seem to make sense for investors over there. It didn't seem to make sense to invest a lot of resources in it. And we thought it was a good idea to offer the investors there a chance at some liquidity and getting out. And we offered them about a 50% premium. At the same time, for the parent company, it gives us a lot more flexibility. So if we want to introduce a new product in China because of the Hong Kong Stock Exchange rules, it's cumbersome, it's bureaucratic. It's very difficult to do. Also, there are strategies we might want to pursue in terms of global tax strategies. There are -- it's much more efficient doing it if we're all in one organization. And then also it's accretive for the parent company because the multiple is so low in China. So we thought it was good for our shareholders in both places.

And when you say product, do you mean other kinds of programming or something like actually different business?

Related, different kinds of businesses. So we have something called IMAX Enhanced, which is on Disney+. If anyone goes on the Marvel tile, all the content is shown in a format called IMAX Enhanced. And we wanted to introduce that to streaming services in China. And we couldn't do that unless they had to buy it from us. And we needed the approval of the independent directors, and it took a long time. It was cumbersome. We just acquired a company called Simwave, but it's really not catchy. So we're calling it IMAX technology and streaming. And what that company does is streaming optimization. So if you're a streaming company, it figures out a way using algorithms to save you a lot of money streaming. And we have a lot of clients in North America. We don't have very many clients internationally. But if we want to introduce that product in China, they have to pay us for it. We need approval. So it's just a cumbersome way to doing business.

Okay. And then you mentioned local language is doing much better in China and probably other -- many other areas. Can you just talk about what you're seeing in terms of local language production versus -- I mean here, we know there's a shutdown. But what's going on in the rest of the world?

So it's pretty much unaffected. The strike hasn't affected it at all. And in fact, as you know better than I do, it's also become a big thing in television and streaming. And we used to think of the world, right, as a Hollywood world, and that was a big place for the content. And Netflix has been very successful in foreign language production. And the amount of it has really ramped up enormously. So I'm trying to remember, but I think in 1979, 3% our box office in India was local language content. And I think this year, I don't remember, but it will be more like 30% or 40% of it. So -- and we've also given tools globally as well. So we film China -- films in China using IMAX cameras. We're about to do that in India with IMAX cameras. It's pretty -- in Korea, we do -- we made a number of films. In France, we've made a number of films. And as I said earlier, the thing that surprises me is how well they play outside of their indigenous market.

It sounds like there's a long runway for growth just from local language. But then going back to something we talked about earlier, which was that your backlog and the number of -- just your backlog, where are you like where do you think you are in terms of total TAM? What markets do you think you have the most upside over the next, let's say, 3 to 5 years?

So where the model works best or where they're the highest per screen averages, so Japan is about double the per screen average of North America. It's about $1 million here and $2 million there. So we only have like 50 theaters in Japan, and I think we could do multiples of it there. On the Middle East, even though it recently opened, we've gotten a lot of traction there. And the per screen averages are very good there. So that's a promising territory. I've said for years that India is promising. And again, the per screen averages there are similar to North America. But the difficulties in doing construction there and the complexity of that particular market have always made it go slower than I hope. And then Western Europe is a tremendous market for us. So in England, we have like 60 theaters. In Germany, we have 10, which is the same as we have in Ecuador. And in France, we only have 20 theaters, and it's one of the highest PSA markets for us in the world. So I think there's a lot of opportunities. LatAm, we're incredibly underpenetrated, but there are tariff issues and other issues there. But I think there's an awful lot of TAM left. And I think especially because of the local language strategy, when people model it out, they think differently about it. They used to say, well, IMAX is this company that shows Hollywood blockbusters, but now it's a whole different mindset that we show local blockbusters and Hollywood blockbusters. So we also use local filmmakers to help promote it in that way, which I think works.

It's a big plus. We've only like 2 minutes left, so I'm just going to skip to the technology. You've really been at the forefront of a lot of like technological innovation. There's a lot going on. I mean so, however, use at this point, AI, but streaming, et cetera, you've got -- your drone streaming technology StreamSmart. Given the strength of your brand and your mutation, the most premium content offering there is really with leading technology, just give us your views of some of these newer technologies and how you plan to integrate them into your business?

Yes. So I think AI, I don't think that where it writes stories and replaces actors and puts new faces on bodies, I don't think that's where there's going to be a lot of development. I think it's going to be much more on postproduction and most -- more on image enhancement. So we've actually dabbled with AI for a number of years. And as I said earlier, we blow up images. So we make them look better, we sharpen the edges, take the grain out. And we've been using AI as a supplement for a while. And I think advances in that area are going to be really good. I think AI is also going to help a lot in marketing and analyzing data. I think, at least IMAX, we really could use a lot of improvement in that area. We have a lot of data, but I don't think we're as adept as we need to be and how to analyze that data and how to target audiences, and I think AI is going to be extremely helpful there. And then in terms of Simwave, which I mentioned, there's a lot of AI technology lock there. And the former CEO of that company has now become our Chief Product Officer. So we're actually aggressively trying to figure out how we could use AI in other areas of our business.

Great. With that, we're like out of time, but thank you so much for joining us.

Thank you, Jess.

Thank you.