IMAX Corporation (IMAX) Earnings Call Transcript & Summary

Good morning, everyone. Please note that important disclosures including my personal holding disclosures and Morgan Stanley disclosures, all up here as a handout available in the registration area and on the Morgan Stanley public website. With that out of the way, my name is Daniel Duran. I work in equity research here at Morgan Stanley covering media and entertainment. I'm joined by my colleague, [ Thomas E. ]. And today, we welcome Rich Gelfond, CEO of IMAX Corporation. Thank you for being here, Rich.

Thanks for having me, Daniel.

So I wanted to start our conversation today by first acknowledging the outstanding weekend performance that Dune: Part Two had in the domestic box office as well as the IMAX box office. So can -- with that in mind, can you begin by giving us, from your perspective, how IMAX differentiates itself both in the theatrical and broader entertainment industry?

Yes, I think you reversed them when you said the regular box office and the IMAX, I think you just said the IMAX and the regular. So domestically, on less than 1% of the screens, we did 23% of the box office in the U.S. And globally, we did 18%, on 8/10 of 1% of the screens. So 1 in 5 people in the world decided to see Dune on IMAX. And I think people haven't really paid enough attention, but Denis Villeneuve, who's the one who directed Dune said, "IMAX is the future of cinema." And he made the film 100% shot with IMAX cameras. And he basically told people to go see it in IMAX that that's the best way to see it. And the only reason the indexing wasn't higher is because we ran out of seats pretty much globally. A recent movie, one of our recent movies right before that was Oppenheimer, which hopefully, this weekend will be collecting a lot of awards at the Academy Awards. And Chris Nolan shot that film with IMAX cameras, and Chris told people to go see it in IMAX. And the numbers were quite similar. And throughout the run, we also added a lot of legs to Oppenheimer. We did about $180 million out of -- the movie is closing in on $1 billion. And what differentiates the movie in IMAX is many aspects of the experience. So the visual experience is better. The sound experience is better. The theater layout is especially designed to optimize viewing for people. It's just a much superior experience. People typically spend about $5 more a ticket to see it in IMAX, and that's among the other reasons that the percentage of the box office is so high. And we're involved with the filmmakers for years. So on Oppenheimer, I probably met with Chris Nolan 2.5 years before it opened and read the book, and we were involved with our cameras and crews of people. And involved in how the movie was made, and we were folded in to how it was marketed. Denis in Dune this weekend, the last Dune, he shot 40% of the film using IMAX cameras. And the results were so good visually as well as the box office that he said this one, he was going to shoot 100%. Again, literally, we've been talking to him for a long time. And I'm based in New York, but I happen to be in L.A. for a month. And I would say there is not a studio and there's not a key director or a talent that we're not talking to about putting IMAX DNA into additional movies going forward. And you look at like our summer of 2025 is already filled up. We haven't publicly announced at all yet, but we have no room to put any more movies in because the filmmakers and the studios understand that there's this global march towards premium. People when they leave the house, they want to see it in a better way, and that's true with concerts and music events and lots of things, and they've really been nailing down the IMAX of it all. And I think that's going to become more and more apparent. And the last point I would make is even for this year, the Godzilla vs. Kong movie was filmed especially for IMAX with IMAX cameras, the Joker, Furiosa from Warner Bros. So we're at the beginning of a trend, which has seen us gain global market share for the last number of years. But recently, it's accelerated because of the filmmakers and the cameras.

Yes. So it sounds like the filmmakers are there. How about the consumers? Are you seeing they're becoming more aware of these ultra premium experiences like IMAX 70mm?

Yes. I mean, there's no question. We have a theater in England at the British Film Institute, which is sold out for the next 4 weeks. You literally can't get a ticket. In New York City, there was a 3:15 a.m. show of Dune this weekend, and they're all sold out. So consumers, they're willing to pay more. They're willing to come at crazy times. There's a great Variety article, if anyone is in to weird articles, about what the crowd was like at 3:15 in the morning. And how much coffee and Red Bull they drank in order to stay up during the experience, but there's enormous consumer demand. We announced our results last week, and last year '23 was equivalent to our best year in box office ever. And so you have to kind of focus that we're not an exhibitor. We're a very different animal. So the box office for exhibitors was down 21%. IMAX's box office was virtually flat from the best year ever, 2019, and it's because of the brand attracting consumers. It's also because we do -- we're in 90 countries, and we do a lot of -- we're not limited by Hollywood movies. So 21% of our box office was foreign language content. And it wasn't only like Chinese movies in China. It was Japanese anime in the U.S. and in the Netherlands. It was Indian movies in the U.K. and in Canada. So we have a very different portfolio. And also our financial model, we don't own real estate. We don't have net debt. We have over $400 million in liquidity. It's just an asset-light completely different model. So last year, we signed 129 new theater systems. We just triple from the year before. So the consumer demand is not only driving the box office at the theaters but it's driving real estate developers and exhibitors around the world to expand the IMAX network. As a matter of fact, in our earnings call, we raised our TAM going forward to where right now, we're only about half penetrated the potential markets we can go into.

Yes. Building off of that, is anybody else building the 70mm IMAX theaters so we don't have to go to 3 a.m. showing? I wasn't able to get a ticket for Oppenheimer.

So fortunately, there's lots of IMAX theaters. In terms of 70mm ones and for those of you who aren't aware, almost all of our theaters are digital. And we transitioned the company years ago. Some of them, about 30, still have film projectors in them. And traditional film is a little bit like vinyl, like the public really has a high demand for that and people really want to go to it. And we maintain those theaters. And as a matter, Dune, about 10 of the theaters are film. Unfortunately, that's kind of a dated model for a wide release. Just without boring you but just to give you a sense, 1 IMAX film print at 1 theater costs about $40,000, and you need a forklift to pick it up. It weighs over 500 pounds. So it's not really a model that we can build on, but we've kept that infrastructure in place. And our -- we're always obsoleting our technology. So after we had analogue technology film, our next generation was digital technology, and that's done extremely well. And by the way, the same print, which cost $40,000, cost $100 today. And our latest technology is laser technology, which provides a very high-end, incredible experience. And we're always innovating on the sound side, it's not just the visual look of it. The sound is special, the theater design, we're involved in film technology. So we always have ways of making the image look bigger, better, sharper. That's the guiding principle that keeps us ahead. But going back to film generation, I think it's like going back to before the car was invented. I don't think you could go backwards.

Got it. So shifting gears a bit. You recently reported 4Q results and you provided some very helpful guidance for the market. Are there any key highlights you would like to expand on today as we start thinking about the growth outlook for the business?

Yes. I think 2024 is going to be much better than The Street and the consensus thinks. I think that what happened because of the strikes was the first 2 months of the year had very little films. And I think that there's always a recency bias. So when people saw no movies, they said, "Oh my god, there are going to be no movies forever." But just to give you kind of a very interesting statistic. Before Dune opened, the box office was down 20% year-over-year. After the first week of Dune, it's now down 13% year-over-year. And as I said before, I think Dune is going to have some real legs on and play. I think there's a lot of other movies, which are going to surprise to the upside. This year after Dune, there's a Kong vs. Godzilla (sic) [ Godzilla vs. Kong ] film; there's Furiosa, which is a sequel to Mad Max; there is the Joker, starring Lady Gaga and Joaquin Phillips (sic) [ Phoenix ], which my team has seen some of the footage is really special; there's Wicked, Universal made Wicked 1 and Wicked 2. And while I'm -- been in L.A., I met with every studio and just the vibe coming out on a lot of these things. There's Planet of the Apes from Disney coming. And then I forgot probably the 2 biggest movies of the year, Despicable Me, the sequel coming out; and then Deadpool, which had more views on the Super Bowl, I guess, than any trailer in history. So I think -- and then there's for Christmas time, there's a Sonic, there's a prequel to The Lion King. There's just a lot of things out there. And I think it's -- when there's a strike and there's no movies, I think it's easy to forecast that the futures could be that way forever. Just like when we were in the era of growing streaming services and everybody said, "Oh, that's going to go on forever." I just don't think the world works that way, and I feel pretty good about it. But then you go to '25, and that's just kind of a ridiculously good year. Literally, at IMAX, we cannot book another movie from May through September because our schedule is completely filled. And the vast majority of those movies are going to be filmed with IMAX cameras. And among the movies coming out next year are the final Mission: Impossible. They no longer call it 8 because I think it's going to end the series. There is Superman, which is Warner Bros. reboot on superhero movies. There's How To Train Your Dragon, a live action version. There's Formula One (sic) [ F1 ], which is directed by Joe Kosinski, who did Maverick and it stars Brad Pitt. It's an embarrassment of riches, what am I missing, Jennifer? Captain America -- oh, and Marvel's doing an original Fantastic Four likely filmed with IMAX cameras, and that will integrate a lot of the Fox characters with the traditional Marvel characters. And I'm just giving you a 3-month span. Oh, I forgot a little movie at the end of the year called Avatar, which Avatar 1 and Avatar 2 are the two biggest movies in the history of IMAX. Just last year, we did over $250 million on Avatar 2. So 2025, I think will be an amazing year.

That's great to hear. Here at Morgan Stanley, we're very bullish on theatrical. So let me follow up on that. So given the likely increase in high budget films in the years to come, can you speak on how you manage the crowding effect issues with blockbusters. And this is important because it -- given recent trends, it seems more and more like you need an IMAX window to have an effective blockbuster?

So in my meetings in L.A., one of the high-ranking filmmakers basically said to me, we can't release a film without IMAX being a cornerstone of the release schedule. So what you do is you start really way in advance and you start talking about whether it's with cameras or aspect ratio, when the dates will be. And a number of the studios have as part of their green light process, is there going to be an IMAX release if there is or are we going to film it with IMAX cameras? And like I said for next summer, it's over a year away, and we've already booked those slots. Part of this was driven by kind of a controversy, which I think actually benefited our brand, which is we had agreed to do Oppenheimer last year and Mission Impossible dated in IMAX about 8 days before Oppenheimer. And for whatever complicated reasons, it ran at a steam when it lost its IMAX screens. And I think that was like a wake-up call to Hollywood, and they kind of said, "We better lock in the IMAX release early otherwise, we're going to come up short." So that's really been a catalyst for people to date their movies in advance. And the other thing I would say, which is quite interesting, a little subtle is that studios can't talk to each other about release dates. That's illegal under the antitrust laws. But they certainly can talk to us about an IMAX release date. So if a studio calls us and says, "We want July 4th weekend." We could say, "Sorry, we have something on July 4. Can't do it." And then they would come back and say, "What about August 1?" Or whatever it is. And we'll say, "We can do that." So I think we actually play a role in the ecosystem and rationalizing it. So there's not a pile up, back to your question of too many movies being dated at that time. And I think in a sense -- and the public gets this, we become somewhat of a curator for these global blockbusters. And then, again, as I said before, a lot of our releases are not North America. So one good thing is Chinese New Year is usually late January or February, which is a soft season in the United States. So we're able to put a lot of big films. Then the big Indian holidays are in an off period for the U.S. films. So I think we can do a pretty good job of spreading it out.

That's great. What about non-Hollywood films? Can you give us some color on your expectations about local language content and alternative content benefiting IMAX domestically but also internationally?

So the way we think about our film slate is in 3 buckets. The first bucket is blockbusters. And then under that are Hollywood blockbusters and non-foreign language blockbusters. So that's been most of our revenues so far, but we're actually branching out in 2 other buckets. The second bucket is documentaries, and IMAX built a lot of its heritage on documentaries. And we've had, I don't know, probably a half dozen films that have done over $100 million, IMAX documentaries. One was on climbing Everest. And what they do is we see IMAX as an awe-inspiring platform. So Dune is that kind of movie. Avatar is that kind of movie. Oppenheimer, where people really want to seek it out because you feel like you're there and you're inspired. So right now, we have a movie releasing in May called Blue Angels. And we, with some partners, financed at Bad Robot. J.J. Abrams co-produced it with us, and then we sold it to Amazon. So it will play on a variety of IMAX screens, Amazon in different windows and IMAX institutional screens. So there's a lot of revenue opportunities in that for us. And at the same time now, we greenlit -- it's called Stormbusters (sic) [ Stormbound ]. And it's about people who chase storms around, including hurricanes and tornadoes. And Adam McKay, who's very famous documentary filmmaker is partnering with us on that. And then another one, we're doing a documentary in China about elephants that migrate. It's kind of like March of the Penguins, if you remember that years ago, but it's march of the elephants. And it's a weird migration pattern, which I think will have appeal. And again, we'll sell those to streamers. We'll have multiple release windows around them. And then there is alternative content. Now you remember last year, both Taylor Swift and Beyoncé had these concerts, and they did very well on a global basis. But we see alternative content as broader. So already this year, we did -- we took a 40-year-old Queen concert called QUEEN ROCKS MONTREAL (sic) [ QUEEN ROCK MONTREAL ]. And using our technology, we made it look brand-new, and we remix the sound. And it did $5.5 million in a little more than a weekend. And I'm a Queen freak, so seeing Freddie Mercury look like he's alive through a time machine, it was just visually -- and the sound was really spectacular. And then we did André 3000. We did an alternative event doing that. We did, Stop Making Sense, which is a Talking Heads documentary. But we've also done live events, and stay tuned that we're working on kind of a very large live event that we'll probably announce shortly if it all gets finalized. But we're looking at alternative forms of content. Other things are -- we thought horror would be a great venue for IMAX because it's like you're in the movie at IMAX. You're not watching somebody getting scared. You are getting scared and a number of other things like that. So right now, blockbusters are the vast majority of our box office, and we're not going to flip a switch. And that's not going to be the case, especially given what the slate is in '25. But I think over time, you'll see us mix in more documentaries, more alternative content and more foreign language film.

Great. Thank you for that. [ Thomas ]?

Yes. I would love to expand on that non-U.S. opportunity. It does seem to me that the box office is in varying states of recovery based on the country that you pick. And I think China has come back, but some of that seems more focused now on local content as opposed to the Hollywood content. So it sounds like you, as a company, are exposed to some of that, but maybe just talk about what the drivers are in terms of the recovery, what you're seeing in these markets that might be different?

Yes. I would use the opposite word of exposed. We're benefiting from it because we saw this trend start to happen years ago, and we have over 100 employees in Shanghai, and we work with every major studio, most major filmmakers there. We have a team of people embedded in that market. And last year, we did about $300 million in box office in China, which was up significantly from the year before. And China was just emerging last year from the pandemic. So you're quite right. Hollywood films have not done as well. But last year, we had our best Chinese New Year ever because we -- this year, we're filming 4 IMAX films with IMAX cameras in China, and we're very much embedded. For those of you who don't know, we have 800 theaters in China. And when we're involved in a film, we do 10% of the box office there. So it's an important market to us. Another example, Japan. Japan, we have -- per screen average is the metrics that we look at for theater performance. And in the U.S., our PSAs are $1 million. In Japan, they're $2 million per theater. So local language film in Japan, we've also really killed it. And we started off with Hollywood films, but now there's almost not a big Japanese film that they don't want to release in IMAX. And one example, I'm sure many of you have heard of Miyazaki, the famous anime director in Japan. And he made his last film called, The Boy and the Heron, which is actually up for an Academy Award this year. And he's old school, and he said, "I never release it in IMAX. I do it the way I do it." But he saw our test and he saw the results and he released it in IMAX. And again, the box office was extremely successful. So we're really focused not just on the Hollywood box office but the opportunity globally. And one thing in 2023 that happened, which is very interesting is that Japanese films didn't only play in Japan but they played in the United States and they played in China. So Dragonslayer (sic) [ Demon Slayer ] was a huge success. In Korea, they actually released 2 TV episodes in IMAX, and they did $2 million. I don't know, it was like 20 screens, which is a very good performance. And Indian films being released on a global basis. And IMAX is really the only company in the world that has the infrastructure on the ground to pick up those films. And again, that -- I said this before, but I'm going to repeat it, the regular box office was down from 2019, the one that exhibitors play in by 21%, and we were flat. And we continue to work on that. I mean it's just a different model. Sorry for being repetitive again, but Denis Villeneuve said, "IMAX is the cinema of the future." And I certainly see it that way. And I think as these things unfold, other people will see it that way.

Is that market share structurally consistent, I think, in terms of just the long term, the non-Hollywood component continues to grow...

You mean in China or everywhere?

Yes, outside the U.S.

So our market share has been increasing. I don't remember exactly the number, but I think between like '18 and '23, it was up from -- it was up like around 50% our market share.

Okay. Makes sense. I wanted to also ask about your relationship with the larger inhibitors. Like you talked about that bifurcation and what exhibitors see versus what you see. I think in light of some of the challenging balance sheet structure issues with some of these large exhibitors, how have your relationships with them changed? And how do you help, I think, in terms of just supporting a structure that continues to provide them with an opportunity to kind of grow IMAX within their theaters?

So yes, a number of their balance sheets are challenged, but that tends to be more in North America than in other places in the world. And it's a function of over screening in North America, the LBO-zation of cinema, right, putting tons of debt on it, too many screens, a lot of those factors. So Cineworld went bankrupt last year. They -- as you know, in bankruptcy, you could turn down leases. They turned down either, I think, 0 or maybe 1 lease because the answer is that our -- the IMAX is one of the top performers and et cetera, at virtually all the good multiplexes where they're at. So that's the nightmare scenario, right? And we -- every one of our payables was up to date. We wrote a 0 in that. I've been in this job for a long time. In 2002, there was another challenge period. And again, not only didn't we lose theaters but that started a tremendous growth spurt for us because they cleaned up their balance sheets and they cleaned up their networks. So it's definitely an issue, you watch it. But I think just because of how important we are to that ecosystem, it's not a fundamental risk. One of the business models we have is we offer to joint venture with the exhibition partners. So we put up some of the capital and we get a bigger part of the box office. So we've tried to look at their difficult balance sheets as an opportunity for us because we're out there. They'll pay for the retrofit, and we'll put up a certain amount of the cost of our equipment, and we'll get a piece of the box office. And that's a very good recurring revenue stream for us. I think the last thing I'd like to say on that point, and it's nuanced but very interesting. And actually, our client in Belgium, Kinepolis, who did, I think, an 8-theater deal with us last year. They came to us and they said, "Look, because of our balance sheet, we're not going to build more big multiplexes. Those are expensive." They take a lot of debt, but if we upgrade to premium, and premium is a global trend, people wanting to see things in IMAX. It makes much more sense for us to invest our capital in upgrading theaters to IMAX than it does to build new multiplexes. So I think that trend is benefiting us as well. With all that said, in China, it's been slower than elsewhere to come out of the pandemic. So I think China is the only place where constrained balance sheets have small consequences. But again, we're 1% of the screens. In China, we have 800 there and another 200 in backlog. So we've done a very good job there. I think that's just a small part of our business.

Understood. Makes sense. And you guided to, I believe, 120 to 150 installations this year in '24. And how should we think about the gating factors in terms of your ability to kind of expand the footprint and your partners, and how that kind of comes together?

So the only constraint in the rollout is our exhibitor partners. So we could do 200 a year, 300 a year, whatever it is. We just have to order the inventory and lead time, and we have a designed apartment. So we're not the gating factor. The gating factor is the partners. And I believe that maybe during the pandemic but other than the pandemic, I don't think we've ever missed our installation guidance because we pay a lot of attention to that, and we take it seriously. In every 2 weeks, we have calls and people go to the sites to see what's going on there. And last year, our range was 110 to 130, and we did 128 for the year, which is pretty close to the high end of the range. So we spend a lot of time giving it. It's a perfect question after your last question. I think the upside and getting to the high end of that range would probably depend on how quickly China emerges. So we like to be quite certain that we'll end up within the range, but the reason for the width of the range is we're just not sure how quickly that will come back.

Makes sense. You also provided some pretty helpful color on margin expectations both for this year and then expanding even further, I think, into '25 into the 40s. What's the driving factor of that? How should we think about the moving pieces to get there?

Well, one of the factors is just throughput. We're extremely high-margin business. Our margins are in the 30s. In the third quarter this year, they were 47%. So when you go forward to 2025, and you look at that slate, the sheer volume of what goes through should drive -- we think it will be in the 30s this year and have a 4 in front of it next year. So that's the first reason. The second thing is we've been extremely focused on cost control. So we barely grown our head count. We did a small acquisition. So our SG&A has gone up a little bit, but just a small amount. And it's cost discipline and volume. And then I would say the final thing is -- I know it's a cliche, everyone uses it, to drive their stock price. But we could benefit in a lot of ways from AI. And no, we're not selling AI products, and no, we're not putting people on our board who are AI expert. But just a lot of off-the-shelf technology can help a lot. And one example is that our network of 1,700-plus theaters, we monitor it in real time every day. And the reasons we monitor is if the sound is too low or belts about to break, we like to be in front of it. And it's a very profitable business for us. But we have tons and tons of data that we couldn't possibly analyze. But we're doing a project now, an AI project where we could do much more predictive maintenance by putting the variables together. There's a lot of cost in maintaining a worldwide network. We can buy the right kind of inventory in advance and manage our cash better. But I could give you 10 examples like that. Another one I like is just utilization rates in our theaters. So we can monitor if there are 3 shows or 4 shows and how many of them are sold out or not sold out, and we can work with our partners and say, "Ad shows here." Or if something is not working. So there's a lot of things that kind of mining data through new techniques I think will help a lot on the cost side. One example is our DMR, where we blow up our films. We put that into the cloud last year. And I mean that's created enormous efficiencies for us, especially in foreign language films.

Got it. Got it. Makes sense. I did want to also ask before I pass it back to Daniel for the last one. What's the in-home IMAX opportunity? I think you made an acquisition back in '22, and there's also a partnership with Apple Vision Pro. What -- how should we think about how IMAX kind of extends beyond the theater?

Well, IMAX has to be the most underutilized brand in the world. I mean, everybody knows what it is. It's all over the place. But there has to be an opportunity for further monetization in the home. So we bought a company called SSIMWAVE, which actually saves streamers a lot of money and increases quality using -- sorry, AI algorithms. And we made a lot of progress. And since we bought it, it was a small acquisition, $25 million. In monetizing, in different -- in trying to monetize it. So we hired a new sales staff, our marketing staff. We -- it was kind of a start-up plus. So we productized it. So I'm pretty sure this year, you'll start to see some more significant financial benefits. And Apple really wanted us on the Vision Pro because of our brand. So we built kind of a 1.0 app, which was actually rated in Vision Pro's top 5 apps. And you can buy a 2D movie or a 3D movie, and we get paid doing that. But I'm not sure that will be a big business. In the short run, one thing I think we're going to be able to do is show trailers and use it as a marketing tool. And I'm pretty enthusiastic about that.

We're out of time but quickly, if you could reshoot any film history using IMAX technology, which one would it be?

It's a tough call. So I think it will be between two. I think, one, Lawrence of Arabia, because of the scope and the sound and what it looked like then. And I think people love to see it in IMAX. And the other one would be 2001: A Space Odyssey, because, again, IMAX and space are very synergistic. But I also think the fact that it was the first film about AI would make it very current and people would go back and see it again.

Those are great answers. If that ever happens, you have 2 guaranteed tickets right here. So thank you very much for your time. We look forward to having you next year.

Thank you.

Thanks, everyone.